EAGLE BANCORP INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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The following discussion provides information about the results of operations,
financial condition, liquidity, and capital resources of Eagle Bancorp, Inc.
(the "Company") and its subsidiaries as of the dates and periods indicated. This
discussion and analysis should be read in conjunction with the unaudited
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
report and the Management Discussion and Analysis in the Company's Annual Report
on Form 10-K for the year ended December 31, 2020.
This report contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"), as amended, including
statements of goals, intentions, and expectations as to future trends, plans,
events or results of Company operations and policies and regarding general
economic conditions. In some cases, forward-looking statements can be identified
by use of words such as "may," "will," "can," "anticipates," "believes,"
"expects," "plans," "estimates," "potential," "assume," "probable," "possible,"
"continue," "should," "could," "would," "strive," "seeks," "deem,"
"projections," "forecast," "consider," "indicative," "uncertainty," "likely,"
"unlikely," "likelihood," "unknown," "attributable," "depends," "intends,"
"generally," "feel," "typically," "judgment," "subjective" and similar words or
phrases. These statements are based upon current and anticipated economic
conditions, nationally and in the Company's market (including the macroeconomic
and other challenges and uncertainties resulting from the coronavirus
("COVID-19") pandemic, including on our credit quality and business operations),
interest rates and interest rate policy, competitive factors and other
conditions, which by their nature are not susceptible to accurate forecast, and
are subject to significant uncertainty. For details on factors that could affect
these expectations, see the risk factors contained in this report and the risk
factors and other cautionary language included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2020, and in other periodic and
current reports filed by the Company with the Securities and Exchange
Commission. Because of these uncertainties and the assumptions on which this
discussion and the forward-looking statements are based, actual future
operations and results in the future may differ materially from those indicated
herein. Readers are cautioned against placing undue reliance on any such
forward-looking statements. The Company's past results are not necessarily
indicative of future performance, and nothing contained herein is meant to or
should be considered and treated as earnings guidance of future quarters'
performance projections. All information is as of the date of this report. Any
forward-looking statements made by or on behalf of the Company speak only as to
the date they are made. Except to the extent required by applicable law or
regulation, the Company undertakes no obligation to revise or update publicly
any forward looking statement for any reason.
GENERAL
The Company is a growth-oriented, one-bank holding company headquartered in
Bethesda, Maryland. 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 eighteen branch offices,
including seven in Northern Virginia, six in Suburban Maryland, and five in
Washington, D.C. The Bank also operates five lending offices, with one in
Northern Virginia, three in Suburban Maryland and one in Washington, D.C.
The Bank offers a broad range of commercial banking services to its business and
professional clients, as well as full service consumer banking services to
individuals living and/or working primarily in the Bank's market area. The Bank
emphasizes providing commercial banking services to sole proprietors, small and
medium-sized businesses, non-profit organizations and associations, and
investors living and working in and near the primary service area. These
services include the usual deposit functions of commercial banks, including
business and personal checking accounts, "NOW" accounts and money market and
savings accounts, business, construction, and commercial loans, residential
mortgages and consumer loans, and cash management services. The Bank is also
active in the origination and sale of residential mortgage loans and the
origination of Small Business Administration ("SBA") loans.

The residential mortgage loans are originated for sale to third-party investors,
generally large mortgage and banking companies, under best efforts and/or
mandatory delivery commitments with the investors to purchase the loans subject
to compliance with pre-established criteria. The decision whether to sell
residential mortgage loans on a mandatory or best efforts lock basis is a
function of multiple factors, including but not limited to overall market
volumes of mortgage loan originations, forecasted "pull-through" rates of
origination, loan closing operational considerations, pricing differentials
between the two methods, and availability and pricing of various interest rate
hedging strategies associated with the mortgage origination
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pipeline. The Company continually monitors these factors to maximize
profitability and minimize operational and interest rate risks.
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
shortly thereafter 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
Since the inception of the COVID-19 pandemic in March of 2020, much progress has
been made in reopening economies back up domestically and abroad. In the United
States and in other nations around the world, the availability of vaccines
ramped up significantly in the first three quarters of 2021. Although management
feels we're generally trending in a positive direction and strides have been
made in the fight against COVID-19, we remain cautious given the potential for
lingering effects of the pandemic, including vaccination efficacy against
variants and the speed of vaccination adoption around the country, which could
continue to impair some customers' ability to fulfill their financial
obligations to the Company.

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. As concerns over the most severe impacts of the pandemic have abated,
the Company's non-branch personnel returned to work on a "hybrid" basis on
November 1, 2021. The hybrid workplace allows certain employees to work remotely
a portion of the week, but provides that each department has at least 50% of its
staff in the office each day. We have established general guidelines for
returning to the workplace that include having employees maintain safe
distances, staggered work schedules to limit the number of employees in a single
location, more frequent cleaning of our facilities and other practices
encouraging a safe working environment, including required COVID-19 training
programs. We are monitoring jurisdictional guidelines and will continue to
respond as appropriate.

On March 27, 2020, the CARES Act was signed into law. It contains substantial
tax and spending provisions intended to address the impact of the COVID-19
pandemic. The CARES Act created the Paycheck Protection Program (the "PPP"), a
program designed to aid small- and medium-sized businesses through federally
guaranteed loans distributed through banks. These loans are intended to
guarantee payroll and other costs to help those businesses remain viable and
allow their workers to pay their bills.
As an SBA preferred lender, the Bank has been participating in the PPP program,
which is winding down as loans complete the forgiveness process. As of
September 30, 2021, the Bank had an outstanding balance of PPP loans remaining
of $67.3 million.

Following the CARES Act, the Consolidated Appropriations Act was signed in to
law on December 27, 2020 which expanded and modified the PPP as well as provided
additional COVID-19 support. Subsequently, the American Rescue Plan Act of 2021
was signed in to law on March 11, 2021 providing additional relief in the form
of testing and vaccination sites along with direct stimulus checks. Governmental
actions taken in response to the COVID-19 pandemic have not always been
coordinated or consistent across jurisdictions but, in general, have been
expanding in scope and intensity. The efficacy and ultimate effect of these
actions is not known.

In response to the COVID-19 pandemic, we had previously implemented a short-term
loan modification program to provide temporary payment relief to certain
borrowers who meet the program's qualifications. Initial modifications under the
program have predominantly been for 90 days, with a second 90 day modification
if warranted. These types of loan modifications are no longer being granted at
this time. The deferred payments along with interest accrued during the deferral
period are due and payable on the existing maturity date of the existing loan.
As of September 30, 2021, we had ongoing temporary modifications on
approximately 6 loans representing approximately $70 million (approximately 1.0%
of total loans) in outstanding balances, as compared to 36 loans representing
approximately $72 million (approximately 0.9% of total loans) at December 31,
2020. Additionally, none of the deferrals are reflected in the Company's asset
quality measures (i.e. non-
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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 troubled debt restructurings
("TDRs"). Some of these deferrals may have met the criteria for treatment under
U.S. generally accepted accounting principles ("GAAP") as troubled debt
restructurings ("TDRs"). Similar provisions have also been confirmed by
interagency guidance issued by the federal banking agencies and confirmed with
staff members of the Financial Accounting Standards Board.

We continue to monitor the impact of COVID-19 closely even as economic forecasts
improve. In addition, we continue to monitor the effects that have resulted from
the CARES Act and other legislative and regulatory developments related to
COVID-19; however, the extent to which the COVID-19 pandemic could impact our
operations and financial results during the remainder of 2021 and in 2022 is
uncertain.
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements are prepared in accordance with
GAAP and follow general practices within the banking industry. Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the Consolidated Financial Statements;
accordingly, as this information changes, the Consolidated Financial Statements
could reflect different estimates, assumptions, and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions and
judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. Estimates, assumptions,
and judgments are necessary when assets and liabilities are required to be
recorded at fair value, when a decline in the value of an asset not carried on
the financial statements at fair value warrants an impairment write-down or a
valuation reserve to be established, or when an asset or liability needs to be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility. The Company
applies the accounting policies contained in Note 1 to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2020 and Note 1 to the Consolidated Financial Statements
included in this report. There have been no significant changes to the Company's
accounting policies as disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 2020 except as indicated below and in "Accounting
Standards Adopted in 2021" in Note 1 to the Consolidated Financial Statements in
this report.
Provision for Credit Losses and Provision for Unfunded Commitments
A consequence of lending activities is that we may incur credit losses, so we
record an allowance for credit losses ("ACL") with respect to loan receivables
and a reserve for unfunded commitments ("RUC") as estimates of those losses. The
amount of such losses will vary depending upon the risk characteristics of the
loan portfolio as affected by economic conditions such as changes in interest
rates, the financial performance of borrowers and regional unemployment rates,
which management estimates by using a national forecast and estimating a
regional adjustment based on historical differences between the two.
CECL requires an estimate of the credit losses expected over the life of an
exposure (or pool of exposures). The Provision for Unfunded Commitments
represents the expected credit losses on off-balance sheet commitments such as
unfunded commitments to extend credit and standby letters of credit. The RUC is
determined by estimating future draws and applying the expected loss rates on
those draws.
Management has significant discretion in making the judgments inherent in the
determination of the provisions for credit loss, ACL, and the RUC. Our
determination of these amounts requires significant reliance on estimates and
significant judgment as to the amount and timing of expected future cash flows
on loans, significant reliance on historical loss rates on homogenous
portfolios, consideration of our quantitative and qualitative evaluation of
economic factors, and the reliance on our reasonable and supportable forecasts.

The allowance for credit losses (“PCL”) represents the periodic charge for expected credit losses arising from the Company’s AFS loan and securities portfolios.

The Company uses a loan-level probability of default ("PD")/ loss given default
("LGD") cash flow method with an exposure at default ("EAD") model to estimate
expected credit losses for the commercial, income producing - commercial real
estate, owner occupied - commercial real estate, real estate mortgage -
residential, construction - commercial and residential, construction - C&I
(owner occupied), home equity, and other consumer loan pools. For each of these
loan segments, the Company generates cash flow projections at the instrument
level wherein payment expectations are adjusted for estimated prepayment speed,
probability of default, and loss given default. The modeling of expected
prepayment speeds is based on historical internal data. PPP loans are included
in the model but do not carry a reserve, as these loans are fully guaranteed by
the
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SBA, whose guarantee is supported by the full faith and credit of the Government of the United States.

The Company uses regression analysis of historical internal and peer data (as
Company loss data is insufficient) to determine suitable loss drivers to utilize
when modeling lifetime probability of default and loss given default. This
analysis also determines how expected probability of default will react to
forecasted levels of the loss drivers. For our cash flow model, management
utilizes and forecasts regional unemployment by using a national forecast and
estimating a regional adjustment based on historical differences between the two
as a loss driver over our reasonable and supportable period of 18 months, and
reverts back to a historical loss rate over the following 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.

The ACL also includes an amount for inherent risks not reflected in the
historical analyses. Relevant factors include, but are not limited to,
concentrations of credit risk, changes in underwriting standards, experience and
depth of lending staff, and trends in delinquencies. While our methodology in
establishing the reserve for credit losses attributes portions of the ACL and
RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is
available to absorb credit losses expected in the total loan portfolio and total
amount of unfunded credit commitments, respectively.

Under CECL, reserve for credit losses are significantly influenced by the
composition, characteristics and quality of our loan portfolio, as well as the
prevailing economic conditions and forecasts utilized. Material changes to these
and other relevant factors may result in greater volatility to the reserve for
credit losses, and therefore, greater volatility to our reported earnings. See
Notes 1 and 5 to the Consolidated Financial Statements for more information on
the provision for credit losses.

Goodwill and Other Intangibles
Goodwill is subject to impairment testing at the reporting unit level and must
be conducted at least annually. The Company performs impairment testing during
the fourth quarter of each year or when events or changes in circumstances
indicate the assets might be impaired.
Determining the fair value of a reporting unit under the goodwill impairment
test involves judgment and often involves the use of significant estimates and
assumptions. Estimates of fair value are primarily determined using discounted
cash flows, market comparisons and recent transactions. These approaches use
significant estimates and assumptions including projected future cash flows,
discount rates reflecting the market rate of return, projected growth rates and
determination and evaluation of appropriate market comparables. Future events
could cause the Company to conclude that goodwill or other intangibles have
become impaired, which would result in recording an impairment loss. Any
resulting impairment loss could have a material adverse impact on the Company's
financial condition and results of operations. Annual impairment testing of
intangibles and goodwill as required by GAAP will be performed in the fourth
quarter of 2021.

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RESULTS OF OPERATIONS
Earnings Summary
Three Months Ended September 30, 2021 vs. Three Months Ended September 30, 2020
Net income for the three months ended September 30, 2021 was $43.6 million
compared to $41.3 million for the same period in 2020, a 5% increase. Net income
per basic and diluted common share for the three months ended September 30, 2021
was $1.36 compared to $1.28 per basic and diluted common share for the same
period in 2020, a 6% increase.
Net income increased for the three months ended September 30, 2021 relative to
the same period in 2020 due primarily to a $7.5 million net reversal of the
provision for credit losses and reserve for unfunded commitments, partially
offset by lower noninterest income (before investment gain) of $6.8 million due
primarily to lower gain on sale of loans. By comparison, the third quarter of
2020 included net provisions for credit losses and unfunded commitments of $4.5
million and noninterest income (before investment gain) of $17.7 million.
Total revenue (i.e. net interest income plus noninterest income) was $87.3
million for the three months ended September 30, 2021 as compared to $96.9
million for the same period in 2020. The most significant portion of revenue is
net interest income, which was $79.0 million for the three months ended
September 30, 2021, compared to $79.0 million for the same period in 2020. Net
interest income was flat due to a 13% increase in average earning assets, offset
by a corresponding decline in net interest margin (see next paragraph), when
comparing the three months ended September 30, 2021 with the same period in
2020.

The net interest margin, which measures the difference between interest income
and interest expense (i.e. net interest income) as a percentage of earning
assets, was 2.73% for the three months ended September 30, 2021 and 3.08% for
the same period in 2020. The drivers of the change are detailed in the "Net
Interest Income and Net Interest Margin" section below.
The benefit of noninterest sources funding earning assets was 22 basis points
for the three months ended September 30, 2021 as compared to 33 basis points for
the same period in 2020. The decrease in benefit from noninterest sources was
due to a 58 basis points reduction in the average yield on interest earning
assets, as loans (held for investment) declined and investments and interest
bearing deposits with other banks increased, compared to a smaller decline of 34
basis points in total interest bearing liabilities. This led to a 35 basis point
decrease in the net interest margin for the three months ended September 30,
2021 as compared to the same period in 2020.
Total noninterest income for the three months ended September 30, 2021 decreased
to $8.3 million from $17.8 million for the same period in 2020, a 53% decrease.
The decrease was primarily due to lower gain on sale of loans, which were
entirely of residential mortgage loans. Other income also fell on lower FHA
trade premiums. For further information on the components and drivers of these
changes see "Noninterest Income" section below.
Gain on sale of loans for the three months ended September 30, 2021 was $3.3
million compared to $12.2 million for the same period in 2020, an decrease of
73%. Residential mortgage origination and sale volume peaked in the third
quarter of 2020 based on a combination of low rates, concerns about rising rates
and rising home values. This increase in mortgage volume abated as mortgage
rates started to increase at the beginning of 2021.
Other income for the three months ended September 30, 2021 decreased to $1.6
million from $4.0 million for the same period in 2020, a 60% decrease. This
decrease was attributed to gain on sale of Other Real Estate Owned ("OREO") and
FHA trade premiums being negligible for the three months ended September 30,
2021, compared to a combined $2 million for the same period in 2020.

Noninterest expenses totaled $36.4 million for the three months ended September
30, 2021, as compared to $36.9 million for same period in 2020, a 1% decrease.
See the "Noninterest Expense" section for further detail on the components and
drivers of the change.
Income tax expenses were $14.8 million for the three months ended September 30,
2021 an increase of 5.4%, compared to the same period in 2020. The components
and drivers of the change are discussed in the "Income Tax Expense" section
below.
The efficiency ratio, which measures the ratio of noninterest expense to total
revenue, was 41.7% for the three months ended September 30, 2021, as compared to
38.1% the same period in 2020.
Management believes it has effectively managed the Company over the past twelve
months as deposits flowed into the Bank, increasing the balance sheet by
maintaining a focus on disciplined pricing of both loans and sources of funding.
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At September 30, 2021, total loans (including PPP loans) were 13.1% lower than
they were a year earlier, and average loans were 10.8% lower in the three months
ended September 30, 2021 as compared to the same period in 2020. PPP loans
represented $67.3 million of total loans at September 30, 2021, compared to
$456.1 million a year earlier. Notwithstanding the impact of the reduction of
PPP loans (through forgiveness and sales) to total loans, the decrease in loan
balance is mostly attributable to elevated payoffs and prepays due in part to
successful completion of construction projects, competition to refinance at
lower rates with longer amortization periods, and excess liquidity at competing
banks as well as many companies and construction project sponsors. From a
liquidity and funding perspective, the Company continues to benefit from a
higher level of both interest bearing and noninterest bearing accounts relative
to the third quarter of 2020. At September 30, 2021, total deposits were 18.2%
higher than deposits a year earlier, while average deposits were 15.8% higher
for the three months ended September 30, 2021 compared with the three months
ended September 30, 2020.

In terms of the average asset composition, loans, which generally have higher
yields than securities and other earning assets, represented 61% of average
earning assets for the three months ended September 30, of 2021, down from 78%
for the same period in 2020. The decline was primarily a result of strong
deposit inflows in the third quarter of 2020, which resulted in a significant
increase in cash and securities combined with the aforementioned decline in
loans.
The ratio of common equity to total assets was 11.49% at September 30, 2021.
This is down from 12.11% a year earlier, as assets increased by 14.6% (supported
by strong deposit inflows which significantly increased assets held in cash and
securities) and common equity (reduced by dividends and stock repurchases)
increased by a smaller 8.9%. As discussed later in "Capital Resources and
Adequacy," the regulatory capital ratios of the Bank and Company remain above
well capitalized levels.
For the three months ended September 30, 2021, the Company reported an
annualized return on average assets ("ROAA") of 1.46%, as compared to 1.57% for
the same period in 2020. Total shareholders' equity was $1.33 billion at
September 30, 2021, compared to $1.22 billion a year earlier. The annualized
return on average common equity ("ROACE") for the three months ended September
30, 2021 was 13.00% as compared to 13.58% for the same period in 2020. The
annualized return on average tangible common equity ("ROATCE") for the three
months ended September 30, 2021 was 14.11% as compared to 14.87% for the same
period in 2020. The decrease in these earnings-based ratios, in spite of higher
net income for the period ($43.6 million versus $41.3 million), was due to the
increase in average assets for the three months ended September 30, 2021,
compared to the same period in 2020. Refer to the "Use of Non-GAAP Financial
Measures" section for additional detail and a reconciliation of GAAP to non-GAAP
financial measures.

Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
Net interest income increased by 3% for the nine months ended September 30, 2021
over the same period in 2020 ($246.3 million as compared to $240.1 million).
This was largely attributable the decline in the interest paid on deposits
outpacing the decline in interest and fees on loans, and a 15.1% increase in
average earnings assets compared to an increase of 11.3% for interest bearing
liabilities.
For the nine months ended September 30, 2021, the Company reported an annualized
ROAA of 1.56% as compared to 1.24% for the same period in 2020. The annualized
ROACE for the nine months ended September 30, 2021 was 13.98% as compared to
10.44% for the same period in 2020. The annualized ROATCE for the nine months
ended September 30, 2021 was 15.21% as compared to 11.45% for the same period in
2020. The increase in these ratios was primarily due to reversals from the
allowance for credit losses on loans and the reserve for unfunded commitments in
the first nine months of 2021, versus increases to both of these accounts for
the same period in 2020. Refer to the "Use of Non-GAAP Financial Measures"
section for additional detail and a reconciliation of GAAP to non-GAAP financial
measures.

The net interest margin was 2.91% for the nine months ended September 30, 2021
and 3.27% for the same period in 2020. Average earning asset yields decreased 73
basis points to 3.29% for the nine months ended September 30, 2021, as compared
to 4.02% for the same period in 2020. The average cost of interest bearing
liabilities decreased by 56 basis points to 0.61% for the nine months ended
September 30, 2021, as compared to 1.17% for the same period in 2020. Combining
the change in the yield on earning assets and the costs of interest bearing
liabilities, the net interest spread decreased by 17 basis points for the nine
months ended September 30, 2021 as compared to the same period in 2020 (2.68% as
compared to 2.85%). The benefit of noninterest sources funding earning assets
decreased by 19 basis points, based on a benefit of 23 basis points for the nine
months ended September 30, 2021 as compared to a benefit of 42 basis points for
the same period in 2020.

The Company believes it has effectively managed its pricing and interest rate
risk over the past twelve months as market interest rates moved lower and have
stayed low. This factor has been significant to overall earnings performance
over the past twelve months as net interest income represents 89% of the
Company's total revenue for the nine months ended September 30, 2021.
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For the nine months ended September 30, 2021, total loans decreased 11.7% from
December 31, 2020 (from $7.8 billion to $6.9 billion), and average loans were
6.0% lower in the first nine months of 2021 as compared to the same period in
2020. At September 30, 2021, total deposits were 5.2% lower than deposits at
December 31, 2020, while average deposits were 17.4% higher for the first nine
months of 2021 compared with the same period in 2020.

There was decline in average loans from $7.9 billion to $7.4 billion over the
nine months ended September 30, 2021 as compared to the same period in 2020, but
the Bank has significant liquidity as average deposits increased from $8.3
billion to $9.7 billion. The increase in deposits has come from certain
financial intermediary relationships that are also experiencing increased
liquidity. In terms of the average asset composition, loans, which generally
have higher yields than securities and other earning assets, represented 65% and
80% of average earning assets for the first nine months of 2021 and 2020,
respectively. For the first nine months of 2021, as compared to the same period
in 2020, average loans, excluding loans held for sale, decreased $473 million,
or 6%, due to the sale of PPP loans, and payoffs/paydowns outpaced loan
originations/fundings. Average investment securities for the nine months ended
September 30, 2021 and 2020 amounted to 13% and 9% of average earning assets,
respectively. The combination of federal funds sold, interest bearing deposits
with other banks and loans held for sale represented 21% and 11% of average
earning assets for the first nine months of 2021 and 2020, respectively.

The provision for credit losses decreased with a reversal of $14.4 million for
the nine months ended September 30, 2021 as compared to a provision of $40.7
million for same period in 2020. The primary difference is the during the nine
months ended September 30, 2021, the economy was recovering from the COVID-19
pandemic leading to improvement in credit quality and improvement and
adjustments in qualitative and environmental factors and corresponding reversals
from the Allowance for Credit Losses, versus the same period in 2020 when the
onset of the COVID-19 pandemic necessitated increased provisions to the
Allowance for Credit Losses. Net charge-offs of $12.2 million for the nine
months ended September 30, 2021 represented an annualized 0.22% of average
loans, excluding loans held for sale, as compared to $14.6 million, or an
annualized 0.25% of average loans, excluding loans held for sale, in the first
nine months of 2020. Net charge-offs in the first nine months of 2021 were
attributable to commercial loans ($7.4 million) and commercial real estate loans
($4.8 million).

Total noninterest income for the nine months ended September 30, 2021 decreased
to $29.8 million from $35.8 million for the same period in 2020, a 17% decrease.
Gain on sale of loans for the nine months ended September 30, 2021 decreased to
$12.0 million from $16.2 million for the same period in 2020, a 26% decrease.
Residential mortgage origination and sale volume rose after a slow first quarter
of 2020 and accelerated and peaked in the third quarter of 2020 based on a
combination of low rates, concerns about rising rates and rising home values.
This increase in mortgage volume abated at the beginning of 2021 as mortgage
rates started to increase and has remained at a relatively consistent level for
the first three quarters of 2021. Residential mortgage loans locked were $831.4
million for the first nine months of 2021 as compared to $1,433.3 million for
the same period in 2020.

Residential lending gains for the first nine months of 2020 include $3.9 million
in hedge and mark to market losses incurred during the first three quarters of
2020 that were not repeated in 2021. The 2020 losses were 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 2020.

Other income for the nine months ended September 30, 2021 decreased to $11.0
million from $12.8 million for the nine months ended September 30, 2020, a 14%
decrease. The primary decreases were in loan service fees and gain on sale of
OREO. Gains on sale of investments were $2.1 million and $1.7 million for the
nine months ended September 30, 2021 and 2020, respectively.

For the first nine months of 2021, the efficiency ratio was 39.8% as compared to
39.6% for the same period in 2020. Noninterest expenses totaled $109.9 million
for the nine months ended September 30, 2021, as compared to $109.2 million for
the same period in 2020, a 1% increase. The increase in noninterest expense is
primarily from increased salaries and employee benefits, partially offset by a
reduction in legal costs.

Salaries and employee benefits were $63.8 million for the nine months ended
September 30, 2021, as compared to $54.3 million for the same period in 2020, an
increase of $9.5 million or 18% due to payroll taxes associated with annual
vesting, additional restricted stock awards granted and amortization, and higher
annual incentive accruals based on performance expectations.

Legal, accounting and professional fees have decreased $ 5.5 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

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Data processing costs have been $ 8.5 million for the nine months ended September 30, 2021 compared to $ 8.0 million for the same period in 2020, an increase of 6%.

FDIC the expenses were $ 5.59 million for the nine months ended September 30, 2021
compared to $ 5.56 million for the same period in 2020, an increase of 0.5%.

Other expenses were $9.5 million for the nine months ended September 30, 2021
compared to $11.8 million over the same period ended September 30, 2020, a 19%
decrease.

The reasons for the non-interest expense results described above are discussed in more detail in the “Non-interest expense” section.

Income tax expenses were $46 million for the nine months ended September 30,
2021 an increase of 45%, compared to the same period in 2020. The components and
drivers of the change are discussed in the "Income Tax Expense" section below.

The ratio of common equity to total assets increased to 11.49% at September 30,
2021 from 11.16% at December 31, 2020 as the increase in common equity (from
earnings of $135.1 million, reduced by dividends of $31.9 million and stock
purchases of $677 thousand), for the nine months ended September 30, 2021,
outweighed the increase in assets increased over that same period. The earnings
are is 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, investment securities, and interest bearing deposits with
other banks and other short term investments. The cost of funds represents
interest expense on deposits, customer repurchase agreements and other
borrowings. Noninterest bearing deposits and capital are other components
representing funding sources (refer to discussion above under Results of
Operations). Changes in the volume and mix of assets and funding sources, along
with the changes in yields earned and rates paid, determine changes in net
interest income.
Net interest income was $79.0 million for the three months ended September 30,
2021, unchanged from the $79.0 million for the same period in 2020. Net interest
income was flat due to a 13% increase in average earnings assets, offset by a
corresponding decline in net interest margin, when comparing the three months
ended September 30, 2020 with the same period in 2021. Additionally, the PPP
loans had an average yield of 6.69% (includes fee acceleration from the
forgiveness process) for the three months ended September 30, 2021, which
positively impacted the overall yield of the total loan portfolio by
approximately 5 basis points.
For the nine months ended September 30, 2021, net interest income increased by
$6.2 million, which reflects earnings on a higher level of average earnings
assets and $4.7 million of accelerated interest income from the PPP sale in the
second quarter of 2021. Additionally, the PPP loans had an average yield of
6.22% (includes fee acceleration from the forgiveness process) for the nine
months ended September 30, 2021, which positively impacted the overall yield of
the total loan portfolio by approximately 7 basis points.
The net interest margin was 2.91% for the nine months ended September 30, 2021
and 3.27% for the same period in 2020. The decline reflects the impact of lower
rates on increased cash and securities balances and loans balances representing
a lower percentage of earning assets, partially offset by the accelerated
interest income from the PPP sale.

In the first nine months of 2021 as compared to the same period in 2020, average
U.S. Treasury rates in the two to five year range decreased by approximately 10
basis points and the average yield curve steepened as the average two to ten
year spread went from an average of 43 basis points to an average of 124 basis
points. The Company experienced 36 basis points of net interest margin
compression between the first nine months of 2020 as compared to the first nine
months of 2021 (from 3.27% to 2.91%). In addition, our cost of funds declined 37
basis points (from 0.75% to 0.38%), while the yield on earning assets declined
by 73 basis points (from 4.02% to 3.29%). Average liquidity was $2.7 billion for
the third quarter of 2021 and $1.3 billion for the third quarter of 2020. The
yield on our loan assets was negatively impacted by the low interest rate
environment in the first three quarters of 2021 as legacy fixed rate loans
originated in higher rate eras matured and paid off or were prepaid off. A
substantial portion of the variable rate loan portfolio has interest rate floors
that cushioned the decline in loan yields.

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Average earning asset yields decreased 73 basis points to 3.29% for the nine
months ended September 30, 2021, as compared to 4.02% for the same period in
2020. The average cost of interest bearing liabilities decreased by 56 basis
points (to 0.61% from 1.17%) for the nine months ended September 30, 2021 as
compared to the same period in 2020. Combining the change in the yield on
earning assets and the costs of interest bearing liabilities, the net interest
spread decreased by 17 basis points for the nine months ended September 30, 2021
as compared to 2020 (2.85% as compared to 2.68%).

The tables below presents the average balances and rates of the major categories
of the Company's assets and liabilities for the three months ended September 30,
2021 and 2020 and also the nine months ended September 30, 2021 and 2020.
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,
together with net interest income, 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.


                                       54
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                              Eagle Bancorp, Inc.
      Consolidated Average Balances, Interest Yields And Rates (Unaudited)
                             (dollars in thousands)
                                                                                 Three Months Ended September 30,
                                                               2021                                                            2020
                                         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                          $  2,668,265          $  1,083                    0.16  %       $  1,275,932          $    384                    0.12  %
Loans held for sale (1)                    56,866               642                    4.52  %             79,354               567                    2.86  %
Loans (1) (2)                           7,055,621            81,540                    4.59  %          7,910,260            88,730                    4.46  %
Investment securities available for
sale (2)                                1,670,723             5,877                    1.40  %            906,990             4,141                    1.82  %
Federal funds sold                         34,805                10                    0.11  %             33,403                11                    0.13  %
Total interest earning assets          11,486,280            89,152                    3.08  %         10,205,939            93,833                    

3.66%

Total noninterest earning assets          432,215                                                         376,681
Less: allowance for credit losses          92,169                                                         109,025
Total noninterest earning assets          340,046                                                         267,656
TOTAL ASSETS                         $ 11,826,326                                                    $ 10,473,595

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction         $    842,086          $    402                    0.19  %       $    756,005          $    483                    0.25  %
Savings and money market                4,971,866             3,645                    0.29  %          3,998,603             4,929                    0.49  %
Time deposits                             763,513             2,543                    1.32  %          1,112,664             5,583                    2.00  %
Total interest bearing deposits         6,577,465             6,590                    0.40  %          5,867,272            10,995                    0.75  %
Customer repurchase agreements             27,348                14                    0.20  %             28,523                84                    1.17  %
Other short-term borrowings               300,003               506                    0.67  %            300,003               505                    0.66  %
Long-term borrowings                      121,346             2,997                    9.88  %            267,946             3,211                    4.69  %
Total interest bearing liabilities      7,026,162            10,107                    0.57  %          6,463,744            14,795                    

0.91%

Noninterest bearing liabilities:
Noninterest bearing demand              3,370,649                                                       2,724,640
Other liabilities                          98,493                                                          74,066
Total noninterest bearing
liabilities                             3,469,142                                                       2,798,706

Shareholders' Equity                    1,331,022                                                       1,211,145
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY                               $ 11,826,326                                                    $ 10,473,595

Net interest income                                        $ 79,045                                                        $ 79,038
Net interest spread                                                                    2.51  %                                                         2.75  %
Net interest margin                                                                    2.73  %                                                         3.08  %
Cost of funds                                                                          0.35  %                                                         0.58  %


(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 $5.4 million for the three months ended September 30, 2021 and 2020,
respectively.
(2)Interest and fees on loans and investments exclude tax equivalent
adjustments.
                                       55
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                                                                                   Nine Months Ended September 30,
                                                                2021                                                             2020
                                         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                          $  2,288,660          $   2,239                    0.13  %       $    990,051          $   2,104                    0.28  %
Loans held for sale (1)                    79,264              1,936                    3.26  %             66,158              1,605                    3.23  %
Loans (1) (2)                           7,385,733            258,188                    4.67  %          7,859,188            277,374                    4.71  %
Investment securities available for
sale (2)                                1,506,996             15,878                    1.41  %            865,484             14,139                    2.18  %
Federal funds sold                         32,146                 25                    0.10  %             33,424                 84                    0.34  %
Total interest earning assets          11,292,799            278,266                    3.29  %          9,814,305            295,306                   

4.02%

Total noninterest earning assets          408,167                                                          368,974
Less: allowance for credit losses         100,756                                                           99,198
Total noninterest earning assets          307,411                                                          269,776
TOTAL ASSETS                         $ 11,600,210                                                     $ 10,084,081

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction         $    819,033          $   1,217                    0.20  %       $    787,434          $   2,679                    0.45  %
Savings and money market                4,842,621             11,312                    0.31  %          3,751,397             21,619                    0.77  %
Time deposits                             826,790              8,759                    1.42  %          1,199,654             19,757                    2.20  %
Total interest bearing deposits         6,488,444             21,288                    0.44  %          5,738,485             44,055                    1.03  %
Customer repurchase agreements             22,240                 34                    0.20  %             29,710                257                    1.16  %
Other short-term borrowings               300,003              1,502                    0.67  %            273,452              1,363                    0.66  %
Long-term borrowings                      197,090              9,114                    6.17  %            257,265              9,486                    4.84  %
Total interest bearing liabilities      7,007,777             31,938                    0.61  %          6,298,912             55,161                   

1.17%

Noninterest bearing liabilities:
Noninterest bearing demand              3,206,250                                                        2,519,867
Other liabilities                          93,960                                                           71,314
Total noninterest bearing
liabilities                             3,300,210                                                        2,591,181

Shareholders' Equity                    1,292,223                                                        1,193,988
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY                               $ 11,600,210                                                     $ 10,084,081

Net interest income                                        $ 246,328                                                        $ 240,145
Net interest spread                                                                     2.68  %                                                          2.85  %
Net interest margin                                                                     2.91  %                                                          3.27  %
Cost of funds                                                                           0.38  %                                                          0.75  %


(1)Loans placed on nonaccrual status are included in average balances. Net loan
fees and late charges included in interest income on loans totaled $26.3 million
and $16.1 million for the nine months ended September 30, 2021 and 2020,
respectively.
(2)Interest and fees on loans and investments exclude tax equivalent
adjustments.
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Provision for credit losses

The provision for credit losses represents the amount of expense charged to
current earnings to fund the ACL on loans and the ACL on available for sale
investment securities. The amount of the allowance for credit losses on loans is
based on many factors that reflect management's assessment of the risk in the
loan portfolio. Those factors include historical losses based on internal and
peer data, economic conditions and trends, the value and adequacy of collateral,
volume and mix of the portfolio, performance of the portfolio, and internal loan
processes of the Company and Bank.
The provision for unfunded commitments is presented separately on the Statement
of Income. This provision considers the probability that unfunded commitments
will fund among other factors.
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 "Allowance for Credit Losses - Loans" section of Note 1 to the
Consolidated Financial Statements.
The results of this process, in combination with conclusions of the Bank's
outside consultants' review of the risk inherent in the loan portfolio, support
management's assessment as to the adequacy of the allowance at the balance sheet
date. Please refer to the discussion under "Critical Accounting Policies" above
and in Note 1 to the Consolidated Financial Statements for an overview of the
methodology management employs on a quarterly basis to assess the adequacy of
the allowance and the provisions charged to expense. Also, refer to the table on
the next page which reflects activity in the allowance for credit losses.
During the three months ended September 30, 2021, the ACL on loans reflected a
reversal of $8.3 million in the provision and $1.3 million in net charge-offs,
which were attributable primarily to one commercial loan with a balance of $1
million. The provision for credit losses on loans for the same period in 2020
was $6.6 million. The high level of provisioning in the third quarter of 2020
was primarily due to the impact of COVID-19 on our actual and expected future
credit losses. The reversal in the third quarter of 2021 was primarily driven by
the decline in loans, improvement in credit quality, and improvement and
adjustments in qualitative and environmental factors. Net charge-offs for the
three months ended September 30, 2021, represented an annualized 0.08% of
average loans, excluding loans held for sale, as compared to $5.2 million, or an
annualized 0.26% of average loans, excluding loans held for sale, for the same
period in 2020.

During the nine months ended September 30, 2021, the ACL on loans reflected a
reversal of $14.5 million in the provision, and $12.2 million in net charge-offs
during the period. The provision for credit losses on loans was $40.7 million
for the nine months ended September 30, 2020. Net charge-offs in the first nine
months of 2021 represented an annualized 0.22% of average loans, excluding loans
held for sale, as compared to $14.6 million, or an annualized 0.25% of average
loans, excluding loans held for sale, in the first nine months of 2020.

As part of its comprehensive loan review process, internal loan and credit
committees carefully evaluate loans that are past-due 30 days or more. The
Committees make a thorough assessment of the conditions and circumstances
surrounding each delinquent loan. The Bank's loan policy requires that loans be
placed on nonaccrual if they are 90 days past-due, unless they are well secured
and in the process of collection. Additionally, Credit Administration
specifically analyzes the status of development and construction projects, sales
activities and utilization of interest reserves in order to carefully and
prudently assess potential increased levels of risk requiring additional
reserves.
The maintenance of a high quality loan portfolio, with an adequate allowance for
credit losses, will continue to be a primary management objective for the
Company. The Company's goal is to mitigate risks in the event of unforeseen
threats to the loan portfolio as a result of economic downturn or other negative
influences. Plans for mitigating inherent risks in managing loan assets include
carefully enforcing loan policies and procedures, evaluating each borrower's
business plan during the underwriting process and throughout the loan term,
identifying and monitoring primary and alternative sources for loan repayment,
and obtaining collateral to mitigate economic loss in the event of liquidation.
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The following table sets forth activity in the allowance for credit losses for
the periods indicated.
                                                                            Nine Months Ended
                                                                              September 30,
(dollars in thousands)                                                   2021               2020
Balance at beginning of period                                       $ 109,579          $  73,658
Impact of adopting CECL                                                      -             10,614
Charge-offs:
Commercial                                                               7,691              7,332
Income producing - commercial real estate                                5,216              4,300
Owner occupied - commercial real estate                                      -                 20
Real estate mortgage - residential                                           -                  -
Construction - commercial and residential                                  206              2,947
Construction - C&I (owner occupied)                                          -                  -
Home equity                                                                  -                 92
Other consumer                                                               1                  -
Total charge-offs                                                       13,114             14,691

Recoveries:
Commercial                                                                 326                116
Income producing - commercial real estate                                   97                  -
Owner occupied - commercial real estate                                      -                  -
Real estate mortgage - residential                                           -                  -
Construction - commercial and residential                                  499                  -
Construction - C&I (owner occupied)                                          -                  -
Home equity                                                                  -                  -
Other consumer                                                              17                 20
Total recoveries                                                           939                136
Net charge-offs                                                         12,175             14,555
Provision for Credit Losses- Loans                                     (14,498)            40,498
Balance at end of period                                             $  

82,906 $ 110,215

Annualized ratio of net write-offs for the period to average outstanding loans for the period

                               0.22  %            0.25  %



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.

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                                                  September 30, 2021                                 December 31, 2020
                                       ACL - Loans   % of Total     % of Total            ACL - Loans      % of Total   % of Total
(dollars in thousands)                                   ACL          Loans                                   ACL          Loans
Commercial                             $  16,927            20  %          19  %       $        26,569           24  %         19  %
PPP loans                                      -             -  %           1  %                     -            -  %          6  %
Income producing - commercial
real estate                               41,431            51  %          49  %                55,385           51  %         47  %
Owner occupied - commercial real
estate                                    11,945            14  %          14  %                14,000           13  %         13  %
Real estate mortgage -
residential                                1,054             1  %           1  %                 1,020            1  %          1  %
Construction - commercial and
residential                                7,613             9  %          12  %                 9,092            8  %         11  %
Construction - C&I (owner
occupied)                                  3,128             4  %           3  %                 2,437            2  %          2  %
Home equity                                  768             1  %           1  %                 1,039            1  %          1  %
Other consumer                                40             -  %           -  %                    37            -  %          -  %
Total allowance                        $  82,906           100  %         100  %       $       109,579          100  %        100  %




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 $36.4 million at
September 30, 2021 representing 0.31% of total assets, as compared to $65.9
million of nonperforming assets, or 0.59% of total assets, at December 31, 2020.
At September 30, 2021, the Company had no accruing loans 90 days or more past
due. Management remains attentive to early signs of deterioration in borrowers'
financial conditions and to taking the appropriate action to mitigate risk.
Furthermore, the Company is diligent in placing loans on nonaccrual status and
believes, based on its loan portfolio risk analysis, that its allowance for
credit losses, at 1.21% of total loans at September 30, 2021, is adequate to
absorb expected credit losses within the loan portfolio at that date.
CECL allows for institutions to evaluate individual loans in the event that the
asset does not share similar risk characteristics with its original
segmentation. This can occur due to credit deterioration, increased collateral
dependency or other factors leading to impairment. In particular, the Company
individually evaluates loans on nonaccrual status and those identified as TDRs,
though it may individually evaluate other loans or groups of loans as well if it
determines they no longer share similar risk with their assigned segment.
Reserves on individually assessed loans are determined by one of two methods:
the fair value of collateral or the discounted cash flow. Fair value of
collateral is used for loans determined to be collateral dependent, and the fair
value represents the net realizable value of the collateral, adjusted for sales
costs, commissions, senior liens, etc. The continuing payments are discounted
over the expected life at the loan's original contract rate and include
adjustments for risk of default.
Loans are considered to have been modified in a TDR when, due to a borrower's
financial difficulties, the Company makes unilateral concessions to the borrower
that it would not otherwise consider. Concessions could include interest rate
reductions, principal or interest forgiveness, forbearance, and other actions
intended to minimize economic loss and to avoid foreclosure or repossession of
collateral. Alternatively, management, from time-to-time and in the ordinary
course of business, implements renewals, modifications, extensions, and/or
changes in terms of loans to borrowers who have the ability to repay on
reasonable market-based terms, as circumstances may warrant. Such modifications
are not considered to be TDRs, as the accommodation of a borrower's request does
not rise to the level of a concession if the modified transaction is at market
rates and terms and/or the borrower is not experiencing financial difficulty.
For example: (1) adverse weather conditions may create a short term cash flow
issue for an otherwise profitable retail business that suggests a temporary
interest-only period on an amortizing loan; (2) there may be delays in
absorption on a real estate project that reasonably suggests extension of the
loan maturity at market terms; or (3) there may be maturing loans to borrowers
with demonstrated repayment ability who are not in a position at the time of
maturity to obtain alternate long-term financing. The determination of whether a
restructured loan is a TDR requires consideration of all of the facts and
circumstances surrounding the change in terms, and the exercise of prudent
business judgment.

The Company had seven TDRs at September 30, 2021 totaling approximately $16.5
million. Five of these loans totaling approximately $10.2 million are performing
under their modified terms. In the first nine months of 2020, two
                                       59
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performing TDR loans, with a balance of $6.3 million, defaulted on its modified
terms and was placed on nonaccrual status. A default is considered to have
occurred once the TDR is past due 90 days or more or it has been placed on
nonaccrual. Commercial and consumer loans modified in a TDR are closely
monitored for delinquency as an early indicator of possible future default. If
loans modified in a TDR subsequently default, the Company evaluates the loan for
possible further impairment. 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 nine months
ended September 30, 2021 and 2020, there were no loans modified in a TDR.

There is uncertainty regarding the region's overall economic outlook given lack
of clarity over how long COVID-19 will continue to impact our region. Management
has been working with customers on payment deferrals to assist companies in
managing through this crisis. Some of these deferrals may have met the criteria
for treatment under GAAP as TDRs. As of September 30, 2021, we had ongoing
temporary modifications on approximately 6 loans representing approximately
$70 million (approximately 1.0% of total loans) in outstanding balances, as
compared to 36 loans representing approximately $72 million (approximately 0.9%
of total loans) at December 31, 2020. Additionally, none of the deferrals are
reflected in the Company's asset quality measures (i.e. non-performing loans)
due to the provision of the CARES Act that permits U.S. financial institutions
to temporarily suspend the GAAP requirements to treat such short-term loan
modifications as TDRs. Similar provisions have also been confirmed by
interagency guidance issued by the federal banking agencies and confirmed with
staff members of the Financial Accounting Standards Board.

Total nonperforming loans amounted to $31.2 million at September 30, 2021 (0.46%
of total loans) compared to $60.9 million at December 31, 2020 (0.79% of total
loans).
Included in nonperforming assets are OREO properties, which at September 30,
2021 was $5.1 million for five foreclosed properties. As of December 31, 2020,
OREO was $5.0 million.
OREO properties are carried at fair value less estimated costs to sell. It is
the Company's policy to obtain third party appraisals prior to foreclosure, and
to obtain updated third party appraisals on OREO properties generally not less
frequently than annually. Generally, the Company would obtain updated appraisals
or evaluations where it has reason to believe, based upon market indications
(such as comparable sales, legitimate offers below carrying value, broker
indications and similar factors), that the current appraisal does not accurately
reflect current value. There were no sales of an OREO property during the first
nine months of 2021 or 2020.
The following table shows the amounts of nonperforming assets at the dates
indicated for September 30, 2021.
(dollars in thousands)                                               September 30, 2021         December 31, 2020
Nonaccrual Loans:
Commercial                                                          $         12,147           $         15,352
Income producing - commercial real estate                                     14,933                     18,879
Owner occupied - commercial real estate                                        1,593                     23,158
Real estate mortgage - residential                                             2,018                      2,932
Construction - commercial and residential                                          -                        206
Construction - C&I (owner occupied)                                                -                          -
Home equity                                                                      556                        416
Other consumer                                                                     -                          -
Accruing loans-past due 90 days                                                    -                          -
Total nonperforming loans (1)                                                 31,247                     60,943
Other real estate owned                                                        5,135                      4,987
Total nonperforming assets                                          $         36,382           $         65,930

Coverage ratio, allowance for credit losses to total nonperforming loans

                                                           265.32   %                 179.80  %
Ratio of nonperforming loans to total loans                                     0.46   %                   0.79  %
Ratio of nonperforming assets to total assets                                   0.31   %                   0.59  %


________________________________________________________

(1)Nonaccrual loans reported in the table above do not include loans that
migrated from a performing TDR status during the period. During the nine months
ended September 30, 2021, there were no loans that migrated from a performing
TDR
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status. During the nine months ended September 30, 2020 there were two loans
totaling $6.3 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 September 30, 2021, there were $87.9 million of performing loans considered
to be potential problem loans, defined as loans that are not included in the 90
days past due, nonaccrual or restructured categories, but for which known
information about possible credit problems causes management to be uncertain as
to the ability of the borrowers to comply with the present loan repayment terms,
which may in the future result in disclosure in the past due, nonaccrual or
restructured loan categories. Potential problem loans were $91.2 million at
December 31, 2020. The Company has taken a conservative yet proactive approach
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 September 30, 2021 decreased
to $8.3 million from $17.8 million for the three months ended September 30,
2020, a 53% decrease. Gain on sale of loans for the three months ended
September 30, 2021 decreased to $3.3 million from $12.2 million for the three
months ended September 30, 2020, a 73% decrease; a decrease in gains on the sale
of residential mortgage comprised the entire $8.9 million difference between the
two periods. Residential mortgage loan locked commitments were $280 million for
the three months ended September 30, 2021 as compared to $593 million for the
same period in 2020.
The decision whether to sell residential mortgage loans on a mandatory or best
efforts lock basis is a function of multiple factors, including but not limited
to overall market volumes of mortgage loan originations, forecasted
"pull-through" rates of origination, loan underwriting and closing operational
considerations, pricing differentials between the two methods, and availability
and pricing of various interest rate hedging strategies associated with the
mortgage origination pipeline. The Company continually monitors these factors to
maximize profitability and minimize operational and interest rate risks.
Other income for the three months ended September 30, 2021 decreased to $1.6
million from $4.0 million for the three months ended September 30, 2020, a 60%
decrease.
Service charges on deposits for the three months ended September 30, 2021
increased to $1.2 million from $1.1 million for the three months ended September
30, 2020, a 13% increase, due to an increase in deposit activity.
Gain on sale of investment securities were $1.5 million for the three months
ended September 30, 2021 compared to $115 thousand for the same period in 2020.
Total noninterest income for the nine months ended September 30, 2021 decreased
to $29.8 million from $35.8 million for the nine months ended September 30,
2020, a 17% decrease. Gain on sale of loans for the nine months ended
September 30, 2021 decreased to $12.0 million from $16.2 million for the nine
months ended September 30, 2020, a 26% decrease; the decrease was driven by
lower gains on the sale of residential mortgage loans. Residential mortgage
loans locked commitments were $831 million for the first nine months of 2021 as
compared to $1.43 billion for the first nine months of 2020. Service charges on
deposits for the nine months ended September 30, 2021 decreased to $3.3 million
from $3.4 million for the nine months ended September 30, 2020, a 4% decrease.

Residential lending gains for the first nine months of 2020 include $3.9 million
in hedge and mark to market losses incurred during the first three quarters of
2020 that were not repeated in 2021. The 2020 losses were 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 2020.
Other income for the nine months ended September 30, 2021 decreased to $11.0
million from $12.8 million for the nine months ended September 30, 2020, a 14%
decrease. The primary decreases were in loan service fees and gain on sale of
OREO.
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Gains on sale of investments were $2.1 million and $1.7 million for the nine
months ended September 30, 2021 and 2020, respectively.
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 September 30,
2021, the Company had eight loans outstanding under FHA mortgage loan servicing
agreements for a total of $218.5 million. 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, pending market conditions
and other factors outlined above, may utilize either or both "mandatory
delivery" and "best efforts" forward loan sale commitments to sell those loans,
servicing released. Loans sold are subject to repurchase in circumstances where
documentation is deficient, the underlying loan becomes delinquent, or there is
fraud by the borrower. Loans sold are subject to penalty if the loan pays off
within a specified period following loan funding and sale. The Bank considers
these potential recourse provisions to be a minimal risk, but has established a
reserve under GAAP for possible repurchases. There were no repurchases due to
fraud by the borrower during the nine months ended September 30, 2021. The
reserve amounted to $89 thousand at September 30, 2021 and is included in other
liabilities on the Consolidated Balance Sheets.
Beyond the participation in the PPP program, the Company is an originator of SBA
loans and its practice is to sell the guaranteed portion of those loans at a
premium. There was $232 thousand of income from this source for the nine months
ended September 30, 2021 compared to $288 thousand for the same period in 2020.
Activity in SBA loan sales to secondary markets can vary widely from quarter to
quarter. See "Note 1: Summary of Significant Accounting Policies" for details
regarding the Company's participation in the PPP program.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and
equipment expenses, marketing and advertising, data processing, legal,
accounting and professional, FDIC insurance, and other expenses.
Total noninterest expenses totaled $36.4 million for the three months ended
September 30, 2021, as compared to $36.9 million for the three months ended
September 30, 2020, a 1.5% decrease. Total noninterest expenses totaled $109.9
million for the nine months ended September 30, 2021, as compared to $109.2
million for the nine months ended September 30, 2020, a 0.6% increase due
substantially to the following:
Salaries and employee benefits were $22.1 million for the three months ended
September 30, 2021, as compared to $19.4 million for the same period in 2020, an
increase of $2.8 million or 14%. Salaries and employee benefits were $63.8
million for the nine months ended September 30, 2021, as compared to $54.3
million for the same period in 2020, an increase of $9.5 million or 18%. For
both the three month and nine month periods, the increase was due to increased
incentive bonus accruals based on economic outlook in 2021 (continued reopening
of economy) compared to accruals in the third quarter of 2020 (continuation of
the COVID-19 pandemic), and an increase in share based compensation. At
September 30, 2021, the Company's full time equivalent staff numbered 509 as
compared to 515 at September 30, 2020.

Premises and equipment for the three months ended September 30, 2021 and 2020,
respectively, were $3.9 million, of which $3.2 million were premise expenses,
and $5.1 million, of which $4.4 million were premises expenses. Premises and
equipment expenses were $11.1 million for the nine months ended September 30,
2021, of which $9.3 million were premises expenses. For the nine months ended
September 30, 2020 premises and equipment expenses were $12.4 million, of which
$10.3 million were premises expenses. For the nine months ended September 30,
2021, the Company recognized $291 thousand of sublease revenue as compared to
$261 thousand for the same period in 2020. Sublease revenue is accounted for as
a reduction to premises and equipment expenses.
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Marketing and advertising spending rose $ 1.0 million for the three months ended September 30, 2021 and $ 928,000 for the same period in 2020. Marketing and advertising expenses were high $ 2.9 million for the nine months ended September 30, 2021 and $ 3.1 million for the same period in 2020. The decrease is due to a decrease in advertising, promotions and sponsorships.

Data processing expenses were $2.9 million for the three months ended
September 30, 2021 compared to $2.7 million for the same period in 2020. Data
processing expense increased to $8.5 million for the nine months ended
September 30, 2021 from $8.0 million for the same period in 2020, a 6% increase.
The increase, which took place in the first quarter of 2021 was related to an
increase in licensing fees.
Legal, accounting and professional fees were $2.0 million for the three months
ended September 30, 2021, compared to $3.1 million for the three months ended
September 30, 2020, a decrease of $1.1 million. Legal fees and expenditures were
$357 thousand and $1.8 million for the three months ended September 30, 2021 and
2020, respectively, and were primarily associated with previously disclosed
ongoing governmental investigations and related subpoenas and document requests,
as well as our defense of the previously disclosed class action lawsuit. Legal,
accounting and professional fees for the nine months ended September 30, 2021
were $8.5 million compared to $14.1 million for the nine months ended
September 30, 2020, a decrease of $5.5 million, primarily due to higher legal
fees in 2020 versus the same period in 2021. The amount of legal fees and
expenditures reported for the three months ended September 30, 2021 are net of
expected insurance coverage where we believe we have a high likelihood of
recovery pursuant to our D&O insurance policies but does not include any offset
for potential claims we may have in the future as to which recovery is
impossible to predict at this time. See Part II, Item 1 - "Legal Proceedings"
for more information.

FDIC expenses were $1.5 million for the three months ended September 30, 2021
compared to $2.2 million for the same period in 2020, a 28% decrease. FDIC
expenses were $5.59 million for the nine months ended September 30, 2021
compared to $5.56 million for the same period in 2020, a 0.5% increase. The
increase for the first nine months of 2021 compared to the same period in 2020
were due to a higher deposit base, offset by improved metrics used in the
calculation of fees.
The major components of other expenses include broker fees, franchise taxes,
director compensation and insurance expense. Other expenses decreased to $2.9
million for the three months ended September 30, 2021 from $3.5 million for the
same period in 2020, an 18% decrease. Other expenses decreased to $9.5 million
for the nine months ended September 30, 2021 from $11.8 million for the same
period September 30, 2020, a 19% decrease, due primarily to lower broker fees
and lower OREO expense, partially offset by higher real estate taxes-utilities.
The efficiency ratio, which measures the ratio of noninterest expense to total
revenue, was 41.6% for the third quarter of 2021, as compared to 38.1% for the
third quarter of 2020. For the first nine months of 2021, the efficiency ratio
was 39.8% as compared to 39.6% for the same period in 2020. The increase in the
third quarter of 2021 over the third quarter of 2020 was primarily due to an
decrease in noninterest income.
As a percentage of average assets, total noninterest expense (annualized) was
1.23% for the three months ended September 30, 2021 as compared to 1.41% for the
same period in 2020. As a percentage of average assets, total noninterest
expense (annualized) was 1.26% for the nine months ended September 30, 2021 as
compared to 1.44% for the same period in 2020.
Income Tax Expense
The Company's ratio of income tax expense to pre-tax income ("effective tax
rate") for the three months ended September 30, 2021 and 2020 was 25.4%. The
total tax provision for the three months ended September 30, 2021 was $14.8
million, compared to $14.1 million for the three months ended September 30,
2020. The effective income tax rate for the nine months ended September 30, 2021
and 2020 was 25.4%. The total tax provision for the nine months ended September
30, 2021 was $46.1 million, compared to $31.8 million for the nine months ended
September 30, 2020. The Company's earnings increased for the three and nine
months ended September 30, 2021 with a corresponding increase to disallowed
expenses giving rise to no incremental change to the effective tax rate.The
Company has not recorded any liabilities for uncertain tax positions as of
September 30, 2021. The Company remains subject to periodic audits and reviews
by the taxing authorities, and the Company's returns for the years 2018-2020
remain open for examination.
FINANCIAL CONDITION
Summary
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Total assets at September 30, 2021 was $11.6 billion and at December 31, 2020
was $11.1 billion . The largest component of assets, total loans (excluding
loans held for sale), were $6.9 billion at September 30, 2021, as compared to
$7.8 billion at December 31, 2020, an 11.7% decrease. The decrease in loans over
the nine months ended September 30, 2021, was driven by the successful
completion of projects, and at the outset of the COVID-19 pandemic, our focus on
serving existing loan clients and maintaining credit quality. More recently, in
the second and third quarters of 2021, the decline in loans also has been
influenced by the competition to refinance at lower rates for longer
amortization periods, and excess liquidity at competing banks as well as many
companies and construction project sponsors. Additionally, the Bank reduced its
PPP loans from $565 million at March 31, 2021 to $67 million at September 30,
2021 though the forgiveness process and loan sales.
Loans held for sale amounted to $53.4 million at September 30, 2021 compared to
$88.2 million at December 31, 2020, a 39.4% decrease. The investment portfolio
totaled $1.8 billion at September 30, 2021 as compared to $1.2 billion at
December 31, 2020, an increase of 55.2%, primarily due to the deployment of cash
from deposit inflows into investments.
Total deposits at September 30, 2021 were $9.7 billion and at December 31, 2020
were $9.2 billion. We continue to work on expanding the breadth and depth of our
existing relationships while we pursue building new relationships. Total
borrowed funds (excluding customer repurchase agreements) were $369.6 million at
September 30, 2021, as compared to $568.1 million at December 31, 2020.
Total shareholders' equity was $1.33 billion as of September 30, 2021 compared
to $1.24 billion as of December 31, 2020, an increase of $90.8 million. This
increase was primarily from earnings of $135.1 million and $5.8 million in
additional paid-in capital associated with share-based compensation, offset by
$17.8 million in unrealized losses on AFS securities (net of taxes), $31.9
million in dividends declared and $677 thousand of stock repurchases, .
The Company's capital ratios remain substantially in excess of regulatory
minimum and buffer requirements, with a total risk based capital ratio of 16.59%
at September 30, 2021, as compared to 17.04% at December 31, 2020, common equity
tier 1 ("CET1") risk based capital was 15.33% at September 30, 2021 compared to
13.49% at December 31, 2020, tier 1 risk based capital ratios of 15.33% at
September 30, 2021, as compared to 13.49% at December 31, 2020, and a tier 1
leverage ratio of 10.58% at September 30, 2021, as compared to 10.31% at
December 31, 2020.
The ratio of common equity to total assets was 11.49% at September 30, 2021, as
compared to 11.16% at December 31, 2020. Book value per share was $41.68 at
September 30, 2021, a 6.7% increase over $39.05 at December 31, 2020. In
addition, the tangible common equity ratio was 10.68% at September 30, 2021, as
compared to 10.31% at December 31, 2020. Tangible book value per share was
$38.39 at September 30, 2021, a 7.4% increase over $35.74 at December 31, 2020.
Refer to the "Use of Non-GAAP Financial Measures" section for additional detail
and a reconciliation of GAAP to non-GAAP financial measures.
In order to be considered well-capitalized, the Bank must have a CET1 risk based
capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based
capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank
exceed all these requirements and satisfy the capital conservation buffer of
2.5% of CET1 capital required to engage in capital distribution. Failure to
maintain the required capital conservation buffer would limit the ability of the
Company and the Bank to pay dividends, repurchase shares or pay discretionary
bonuses.
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Loans, net of amortized deferred costs and charges, at September 30, 2021 and
December 31, 2020 by major category are summarized below.

                                                     September 30, 2021                             December 31, 2020
(dollars in thousands)                           Amount                    %                    Amount                    %
Commercial                                $       1,289,215                  19  %       $       1,437,433                  19  %
PPP loans                                            67,311                   1  %                 454,771                   6  %
Income producing - commercial real estate         3,337,303                  49  %               3,687,000                  47  %
Owner occupied - commercial real estate             977,617                  14  %                 997,694                  13  %
Real estate mortgage - residential                   76,259                   1  %                  76,592                   1  %
Construction - commercial and residential           824,133                  12  %                 873,261                  11  %
Construction - C&I (owner occupied)                 222,366                   3  %                 158,905                   2  %
Home equity                                          55,527                   1  %                  73,167                   1  %
Other consumer                                        1,132                   -  %                   1,389                   -  %
Total loans                                       6,850,863                 100  %               7,760,212                 100  %
Less: allowance for credit losses                   (82,906)                                      (109,579)
Net loans (1)                             $       6,767,957                              $       7,650,633


(1)Excludes accrued interest receivable of $40.0 million and $30.8 million at
September 30, 2021 and December 31, 2020, respectively, which is recorded in
other assets.

In its lending activities, the Company seeks to develop and expand relationships
with clients whose businesses and individual banking needs will grow with the
Bank. Superior customer service, local decision making, and accelerated
turnaround time from application to closing have been significant factors in
growing the loan portfolio and meeting the lending needs in the markets served,
while maintaining sound asset quality.
Loans outstanding were $6.9 billion at September 30, 2021, a decrease of $909.3
million, or 11.7%, from the $7.8 billion at December 31, 2020. PPP loans
outstanding were $67.3 million at September 30, 2021, a decrease of $387.5
million, from the $454.8 million at December 31, 2021. If PPP loans are
excluded, loans outstanding were $6.8 billion at September 30, 2021, a decrease
of $521.9 million from December 31, 2020. PPP loans accounted for approximately
42.6% total decrease in loans outstanding over the nine months ended
September 30, 2021. Refer to the "Use of Non-GAAP Financial Measures" section
for additional detail and a reconciliation of GAAP to non-GAAP financial
measures.

Loan balances have incrementally fallen since the second quarter of 2021. The
low interest rate environment and extremely competitive landscape remain factors
impacting growth in our lending efforts, and the rate and amount of payoffs have
increased in the third quarter. Notwithstanding an increased supply of
residential (rental) units, for sale single family residential properties and
multi-family commercial real estate leasing in the Bank's market area have held
up well, particularly for well-located projects close to the District of
Columbia. As a general matter, there has been some softening and slow decision
making relative to renewals in the office leasing market as tenants evaluate the
"new normal" with respect to office occupancy. Overall, commercial real estate
values have generally held up well, but we continue to be cautious of the
capitalization rates at which some assets are trading and as a result we are
being cautious with our valuations. Commercial loans meet reasonable
underwriting standards, including appropriate collateral and cash flow necessary
to support debt service. Valuations associated with the moderately priced
housing market have generally been increasing, with well-located,
Metro-accessible properties garnering a premium. We believe there will be more
opportunities to originate loans for large commercial projects and grow the loan
portfolio as economic conditions improve. The potential impact from the COVID-19
pandemic may not yet have been fully reflected in the market across all asset
types. Please refer to the COVID-19 risk factor in Item 1A below.


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Loan Portfolio Exposures – COVID-19:

Industrial segments within the portfolio of loans to September 30, 2021 who we believe may have increased the risk from the COVID-19 pandemic include:

                                                     Principal Balance
Industry                                                (in 000's)                         % of Loan Portfolio
Accommodation & Food Services                   $          623,813          (1)                             9.1  %
Retail Trade                                                79,078          (2)                             1.2  %

Commercial Real Estate exposure (not included
above)
Restaurant                                                  35,043                                          0.5  %
Hotel                                                       61,150                                          0.9  %
Retail                                                     376,342                                          5.5  %
Total                                           $        1,175,426                                         17.2  %


1 Includes $31.3 million of PPP loans.
2 Includes $64 thousand of PPP loans.
Concerns over exposures to the Accommodation and Food Service industry and
Retail Trade are the most immediate at this time. Accommodation and Food Service
exposure represents 9.1% of the Bank's loan portfolio as of September 30, 2021.
Retail Trade exposure represents 1.2% of the Bank's loan portfolio. The Bank has
ongoing extensive outreach to these customers and has assisted where necessary
with PPP loans and payment deferrals or interest-only periods in the short term
while customers work to adapt to the evolving landscape of the COVID-19
pandemic. The uncertain duration and severity of the pandemic and the timing of
recovery may impact future credit challenges in these areas.

Although not evidenced at September 30, 2021, it is anticipated that some
portion of the CRE loans secured by the above property types could be impacted
by the tenancies associated with impacted industries. The Bank is working with
CRE investor borrowers and monitoring rent collections as part of our portfolio
management oversight.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of
demand deposits, money market accounts, NOW accounts, savings accounts and
certificates of deposit. The deposit base includes transaction accounts, time
and savings accounts, which customers use for cash management and which provide
the Bank with a source of fee income and cross-marketing opportunities, as well
as an attractive source of lower cost funds. To meet funding needs during
periods of high loan demand and seasonal variations in core deposits, the Bank
utilizes alternative funding sources such as secured borrowings from the Federal
Home Loan Banks (the "FHLB"), federal funds purchased lines of credit from
correspondent banks and brokered deposits from regional and national brokerage
firms and IntraFi Network, LLC ("IntraFi").
For the nine months ended September 30, 2021, noninterest bearing deposits
increased by $27.1 million as compared to December 31, 2020, while interest
bearing deposits increased by $452.2 million during the same period.
From time to time, the Bank accepts brokered time deposits, generally in
denominations of less than $250 thousand, from national brokerage networks,
including IntraFi. Additionally, the Bank participates in the Certificates of
Deposit Account Registry Service (the "CDARS") and the Insured Cash Sweep
product ("ICS"), which provide for reciprocal ("two-way") transactions among
banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The
Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's
Insured Network Deposit ("IND"). At September 30, 2021, total deposits included
$2.7 billion of brokered deposits (excluding the CDARS and ICS two-way) which
represented 28.3% of total deposits. At December 31, 2020, total brokered
deposits (excluding the CDARS and ICS two-way) were $2.4 billion, or 26.2% of
total deposits. The CDARS and ICS two-way component represented $808.1 million,
or 8.4%, of total deposits and $790.0 million, or 8.6%, of total deposits at
September 30, 2021 and December 31, 2020, respectively. These sources are
believed by the Company to represent a reliable and cost efficient alternative
funding source for the Bank. However, to the extent that the condition,
regulatory position or reputation of the Company or Bank deteriorates, or to the
extent that there are significant
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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 September 30, 2021, the Company had $2.84 billion in noninterest bearing
demand deposits, representing 29% of total deposits, compared to $2.81 billion
of noninterest bearing demand deposits at December 31, 2020, or 31% of total
deposits. Average noninterest bearing deposits of total deposits for the nine
months ended September 30, 2021 and 2020 were 33% and 31%. The Bank also offers
business NOW accounts and business savings accounts to accommodate those
customers who may have excess short term cash to deploy in interest earning
assets.
As an enhancement to the basic noninterest bearing demand deposit account, the
Company offers a sweep account, or "customer repurchase agreement," allowing
qualifying businesses to earn interest on short-term excess funds that are not
suited for either a certificate of deposit or a money market account. The
balances in these accounts were $29.4 million at September 30, 2021 compared to
$26.7 million at December 31, 2020. Customer repurchase agreements are not
deposits and are not insured by the FDIC, but are collateralized by U.S. agency
securities and/or U.S. agency backed mortgage backed securities. These accounts
are particularly suitable to businesses with significant fluctuation in the
levels of cash flows. Attorney and title company escrow accounts are examples of
accounts which can benefit from this product, as are customers who may require
collateral for deposits in excess of FDIC insurance limits but do not qualify
for other pledging arrangements. This program requires the Company to maintain a
sufficient investment securities level to accommodate the fluctuations in
balances which may occur in these accounts.

At September 30, 2021 the Company had $751.5 million in time deposits. Time
deposits decreased by $226.3 million from year end December 31, 2020. The Bank
raises and renews time deposits through its branch network, for its public funds
customers, and through brokered certificates of deposits ("CDs") to meet the
needs of its community of savers and as part of its interest rate risk
management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit
provided by correspondent banks (which are unsecured) at September 30, 2021 and
December 31, 2020. At September 30, 2021 and December 31, 2020, the Company had
$300 million of FHLB short-term advances borrowed as part of the overall asset
liability strategy and to support loan growth. Outstanding FHLB advances are
secured by collateral consisting of a blanket lien on qualifying loans in the
Bank's commercial mortgage, residential mortgage and home equity loan
portfolios.
Long-term borrowings outstanding at September 30, 2021 included the Company's
August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1,
2024. On August 2, 2021, the Company redeemed $150 million of subordinated debt
issued on July 26, 2016. The redemption accelerated deferred financing costs of
$1.3 million, which is included in interest income for the third quarter of
2021. For additional information on the subordinated notes, please refer to
Notes 8 and 13 to the Consolidated Financial Statements included in this report.
Liquidity Management
Liquidity is a measure of the Company's and Bank's ability to meet loan demand
and to satisfy depositor withdrawal requirements in an orderly manner. The
Bank's primary sources of liquidity consist of cash and cash balances due from
correspondent banks, excess reserves at the Federal Reserve, loan repayments,
federal funds sold and other short-term investments, maturities and sales of
investment securities, income from operations and new core deposits into the
Bank. The Bank's investment portfolio of debt securities is held in an
available-for-sale status which allows for flexibility, subject to holdings held
as collateral for customer repurchase agreements and public funds, to generate
cash from sales as needed to meet ongoing loan demand. These sources of
liquidity are considered primary and are supplemented by the ability of the
Company and Bank to borrow funds or issue brokered deposits, which are termed
secondary sources of liquidity and which are substantial.
Additionally, the Bank can purchase up to $155 million in federal funds on an
unsecured basis from its correspondents, against which there was no amount
outstanding at September 30, 2021, and can obtain unsecured funds under one-way
CDARS and ICS brokered deposits in the amount of $1.7 billion, against which
there was $77 thousand outstanding at September 30, 2021. The Bank also has a
commitment from IntraFi to place up to $1.8 billion of brokered deposits from
its IND program in amounts requested by the Bank, as compared to an actual
balance of $1.65 billion at September 30, 2021. At September 30, 2021, the Bank
was also eligible to make advances from the FHLB up to $1.0 billion based on
loans pledged as collateral to the FHLB, of which there was $300 million
outstanding at September 30, 2021. The Bank may enter into repurchase agreements
as well as obtain additional borrowing capabilities from the FHLB, provided
adequate collateral exists to secure these lending relationships. The Bank also
has a back-up borrowing facility through the Discount Window at the Federal
Reserve Bank of Richmond ("Federal Reserve Bank"). This facility, which amounts
to approximately $588 million, is collateralized with
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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 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 17.4% for the first nine months of 2021 as compared to the same period
in 2020. However, we still maintain a very liquid investment portfolio,
including significant overnight liquidity. In the third quarter of 2021, average
short term liquidity was $2.7 billion, which is above EagleBank's average needs,
and secondary sources of liquidity at September 30, 2021 were $2.9 billion.
At September 30, 2021, under the Bank's liquidity formula, it had $6.6 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 September 30,
2021 are as follows:
(dollars in thousands)
Unfunded loan commitments      $ 2,180,111
Unfunded lines of credit            96,874
Letters of credit                   88,495
Total                          $ 2,365,480



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 September 30, 2021, unfunded loan commitments included
$137.0 million related to interest rate lock commitments on residential mortgage
loans and were of a short-term nature. The pipeline of loan commitments remains
strong.
Unfunded lines of credit are agreements to lend to a customer as long as there
is no violation of the terms or conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since commitments may expire without being
drawn, the total commitment amount does not necessarily represent future cash
requirements.
Letters of credit include standby and commercial letters of credit. Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance by the Bank's customer to a third party. Standby letters of
credit generally become payable upon the failure of the customer to perform
according to the terms of the underlying contract with the third party. Standby
letters of credit are generally not drawn. Commercial letters of credit are
issued specifically to facilitate commerce and typically result in the
commitment being drawn when the underlying transaction is consummated between
the
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customer and a third party. The contractual amount of these letters of credit
represents the maximum potential future payments guaranteed by the Bank. The
Bank has recourse against the customer for any amount it is required to pay to a
third party under a letter of credit, and holds cash and or other collateral on
those standby letters of credit for which collateral is deemed necessary.
Asset/Liability Management and Quantitative and Qualitative Disclosures about
Market Risk
A fundamental risk in banking is exposure to market risk, or interest rate risk,
since a bank's net income is largely dependent on net interest income. The
Bank's ALCO formulates and monitors the management of interest rate risk through
policies and guidelines established by it and the full Board of Directors and
through review of detailed reports discussed quarterly. In its consideration of
risk limits, the ALCO considers the impact on earnings and capital, the level
and direction of interest rates, liquidity, local economic conditions, outside
threats and other factors. Banking is generally a business of managing the
maturity and repricing mismatch inherent in its asset and liability cash flows
and to provide net interest income growth consistent with the Company's profit
objectives.
During the nine months ended September 30, 2021, the Company was able to produce
a net interest margin of 2.91% as compared to 3.27% during the same period in
2020, and continue to manage its overall interest rate risk position. The
Company, along with many other banks, continues to be challenged in 2021 during
a period of ongoing low interest rates, lower loan balances and an inflow of
deposits. This has changed the earning assets mix and increased funds held in
investments and interest bearing deposits at other banks, both of which have
rates well below those on loans.
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. 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 September 30, 2021,
the average investment portfolio balance increased by $763.7 million, or 84%, as
compared to average balance for the three months ended September 30, 2020. The
cash received from deposit growth along with cash flows from the investment and
loan portfolio were deployed primarily into cash and new investments, as loan
balances have declined.
The percentage mix of municipal securities was 7% of total investments at
September 30, 2021 and 9% at December 31, 2020. The portion of the portfolio
invested in mortgage backed securities was 67% and 72% at September 30, 2021 and
December 31, 2020, respectively. The portion of the portfolio invested in U.S.
agency investments was 20% at September 30, 2021 and 16% at December 31, 2020.
Shorter duration floating rate corporate bonds were 5% and 3% of total
investments at September 30, 2021 and December 31, 2020, respectively, and SBA
bonds, which are included in mortgage backed securities, were 3% and 6% of total
investments at September 30, 2021 and December 31, 2020, respectively. The
duration of the investment portfolio increased to 4.2 years at September 30,
2021 from 3.2 years at December 31, 2020.
The re-pricing duration of the loan portfolio was 18 months at September 30,
2021 as compared to 21 months at December 31, 2020 with fixed rate loans
amounting to 42% and 45% of total loans at September 30, 2021 and December 31,
2020, respectively. Variable and adjustable rate loans comprised 58% (offset by
1% from the dilution impact of PPP loans) and 55% of total loans at
September 30, 2021 and December 31, 2020, respectively. Variable rate loans are
generally indexed to either the one month LIBOR interest rate, or the Wall
Street Journal prime interest rate, while adjustable rate loans are indexed
primarily to the five year U.S. Treasury interest rate.
The duration of the deposit portfolio held steady in this low rate environment,
measuring 45 months at September 30, 2021 from 42 months at December 31, 2020.
The net unrealized loss before income tax on the investment portfolio was $2.5
million at September 30, 2021 as compared to a net unrealized gain before tax of
$22.0 million at December 31, 2020. This change is primarily due to higher
interest rates. At September 30, 2021, the net unrealized loss position
represented 0.1% of the investment portfolio's book value.

There can be no assurance that the Company will be able to successfully achieve
its optimal asset liability mix, as a result of competitive pressures, customer
preferences and the inability to perfectly forecast future interest rates and
movements.
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One of the tools used by the Company to manage its interest rate risk is the
static gap analysis presented below. The Company also employs an earnings
simulation model on a quarterly basis to monitor its interest rate sensitivity
and risk and to model its balance sheet cash flows and the related income
statement effects in different interest rate scenarios. The model utilizes
current balance sheet data and attributes and is adjusted for assumptions as to
investment maturities (including prepayments), loan prepayments, interest rates,
and the level of noninterest income and noninterest expense. The data is then
subjected to a "shock test" which assumes a simultaneous change in interest
rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the
entire yield curve, but not below zero. The results are analyzed as to the
impact on net interest income, net income and the market equity over the next
twelve and twenty-four month periods from September 30, 2021. In addition to
analysis of simultaneous changes in interest rates along the yield curve,
changes based on interest rate "ramps" is also performed. This analysis
represents the impact of a more gradual change in interest rates, as well as
yield curve shape changes.
For the analysis presented below, at September 30, 2021, the simulation assumes
a 45 basis point change in interest rates on money market and interest bearing
transaction deposits for each 100 basis point change in market interest rates in
a decreasing interest rate shock scenario with a floor of 0 basis points
(compared to a floor 10 basis points in the same analysis as of September 30,
2020), and assumes a 45 basis point change in interest rates on money market and
interest bearing transaction deposits for each 100 basis point change in market
interest rates in an increasing interest rate shock scenario. The floor rate in
the analysis was lowered due to the fact that in the current interest rate
environment, there are interest bearing accounts with current rates less than 10
basis points. The beta factors were lowered from prior period analysis to
reflect the Bank's historical experience and the determination that the build-up
of excess liquidity would allow the Bank not to raise deposit rates as
aggressively as it might under different circumstances.
The Company's analysis at September 30, 2021 shows a moderate effect on net
interest income (over the next 12 months) as well as a moderate effect on the
economic value of equity when interest rates are shocked both down 100 and 200
basis points and up 100, 200, 300, and 400 basis points. This moderate impact is
due substantially to the significant level of variable rate and repriceable
assets and liabilities and related shorter relative durations. The repricing
duration of the investment portfolio at September 30, 2021 is 4.9 years, the
loan portfolio 1.5 years, the interest bearing deposit portfolio 3.75 years, and
the borrowed funds portfolio 6.76 years.
The following table reflects the result of simulation analysis on the
September 30, 2021 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                                 33.8%                                   59.8%                                    12.2%
                 + 300                                 24.0%                                   42.5%                                     9.4%
                 + 200                                 14.5%                                   25.7%                                     6.5%
                 + 100                                  6.2%                                   11.1%                                     3.4%
                   -                                     -                                       -                                        -
                 - 100                                 (2.1)%                                  (3.6)%                                   (9.4)%
                 - 200                                 (3.4)%                                  (5.9)%                                  (24.6)%


The results of the simulation are within the relevant policy limits adopted by
the Company for percentage change in net interest income. For net interest
income, the Company has adopted a policy limit of -10% for a 100 basis point
change, -12% for a 200 basis point change, -18% for a 300 basis point change and
-24% for a 400 basis point change. For the market value of equity, the Company
has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200
basis point change, -25% for a 300 basis point change and -30% for a 400 basis
point change. The amounts in the first three quarters of 2021 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
September 30, 2021, interest rate shocks of -100, -200, -300 and -400 basis
points leave the Bank with near zero down to negative rate instruments and are
not considered practical or informative. The changes in net interest income, net
income and the economic value of equity in higher interest rate shock scenarios
at September 30, 2021 are not considered to be excessive. The impact of 2.1% in
net interest income and 3.6% in net income given a 100 basis point decrease in
market interest rates reflects in large measure the impact of variable rate
loans and fed funds sold repricing downward while deposits remain at expected
floor rates and are not expected to have lower interest rates.
In the first three quarters of 2021, the Company continued to manage its
interest rate sensitivity position to moderate levels of risk, as indicated in
the simulation results above. The interest rate risk position at September 30,
2021, was relatively
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similar to the December 31, 2020 position for both the up and down rate
scenarios, though we are showing greater asset sensitivity owing from the change
in beta factors described above.
Although certain assets and liabilities may have similar maturities or repricing
periods, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate mortgage loans, have features that limit changes
in interest rates on a short-term basis and over the life of the loan. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels could deviate significantly from those assumed in modeling. Finally, the
ability of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
During the first three quarters of 2021, average market interest rates increased
across the yield curve as compared to the 2020 year end. In the most recent
quarter, however, there was on average a flattening of the yield curve as
compared to the market rates during second quarter of 2021, with rate decreases
being more significant at the longer end of the yield curve.
As compared to the second quarter of 2021 the third quarter average two-year
U.S. Treasury rate increased by 5 basis points from 0.17% to 0.22%, the average
five year U.S. Treasury rate decreased by 5 basis points from 0.84% to 0.79% and
the average ten year U.S. Treasury rate decreased by 27 basis points from 1.59%
to 1.32%. The Company's net interest margin was 2.73% for the third quarter of
2021 and 3.08% in the third quarter of 2020. The Company believes that the net
interest margin in the most recent quarter as compared to 2020's third 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 rate
sensitive assets and interest expense on rate sensitive liabilities. Net
interest income represented 89% and 87% of the Company's revenue for the first
three quarters of 2021 and 2020, respectively.
In falling interest rate environments, net interest income is maximized with
longer term, higher yielding assets being funded by lower yielding short-term
funds, or what is referred to as a negative mismatch or gap. Conversely, in a
rising interest rate environment, net interest income is maximized with shorter
term, higher yielding assets being funded by longer-term liabilities or what is
referred to as a positive mismatch or gap.
The gap position, which is a measure of the difference in maturity and repricing
volume between assets and liabilities, is a means of monitoring the sensitivity
of a financial institution to changes in interest rates. The table 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. While a positive
gap indicates the degree to which the volume of repriceable assets exceeds
repriceable liabilities in given time periods.
At September 30, 2021, the Company had a positive gap position of approximately
$426 million or 3.68% of total assets, out to three months, and a positive
cumulative gap position of $686 million, or 5.92% of total assets out to twelve
months. At December 31, 2020, the Company had a positive gap position of
approximately $464 million or 4.2% of total assets out to three months and a
positive cumulative gap position of $352 million or 3% of total assets out to 12
months. The change in the gap position at September 30, 2021 as compared to
December 31, 2020 was due to reduction in time deposits relative to money market
demand amount, and the maturity of a $100 million pay fixed balance sheet swap
in April 2021. Such a change in the gap position is not deemed material to the
Company's overall interest rate risk position, which relies more heavily on
simulation analysis that captures the full opportunity within the balance sheet.
The current position is within guideline limits established by the ALCO. While
management believes that this overall position creates a reasonable balance in
managing its interest rate risk and maximizing its net interest margin within
plan objectives, there can be no assurance as to the actual results.
Management has carefully considered its strategy to maximize interest income by
reviewing interest rate levels, economic indicators and call features within its
investment portfolio, as well as interest rate floors within its loan portfolio.
These factors have been discussed with the ALCO and management believes that
current strategies remain appropriate to current economic and interest rate
trends.
If interest rates increase by 100 basis points, the Company's net interest
income and net interest margin are expected to increase modestly due to the
impact of significant volumes of variable rate assets more than offsetting the
assumption of an increase in money market interest rates by 70% of the change in
market interest rates.
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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.
Gap Analysis
September 30, 2021
(dollars in thousands)
                                                                                                                                                        Total
                                                  0-3                4-12               13-36                37-60               Over 60                Rate
Repriceable in:                                 months              months              months               months               months              Sensitive            Non Sensitive              Total
RATE SENSITIVE ASSETS:
Investment securities                       $   216,780          $ 168,743          $   363,334          $   329,616          $   708,186          $  1,786,659
Loans (1)(2)                                  3,612,317            665,963            1,390,616              643,721              538,247             6,850,864
Fed funds and other short-term
investments                                   2,491,678                  -                    -                    -                    -             2,491,678
Other earning assets                            108,158                  -                    -                    -                    -               108,158
Total                                       $ 6,428,933          $ 834,706          $ 1,753,950          $   973,337          $ 1,246,433          $ 11,237,359          $      347,958          $ 11,585,317

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand                  $    95,389          $ 266,272  

$ 583,465 $ 436,589 $ 1,454,703 $ 2,836,418
Interest-bearing transaction

                    812,410                  -                    -                    -                    -               812,410
Savings and money market                      4,943,157                  -                    -                    -              325,000             5,268,157
Time deposits                                   122,449            308,402              295,711               21,811                3,130               751,503
Customer repurchase agreements and
fed funds purchased                              29,401                  -                    -                    -                    -                29,401
Other borrowings                                      -                  -               69,639                    -              300,000               369,639
Total                                       $ 6,002,806          $ 574,674          $   948,815          $   458,400          $ 2,082,833          $ 10,067,528          $      186,092          $ 10,253,620
GAP                                         $   426,127          $ 260,032          $   805,135          $   514,937          $  (836,400)         $  1,169,831
Cumulative GAP                              $   426,127          $ 686,159          $ 1,491,294          $ 2,006,231          $ 1,169,831

Cumulative gap as percent of total
assets                                             3.68  %            5.92  %             12.87  %             17.32  %             10.10  %

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based           $         -          $       -  

$ – $ – $ – $

Interest Rate Swaps - Fed Funds based                 -                  -                    -                    -                    -                     -
Total                                       $         -          $       -          $         -          $         -          $         -          $          -                                  $          -
GAP                                         $   426,127          $ 260,032          $   805,135          $   514,937          $  (836,400)         $  1,169,831
Cumulative GAP                              $   426,127          $ 686,159          $ 1,491,294          $ 2,006,231          $ 1,169,831

Cumulative gap as percent of total
assets                                             3.68  %            5.92  %             12.87  %             17.32  %             10.10  %


(1)Excludes 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
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lending are expected to employ heightened levels of risk management with respect
to their commercial real estate portfolios, and may be required to hold higher
levels of capital. The Company, like many community banks, has focused on
commercial real estate loans, and the Company has experienced growth in its
commercial real estate portfolio in recent years. At September 30, 2021, we did
exceed the construction, land development, and other land acquisitions
regulatory concentration threshold, we continue to monitor our concentration in
commercial real estate lending and remain in compliance with the guidance issued
by the federal banking regulators. Construction, land and land development loans
represent 105% of total risk based capital. Management has extensive experience
in commercial real estate lending, and has implemented and continues to maintain
heightened risk management procedures, and strong underwriting criteria with
respect to its commercial real estate portfolio. Loan monitoring practices
include but are not limited to periodic stress testing analysis to evaluate
changes to cash flows, owing to interest rate increases and declines in net
operating income. Nevertheless, as our commercial real estate concentration
fluctuates each quarter, we may be required to maintain higher levels of
capital, which could require us to obtain additional capital, and may adversely
affect shareholder returns. The Company has an extensive Capital Plan and
Capital Policy, which includes pro-forma projections including stress testing
within which the Board of Directors has established internal minimum targets for
regulatory capital ratios that are in excess of well capitalized ratios.

The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five categories, including well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If a bank is only adequately
capitalized, regulatory approval is required to, among other things, accept,
renew or roll-over brokered deposits. If a bank is undercapitalized, capital
distributions and growth and expansion are limited, and plans for capital
restoration are required.
The Board of Governors of the Federal Reserve Board and the FDIC have adopted
rules (the "Basel III Rules") implementing the Basel Committee on Banking
Supervision's capital guidelines for U.S. banks (commonly known as Basel III).
Under the Basel III Rules, the Company and Bank are required to maintain,
inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of
7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a
minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum
leverage ratio of 4.0%. At September 30, 2021, the Company and the Bank meet all
these requirements, and satisfy the requirement to maintain a capital
conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.
During the fourth quarter of 2020, the Company started a new stock repurchase
plan. Under the Board approval in December, the Company may repurchase up to an
aggregate of 1,588,848 shares of its common stock (inclusive of shares remaining
under the initial authorization), commencing January 1, 2021 through December
31, 2021, subject to earlier termination by the Board of Directors (the "2021
Stock Repurchase Plan"). In the third quarter of 2021, the Company completed
repurchases of 11,609 shares for $614,609 at an average cost of $52.94 per share
under the 2021 Stock Repurchase Plan. No stock repurchases took place during the
second quarter of 2021. In the first quarter of 2021, the Company completed
repurchases of 1,466 shares for a total of $62,000 at an average cost of $42.46
per share under the 2021 Stock Repurchase Plan. For the nine months ended
September 30, 2021, and since the start of the 2021 Stock Repurchase Plan, the
Company has repurchased a total of 13,075 shares for $676,901 at an average cost
of $51.77 per share.
The Company announced a regular quarterly cash dividend on September 29, 2021 of
$0.40 per share to shareholders of record on October 21, 2021 and payable on
November 1, 2021.

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The actual amounts and ratios of the capital of the Company and of the Bank at
September 30, 2021 and December 31, 2020 are shown 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 September 30, 2021
CET1 capital (to risk weighted
assets)                               $ 1,240,026                15.33  %       $ 1,230,642                15.28  %                    7.00  %                     6.50  %
Total capital (to risk weighted
assets)                                    1,341,934             16.59  %            1,304,550             16.20  %                   10.50  %                    10.00  %
Tier 1 capital (to risk
weighted assets)                           1,240,026             15.33  %            1,230,642             15.28  %                    8.50  %                     8.00  %
Tier 1 capital (to average
assets)                                    1,240,026             10.58  %            1,230,642             10.53  %                    4.00  %                     5.00  %

As of December 31, 2020
CET1 capital (to risk weighted
assets)                               $ 1,137,896                13.49  %       $ 1,244,028                14.90  %                    7.00  %                     6.50  %
Total capital (to risk weighted
assets)                                 1,438,224                17.04  %         1,338,356                16.03  %                   10.50  %                    10.00  %
Tier 1 capital (to risk
weighted assets)                        1,137,896                13.49  %         1,224,028                14.90  %                    8.50  %                     8.00  %
Tier 1 capital (to average
assets)                                 1,137,896                10.31  %         1,224,028                11.29  %                    4.00  %                     5.00  %



* Applies to Bank only
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At
September 30, 2021 the Bank could pay dividends to the Company to the extent of
its earnings so long as it maintained the minimum required capital ratios listed
in the table above.
In December 2018, federal banking regulators issued a final rule that provides
an optional three-year phase-in period for the adverse regulatory capital
effects of adopting the CECL methodology pursuant to new accounting guidance for
the recognition of credit losses on certain financial instruments, effective
January 1, 2020. In March 2020, the federal banking regulators issued an interim
final rule that provides banking organizations with an alternative option to
temporarily delay for two years the estimated impact of the adoption of the CECL
methodology on regulatory capital, followed by the three-year phase-in period.
The cumulative amount that is not recognized in regulatory capital will be
phased in at 25 percent per year beginning January 1, 2022. We have elected to
adopt the March 2020 interim final rule.
On August 2, 2021, the Company paid in full $150.0 million of subordinated debt
due 2026 and accelerated deferred financing costs of $1.3 million on that date.
Refer to Note 8 for additional detail.
Use of Non-GAAP Financial Measures
The Company considers the following non-GAAP measurements useful for investors,
regulators, management and others to evaluate capital adequacy and to compare
against other financial institutions. The tables below provide a reconciliation
of these non-GAAP financial measures with financial measures defined by GAAP.
Tangible common equity to tangible assets (the "tangible common equity ratio"),
tangible book value per common share, the annualized return on average tangible
common equity, and efficiency ratio are non-GAAP financial measures derived from
GAAP-based amounts. The Company calculates the tangible common equity ratio by
excluding the balance of intangible assets from common shareholders' equity and
dividing by tangible assets. The Company calculates tangible book value per
common share by dividing tangible common equity by common shares outstanding, as
compared to book value per common share, which the Company calculates by
dividing common shareholders' equity by common shares outstanding. The Company
calculates the ROATCE by dividing net income available to common shareholders by
average tangible common equity which is calculated by excluding the average
balance of intangible assets from the average common shareholders' equity. The
Company calculates the efficiency ratio by dividing noninterest expense by the
sum of net interest income and noninterest income. The efficiency ratio measures
a bank's overhead as a percentage of its revenue. The Company considers this
information important to shareholders as tangible equity is a measure that is
consistent with the calculation of capital for bank regulatory purposes,
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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
(dollars in thousands except per share data)
                                     September 30, 2021          December 31, 2020          September 30, 2020
Common shareholders' equity         $        1,331,697          $       1,240,892          $        1,223,402
Less: Intangible assets                       (105,103)                  (105,114)                   (105,165)
Tangible common equity              $        1,226,594          $       1,135,778          $        1,118,237

Book value per common share         $            41.68          $           39.05          $            37.96
Less: Intangible book value per
common share                                     (3.29)                     (3.31)                      (3.26)
Tangible book value per common
share                               $            38.39          $           35.74          $            34.70

Total assets                        $       11,585,317          $      11,117,802          $       10,106,294
Less: Intangible assets                       (105,103)                  (105,114)                   (105,165)
Tangible assets                     $       11,480,214          $      11,012,688          $       10,001,129
Tangible common equity ratio                     10.68  %                   10.31  %                    11.18  %

                                                   September 30, 2021                        December 31, 2020                     September 30, 2020
                                                                                                                        Three Months
                                     Three Months Ended          Nine Months Ended              Year Ended                Ended(1)           

Nine months ended average shareholders’ equity of ordinary shareholders $ 1,331,022 $ 1,292,223 $ 1,204,341 $ 1,211,145 $

1,193,988

Less: Average intangible assets               (105,126)                  (105,151)                   (104,903)             (105,106)                 

(104,826)

Average tangible ordinary equity $ 1,225,896 $ 1,187,072 $ 1,099,438 $ 1,106,039 $

1,089,162

Net Income Available to Common
Shareholders                        $           43,609          $         

$ 135,071 $ 132,217 $ 41,346 $

93,325

Average tangible ordinary equity $ 1,225,896 $ 1,187,072 $ 1,099,438 $ 1,032,720 $

1,089,162

Annualized Return on Average
Tangible Common Equity                           14.11  %                   15.21  %                    12.03  %              14.87  %                   11.45  %



                                          Three Months Ended September 30,                         Nine Months Ended September 30,
                                          2021                        2020                         2021                        2020
Net interest income                             $79,045                     $79,038                     $246,328                    $240,145
Noninterest income                                8,299                      17,844                       29,811                      35,809
Revenue                                         $87,344                     $96,882                     $276,139                    $275,954

Noninterest expense                             $36,375                     $36,915                     $109,856                    $109,154
Efficiency ratio                               41.65  %                    38.10  %                     39.78  %                    39.56  %



(1)These numbers have been corrected from the original disclosure in the
Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, which
stated that average common shareholders' equity was $1,137,826,000, average
tangible common equity was $1,032,720,000 and annualized return on average
tangible common equity was 15.93%, all for the three months ended September 30,
2020.

Total loans, excluding loans held for sale and PPP loans is a non-GAAP financial
measures derived from GAAP-based amounts. The Company calculates total loans,
excluding loans held for sale and PPP loans by excluding the balance of the PPP
loans from the total loans. The Company considers this information important to
shareholders as total loans, excluding loans
                                       75
--------------------------------------------------------------------------------

held for sale and PPP loans is a measure that removes fluctuations associated
with the activity related to the non-core business and management of the PPP
portfolio.

                                                  September 30,          December 31,          September 30,
                                                       2021                  2020                   2020

Total loans, excluding loans held for sale
(GAAP)                                           $   6,850,863          $  7,760,212          $   7,880,255
Less: PPP loans                                        (67,311)             (454,771)              (456,115)
Total loans, excluding loans held for sale
and PPP loans (Non-GAAP)                         $   6,783,552          $  

7,305,441 $ 7,424,140

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