EAGLE BANCORP INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company. The Company’s primary subsidiary is the Bank, and the Company’s other direct and indirect active subsidiaries are Bethesda Leasing, LLC, Eagle Insurance Services, LLC, and Landroval Municipal Finance, Inc. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report. 37 Table of Contents Caution About Forward Looking Statements . This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with 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 forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward looking statements. The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward looking statements: • The macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic; • The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; • The willingness of customers to substitute competitors’ products and services for our products and services; • Our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of, and our ability to sell, properties which stand as collateral for loans we make; • The effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions; • The growth and profitability of noninterest or fee income being less than expected; • Changes in the level of our nonperforming assets and charge-offs; • Changes in consumer spending and savings habits; • Changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; • The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; • The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board, inflation, interest rate, market and monetary fluctuations; • Results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses, to write-down assets or to hold more capital; • The effects or impact of any litigation, regulatory proceeding, including enforcement proceedings, and any possibly resulting fines, judgments, expenses or restrictions on our business activities; • Unanticipated regulatory or judicial proceedings; • The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; • Technological and social media changes; • Cybersecurity breaches, threats, and cyber-fraud that cause the Bank to sustain financial losses; • The strength of the United States economy, in general, and the strength of the local economies in which we conduct operations; • Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; and 38 Table of Contents • The factors discussed under the caption “Risk Factors” in this report. If one or more of the factors affecting our forward looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward looking information and statements contained in this report. You should not place undue reliance on our forward looking information and statements. We will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements. GENERAL The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebratin g twenty-three years of successful operations. The Company provides general commercial and consumer banking services through 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 and 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 seventeen branch offices (six in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.), a principal corporate office, five lending centers (two are co-located with branches and one co-located in the principal corporate office) and one operations center. Refer to the Business Section above, which describes in detail the various banking services offered. In general, the economy began to recover in 2021 as COVID-19 vaccines and treatments became more readily available in communities in the US and around the world. The improvement in the overall economy in 2021 led to supply chain issues, low unemployment rates and inflation. This led to expectations that the Federal Reserve Open Market Committee ("FOMC"), would discontinue the generally accommodative monetary policy it had pursued when the COVID-19 pandemic begin in early 2020. In late 2021, the Federal Reserve begun tapering purchases of securities and is no longer expanding its balance sheet as aggressively. Actual real U.S. GDP growth for 2021 was 5.7%, in contrast to a 3.4% decrease in 2020, which was adversely impacted by the onset of COVID-19. Employment climbed throughout 2021 as the U.S. unemployment rate ended the year at 3.9%, down from 6.7% at the end of 2020. Longer-term U.S. interest rates increased in 2021, with the ten year U.S. Treasury rate averaging 1.45% in 2021 as compared to 0.88% in 2020. The yield curve in 2021 was steeper than in 2020, but narrowed toward the end of 2021 (two year as compared to ten year U.S. Treasury rates). As the ten year U.S. Treasury rate increased in late 2021, the volume of residential mortgage lending began to decrease. Overall, real estate values in most of the Company's markets were stable-to-increasing in 2021 as interest rates, although up versus the prior year, remained historically low. Political gridlock continued in Washington, D.C. over concerns of pandemic policy, public debt and deficits, as well as tax policy and spending levels. The Company’s primary market, the Washington, D.C. metropolitan area, has continued to perform well relative to other parts of the country notwithstanding the impact of the COVID-19 pandemic, due to a stable public sector along with increased government spending. The private sector, in particular, the Leisure and Hospitality sector still faces challenges associated with the pandemic. In spite of these challenges, the Washington, D.C. metropolitan area maintains a diverse economy including a large healthcare component, substantial business services, and a highly educated work force. The Company has the financial resources to meet, and has remained committed to meeting, the credit needs of its community. The decline in the Company's loan balances in 2021 was a result of successful projects paying off, the 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. While our loan balances declined in 2021, deposit inflows increased our liquidity levels, which increased earning assets, but negatively impacted net interest margins and resulted in a much lower loan to deposit ratio. The Company’s capital position remained strong in 2021 as a result of good earnings that were enhanced by reversal of provisions to the ACL, improved economic conditions and improved asset quality. Additionally, while mortgage rates increased in 2021 over 2020, the Company's residential lending group continues to contribute to earnings through the origination and sale of residential mortgages. As a result of the Company’s strong capital position and earnings, we were able to increase our quarterly dividend several times in 2021 and continue our share repurchase program. Although the number of shares 39 Table of Contents repurchased by the Company was much smaller in 2021, this was due to the increase in the price of the Company common stock, making repurchases less accretive to earnings per share. The Company believes its strategy of remaining growth-oriented, retaining talented staff and maintaining focus on seeking quality lending and deposit relationships has proven successful and is evidenced in its financial and performance ratios. Additionally, the Company believes such focus and strategy of relationship building has fostered future growth opportunities, as the Company’s reputation in the marketplace remains strong. At December 31, 2021, the Company had total assets of approximately $11.8 billion, total loans of $7.1 billion, total deposits of $10.0 billion and seventeen branches in the Washington, D.C. metropolitan area. Impact of COVID-19 During 2020 and to a lesser extent in 2021, our business has been, and continues to be, impacted by the ongoing outbreak of COVID-19. In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the U.S. and globally, including the markets that we serve. Efforts to limit the spread of COVID-19 have included quarantines, shelter-in-place orders, the closure or limiting capacity of businesses, travel restrictions, supply chain limitations and prohibitions on public gatherings, among other things, throughout many parts of the United States, including the Washington D.C. area. As the COVID-19 pandemic is ongoing and dynamic in nature, there are many uncertainties, including its severity, duration, impact to our customers, employees and vendors, impact to the financial services and banking industry, impact to the economy as a whole and the level of governmental intervention (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect the Company. Furthermore, the sustainability of the economic recovery remains unclear and significant volatility could continue for a prolonged period as the potential exists for additional variants of COVID-19, including the recent Omicron variant, to impede the economic recovery. 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, including those identified below for the year ended December 31, 2021, 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. 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 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. As a result of our January 1, 2020 adoption of FASB's Accounting Standard Codification ("ASC") 326, Measurement of Credit Losses on Financial Instruments , and its related amendments, our methodology for estimating these credit losses changed significantly from years prior to 2020.. The standard replaced the “incurred loss” approach with a “current expected credit loss” approach known as CECL, which requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). CECL removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” 40 Table of Contents 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 Provision for Credit Losses ("PCL") represents the expected credit losses arising from the Company's loan and AFS securities portfolios. The PCL is determined by following: The Company uses a loan-level probability of default ("PD")/ loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds is based on historical internal data. PPP loans are included in the model but do not carry a reserve, as these loans are fully guaranteed by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default will react to forecasted levels of the loss drivers. For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as a loss driver over our reasonable and supportable period of 18 months, and reverts back to a historical loss rate over the following twelve months on a straight-line basis. While the COVID-19 pandemic negatively impacted unemployment projections for 2020, which informed our CECL economic forecast and increased our loss reserve for that year, there were positive signs in 2021 as the unemployment rate and economic forecast suggested the impact of the COVID-19 pandemic on credit would not be as significant as previously considered in 2020. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. While our methodology in establishing the 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. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted the performance outlook in the Accommodation & Food Service segment of our loan portfolio, which informs our CECL economic forecast and continues to adversely impact our loss reserve as of December 31, 2021. See Notes 1, 3 and 4 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factor in Item 1A for more information on the provision for credit losses. Goodwill and Other Intangibles Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets and mortgage servicing rights ("MSRs") that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. 41 Table of Contents Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year (as of December 31) or when events or changes in circumstances indicate the assets might be impaired. The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Determining the fair value of a reporting unit under the goodwill impairment test is a matter of judgment and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. 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. Management performed its annual assessment of goodwill as of December 31, 2021. Based on the results of qualitative assessments of the reporting unit, the Company concluded that no impairment existed at December 31, 2021. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. See “Item 1A Risk Factors—Changes in the value of goodwill and intangible assets could reduce our earnings” for more information. SELECTED FINANCIAL DATA The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2021. The information contained in this section should be read together with the December 31, 2021 audited Consolidated Financial Statements and the accompanying Notes included in Item 8. Financial Statements And Supplementary Data of this Form 10-K. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2020. Use of Non-GAAP Financial Measures The information set forth below contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “efficiency ratio,” and “return on average common equity.” Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are used as a measure of our performance by investors. These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures. A reconciliation table is set forth below following the selected historical consolidated financial data. 42 Table of Contents Years Ended December 31, 2021 2020 2019 Balance Sheets - Period End Securities $ 2,623,408 $ 1,151,083 $ 843,363 Loans held for sale 47,218 88,205 56,707 Loans 7,065,598 7,760,212 7,545,748 Allowance for credit losses (74,965) (109,579) (73,658) Intangible assets, net 105,793 105,114 104,739 Total assets 11,847,310 11,117,802 8,988,719 Deposits 9,981,540 9,189,203 7,224,391 Borrowings 369,670 568,077 498,667 Total liabilities 10,496,535 9,876,910 7,798,038 Total shareholders’ equity 1,350,775 1,240,892 1,190,681 Tangible common equity (1) 1,244,982 1,135,778 1,085,942 Statements of Income Interest income $ 364,496 $ 389,986 $ 429,630 Interest expense 39,982 68,424 105,585 Provision (reversal) for credit losses (20,821) 45,571 13,091 Noninterest income 40,385 45,696 25,699 Noninterest expense 149,165 144,162 139,862 Income before taxes 237,674 176,145 196,791 Income tax expense 60,983 43,928 53,848 Net income 176,691 132,217 142,943 Cash dividends declared 44,691 28,330 22,332 Total revenue (2) 364,899 367,258 349,744 43 Table of Contents Years Ended December 31, (dollars in thousands except per share data) 2021 2020 2019 Per Common Share Data Net income, basic $ 5.53 $ 4.09 $ 4.18 Net income, diluted 5.52 $ 4.09 4.18 Dividends declared 1.40 0.88 0.66 Book value 42.28 39.05 35.82 Tangible book value (3) 38.97 35.74 32.67 Common shares outstanding 31,950,092 31,779,663 33,241,496 Weighted average common shares outstanding, basic 31,935,824 32,334,201 34,178,804 Weighted average common shares outstanding, diluted 32,003,090 32,362,556 34,210,646 Ratios Net interest margin 2.81 % 3.19 % 3.77 % Efficiency ratio (4) 40.88 % 39.25 % 39.99 % Return on average assets 1.49 % 1.28 % 1.61 % Return on average common equity 13.54 % 10.98 % 12.20 % Return on average tangible common equity (1) 14.73 % 12.03 % 13.40 % CET1 capital (to risk weighted assets) 15.02 % 13.49 % 12.87 % Total capital (to risk weighted assets) 16.15 % 17.04 % 16.20 % Tier 1 capital (to risk weighted assets) 15.02 % 13.49 % 12.87 % Tier 1 capital (to average assets) 10.19 % 10.31 % 11.62 % Tangible common equity ratio 10.60 % 10.31 % 12.22 % Dividend payout ratio 25.29 % 21.59 % 15.79 % Asset Quality Nonperforming assets and loans 90+ past due $ 30,843 $ 65,930 $ 50,216 Nonperforming assets and loans 90+ past due to total assets 0.26 % 0.59 % 0.56 % Nonperforming loans to total loans 0.41 % 0.79 % 0.65 % Allowance for credit losses to loans 1.06 % 1.41 % 0.98 % Allowance for credit losses to nonperforming loans 256.66 % 179.80 % 151.16 % Net charge-offs $ 13,339 $ 20,097 $ 9,377 Net charge-offs to average loans 0.18 % 0.26 % 0.13 % (1) Tangible common equity and return on average tangible common equity are non-GAAP financial measures. Tangible common equity is defined as total common shareholders’ equity reduced by goodwill and other intangible assets. (2) Total revenue calculated as net interest income plus noninterest income. (3) Tangible book value per common share, a non-GAAP financial measure, is defined as tangible common shareholders’ equity divided by total common shares outstanding. (4) Computed by dividing noninterest expense by the sum of net interest income and noninterest income. 44 Table of Contents The following table details our Non-GAAP to GAAP reconciliation for the years 2019 through 2021. Non-GAAP Reconciliation Years Ended December 31, (dollars in thousands except per share data) 2021 2020 2019 Common shareholders’ equity $ 1,350,775 $ 1,240,891 $ 1,190,681 Less: Intangible assets (105,793) (105,114) (104,739) Tangible common equity $ 1,244,982 $ 1,135,777 $ 1,085,942 Book value per common share $ 42.28 $ 39.05 $ 35.82 Less: Intangible book value per common share (3.31) (3.31) (3.15) Tangible book value per common share $ 38.97 $ 35.74 $ 32.67 Total assets $ 11,847,310 $ 11,117,802 $ 8,988,719 Less: Intangible assets (105,793) (105,114) (104,739) Tangible assets $ 11,741,517 $ 11,012,688 $ 8,883,980 Tangible common equity ratio 10.60 % 10.31 % 12.22 % Average common shareholders’ equity $ 1,304,902 $ 1,204,341 $ 1,172,051 Less: Average intangible assets (105,256) (104,903) (105,167) Average tangible common equity $ 1,199,646 $ 1,099,438 $ 1,066,884 Net Income $ 176,691 $ 132,217 $ 142,943 Average tangible common equity $ 1,199,646 $ 1,099,438 $ 1,066,884 Return on average tangible common equity 14.73 % 12.03 % 13.40 % Total noninterest expense $ 149,165 $ 144,162 $ 139,862 Net interest income $ 324,514 $ 321,562 $ 324,045 Total noninterest income 40,385 45,696 25,699 Total of net interest and noninterest income $ 364,899 $ 367,258 $ 349,744 Efficiency ratio 40.88 % 39.25 % 39.99 % RESULTS OF OPERATIONS Overview Net income for the years ending December 31, 2021 and 2020 were $176.7 million and $132.2 million, respectively. Net income per basic and diluted common share for 2021 was $5.53 and $5.52, respectively, compared to $4.09 per basic and diluted common share for 2020, a 35% increase. Net income increased in 2021 relative to 2020 primarily due to reversals from the allowance for credit losses and, to a lesser extent, net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense. The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which increased to $324.5 million in 2021 compared to $321.6 million for 2020. The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points in net interest margin. The net interest margin, which measures the difference between interest income and interest expense (i.e., net interest income) as a percentage of earning assets, was 2.81% for 2021 and 3.19% for 2020, a decline of 38 basis points. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below. 45 Table of Contents The provision for credit losses in 2021 was a reversal of $20.8 million as compared to a provision of $45.6 million in 2020. The reversal of the provision was primarily driven by the improved economic environment, adjustments to the quantitative components of the CECL model and improvements in asset quality. F or information on the components and drivers of these changes see "Provision for Credit Losses" section below. Total noninterest income in 2021 was $40.4 million, as compared to $45.7 million in 2020, a 12% decrease. Noninterest expenses in 2021 totaled $149.2 million, as compared to $144.2 million in 2020, a 3% increase. The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.88% for 2021 as compared to 39.25% for 2020. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. Income tax expense in 2021 was $61.0 million, as compared to $43.9 million in 2020, a 39% increase. At December 31, 2021, total loan balances (including PPP loans) were 9% lower than they were at December 31, 2020, and average loans were 8% lower in 2021 as compared to 2020. PPP loans represented $51.1 million of total loans at the end of 2021, as compared to $454.8 million at the end of 2020. Excluding PPP loans, loans decreased 4% in 2021, driven by higher payoffs and paydowns, which outpaced originations and advances. The decline in PPP loans was the result of the forgiveness process and, in the second quarter of 2021, the Company's sale of a portion of the PPP loan portfolio. Deposit growth was strong throughout 2021, and resulted in well above historical average overnight liquidity for the Company. Deposit funding during 2021 was primarily from noninterest bearing and money market accounts. In large part due to those inflows, total deposits at December 31, 2021 were 9% higher than deposits at December 31, 2020, while average deposits were 17% higher for 2021 compared with 2020. This increase in deposits allowed the Company to sustain strong primary and secondary sources of liquidity and increase the size of the investment securities portfolio. In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 63% and 76% of average earning assets for 2021 and 2020, respectively. For 2021, as compared to 2020, average loans, excluding loans held for sale, decreased $607.6 million, or 8%, driven by higher payoffs and paydowns, which outpaced originations and advances, and PPP loan forgiveness and sale. Average investment securities for 2021 were 14% of average earning assets compared to 9% for 2020. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 23% and 12% of average earning assets for 2021 and 2020, respectively, as much higher levels of on-balance sheet liquidity existed throughout 2021. These increases were driven by the decline in loans coupled with the inflow of deposits. The ratio of common equity to total assets increased to 11.40% at December 31, 2021 from 11.16% at December 31, 2020, due to common equity growing faster rate than total assets, even with common equity reductions due to $682 thousand in share repurchase activity and $44.7 million of cash dividends declared. For 2021, the return on average assets (“ROAA”) was 1.49%, as compared to 1.28% for 2020. Total shareholders’ equity was $1.35 billion at December 31, 2021 and $1.24 billion and 2020, an increase of 9%. The return on average common equity (“ROACE”) for 2021 was 13.54% as compared to 10.98% for 2020. The return on average tangible common equity (“ROATCE”) for 2021 was 14.73% as compared to 12.03% for 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 increase in these returns was primarily due to reversals from the allowance for credit losses and to a lesser extent net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense. 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, loans held for sale, investment securities, and interest bearing deposits with other banks. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings, which consist of federal funds purchased, advances from the FHLB and subordinated notes. Noninterest bearing deposits and capital are other components representing funding sources. 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. 46 Table of Contents Net interest income in 2021 was $324.5 million compared to $321.6 million in 2020. For 2021, net interest income increased 1% over the same period for 2020. The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points in net interest margin. The net interest margin was 2.81% for 2021, as compared to 3.19% for 2020, a decline of 38 basis points. This decline was led by a lower rate environment and the decline in loans, which generally have higher yields than securities. Additionally, the increase in deposits, led to an increase in low yielding assets such as securities or interest bearing deposits at other banks, which contributed to net income and liquidity, but lowered net interest margin. In 2021, average loans decreased $607.6 million or 8% and average deposits increased by $1.4 billion or 17%. Loans, the largest component of interest income on earnings assets, had a yield of 4.62% in 2021, compared to 4.66% in 2020, a decline of 4 basis points (includes PPP loans). The decline in yield was minimized due to disciplined loan pricing practices and the sale or forgiveness of PPP loans, which accelerated net deferred fees and cost into interest income. Additionally, the deposit mix remained favorable, with average noninterest deposits being 34% of average total deposits, up from 31% in 2020. In 2021, total net loans, the primary source of the Bank’s revenue, declined, although total assets increased over the same period. Further, loan pricing pressures in the highly competitive market for high-quality commercial loans, and the cost sand implementation risks associated with pursuing loan growth, has put pressure on loan portfolio yields and consequently the Bank’s net interest margin and net income. The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the years ended December 31, 2021, 2020 and 2019. Included in the table are two measurements, interest rate spread and net interest margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest expense on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates as compared to cost of funds, management believes that the net interest margin typically provides a better measurement of performance. However, given the increase in assets and liquidity from deposits, the usefulness of net interest margin comparisons are diluted. To illustrate, in 2021 net interest margins declined 38 basis points, which would normally be expected to lead to a decrease in net interest income; however, since average earning assets were up 14%, net interest income increased by 0.9%. The net interest margin (as compared to the net interest spread) includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets. 47 Table of Contents Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) Years Ended December 31, 2021 2020 2019 Average Balance Interest Average Yield / Rate Average Balance Interest Average Yield / Rate Average Balance Interest Average Yield / Rate Assets Interest earning assets: Interest bearing deposits with other banks and other short-term investments $ 2,499,377 $ 3,511 0.14 % $ 1,181,591 $ 2,601 0.22 % $ 392,245 $ 7,438 1.90 % Loans held for sale 71,043 2,278 3.21 % 67,361 2,125 3.15 % 40,192 1,565 3.89 % Loans (1) (2) 7,260,886 335,471 4.62 % 7,868,523 366,729 4.66 % 7,332,886 399,358 5.45 % Investment securities available-for-sale (2) 1,653,522 23,205 1.40 % 929,983 18,440 1.98 % 796,608 21,037 2.64 % Federal funds sold 31,667 31 0.10 % 32,781 91 0.28 % 23,253 232 1.00 % Total interest earning assets 11,516,495 364,496 3.16 % 10,080,239 389,986 3.87 % 8,585,184 429,630 5.00 % Noninterest earning assets 416,492 371,345 339,565 Less: allowance for credit losses 96,252 101,621 71,683 Total noninterest earning assets 320,240 269,724 267,882 Total Assets $ 11,836,735 $ 10,349,963 $ 8,853,066 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing transaction $ 814,999 $ 1,609 0.20 % $ 783,568 $ 3,190 0.41 % $ 743,361 $ 6,491 0.87 % Savings and money market 4,947,198 15,000 0.30 % 3,925,413 26,271 0.67 % 2,873,054 50,042 1.74 % Time deposits 803,718 11,163 1.39 % 1,149,185 24,105 2.10 % 1,404,748 34,493 2.46 % Total interest bearing deposits 6,565,915 27,772 0.42 % 5,858,166 53,566 0.91 % 5,021,163 91,026 1.81 % Customer repurchase agreements and federal funds purchased 24,884 51 0.20 % 29,345 293 1.00 % 30,024 345 1.15 % Other short-term borrowings 300,003 2,008 0.67 % 280,126 1,870 0.66 % 135,699 2,298 1.67 % Long-term borrowings 164,970 10,151 6.15 % 259,975 12,696 4.80 % 217,507 11,916 5.40 % Total interest bearing liabilities 7,055,772 39,982 0.57 % 6,427,612 68,425 1.06 % 5,404,393 105,585 1.95 % Noninterest bearing liabilities: Noninterest bearing demand 3,374,662 2,643,856 2,210,516 Other liabilities 101,399 74,154 66,106 Total noninterest bearing liabilities 3,476,061 2,718,010 2,276,622 Shareholders’ equity 1,304,902 1,204,341 1,172,051 Total Liabilities and Shareholders’ Equity $ 11,836,735 $ 10,349,963 $ 8,853,066 Net interest income $ 324,514 $ 321,561 $ 324,045 Net interest spread 2.59 % 2.81 % 3.05 % Net interest margin 2.81 % 3.19 % 3.77 % Cost of funds 0.35 % 0.68 % 1.23 % (1) L oans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $30.6 million, $22.3 million, and $17.8 million, for the years ended December 31, 2021, 2020 and 2019, respectively. (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 48 Table of Contents Rate/Volume Analysis of Net Interest Income The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates. As the table shows, the increase in net interest income in 2021, as compared to 2020 was due to a decrease in the volume of earning assets more than offset by lower deposit rates. The decrease in net interest income in 2020 as compared to 2019 was a function of an increase in the volume of earning assets more than offset by a decline in the net interest margin. 2021 compared with 2020 2020 compared with 2019 (dollars in thousands) Change Due to Volume Change Due to Rate Total Increase (Decrease) Change Due to Volume Change Due to Rate Total Increase (Decrease) Interest earned on Loans $ (28,320) $ (2,938) $ (31,258) $ 29,171 $ (61,799) $ (32,628) Loans held for sale 116 37 153 1,058 (498) 560 Investment securities 14,354 (9,589) 4,765 3,522 (6,119) (2,597) Interest bearing bank deposits 2,901 (1,991) 910 14,968 (19,805) (4,837) Federal funds sold (3) (57) (60) 95 (236) (141) Total interest income (10,952) (14,538) (25,490) 48,814 (88,457) (39,643) Interest paid on Interest bearing transaction 128 (1,709) (1,581) 351 (3,652) (3,301) Savings and money market 6,838 (18,109) (11,271) 18,329 (42,101) (23,772) Time deposits (7,246) (5,696) (12,942) (6,275) (4,113) (10,388) Customer repurchase agreements (45) (197) (242) (8) (44) (52) Other borrowings (4,506) 2,100 (2,406) 4,772 (4,420) 352 Total interest expense (4,831) (23,611) (28,442) 17,169 (54,330) (37,161) Net interest income $ (6,121) $ 9,073 $ 2,952 $ 31,645 $ (34,127) $ (2,482) 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 ACL 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 (as Company loss data is insufficient), 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 ACL under CECL (adopted January 1, 2020) utilizes an economic forecast that is updated quarterly with the significant measure being the expected regional unemployment rate, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two. The provision for credit losses was a reversal of $20.8 million in 2021, as compared to a provision of $45.6 million in 2020. The reversal in 2021 was largely due to the improvement of the economy as the COVID-19 vaccines and treatments became widely available and the improvement in credit quality, whereas the provision in 2020 was due to a reserve build associated with the onset of the COVID-19 pandemic. The provision for unfunded commitments is presented separately on the Statement of Income. This provision considers the probability that unfunded commitments will fund. The provision was a reversal of $1.1 million in 2021, as compared to a provision of $1.4 million in 2020. Management has developed a comprehensive analytical process to monitor the adequacy of the ACL. 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. 49 Table of Contents Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Cash Flow Method" section of Note 1 to the Consolidated Financial Statements. The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under “Critical Accounting Policies” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table in the "Allowance for Credit Losses" section which reflects activity in the ACL. For 2021, the ACL decreased by $34.6 million, reflecting a reversal of $20.8 million to provision for credit losses and $13.3 million in net charge-offs. Net charge-offs of $13.3 million during 2021 represented 0.18% of average loans, excluding loans held for sale, as compared to $20.1 million or 0.26% of average loans, excluding loans held for sale, in 2020. Net charge-offs during 2021 were attributable primarily to commercial real estate ($5.1 million) and commercial loans ($8.3 million). At December 31, 2021 the ACL represented 1.06% of loans outstanding, as compared to 1.41% at December 31, 2020. The ACL represented 257% of nonperforming loans at December 31, 2021, as compared to 180% at December 31, 2020. As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The maintenance of a high quality loan portfolio, with an adequate ACL, will continue to be a primary management objective for the Company. Noninterest Income 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 year ended December 31, 2021 was $40.4 million as compared to $45.7 million for the year ended December 31, 2020. The 12% decrease was due substantially to $8.0 million lower gains on sa le of residential mortgage loans which was partially offset by $1.1 million higher gains on sales of securities and $1.6 million higher fees associated with the origination, securitization, sale and servicing of FHA loans. For the year ended December 31, 2021, service charges on deposit accounts slightly increased $146 thousand to $4.6 million from $4.4 million for the same period in 2020, an increase of 3%. While deposits increased significantly in 2021, deposit fees continue to be waived due to the pandemic. Gain on sale of loans consists of gains on the sale of residential mortgage and SBA loans. For the year ended December 31, 2021, gain on sale of loans was $14.0 million, compared to $22.1 million in 2020, a decrease of 36%. The decrease was driven by higher residential mortgage rates in the latter part of the year, which reduced mortgage origination volume. The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans with servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or 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 generally accepted accounting principles ("GAAP") for possible repurchases. There were no repurchases due to fraud by the borrower during the year ended December 31, 2021. The reserve is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment. 50 Table of Contents Residential mortgage Years Ended December 31, (dollars in thousands) 2021 2020 % Change Gain on sale $ 13,585 $ 22,368 (39.3) % Closed loans 1,140,408 1,260,615 (9.5) % Locked loans 994,452 1,860,813 (46.6) % Reserve 125 205 (39.2) % 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. The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. Income from this source was $460 thousand for the year ended December 31, 2021 compared to $269 thousand for the same period in 2020. Activity in SBA loan sales to secondary markets can vary widely from year to year. Gain on the sale of investments were $3.0 million for the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020. Other income totaled $16.8 million for the year ended December 31, 2021 as compared to $15.3 million for 2020, an increase of 9%. The FHA business unit generated income on the sale of FHA multifamily-backed GNMA securities of $5.0 million for 2021 compared to $3.4 million for 2020. Servicing agreements relating to the Ginnie Mae ("GNMA") 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 December 31, 2021, the Company did not have any funds advanced outstanding under FHA mortgage loan servicing agreements. Noninterest Expense Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional fees, FDIC insurance premiums, and other expenses. Total noninterest expenses totaled $149.2 million for 2021, as compared to $144.2 million for 2020, a 3% increase. For 2021, the efficiency ratio (ratio of noninterest expenses to total revenue) was 40.88% as compared to 39.25% for 2020. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. Salaries and employee benefits were $88.4 million for 2021, as compared to $74.4 million for 2020, an increase of 19%. The increase was a result of higher incentive bonus accruals based on Company performance and increased share based compensation. At December 31, 2021, the Company’s full time equivalent staff numbered 507, as compared to 519 at December 31, 2020. Premises and equipment expenses were $14.9 million for 2021 as compared to $15.7 million for 2020, a decrease of 5%. The reduction in rent expense from the closure of several locations and was partially offset by normal lease increases and acceleration of leasehold amortization; and the third quarter of 2020 included a $1.7 million adjustment which increased rent expense in accordance with ASC 842 on leases. Marketing and advertising expenses were $4.2 million for 2021 as compared to $4.3 million for 2020, a decrease of 3%. Marketing and advertising expenses remained low in 2021 as events and conferences remained on hold as a result of COVID-19. 51 Table of Contents Data processing expenses were $11.7 million for 2021 as compared to $10.7 million in 2020, an increase of 9%, primarily due to increased customer activity and annual increases in license fee renewals. Legal, accounting and professional fees and expenses were $11.5 million for 2021 as compared to $16.4 million in 2020, a 30% decrease. The decrease was primarily associated with reduced legal fees as the Company incurred significant legal expenses in 2020 due to ongoing governmental investigations and subpoenas and document requests. Refer to Note 21 – Commitments and Contingent Liabilities to the Consolidated Financial Statements for additional information on the Company’s recent proceedings. FDIC insurance expense was $5.9 million for 2021 as compared to $7.9 million in 2020, a decrease of 26%. The decrease was primarily due to adoption of the large bank assessment methodology. Other expenses were $12.6 million for 2021 as compared to $14.7 million for 2020, a decrease of 14%. The decrease was associated with reductions in OREO expense, franchise tax, other loan expenses, telephone and travel expense. The major components of cost in this category include broker fees, franchise tax, insurance expenses, and director compensation. Cost control remains a significant operating objective of the Company. Income Tax Expense Income tax expense was $61.0 million for 2021 as compared to $43.9 million in 2020, resulting in an effective tax rate of 25.7% and 24.9%, respectively. The increase in rates was due to an increase in state income taxes and nondeductible stock-based compensation awarded to execu tiv e officers. BALANCE SHEET ANALYSIS Overview In 2021, asset growth was driven by deposits inflows. The cash from deposit inflows, along with cash from the decline in loans (from payoffs and paydowns) was invested in investment securities. Total assets at December 31, 2021 were $11.8 billion as compared to $11.1 billion at December 31, 2020, a 7% increase. Total loans (excluding loans held for sale) were $7.1 billion at December 31, 2021, as compared to $7.8 billion at December 31, 2020 a 9% decrease. The investment securities portfolio totaled $2.6 billion at December 31, 2021 as compared to $1.2 billion at December 31, 2020, a 128% increase. For the year ended December 31, 2021, total deposits were $10.0 billion as compared to $9.2 billion at December 31, 2020 , an increase of 9%. Total shareholders’ equity at December 31, 2021 was $1.35 billion as compared to $1.24 billion at December 31, 2020, a 9% increase. The increase in shareholders’ equity in 2021 was from net income offset primarily by cash dividends and unrealized losses on the AFS investments included in other comprehensive income (loss). The total risk based capital ratio was 16.15% at December 31, 2021, as compared to 17.04% at December 31, 2020. In addition, the tangible common equity ratio was 10.60% at December 31, 2021, compared to 10.31% at December 31, 2020. The ratio of common equity to total assets was 11.40% at December 31, 2021 as compared to 11.16% at December 31, 2020. The Company’s capital position remains well in excess of regulatory requirements for well capitalized status. Total risk based capital decreased by 89 basis points as the large increase in the investment portfolio, offset the decline in loans, and increased risk weighted assets. Investment Securities Available-for-Sale and Short-Term Investments The tables below and Note 3 to the Consolidated Financial Statements provide additional information regarding the Company’s investment securities categorized as “available-for-sale” or AFS. The Company classifies all its investment securities as AFS. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of shareholders’ equity (accumulated other comprehensive income), net of deferred income taxes. At December 31, 2021, the Company had a net unrealized loss in AFS securities of $18.6 million with a deferred tax asset of $5.0 million as compared to a net unrealized gain in AFS securities of $22.0 million at December 31, 2020, with a deferred tax liability of $5.5 million. 52 Table of Contents The AFS portfolio is comprised of U.S. agency securities (24% of AFS securities) with an average duration of 3.0 years, seasoned mortgage backed securities that are 100% agency issued (64% of AFS securities) which have an average expected life of 4.26 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (6% of AFS securities) which have an average duration of 6.5 years, and corporate bonds (5% of AFS securities) which have an average duration of 6.3 years. 95 percent of the investment securities which are debt instruments are rated AAA or AA or have the implicit guarantee of the U.S. Treasury. At December 31, 2021, the investment portfolio was $2.6 billion as compared to $1.2 billion at December 31, 2020, an increase of 128%. The investment portfolio is managed to achieve goals related to liquidity, income, interest rate risk management and to provide collateral for customer repurchase agreements and other borrowing relationships. The increase in the investment portfolio in 2021 was driven by deposit inflows, of which a portion were invested in securities to generate income. The following table provides information regarding the composition of the investment securities portfolio at the dates indicated. Amounts are reported at estimated fair value. At December 31, 2021, the investment portfolio balances at fair value increased as compared to December 31, 2020, and the composition of portfolio changed. The increase in fair value and the change in composition of the portfolio in 2021 was driven by the decision to put more of the cash balances generated by deposit inflows into higher yielding investments, which were primarily residential mortgage backed securities and U.S. agency securities. Years Ended December 31, 2021 2020 (dollars in thousands) Balance Percent of Total Balance Percent of Total U.S. Treasury $ 49,458,000 1.9 % $ — — % U. S. agency securities $ 622,387,000 23.7 % 181,921 15.8 % Residential mortgage backed securities 1,677,673,000 64.0 % 825,001 71.7 % Municipal bonds 145,431,000 5.5 % 108,113 9.4 % Corporate bonds 128,459,000 4.9 % 35,850 3.1 % $ 2,623,407,000 100 % $ 1,150,885 100 % At December 31, 2021, there were no issuers, other than the U.S. Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company’s shareholders’ equity. The following table provides information, on an amortized cost basis, regarding the contractual maturity and weighted-average yield of the investment portfolio at December 31, 2021. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax exempt securities have not been calculated on a tax equivalent basis. One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Total (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield U.S. Treasury $ — — % $ 49,693 0.83 % $ — — % $ — — $ 49,693 0.83 % U. S. Government agency securities 425,597 1.23 % 127,641 1.41 % 76,035 0.89 % $ — — 629,273 1.23 % Residential mortgage backed securities 9,401 1.37 % 1,202,291 1.38 % 463,263 1.51 % 17,818 1.91 % 1,692,773 1.42 % Municipal bonds 4,806 2.45 % 25,457 2.65 % 97,945 2.28 % 13,708 2.39 % 141,916 2.36 % Corporate bonds 18,924 2.31 % 54,630 3.77 % 55,458 2.15 % — — 129,012 2.86 % $ 458,728 1.29 % $ 1,459,712 1.48 % $ 692,701 1.60 % $ 31,526 2.12 % $ 2,642,667 1.48 % Federal funds sold were $20.4 million at December 31, 2021 as compared to $28.2 million at December 31, 2020. These funds represent excess daily liquidity which is invested on an unsecured basis with well capitalized banks, in amounts generally limited both in the aggregate and to any one bank. 53 Table of Contents Interest bearing deposits with banks and other short-term investments were $1.68 billion at December 31, 2021 as compared to $1.75 billion at December 31, 2020. These short term investments represent liquid funds held at the Federal Reserve to meet future loan demand, to fund future increases in investment securities and to meet other general liquidity needs of the Company. The Bank no longer holds any time deposits at December 31, 2021 or December 31, 2020. Loan Portfolio 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 declined over the past year as loans outstanding were $7.1 billion at December 31, 2021, as compared to $7.8 billion at December 31, 2020, a decrease of $695 million or 9% . Loan production in 2021 was predominantly in the income producing - commercial real estate and owner occupied – commercial real estate loan categories, while construction loans have been de-emphasized. That said, the Company continues to be active as a construction lender and we expect to continue to see construction commitments funded up over time. Despite an increased level of in-market competition for business and a decline in net loan growth for the period ended 2021 over 2020, the Bank continued to experience organic gross loan production, having originated more than $1 billion in new CRE loan commitments during 2021. This production was offset by the continued successful completion of projects and subsequent paydowns. Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects. While as a general comment there has been softening in the office leasing market, in certain well-located pockets and submarkets, the sector has evidenced some resilience. Overall, commercial real estate values have generally held up well, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result. "Owner occupied-commercial real estate" and "construction–C&I (owner occupied)" loans represent 18% of the loan portfolio. The Bank has a large portion of its loan portfolio related to real estate, with 61% consisting of commercial real estate and real estate construction loans. When "owner occupied commercial real estate" and "construction–C&I (owner occupied)" are excluded, the percentage of total loans represented by commercial real estate decreases to 60%. Real estate also serves as collateral for loans made for other purposes, resulting in 85% of loans being secured or partially secured by real estate. The following table shows the trends in the composition of the loan portfolio over the past three years. Years Ended December 31, 2021 2020 2019 (dollars in thousands) Amount % Amount % Amount % Commercial $ 1,354,317 19 % $ 1,437,433 19 % $ 1,545,906 20 % PPP loans 51,105 1 % 454,771 6 % — — % Income producing - commercial real estate 3,385,298 48 % 3,687,000 47 % 3,702,747 50 % Owner occupied - commercial real estate 1,087,776 15 % 997,694 13 % 985,409 13 % Real estate mortgage - residential 73,966 1 % 76,592 1 % 104,221 1 % Construction - commercial and residential 896,319 13 % 873,261 11 % 1,035,754 14 % Construction - C&I (owner occupied) 159,579 2 % 158,905 2 % 89,490 1 % Home equity 55,811 1 % 73,167 1 % 80,061 1 % Other consumer 1,427 — % 1,389 — % 2,160 — Total loans 7,065,598 100 % 7,760,212 100 % 7,545,748 100 % Less: Allowance for credit losses (74,965) (109,579) (73,658) Net loans $ 6,990,633 $ 7,650,633 $ 7,472,090 As noted above, a significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C. metropolitan area and secured by real estate or other collateral in that market. Although these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the Washington, D.C. metropolitan real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position. While our basic market area is the Washington, D.C. metropolitan area, the 54 Table of Contents Bank has made loans outside that market area where the applicant is an existing customer and the nature and quality of such loans was consistent with the Bank’s lending policies. At present, the Company believes that commercial real estate values are stable to improving in those sub-markets of the Washington, D.C. metropolitan area in which the Company has significant real estate exposure. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of December 31, 2021, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 320% of consolidated risk based capital; however, growth in that segment over the past 36 months at 4% does not exceed the 50% threshold laid out in the regulatory guidance. Construction, land and land development loans represent 110% of consolidated risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, 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. As of December 31, 2021, loans to the Accommodation and Food Service industry represent 8.3% of the loan portfolio compared to 9.9% as of December 31, 2020. At December 31, 2021, the Company had no concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of businesses that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Certain directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of the Company’s lending business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties; and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features. Refer to Note 4 to the Consolidated Financial Statements for further detail regarding related party loans. Loan Portfolio Exposures - COVID-19: Industry areas of potential concern within the Loan Portfolio are presented below as of December 31, 2021. The Commercial Real Estate exposure is collateral-based and shows exposures on loans secured by tenant type . Industry Principal Balance (in millions) % of Loan Portfolio Accommodation & Food Services (1) $ 584 (1 ) 8.3 % Retail Trade (2) 75 (2 ) 1.1 % Commercial Real Estate exposure (not included above): Restaurant 32 0.5 % Hotel 85 1.2 % Retail 359 5.1 % Total $ 1,135 16.2 % (1) Includes $22.2 million of PPP loans. (2) Includes $36 thousand of PPP loans. 55 Table of Contents The Bank continues to be proactive in regard to exposures to the Accommodation and Food Service industry and Retail Trade. Accommodation and Food Service exposure represents 8.3% of the Bank’s loan portfolio as of December 31, 2021 and Retail Trade exposure represents 1.1% of the Bank’s loan portfolio. The Bank is working with CRE borrowers and monitoring rent collections as part of our portfolio management oversight. Loan Maturity The following table sets forth the time to contractual maturity of the loan portfolio as of December 31, 2021. Due In (dollars in thousands) Total One Year or Less Over One to Five Years Over Five to Ten Years Over Ten Years Commercial $ 1,354,317 $ 368,940 $ 796,850 $ 172,179 $ 16,348 PPP loans 51,105 17,868 33,237 — — Income producing - commercial real estate 3,385,298 1,065,033 1,862,286 457,979 — Owner occupied - commercial real estate 1,087,776 80,361 371,843 484,377 151,195 Real estate mortgage - residential 73,966 15,429 43,373 2,939 12,225 Construction - commercial and residential 896,319 445,848 426,009 14,519 9,943 Construction - C&I (owner occupied) 159,579 16,919 58,015 56,334 28,311 Home equity 55,811 4,745 8,707 939 41,420 Other consumer 1,427 885 — — 542 Total loans $ 7,065,598 $ 2,016,028 $ 3,600,320 $ 1,189,266 $ 259,984 Loans with: Predetermined fixed interest rate $ 3,053,033 $ 547,539 $ 1,696,538 $ 692,088 $ 116,868 Floating or Adjustable interest rate 4,012,565 1,468,489 1,903,782 497,178 143,116 Total loans $ 7,065,598 $ 2,016,028 $ 3,600,320 $ 1,189,266 $ 259,984 Loans are shown in the period based on final contractual maturity. Demand loans, having no contractual maturity, and overdrafts, are reported as due in one year or less. Allowance for Credit Losses The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL. The amount of the ACL is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include 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. Management has developed a comprehensive analytical process to monitor the adequacy of the ACL. This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies. During 2021, a reversal of $20.8 million was made to the provision for credit losses and net charge-offs were $13.3 million. A full discussion of the accounting for ACL is contained in Note 1 to the Consolidated Financial Statements and activity in the ACL is contained in Note 4 to the Consolidated Financial Statements. Also, please refer to the discussion under the caption “Critical Accounting Policies” within Management’s Discussion and Analysis of Financial Condition and Results of Operation for further discussion of the methodology which management employs to maintain an adequate ACL, as well as the discussion under the caption “Provision for Credit Losses.” The ACL represented 1.06% of total loans at December 31, 2021 as compared to 1.41% at December 31, 2020. At December 31, 2021, the allowance represented 257% of nonperforming loans as compared to 180% at December 31, 2020 . The decrease in the ratio of the allowance for loan losses to total loans was due to the provision reversal of $20.8 million and net charge offs of $13.3 million, which had a greater impact on the ratio than the decline in loans.The increase in the coverage ratio is due to the improvement in asset quality, which also contributed to the decision to reverse provisions to the ACL. 56 Table of Contents As part of its comprehensive lo an review process, the Bank’s Board of Directors, Directors’ Loan Committee and Credit Review Committee carefully evaluate loans which are past due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding delinquent and potential problem loans. 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. The Credit Administration department specifically analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk which may require additional reserves. At December 31, 2021, the Company had $29.2 million of loans classified as nonperforming, and $88.6 million of additional loans rated substandard or worse, as compared to $60.9 million of nonperforming loans and $91.2 million of additional loans rated substandard or worse at December 31, 2020. Please refer to Note 1 to the Consolidated Financial Statements under the caption “Loans” for a discussion of the Company’s policy regarding impairment of loans. Please refer to the “Nonperforming Assets” section for a discussion of problem and potential problem assets. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See the “Allowance for Credit Losses” section for a description of the allowance methodology. As the loan portfolio and ACL review processes continue to evolve, and with the adoption of CECL, there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance maintained. Historically, the Bank has enjoyed a high quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates. In 2021, the Company experienced a reduced level of net charge-offs as a percentage of average loans compared to 2020 (0.18% as compared to 0.26%). The maintenance of a high quality portfolio will continue to be a high priority for both management and the Board of Directors. Bank management, being aware of the loan growth experienced by the Bank, is intent on maintaining strong portfolio management and a strong risk rating process. The Bank provides analysis of credit requests and the management of problem credits. The Bank has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system, and has adopted enhanced monitoring of the loan portfolio (in particular the construction loan portfolio) and the adequacy of the ACL, including stress test analyses. Additionally, fair value assessments of loans acquired is made as part of analytical procedures. The loan portfolio analysis process is ongoing and proactive in order to maintain a portfolio of quality credits and to quickly identify any weaknesses before they become more severe. 57 Table of Contents The following table sets forth activity in the allowance for credit losses - for the past three years. Years Ended December 31, (dollars in thousands) 2021 2020 2019 Balance at beginning of year $109,579 $ 73,658 $ 69,944 Impact of adopting CECL — 10,614 — Charge-offs: Commercial 8,788 12,082 4,868 Income producing - commercial real estate — 4,300 1,847 Owner occupied - commercial real estate 5,445 20 — Real estate mortgage - residential — 815 — Construction - commercial and residential 206 2,947 3,496 Home equity — 92 — Other consumer 1 3 8 Total charge-offs 14,440 20,259 10,219 Recoveries: Commercial 486 130 405 Income producing - commercial real estate — — 26 Owner occupied - commercial real estate 97 — 3 Real estate mortgage - residential — — 3 Construction - commercial and residential 499 4 354 Home equity — — — Other consumer 18 28 51 Total recoveries 1,100 162 842 Net charge-offs 13,340 20,097 9,377 Provision for Credit Losses- Loans (21,274) 45,404 13,091 Balance at end of year $74,965 $ 109,579 $ 73,658 Ratio of allowance for credit losses to total loans outstanding at year end 1.06 % 1.41 % 0.98 % Ratio of net charge-offs during the year to average loans outstanding during the year 0.18 % 0.26 % 0.13 % The following table presents the allocation of the ACL by loan category and the percent of allowance in each category. The allocation of the allowance at December 31, 2021 includes specific reserves of $7.0 million against individually assessed loans of $39.1 million as compared to specific reserves of $15.4 million against individually assessed of $71.2 million at December 31, 2020. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the usage of the allowance for any specific loan or category. Years Ended December 31, 2021 2020 (dollars in thousands) Amount ACL % Total Loans % Total Amount ACL % Total Loans % Total Commercial $ 14,475 19 % 20 % $ 26,569 24 % 24 % Income Producing - Commercial Real Estate 38,287 51 % 48 % 55,385 50 % 48 % Owner Occupied - Commercial Real Estate 12,146 16 % 15 % 14,000 13 % 13 % Real Estate Mortgage - Residential 449 1 % 1 % 1,020 1 % 1 % Construction - Commercial and Residential 9,099 12 % 15 % 11,529 11 % 13 % Home Equity 474 1 % 1 % 1,039 1 % 1 % Other Consumer 35 — % — % 37 — % — % Total $ 74,965 100 % 100 % $ 109,579 100 % 100 % 58 Table of Contents Nonperforming Assets As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings ("TDR"), and other real estate owned ("OREO"), totaled $30.8 million at December 31, 2021, representing 0.26% of total assets, as compared to $65.9 million at December 31, 2020, representing 0.59% of total assets. The Company had no accruing loans 90 days or more past due at December 31, 2021 or December 31, 2020. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its ACL at 1.06% of total loans at December 31, 2021, is adequate to absorb expected credit losses. Total nonperforming loans amounted to $29.2 million at December 31, 2021, representing 0.41% of total loans, compared to $60.9 million at December 31, 2020, representing 0.79% of total loans. The decline in nonperforming loans was due to payoffs, note sales, charge offs and loans returning to accrual status after a period of sustained performance which offset new nonperforming loans. The majority of nonperforming loans are believed to be adequately secured by real estate. The CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on nonaccrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default. Nonperforming assets include loans that the Company considers to be individually assessed. Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a TDR that has not shown a period of performance as required under applicable accounting standards. Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis. Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The most common change in terms provided by the Company is an extension of an interest only term. 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 7 TDRs at December 31, 2021, totaling 59 Table of Contents approximately $16.5 million, as compared to 10 TDRs totaling approximately $19.2 million at December 31, 2020. Refer to Note 4 – Loan Modifications for more detail on TDRs. 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. During 2021, there were no loans modified in a TDR as compared to two loans totaling approximately $572 thousand modified in a TDR during 2020. Included in nonperforming assets at December 31, 2021 is OREO of $1.6 million, consisting of three foreclosed properties . Included in nonperforming assets at December 31, 2020 was OREO of $5.0 million , consisting of three foreclosed properties. OREO properties are carried at fair value less estimated costs to sell. It is the Company's policy to generally 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 was one OREO sale in each of 2021 and 2020. Beginning in the third quarter of 2020, all loans that received a second COVID-19 deferral or payment modification were downgraded to a watch-rating if not already rated as such. This was done to raise the visibility of these loans within the loan portfolio. After these COVID-19 deferred or modified loans demonstrate six months of payments and sustained performance, they may be considered for removal of the classification of a watch-rated loan. Watch-rated loans at December 31, 2021 were $351 million, of which $261 million were loans that received a COVID-19 deferral or payment modification (includes loans that were upgraded to watch-rated). As of December 31, 2021, there were three loans with COVID-19 deferrals or payment modifications. Two of the loans were hotels and one was an assisted living facility. The aggregate note balance was $67 million. As of December 31, 2020, the aggregate note balance was $72 million. The following table shows the amounts and relevant ratios of nonperforming assets at the dates indicated: (dollars in thousands) 2021 2020 2019 Nonaccrual Loans: Commercial $ 8,876 $ 15,352 $ 14,928 PPP 1,365 — — Income producing - commercial real estate 13,456 18,879 9,711 Owner occupied - commercial real estate 42 23,158 6,463 Real estate mortgage - residential 2,010 2,932 5,631 Construction - commercial and residential 3,093 206 11,509 Construction - C&I (owner occupied) — — — Home equity 366 416 487 Other consumer — — — Accrual loans-past due 90 days — — — Total nonperforming loans (1)(2) 29,208 60,943 48,729 Other real estate owned 1,635 4,987 1,487 Total nonperforming assets $ 30,843 $ 65,930 $ 50,216 Coverage ratio, allowance for credit losses to total nonperforming loans 256.66 % 179.80 % 151.16 % Ratio of nonperforming loans to total loans 0.41 % 0.79 % 0.65 % Ratio of nonperforming assets to total assets 0.26 % 0.59 % 0.56 % 60 Table of Contents (1) At December 31, 2021, nonaccrual loans reported in the table above included one loan totaling $101 thousand and as of December 31, 2020 there were two loans totaling approximately $6.3 million which migrated from performing troubled debt restructuring. (2) Gross interest income of $1.6 million, $3.7 million and $3.0 million would have been recorded for 2021, 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $101 thousand $679 thousand and $630 thousand at December 31, 2021, 2020 and 2019, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status. 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. Other Earning Assets Residential mortgage loans held for sale amounted to $47.2 million at December 31, 2021 compared to $88.2 million at December 31, 2020. The Company’s general practice is to originate and sell such loans only on a “servicing released” basis in order to enhance noninterest income. See the “Business” section for a description of the Bank’s residential mortgage lending and sales activities. Bank owned life insurance at December 31, 2021 amounted to $108.8 million as compared to $76.7 million at December 31, 2020, which reflected the $30.0 million in additional policies added during 2021. Refer to Note 19 to Consolidated Financial Statements for further detail. Intangible Assets The Company recognizes a servicing asset for the computed value of servicing fees on the sales of multifamily FHA loans, the guaranteed portion of SBA loans, and other loans sold with retained servicing which is in excess of the normal servicing fees. Assumptions related to loan term and amortization are made to arrive at the initial recorded value, which is included in intangible assets, net, on the Consolidated Balance Sheet. For 2021, excess servicing fees of $909 thousand were recorded and $132 thousand was amortized as a reduction of actual service fees collected, which is a component of other income. At December 31, 2021, the balance of excess servicing fees was $1.6 million. For 2020, excess servicing fees of $667 thousand were recorded and $228 thousand was amortized as a reduction of actual service fees collected, which is a component of other income. At December 31, 2020, the balance of excess servicing fees was $946 thousand. In connection with the acquisitions of Fidelity in 2008 and Virginia Heritage in 2014, the Company allocated a portion of the purchase price to core deposit intangibles, based upon an independent evaluation, and which is included in intangible assets, on the Consolidated Balance Sheets. The amount of the core deposit intangible relating to the Fidelity and Virginia Heritage acquisitions was fully amortized at December 31, 2020, as a component of other noninterest expense. In 2008, the Company recorded an unidentified intangible asset (goodwill) incident to the acquisition of Fidelity of $2.2 million. In 2014, the Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $102 million. Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparable factors. Impairment analyses were performed as of December 31, 2021 and December 31, 2020 as part of our regularly scheduled annual impairment testing and found no impairment existed. Future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Refer to Note 7 to the Consolidated Financial Statements for information on the initial and current carrying values as well as additions and amortization. 61 Table of Contents Deposits and Other Borrowings The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, and savings accounts. Additionally, the Bank obtains certificates of deposits from the Washington, D.C. metropolitan area. The deposit base includes transaction accounts, time and savings accounts and accounts which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. 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 FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms. For the year ended December 31, 2021, deposits were $10.0 billion as compared to $9.2 billion at December 31, 2020 , an increase of 9%. Noninterest bearing deposits increased $468.6 million or 17% to $3.3 billion at December 31, 2021 as compared to $2.8 billion at December 31, 2020, while interest bearing deposits increased by $323.7 million, or 5%. Within interest bearing deposits, money market and savings accounts collectively amounted to $5.2 billion at December 31, 2021, or 52% of total deposits, as compared to $4.6 billion, or 51% of total deposits, at December 31, 2020, an increase of $552.1 million, or 12%. Average total deposits for the year ended December 31, 2021 were $9.9 billion, as compared to $8.5 billion for the same period in 2020, an 17% increase. Time deposits were $729.1 million at December 31, 2021, which was 7% of deposits. This is down from $977.8 million at December 31, 2020, which was 11% of deposits. The decline in time deposits is due to the low rate environment which has reduced depositor interest in time deposits. Time deposits $250,000 or more (dollars in thousands) 2021 2020 Three months or less $ 16,663 $ 32,967 More than three months through six months 56,619 122,192 More than three months through twelve months 48,271 47,638 Over twelve months 30,907 28,280 Total $ 152,460 $ 231,077 Maturities of time deposits with balances of $250 thousand or more, which represents 7% and 11% of total deposits as of December 31, 2021 and 2020, respectively. See Note 11 to the Consolidated Financial Statements for additional information regarding the maturities of time deposits and the Average Balances Table in the “Net Interest Income and Net Interest Margin” section for the average rates paid on interest-bearing deposits. Time deposits of $250 thousand or more can be more volatile and more expensive than time deposits of less than $250 thousand. However, because the Bank focuses on relationship banking, and its marketplace demographics are favorable, its historical experience has been that large time deposits have not been more volatile or significantly more expensive than smaller denomination certificates. From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm, and other national brokerage networks, including IntraFi. Additionally, the Bank participates in the CDARS and the ICS products, which provides for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The total of reciprocal deposits at December 31, 2021 was $701.5 million (7% of total deposits) as compared to $790.0 million at December 31, 2020 (9% of total deposits). These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. The Bank also is able to obtain one way CDARS deposits and participates in IntraFi’s Insured Network Deposit, (“IND”). The Bank had $1.7 billion and $1.3 billion of “IND” brokered deposits as of December 31, 2021 and 2020, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding. At December 31, 2021, total deposits included $2.6 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 27% of total deposits. At December 31, 2020, total brokered deposits (excluding the CDARS and ICS two-way) were $2.4 billion, or 26% of total deposits. 62 Table of Contents At December 31, 2021, the Company had $3.3 billion in noninterest bearing demand deposits, representing 33% of total deposits. This compared to $2.8 billion of noninterest bearing demand deposits at December 31, 2020 or 31% of total deposits. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets. As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds, which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $23.9 million at December 31, 2021 compared to $26.7 million at December 31, 2020. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at December 31, 2021 and 2020. At December 31, 2021, the Company had $300.0 million of FHLB advances borrowed as part of the overall asset liability strategy. The Company had $300.0 million FHLB advances outstanding as of December 31, 2020. 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 December 31, 2021 consisted of the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024. Long term borrowings at December 31, 2020 included the subordinated notes due September 1, 2024 and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. For additional information on the Company’s subordinated notes, please refer to Note 13 to the Consolidated Financial Statements, as well as the “Capital Resources and Adequacy” section below. Additionally, long-term borrowings consisted of FHLB advances with maturities over one year, with balances of $0 at December 31, 2021 and $50 million at December 31, 2020. CONTRACTUAL OBLIGATIONS The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. Except for its loan commitments, as shown in Note 21 to the Consolidated Financial Statements. The following table shows details on these fixed and determinable obligations as of December 31, 2021 in the time period indicated. (dollars in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total Deposits without a stated maturity (1) $ 9,252,458 $ — $ — $ — $ 9,252,458 Time deposits (1) 478,056 227,188 20,708 3,130 729,082 Borrowed funds (2) 323,918 69,670 — — 393,588 Operating lease obligations 7,231 13,330 9,517 8,407 38,485 Outside data processing (3) 4,325 5,225 — — 9,550 George Mason sponsorship (4) 675 1,350 1,388 6,075 9,488 D.C. United (5) 844 — — — 844 LIHTC investments (6) 7,973 7,023 469 1,039 16,504 Other (7) $ — $ 2,000 $ — $ — 2,000 Total $ 10,075,480 $ 325,786 $ 32,082 $ 18,651 $ 10,451,999 (1) Excludes accrued interest payable at December 31, 2021. (2) Borrowed funds include customer repurchase agreements, and other short-term and long-term borrowings. (3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2024 and one other vendor arrangement that relates to network infrastructure and data center services that expires in December 2022. (4) The Bank has the option of terminating the George Mason agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030). Should the Bank elect to exercise its right to terminate the George Mason contract, contractual obligations would decrease $3.5 million and $3.6 million for the first option period (years 11-15) and the second option period (16-20), respectively. (5) Marketing sponsorship agreement with D.C. United. (6) Low Income Housing Tax Credits (“LIHTC”) expected payments for unfunded affordable housing commitments. 63 Table of Contents (7) As disclosed in the 8-K dated January 25, 2021, pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to invest an additional $2 million incremental spend above 2020 levels by the end of 2023 to enhance its corporate governance, and risk and compliance controls and infrastructure. The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company’s loans outstanding. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments outstanding and lines and letters of credit at December 31, 2021 and 2020 are as follows: (dollars in thousands) 2021 2020 Unfunded loan commitments $ 1,819,578 $ 2,175,271 Unfunded lines of credit 108,209 107,683 Letters of credit 112,509 70,779 Total $ 2,040,296 $ 2,353,733 Included in the unfunded loan commitments are interest rate lock commitments on residential mortgage loans which are short-term in nature. These interest rate lock commitments were $53.3 million as of December 31, 2021 and $367.7 million as of December 31, 2020. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. See Note 21 to the Consolidated Financial Statements for a summary list of loan commitments at December 31, 2021 and 2020. Loan commitments represent agreements to lend to a customer as long as there is no violation of any condition established in the contract and which have been accepted in writing by the borrower. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Collateral obtained varies, and may include certificates of deposit, accounts receivable, inventory, property and equipment, residential and commercial real estate. Standby letters of credit are conditional commitments issued by the Company which guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. At December 31, 2021, approximately 63% of the dollar amount of standby letters of credit was collateralized. In connection with deposit guarantees, the Bank collateralizes certain public funds using qualified investment securities. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, capital expenditures or capital resources, that is material to investors. LIQUIDITY MANAGEMENT 64 Table of Contents 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 $155.0 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2021, and can borrow unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.8 billion, against which there was $79 thousand outstanding at December 31, 2021. The Bank also has a commitment at December 31, 2021 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 $1.6 billion at December 31, 2021. At December 31, 2021, the Bank was also eligible to make advances from the FHLB up to $1.1 billion based on collateral at the FHLB, of which there were $300.0 million outstanding as of December 31, 2021. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately $549.0 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. The loss of deposits, through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The ALCO has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. At December 31, 2021, under the Bank’s liquidity formula, it had $7.4 billion of primary and secondary liquidity sources. Management believes the amount is deemed adequate to meet current and projected funding needs. CAPITAL RESOURCES AND ADEQUACY The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The federal banking regulators have issued guidance for those institutions, which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company continues to pursue lending opportunities in its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional 65 Table of Contents capital, and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal policy limits for regulatory capital ratios that are in excess of well capitalized ratios (as defined in the section “Regulation” above). 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. At December 31, 2021, the capital position of the Company and its wholly owned subsidiary, the Bank, continue to exceed regulatory requirements and well-capitalized guidelines. The primary indicators relied on by bank regulators in measuring the capital position are four ratios as follows: Tier 1 risk-based capital ratio, Total risk-based capital ratio, the Leverage ratio and the CET1 ratio. Tier 1 capital consists of common and qualifying preferred shareholders’ equity less goodwill and other intangibles. Total risk-based capital consists of Tier 1 capital, plus qualifying subordinated debt, and the qualifying portion of the ACL, and for the Company to a limited extent, excess amounts of restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets, which are prescribed by regulation. The measure of Tier 1 capital to average assets for the prior quarter is often referred to as the leverage ratio. The CET 1 ratio is the Tier 1 capital ratio but excluding preferred stock. The Federal Reserve Board and the other federal banking agencies have adopted the Basel III Rules to implement the Basel III capital guidelines for U.S. banks. The capital rules require a CET1 ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%; a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, or 8.5% with the fully phased in capital conservation buffer; a minimum total capital to risk-weighted assets ratio of 10.5% with the fully phased-in capital conservation buffer; and a minimum leverage ratio of 4.0%. The Basel III Rules also increased risk weights for certain assets and off-balance-sheet exposures. See the “Regulation” section for additional information regarding regulatory capital requirements. The Company’s capital ratios were all well in excess of guidelines established by the Federal Reserve Board and the Bank’s capital ratios were in excess of those required to be classified as a “well capitalized” institution under the prompt corrective action provisions of the Federal Deposit Insurance Act. The Company’s and Bank’s capital ratios at December 31, 2021 and December 31, 2020 are shown in Note 22 to the Consolidated Financial Statements. The ability of the Company to continue to grow is dependent on its earnings and those of the Bank, the ability to obtain additional funds for contribution to the Bank’s capital, through additional borrowings, through the sale of additional common stock or preferred stock, or through the issuance of additional qualifying capital instruments, such as subordinated debt. The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank’s concentrations in commercial real estate loans. See further detail at the “Regulation” and “Risk Factors” sections. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and Notes thereto have been prepared in accordance with GAAP in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services. NEW AUTHORITATIVE ACCOUNTING GUIDANCE Refer to Note 1 to the Consolidated Financial Statements for New Authoritative Accounting Guidance and their expected impact on the Company’s Financial Statements. 66 Table of Contents