What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 376 added, 219 removed, 527 unchanged (53% of the section changed)

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Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Settlement of Legal Matters

On June 1, 2022, we reached an agreement in principle with the SEC staff to resolve the SEC's investigation with respect to the Company.

As previously disclosed, the Company believes the investigation relates to the Company's identification, classification and disclosure of related party transactions;

the retirement of certain former officers and directors;

and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

Under the terms of the settlement, the Company would consent, without admitting or denying the SEC's allegations, to the entry of an administrative cease-and-desist order for violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Securities Exchange Act of 1934, as amended, and Rules 13a-1, 14a-9 and 12b-20 thereunder;

and would pay a civil money penalty of $10.0 million and $2.6 million in disgorgement, plus prejudgment interest.

The agreement with the SEC staff is subject to finalization and then approval by the SEC, and there can be no assurance that the settlement will be agreed to or approved.

In connection with the probable settlement of the SEC matter, we recorded a contingent liability of $13.4 million in other liabilities on the consolidated balance sheet and in other expenses on the consolidated statements of income.

On August 2, 2022, the Bank reached an agreement in principle with the FRB to resolve the previously disclosed investigation with respect to the Bank.

As previously disclosed, the Company believes the investigation relates to the Company's identification, classification and disclosure of related party transactions;

and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

The agreement with the FRB staff is subject to finalization and then approval by the FRB, and there can be no assurance that the settlement will be agreed to or approved.

In connection with the probable settlement of the FRB matter, the Company recorded a contingent liability of approximately $9.5 million as a subsequent event in other liabilities on the consolidated balance sheet and in other expenses on the consolidated statements of income as of and for the three and six months June 30, 2022.

Impact of COVID-19

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COVID-19 has negatively affected, and may 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 to impede the economic recovery.

Furthermore, economic conditions remain unclear and significant volatility could continue for a prolonged period as the potential exists for additional variants of COVID-19 to adversely impact the economy.

CRITICAL ACCOUNTING POLICIES

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Earnings Summary

Three Months Ended March 31, 2022 vs.

Three Months Ended March 31, 2021

Net income for the three months ended March 31, 2022 was $45.7 million compared to $43.5 million for the same period in 2021, an increase of $2.3 million, or 5.2%.

The increase in net income of $2.3 million for the three months ended March 31, 2022 relative to the same period in 2021 was due primarily to a decrease in noninterest expenses of $7.0 million, partially offset by a decrease in noninterest income of $3.1 million and a decrease in net interest income of $2.2 million.

Noninterest expenses decreased due primarily to an accrual reduction of $5.0 million related to stock-based compensation awards and deferred compensation to our former CEO and Chairman.

Additional detail on the accrual reduction is provided in "Noninterest Expense" section below.

Noninterest income decreased due to decreases in gain on sale of residential loans.

Net interest income decreased due to average loans being lower by $673 million and average yield on loans fell 30 basis points while cost of funds fell just 16 basis points.

Three Months Ended June 30, 2022 vs.

Three Months Ended June 30, 2021

Net income for the three months ended June 30, 2022 was $15.7 million compared to $48.0 million for the same period in 2021, a decrease of $32.3 million, or 67.3%.

The decrease in net income of $32.3 million for the three months ended June 30, 2022 relative to the same period in 2021 was due primarily to an increase in noninterest expenses of $23.5 million, in addition to a decrease in noninterest income of $5.4 million and net interest income of $1.7 million.

Noninterest expenses increased primarily in connection with the accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") totaling $22.9 million.

Additional detail on the accrual for the agreements is provided in "Noninterest Expense" section below.

Noninterest income decreased due to decreases in gains on sale of residential loans of $2.6 million and a decrease in gains on sale of securitized loans of $2.2 million, reported within other income, quarter over quarter.

Net interest income decreased as interest expense increased due to rising rates on deposits.

Total revenue (i.e.

net interest income plus noninterest income) was $87.9 million for the three months ended March 31, 2022 as compared to $93.2 million for the same period in 2021.

The most significant portion of revenue is net interest income, which was $80.5 million for the three months ended March 31, 2022, compared to $82.7 million for the same period in 2021.

net interest income plus noninterest income) was $88.5 million for the three months ended June 30, 2022 as compared to $95.6 million for the same period in 2021.

The most significant portion of revenue is net interest income, which was $82.9 million for the three months ended June 30, 2022, compared to $84.6 million for the same period in 2021.

Net interest income was down due to increased interest expense on deposits, which was partially offset by an increase in interest income due to increased income on investments, variable rate loans adjusting upwards and higher average loan balances.

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 2.94% for the three months ended June 30, 2022 and 3.04% for the same period in 2021.

The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.

Total noninterest income for the three months ended June 30, 2022 decreased to $5.6 million from $10.9 million for the same period in 2021, a 49.1% decrease.

Noninterest income was lower due to decreases in gains on sale of residential and securitized loans.

F or further information on the components and drivers of these changes see "Noninterest Income" section below.

Gain on sale of loans for the three months ended June 30, 2022 was $855 thousand compared to $3.5 million for the same period in 2021, a decrease of 75.4%.

The rise in interest rates for residential mortgages in the first half of 2022 had a substantial negative impact on the volume of residential mortgage originations (down 73.4% since the first quarter of 2021) and in turn the sale of residential mortgages declined.

Other income for the three months ended June 30, 2022 decreased to $2.9 million from $5.6 million for the same period in 2021, a 48.6% decrease.

This decrease was primarily attributable to a reduction in gain on sale of loans securitized of $2.2 million due to the rise in interest rates.

Noninterest expenses totaled $59.0 million for the three months ended June 30, 2022, as compared to $35.5 million for same period in 2021, a 66.1% increase.

See the "Noninterest Expense" section for further detail on the components and drivers of the change.

Income tax expenses were $12.8 million for the three months ended June 30, 2022, a decrease of 23.4%, compared to the same period in 2021.

The components and drivers of the change are discussed in the "Income Tax Expense" section below.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 66.64% for the three months ended June 30, 2022, as compared to 37.14% for the same period in 2021.

The adverse change in the efficiency ratio was driven primarily by the $22.9 million accrual of settlement expenses, which increased noninterest expenses.

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

For the three months ended June 30, 2022, the Company reported an annualized return on average assets ("ROAA") of 0.54%, as compared to 1.68% for the same period in 2021.

Total shareholders' equity was $1.3 billion at June 30, 2022, compared to $1.4 billion a year earlier.

The annualized return on average common equity ("ROACE") for the three months ended June 30, 2022 was 4.91% as compared to 14.92% for the same period in 2021.

The annualized return on average tangible common equity ("ROATCE") for the three months ended June 30, 2022 was 5.35% as compared to 16.25% for the same period in 2021.

The decline in returns was driven primarily by the $22.9 million accrual of settlement expenses, which increased noninterest expenses, along with a decrease in net interest income.

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

Six Months Ended June 30, 2022 vs.

Six Months Ended June 30, 2021

Net income for the six months ended June 30, 2022 was $61.4 million as compared to $91.5 million for the same period in 2021, a decrease of $30.1 million, or 33%.

The decrease in net income of $30.1 million for the six months ended June 30, 2022 relative to the same period in 2021 was due to a decreases in net interest income of $3.9 million and noninterest income of $8.5 million and an increase in noninterest expenses of $16.5 million.

Net interest income decreased primarily due to a reduction in coupon rates on our loans, augmented by an increase in the cost of financing in connection with the increasing market rate environment period over period.

Non interest income decreased primarily due to a decrease in gain on sale of residential and securitized loans.

During the six months ended June 30, 2022, the Company closed residential mortgage locked commitments of $228.7 million, down from $551.6 million for the six months ended June 30, 2021.

Noninterest expenses increased primarily in connection with the accrual of settlement expenses in connection with the agreements with the SEC and FRB totaling $22.9 million, which was partially offset by reductions in salaries and benefits of $2.8 million, legal and professional fees of $2.8 million and $2.1 million in FDIC insurance.

Additional detail is provided in "Noninterest Expense" section below.

Total revenue (i.e.

net interest income plus noninterest income) was $176.4 million for the six months ended June 30, 2022 as compared to $188.8 million or the same period in 2021.

The most significant portion of revenue is net interest income, which was $163.4 million for the six months ended June 30, 2022, compared to $167.3 million for the same period in 2021.

Net interest income was down due to lower average loans and lower average yield on loans, offset by an increase in average earning assets other than loans.

The primary driver for the reduction in revenue was the decline in noninterest income due to decreases in gain on sale of residential and securitized loans.

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 2.65% for the three months ended March 31, 2022 and 2.98% for the same period in 2021.

net interest income) as a percentage of earning assets, was 2.79% for the six months ended June 30, 2022 and 3.02% for the same period in 2021.

The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.

Total noninterest income for the three months ended March 31, 2022 decreased to $7.5 million from $10.6 million for the same period in 2021, a 30% decrease.

Noninterest income was lower due to decreases in gain on sale of residential loans.

Total noninterest income for the six months ended June 30, 2022 decreased to $13.0 million from $21.5 million for the same period in 2021, a 39.5% decrease.

Noninterest income was lower due to decreases in gain on sale of residential and securitized loans.

F or further information on the components and drivers of these changes see "Noninterest Income" section below.

Gain on sale of loans for the three months ended March 31, 2022 was $1.5 million compared to $5.2 million for the same period in 2021, a decrease of 71%.

The rise in interest rates for residential mortgages in the first quarter of 2022 had a substantial negative impact on the volume of residential mortgage originations (down 73.4% since the first quarter of 2021) and in turn the sale of residential mortgages declined.

Other income for the three months ended March 31, 2022 increased to $4.1 million from $3.8 million for the same period in 2021, a 6.6% increase.

This increase was primarily attributable to higher loan fees in the first quarter of 2022 and a $911 thousand gain in the first quarter of 2021 from the cancellation of an FHLB borrowing.

Noninterest expenses totaled $31.0 million for the three months ended March 31, 2022, as compared to $38.0 million for same period in 2021, a 18% decrease.

Gain on sale of loans for the six months ended June 30, 2022 was $2.3 million compared to $8.7 million for the same period in 2021, a decrease of 72.9%.

The rise in interest rates for residential mortgages in the first half of 2022 had a substantial negative impact on the volume of residential mortgage originations and in turn the sale of residential mortgages declined.

Other income for the six months ended June 30, 2022 decreased to $7.0 million from $9.4 million for the same period in 2021, a 26.2% decrease.

This decrease was primarily attributable to a reduction in gains on the sale of securitized loans of $2.7 million.

Noninterest expenses totaled $90.0 million for the six months ended June 30, 2022, as compared to $73.5 million or same period in 2021, a 22.4% increase.

See the "Noninterest Expense" section for further detail on the components and drivers of the change.

Income tax expenses were $13.9 million for the three months ended March 31, 2022, a decrease of 4.3%, compared to the same period in 2021.

Income tax expenses were $26.7 million for the six months ended June 30, 2022, a decrease of 14.5%, compared to the same period in 2021.

The components and drivers of the change are discussed in the "Income Tax Expense" section below.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 35.28% for the three months ended March 31, 2022, as compared to 40.74% the same period in 2021.

The improvement in the efficiency ratio was driven by the $5 million accrual reduction which reduced noninterest expenses.

The efficiency ratio was 51.01% for the six months ended June 30, 2022, as compared to 38.92% for the same period in 2021.

The adverse change in the efficiency ratio was driven by the $22.9 million accrual of settlement expenses, which increased noninterest expenses, and was partially offset by the $5.0 million accrual reduction related to share-based compensation awards and deferred compensation associated with our former CEO and Chairman which reduced noninterest expenses.

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

For the three months ended March 31, 2022, the Company reported an annualized return on average assets ("ROAA") of 1.46%, as compared to 1.53% for the same period in 2021.

Total shareholders' equity was $1.3 billion at March 31, 2022, compared to $1.3 billion a year earlier.

The annualized return on average common equity ("ROACE") for the three months ended March 31, 2022 was 13.83% as compared to 14.05% for the same period in 2021.

The annualized return on average tangible common equity ("ROATCE") for the three months ended March 31, 2022 was 14.99% as compared to 15.33% for the same period in 2021.

The slight decline in returns is attributable to the increase average assets which was $12.7 billion for the three months ended March 31, 2022 as compared to $11.5 billion for the same period a year earlier.

For the six months ended June 30, 2022, the Company reported an annualized ROAA of 1.02%, as compared to 1.61% for the same period in 2021.

The annualized ROACE for the six months ended June 30, 2022 was 9.45% as compared to 14.49% for the same period in 2021.

The annualized ROATCE for the six months ended June 30, 2022 was 10.26% as compared to 15.80% or the same period in 2021.

The decline in returns is attributable primarily to the accrual of $22.9 million of settlement expenses and the reduction on the gain on sale of loans as higher interest rates reduced mortgage origination volume.

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

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Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments.

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

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

Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations).

Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

Net interest income was $80.5 million for the three months ended March 31, 2022, as compared to $82.7 million for the same period in 2021.

Net interest income decreased for the three months ended March 31, 2022 due to a decline in average loans and a lower rate environment, partially offset by a 9.7% increase in average earning assets, as compared to March 31, 2021.

The net interest margin was 2.65% for the three months ended March 31, 2022 and 2.98% for the same period in 2021.

Net interest income was $82.9 million for the three months ended June 30, 2022, as compared to $84.6 million for the same period in 2021.

Net interest income decreased for the three months ended June 30, 2022 due to a decline in average loans and lower average loan pricing, partially offset by a 1.3% increase in average earning assets, as compared to June 30, 2021.

The net interest margin was 2.94% for the three months ended June 30, 2022 and 3.04% for the same period in 2021.

The decline reflects the impact of a decline in the average balance of the loan portfolio, which are higher-earning assets, as capital has been deployed into lower interest-earning deposits and investment securities.

In the first three months of 2022 as compared to the same period in 2021, average U.S.

Net interest income was $163.4 million for the six months ended June 30, 2022, as compared to $167.3 million for the same period in 2021.

Net interest income decreased for the six months ended June 30, 2022 due to a decline in average loans and lower average loan pricing, partially offset by a 5.5% increase in average earning assets, as compared to June 30, 2021.

The net interest margin was 2.79% for the six months ended June 30, 2022 and 3.02% for the same period in 2021.

In the first six months of 2022 as compared to the same period in 2021, average U.S.

Treasury rates in the two-to-five year range increased by approximately 186 basis points and the average yield curve flattened as the average two-to-ten year spread went from an average of 131 basis points to an average of 35 basis points.

The Company exper ienced 33 b asis points of net interest margin compression between the first three months of 2021 as compared to the first three months of 2022 (from 2.98% to 2.65%).

The Company experienced 23 basis points of net interest margin compression between the first six months of 2021 as compared to the first six months of 2022 (from 3.02% to 2.79%).

In addition, our cost of funds declined 4 basis points (from 0.39% to 0.35%), while the yield on earning assets declined by 27 basis points (from 3.41% to 3.14%).

Average liquidity was $2.4 billion for the first quarter of 2022 and $2.1 billion for the first quarter of 2021.

While overall rates moved higher in the first quarter of 2022, yield on loans was down as higher rate loans were paid off or paid down, and were replaced by loans with lower rates.

A substantial portion of the variable rate loan portfolio remain at their interest rate floors.

The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three months ended March 31, 2022 and 2021.

Included in the table are measurements of interest rate spread and margin.

Average liquidity was $1.8 billion for the first six months of 2022 and $2.1 billion for the same period of 2021.

While overall rates moved higher in the first six months of 2022, the yield on loans was down as higher rate loans were paid off or paid down, and were replaced by loans with lower rates.

This was partially offset in the second quarter of 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.

The tables below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three and six months ended June 30, 2022 and 2021.

Included in the tables are measurements of interest rate spread and margin.

Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities.

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(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest Average

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

Net loan fees and late charges included in interest income on loans totaled $3.7 million and $7.8 million for the three months ended March 31, 2022 and 2021, respectively.

Net loan fees and late charges included in interest income on loans totaled $4.3 million and $13.4 million for the three months ended June 30, 2022 and 2021, respectively.

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

Six Months Ended June 30,

Balance Interest Average

Yield/Rate Average

Balance Interest Average

Interest earning assets:

Interest bearing deposits with other banks and other short-term investments $ 1,794,793 $ 3,508 0.39 % $ 2,095,711 $ 1,156 0.11 %

Loans held for sale (1)

21,586 398 3.69 % 90,648 1,294 2.84 %

Loans (1) (2)

7,079,355 155,574 4.43 % 7,553,525 176,648 4.72 %

Investment securities available for sale (2)

2,291,096 18,301 1.61 % 1,423,898 10,001 1.42 %

Investment securities held-to-maturity (2)

593,791 6,126 2.08 % — — — %

Federal funds sold 29,915 49 0.33 % 30,795 15 0.10 %

Total interest earning assets 11,810,536 183,956 3.14 % 11,194,577 189,114 3.41 %

Total noninterest earning assets 462,127 395,823

allowance for credit losses 74,008 105,120

Total noninterest earning assets 388,119 290,703

TOTAL ASSETS $ 12,198,655 $ 11,485,280

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction $ 805,891 $ 952 0.24 % $ 807,315 $ 815 0.20 %

Savings and money market 5,141,543 12,496 0.49 % 4,776,928 7,668 0.32 %

Time deposits 689,752 4,449 1.30 % 858,954 6,215 1.46 %

Total interest bearing deposits 6,637,186 17,897 0.54 % 6,443,197 14,698 0.46 %

Customer repurchase agreements 25,368 35 0.28 % 19,644 20 0.21 %

Other short-term borrowings 166,605 580 0.70 % 300,003 997 0.66 %

Long-term borrowings 69,706 2,074 5.95 % 235,590 6,116 5.16 %

Total interest bearing liabilities 6,898,865 20,586 0.60 % 6,998,434 21,831 0.63 %

Noninterest bearing liabilities:

Noninterest bearing demand 3,890,839 3,122,688

Other liabilities 97,353 91,656

Total noninterest bearing liabilities 3,988,192 3,214,344

Shareholders’ Equity 1,311,598 1,272,502

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 12,198,655 $ 11,485,280

Net interest income $ 163,370 $ 167,283

Net interest spread 2.54 % 2.78 %

Net interest margin 2.79 % 3.02 %

Cost of funds 0.35 % 0.39 %

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

Net loan fees and late charges included in interest income on loans totaled $8.0 million and $21.2 million for the six months ended June 30, 2022 and 2021, respectively.

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

Rate/Volume Analysis of Net Interest Income

The rate/volume table below presents the composition of the change in net interest income for the period 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.

Three Months Ended March 31, 2022 Compared With Three Months Ended March 31, 2021

The rate/volume tables below presents the composition of the change in net interest income for the period 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.

Three Months Ended June 30, 2022 Compared With Three Months Ended June 30, 2021

(dollars in thousands) Change

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Net interest income $ 3,698 $ (5,412) $ (1,714)

Six Months Ended June 30, 2022 Compared With Six Months Ended June 30, 2021

(dollars in thousands) Change

Volume Change

Interest earned on

Loans $ (11,089) $ (9,985) $ (21,074)

Loans held for sale (986) 90 (896)

Investment securities available-for-sale 6,091 2,209 8,300

Investment securities held-to-maturity 4,171 1,955 6,126

Interest bearing bank deposits (166) 2,518 2,352

Federal funds sold — 34 34

Total interest income (1,979) (3,179) (5,158)

Interest paid on

Interest bearing transaction (1) 138 137

Savings and money market 585 4,243 4,828

Time deposits (1,224) (542) (1,766)

Customer repurchase agreements 6 9 15

Other borrowings (4,749) 290 (4,459)

Total interest expense (5,383) 4,138 (1,245)

Net interest income $ 3,404 $ (7,317) $ (3,913)

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available-for-sale investment securities.

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

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 and held-to-maturity investment securities.

The amount of the allowance for credit losses on loans is based on management's assessment of current expected credit losses in the portfolio.

Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

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

The provision for unfunded commitments is presented separately on the consolidated statements of income.

This provision considers the probability that unfunded commitments will fund among other factors.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses.

The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors.

Management determines the estimate of the ACL using a CECL model.

Our methodology for determining our allowance was 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.

We develop our estimate of the ACL from several sources:

(i) a quantitative model that determines expected credit losses using a probability of default ("PD") / Loss Given Default ("LGD") cash flow methodology, using internal and third-party provided peer historical loss data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics, i.e., call codes;

(ii) individual evaluation of any loans that exhibit evidence of credit deterioration, excluded from the quantitative model;

(iii) the application of qualitative and environmental factors as determined by management.

We utilize the following qualitative and environmental factors in our CECL methodology:

(i) changes in the nature and volume of the portfolio;

(ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets;

(iii) changes in the value of underlying collateral for loans not individually evaluated;

(iv) changes in lending policies and procedures;

(v) changes in the quality of credit review function;

(vi) changes in lending management and staff;

(vii) concentrations of credit;

(viii) other external factors (competition, legal, regulatory, etc.);

and (ix) changes in national, regional, and local economic and business conditions.

Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and reevaluates all of its factors quarterly.

Refer to additional detail regarding these forecasts in the "Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements.

The results of this process, in combination with conclusions of the Bank's outside consultants' review of the risk inherent in the loan portfolio, support management's assessment as to the adequacy of the allowance at the balance sheet date.

Please refer to the discussion under "Critical Accounting Policies" above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense.

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

During the three months ended March 31, 2022, the ACL on loans reflected a reversal of $3.0 million in the provision and $459 thousand in net charge-offs.

The provision for credit losses on loans for the same period in 2021 was a reversal of $2.3 million.

The first quarter 2022 reversal was primarily driven by improvements in the economic environment, and related adjustments to the quantitative components of the CECL model, in particular the lower modeled probability of default, as well as improvements in asset quality.

During the three months ended June 30, 2022, the ACL on loans reflected a provision of $486 thousand and $674 thousand in net recovery.

The provision for credit losses on loans for the same period in 2021 reflected a reversal of $3.9 million and $5.6 million in net charge-offs.

During the six months ended June 30, 2022, the ACL on loans reflected a reversal of the provision of $2.5 million and net recoveries on loans previously charged off of $215 thousand.

The provision for credit losses on loans for the same six month period in 2021 was a reversal of $6.2 million and $10.8 million in net charge-offs.

Both the first and second quarter 2022 provision was primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, offset by improvements in asset quality.

The reversal in the same period in 2021 was driven by the improved macroeconomic outlook, improvement of credits in the loan portfolio and a reduction in total loans.

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

Three Months Ended

Six Months Ended June 30,

(dollars in thousands) 2022 2021

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Income producing - commercial real estate — (5,216)

Owner occupied - commercial real estate (1,355) —

Construction - commercial and residential — (206)

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Commercial 496 246

Construction - commercial and residential 1,627 6

Other consumer 2 14

Total recoveries 2,125 266

Net charge-offs (459) 5,248

Net charge-offs (recoveries) 215 (10,848)

Reversal of credit losses- loans (2,515) (6,172)

Balance at end of period $ 72,665 $ 92,559

Annualized ratio of net charge-offs during the period to average loans outstanding during the period 0.03 % 0.27 %

Annualized ratio of net (recovery) charge-offs during the period to average loans outstanding during the period (0.01) % 0.29 %

The following table reflects the allocation of the allowance for credit losses at the dates indicated.

The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans

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Nonperforming Assets

As shown in the table below, the Company's level of nonperforming assets, which comprise loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled $25.4 million at March 31, 2022 representing 0.23% of total assets, as compared to $30.8 million of nonperforming assets, or 0.26% of total assets, at December 31, 2021.

At March 31, 2022, the Company had no accruing loans 90 days or more past due.

As shown in the table below, the Company's level of nonperforming assets, which comprise loans delinquent 90 days or more, and nonaccrual loans, which include the nonperforming portion of TDRs and OREO, totaled $20.3 million at June 30, 2022 representing 0.19% of total assets, as compared to $30.8 million of nonperforming assets, or 0.26% of total assets, at December 31, 2021.

At June 30, 2022, the Company had no accruing loans 90 days or more past due.

Management remains attentive to early signs of deterioration in borrowers' financial conditions and to taking the appropriate action to mitigate risk.

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.01% of total loans at March 31, 2022, is adequate to absorb expected credit losses within the loan portfolio at that date.

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.02% of total loans at June 30, 2022, is adequate to absorb expected credit losses within the loan portfolio at that date.

CECL allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation.

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

The C ompany had seven TDRs at March 31, 2022 totaling approximately $16.5 million.

Five of these loans totaling approximately $10.1 million are performing under their modified terms.

For the first three months of 2022 there were two performing TDR loans, with a total balance of $6.3 million, that defaulted on their modified terms.

For the first three months of 2021, one performing TDR loan, with a balance of $101 thousand, defaulted on its modified terms and was placed on nonaccrual status.

The C ompany had four TDRs at June 30, 2022 totaling approximately $5.3 million.

All of these loans are performing under their modified terms.

The Company had seven TDRs at December 31, 2021, totaling $16.5 million.

For the first six months of 2022 there were no TDRs that defaulted on their modified terms.

During the three and six months ended June 30, 2022, three loans that had been modified as TDRs with a balance of $11.1 million, including two that previously were on nonperforming status, were sold, resulting in a charge-off of $1.4 million in connection with the sale.

For the first six months of 2021, one performing TDR loan, with a balance of $101 thousand, defaulted on its modified terms and was placed on nonaccrual status.

During the six months ended June 30, 2021, one previously nonperforming restructured loan with a balance of $2.4 million had its collateral sold, resulting in the full collection of the loan's principal and a partial collection of delinquent interest.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.

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

For both the three months ended March 31, 2022 and 2021, there were no loans modified in a TDR.

Total nonperforming loans amounted to $23.8 million at March 31, 2022 (0.33% of total loans) compared to $29.2 million at December 31, 2021 (0.41% of total loans).

Included in nonperforming assets are OREO properties, which were each $1.6 million for three foreclosed properties at March 31, 2022 and December 31, 2021.

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

Total nonperforming loans amounted to $18.8 million at June 30, 2022 (0.26% of total loans) compared to $29.2 million at December 31, 2021 (0.41% of total loans).

OREO properties are carried at the lower of cost or fair value less estimated costs to sell.

It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually.

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

There were no sales of an OREO property during the first three months of 2022 or 2021.

OREO properties had a lower of cost or fair market value of $1.5 million and $1.6 million for at June 30, 2022 and December 31, 2021, respectively.

During the three and six months ended June 30, 2022, an OREO property was sold, generating proceeds of $241 thousand.

There were no sales of OREO property during the three or six months ended June 30, 2021.

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

(dollars in thousands) March 31, 2022 December 31, 2021

(dollars in thousands) June 30, 2022 December 31, 2021

Nonaccrual Loans:

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Total nonperforming loans 18,842 29,208

23,752 29,208

Other real estate owned 1,487 1,635

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Ratio of nonperforming assets to total assets 0.19 % 0.26 %

(1) Nonaccrual loans reported in the table above do not include loans that migrated from a performing TDR status during the period.

During the three months ended March 31, 2022, there were two loans totaling $6.3 million that migrated from a performing TDR 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.

At March 31, 2022, there wer e $106.2 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.

At June 30, 2022, there were $96.5 million of performing loans considered to be potential problem loans, defined as loans that are not included in the 90 days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.

Potential problem loans were $88.6 million at December 31, 2021.

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Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, FHA multi-family income, income from bank owned life insurance ("BOLI") and other income.

Total noninterest income for the three months ended March 31, 2022 decreased to $7.5 million from $10.6 million for the three months ended March 31, 2021, a 30% decrease.

Gain on sale of loans for the three months ended March 31, 2022 decreased to $1.5 million from $5.2 million for the three months ended March 31, 2021, a 71% decrease;

a decrease in gains on the sale of residential mortgage drove the decline between the two periods.

Residential mortgage loan locked commitments were $136.7 million for the three months ended March 31, 2022 as compared to $303.3 million for the same period in 2021, a 55% decrease.

The rise in interest rates for residential mortgages in the first quarter of 2022 had a substantial negative impact on the volume of mortgage originations and in turn the sale of residential mortgages declined.

Total noninterest income for the three months ended June 30, 2022 decreased to $5.6 million from $10.9 million for the three months ended June 30, 2021, a 49.1% decrease.

Gain on sale of loans for the three months ended June 30, 2022 decreased to $855 thousand from $3.5 million for the three months ended June 30, 2021, a 75.4% decrease;

a decrease in gains on the sale of residential mortgage loans drove the decline between the two periods.

Residential mortgage loan locked commitments were $92.0 million for the three months ended June 30, 2022 as compared to $248.3 million for the same period in 2021, a 63.0% decrease.

Gains on the sale securitized loans for the three months ended June 30, 2022 decreased to $381 thousand from $2.6 million for the three months ended June 30, 2021.

The rise in interest rates for residential mortgages in the first half of 2022 had a negative impact on the volume of mortgage originations and in turn the sale of residential mortgages declined.

The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted "pull-through" rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.

The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.

Other income for the three months ended March 31, 2022 increased to $4.1 million from $3.8 million for the three months ended March 31, 2021, a 7% increase.

This increase was primarily attributable to higher loan fees and the first quarter of 2021 included a $911 thousand gain from the cancellation of an FHLB borrowing.

Service charges on deposits for the three months ended March 31, 2022 increased to $1.3 million from $1.0 million for the three months ended March 31, 2021.

Losses on sales of investment securities were $25 thousand for the three months ended March 31, 2022 compared to a $221 thousand net gain on sale of investment securities for the same period in 2021.

Other income for the three months ended June 30, 2022 decreased to $2.9 million from $5.6 million for the three months ended June 30, 2021, a 48.6% decrease.

This decrease was primarily attributable to the $2.2 million reduction in gains on the sale of securitized loans.

Service charges on deposits for the three months ended June 30, 2022 increased to $1.3 million from $1.1 million for the three months ended June 30, 2021.

Losses on sales of investment securities were $151 thousand for the three months ended June 30, 2022 compared to a $318 thousand net gain on sales of investment securities for the same period in 2021, primarily due to market volatility period over period.

Total noninterest income for the six months ended June 30, 2022 decreased to $13.0 million from $21.5 million for the six months ended June 30, 2021, a 39.5% decrease.

Gain on sale of loans for the six months ended June 30, 2022 decreased to $2.3 million from $8.7 million for the six months ended June 30, 2021, a 72.9% decrease;

a decrease in gains on the sale of residential mortgage loans drove the decline between the two periods.

Residential mortgage loan locked commitments were $228.7 million for the six months ended June 30, 2022 as compared to $551.6 million for the same period in 2021, a 58.5% decrease.

Gains on the sale securitized loans for the six months ended June 30, 2022 decreased to $421 thousand from $3.1 million for the six months ended June 30, 2021.

The rise in interest rates for residential mortgages in the first six months of 2022 had a substantial negative impact on the volume of mortgage originations and in turn the sale of residential mortgages declined.

Other income for the six months ended June 30, 2022 decreased to $7.0 million from $9.4 million for the six months ended June 30, 2021, a 26.2% decrease.

This decrease was primarily attributable to the $2.7 million reduction in gains on the sale of securitized loans.

Service charges on deposits for the six months ended June 30, 2022 increased to $2.6 million from $2.1 million for the six months ended June 30, 2021.

Losses on sales of investment securities were $176 thousand for the six months ended June 30, 2022 compared to a $539 thousand net gain on sale of investment securities for the same period in 2021, primarily due to market volatility period over period.

Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers.

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The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases.

There were no repurchases due to fraud by the borrower during the three months ended March 31, 2022.

The reserve amounted to $82 thousand at March 31, 2022 and is included in other liabilities on the Consolidated Balance Sheets.

Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

There was $181 thousand of income from this source for the three months ended March 31, 2022 compared to $223 thousand for the same period in 2021.

There were no repurchases due to fraud by the borrower during the six months ended June 30, 2022.

The reserve amounted to $50 thousand at June 30, 2022 and is included in other liabilities on the Consolidated Balance Sheets.

In addition to having participated in the PPP program, which has largely ceased since the height of the COVID-19 pandemic, the Company is a long-time originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

There was $10 thousand of income from this source for the three months ended June 30, 2022 and $192 thousand for the six months ended June 30, 2022 compared to $181 thousand and $282 thousand for the three and six months ended June 30, 2021.

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

Summary of Significant Accounting Policies" for details regarding the Company's participation in the PPP program.

Noninterest Expense

Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.

Total noninterest expenses totaled $31.0 million for the three months ended March 31, 2022, as compared to $38.0 million for the three months ended March 31, 2021, a 18.4% decrease due substantially to the followin g:

Salaries and employee benefits were $17.0 million for the three months ended March 31, 2022, as compared to $21.8 million for the same period in 2021, a decrease of $4.8 million or 22%.

For the three month period, the decrease was primarily due to the reduction of the $5.0 million accrual related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022, because we believe any compensation related claims are now time barred under Maryland law.

Total noninterest expenses totaled $59.0 million for the three months ended June 30, 2022, as compared to $35.5 million for the three months ended June 30, 2021, a 66.1% decrease.

Total noninterest expenses totaled $90.0 million for the six months ended June 30, 2022, as compared to $73.5 million for the six months ended June 30, 2021, a 22.4% increase.

Salaries and employee benefits were $21.8 million for the three months ended June 30, 2022, as compared to $19.9 million for the same period in 2021, an increase of $1.9 million or 9.7%.

Salaries and employee benefits were $38.8 million for the six months ended June 30, 2022, as compared to $41.6 million for the six months ended June 30, 2021, a decrease of 6.8%.

The primary reason for decrease for the first six months of 2022 was the reduction of the $5.0 million accrual related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022.

The accrual was originally recorded in the first quarter of 2019.

Absent the accrual reduction, adjusted salaries and employee benefits were down $2.6 million from the fourth quarter of 2021, primarily on lower incentive bonus accruals offset by increases in stock-based compensation (up 62.4% since the first quarter of 2021) and payroll taxes (up 13.7% since the first quarter of 2021).

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

At March 31, 2022, the Company's full time equivalent staff numbered 509 as compared to 508 at March 31, 2021.

Premises and equipment for the three months ended March 31, 2022 and 2021, were $3.1 million and $3.6 million, respectively, of which premises expenses were $2.5 million and $3.1 million respectively.

Marketing and advertising expenses totaled $1.1 million for the three months ended March 31, 2022 and $886 thousand for the same period in 2021.

The increase was due to additional advertising, promotions and sponsorships.

Data processing expenses were $2.9 million for the three months ended March 31, 2022 compared to $2.8 million for the same period in 2021.

The increase was related to an increase in communication expenses.

Legal, accounting and professional fees were $1.6 million for the three months ended March 31, 2022, compared to $3.0 million for the three months ended March 31, 2021, a decrease of $1.4 million.

Legal fees and expenditures were $205 thousand and $964 thousand for the three months ended March 31, 2022 and 2021, respectively, and were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests, as well as our defense of the previously disclosed class action lawsuit.

The amount of legal fees and expenditures reported for the three months ended March 31, 2022 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

See "Part I, Item 1 - "Note 12 - Legal Contingencies" for more information.

FDIC expenses were $1.1 million for the three months ended March 31, 2022 compared to $2.4 million for the same period in 2021, a 56% decrease.

The decrease for the first three months of 2022 compared to the same period in 2021 were due to a change in institution size which improved metrics used in the calculation of fees.

The major components of other expenses include broker fees, franchise taxes, director compensation and insurance expense.

Other expenses increased to $4.3 million for the three months ended March 31, 2022 from $3.5 million for the same period in 2021 a 24% increase, primarily due to director compensation.

The efficiency ratio, which measures the ratio of n oninterest expense to total revenue, was 35.28% for the first quarter of 2022, as compared to 40.74% for the first quarter of 2021.

At June 30, 2022, the Company's full time equivalent staff numbered 506 as compared to 497 at June 30, 2021.

Premises and equipment for the three and six months ended June 30, 2022 and 2021, were $3.5 million and $6.7 million compared to $3.6 million and $7.3 million, respectively, of which premises expenses were $2.8 million and $5.3 million compared to $3.0 million and $6.1 million, respectively.

Marketing and advertising expenses totaled $1.2 million for the three months ended June 30, 2022 and $980 thousand for the same period in 2021.

For the six months ended June 30, 2022, marketing and advertising expense was $2.3 million compared to $1.9 million for the six month period ended June 30, 2021.

The increase for both the three and six month periods were due to additional advertising, promotions and sponsorships.

Data processing expenses were $2.7 million and $5.6 million for the three and six months ended June 30, 2022, respectively, compared to $2.8 million and $5.6 million for the same periods in 2021, respectively.

Legal, accounting and professional fees were $2.1 million and $3.7 million for the three and six months ended June 30, 2022, respectively, compared to $3.5 million and $6.5 million for the three and six months ended June 30, 2021, respectively, and resulted in decreases of $1.4 million and $2.8 million for the comparative periods, respectively.

Legal fees and expenditures were $291 thousand and $1.8 million for the three months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022 and June 30, 2021 legal fees and expenditures were $496 thousand and $2.7 million, respectively.

Legal expenses were greater in 2021 primarily due to the previously disclosed governmental investigations and related subpoenas and document requests, as well as our defense of the previously disclosed class action lawsuit.

The amount of legal fees and expenditures reported for the three and six months ended June 30, 2022 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

See the "General" section for more information.

FDIC expenses were $906 thousand for the three months ended June 30, 2022 compared to $1.6 million for the same period in 2021, a 43.7% decrease.

For the six months ended June 30, 2022, FDIC expenses were $2.0 million compared to $4.0 million for the six months ended June 30, 2021.

The decreases for the first three and six months of 2022 compared to the same periods in 2021 were due to a change in the institution's size, which improved metrics used in the calculation of fees.

The major components of other expenses include settlement expenses, broker fees, franchise taxes, director compensation and insurance expense.

Other expenses increased to $26.7 million and $31.0 million for the three and six months ended June 30, 2022, respectively, from $3.1 million and $6.6 million for the same periods in 2021, respectively, for increases of 752.0% and 369.1%, respectively, both primarily due to the accrual of $22.9 million in connection with the settlements with the SEC and FRB.

The efficiency ratio, which measures the ratio of n oninterest expense to total revenue, was 66.64% for the second quarter of 2022, as compared to 37.14% for the second quarter of 2021.

For the first six months of 2022, the efficiency ratio was 51.01% as compared to 38.92% for the same period in 2021.

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

The improvement in the first quarter of 2022 over the first quarter of 2021 was primarily due to a decrease in noninterest expense from the $5.0 million accrual reduction.

As a percentage of average assets, total noninterest expense (annualized) was 0.99% for the three months ended March 31, 2022 as compared to 1.34% for the same period in 2021.

The improvement in the first quarter of 2022 over the first quarter of 2021 was primarily due to a decrease in noninterest expense from the $5.0 million accrual reduction related to share-based compensation awards and deferred compensation.

The increases in the three and six months ended June 30, 2022 as compared to the same three and six month periods in 2021 were primarily due to the increase in noninterest expense associated with the accrual of $22.9 million of settlement expenses in the second quarter, which were partially offset by the salary accrual reduction of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022.

As a percentage of average assets, total noninterest expense (annualized) was 2.02% for the three months ended June 30, 2022 as compared to 1.24% for the same period in 2021.

As a percentage of average assets, total noninterest expense (annualized) was 1.49% for the six months ended June 30, 2022 as compared to 1.29% for the same period in 2021.

The increases for both the three and six month periods were primarily due to the accrual of the $22.9 million of settlement expenses.

Income Tax Expense

The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended March 31, 2022 and 2021 was 23.4% down from 25.1% the prior quarter.

The total tax provision for the three months ended March 31, 2022 was $13.9 million, compared to $14.6 million for the three months ended March 31, 2021.

The decrease was primarily due to a decrease in noninterest expense from the $5.0 million accrual reduction related to share-based compensation awards and deferred compensation.

The Company remains subject to periodic audits and reviews by the taxing authorities, and the Company's returns for the years 2019-2021 remain open for examination.

The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended June 30, 2022 and 2021 was 44.9% and 30.3%, respectively.

The total tax provision for the three months ended June 30, 2022 was $12.8 million, compared to $16.7 million for the three months ended June 30, 2021.

The effective tax rate for the six months ended June 30, 2022 was 30.3% as compared to 25.5% for the same period in 2021.

The total tax provision for the six months ended June 30, 2022 was $26.7 million, compared to $31.3 million for the six months ended June 30, 2021.

The increase in the effective tax rates over the comparative three and six months ended June 30, 2022 and 2021 was due to the SEC and FRB penalties totaling $22.9 million that are not deductible for tax purposes.

Tax provisions declined over the comparative three and six months ended June 30, 2022 and 2021 due to decreases in net income period over period.

FINANCIAL CONDITION

Total assets at March 31, 2022 and December 31, 2021 were $11.2 billion and $11.8 billion, respectively.

The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.1 billion at March 31, 2022, a 0.7% increase from the balance at December 31, 2021.

The increase in loans over the three months ended March 31, 2022, was driven by growth from CRE loans and C&I loans.

Additionally, the Bank reduced its PPP loans from $51.1 million at December 31, 2021 to $35.7 million at March 31, 2022 through the forgiveness process.

Loans held for sale were $25.5 million at March 31, 2022, compared to $47.2 million at December 31, 2021, a 46.0% decrease.

Investment securities, at amortized cost net of the allowance for credit losses, totaled $3.0 billion at March 31, 2022 as compared to $2.6 billion at December 31, 2021, an increase of 14.6%, primarily due to excess liquidity being invested at greater amounts in higher earning assets in response to higher rates on investments available in the market during the quarter.

During the quarter, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as available-for-sale ("AFS") to held-to-maturity ("HTM"), including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized.

The transferred securities had unrealized losses of $66.2 million, which are included in the book value of the positions post-transfer and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss.

Total assets at June 30, 2022 and December 31, 2021 were $10.9 billion and $11.8 billion, respectively.

The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.2 billion at June 30, 2022, a 1.3% increase from the balance at December 31, 2021.

The increase in loans over the six months ended June 30, 2022, was driven by growth from CRE loans and C&I loans.

Additionally, the Bank reduced its PPP loans from $51.1 million at December 31, 2021 to $9.0 million at June 30, 2022 through the forgiveness process.

Loans held for sale were $13.8 million at June 30, 2022, compared to $47.2 million at December 31, 2021, a 70.7% decrease due to a decline in production.

Investment securities, at amortized cost net of the allowance for credit losses, totaled $3.0 billion at June 30, 2022 as compared to $2.6 billion at December 31, 2021, an increase of 15.1%, primarily due to excess liquidity being invested at greater amounts in higher earning assets in response to higher rates on investments available in the market during the quarter.

During the six months ended June 30, 2022, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as available-for-sale ("AFS") to held-to-maturity ("HTM"), including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized.

The transferred securities had unrealized losses of $66.2 million, and, as of June 30, 2022, $63.5 million remains in accumulated other comprehensive loss, and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss.

The securities transferred were generally municipal bonds, corporate bonds, bonds that qualify for CRA credit, and mortgage-backed securities with longer final maturity dates.

Additionally, during the quarter, a portion of securities purchased were designated as securities HTM.

At quarter-end, $1.1 billion, or 37.6% of the securities portfolio, was classified as securities HTM.

In terms of funding, total deposits at March 31, 2022 were $9.6 billion down from $10.0 billion at December 31, 2021, a decline of 4.0%.

While deposits were down from prior quarter-end, average deposits for the quarter were up, as average deposits for the three months ended March 31, 2022 were $10.9 billion, compared to $10.7 billion the prior quarter.

Total borrowed funds (excluding customer repurchase agreements) were $219.7 million and $369.7 million at March 31, 2022 and December 31, 2021, respectively, the decrease of which was driven by the repayment of an FHLB advance of $150 million in the first quarter of 2022.

Total shareholders' equity was $1.3 billion as of March 31, 2022 compared to $1.4 billion as of December 31, 2021, a decrease of $71.2 million.

In terms of funding, total deposits at June 30, 2022 were $9.2 billion down from $10.0 billion at December 31, 2021, a decline of 8.1%.

Total borrowed funds (excluding customer repurchase agreements) were $349.7 million and $369.7 million at June 30, 2022 and December 31, 2021, respectively, the decrease of which was driven by the repayment of an FHLB advance in the first quarter of 2022.

Total shareholders' equity was $1.3 billion as of June 30, 2022 compared to $1.4 billion as of December 31, 2021, a decrease of $98.1 million.

The decrease in shareholders' equity from the prior quarter-end was primarily as a result of the increase in the overall interest rate environment, which created unrealized losses in investment securities available-for-sale, which are recorded in accumulated other comprehensive income (loss).

For the three months ended March 31, 2022, other comprehensive income was reduced by $107.5 million.

For the six months ended June 30, 2022, other comprehensive loss was increased by $138.1 million.

This reduction was partially offset by retained earnings which included earnings of $61.4 million less dividends declared of $27.1 million.

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Regulatory ratios based on risk-weighted assets declined from the prior quarter as non-risk weighted cash was moved into risk-weighted securities and loans.

The total risk based capital ratio was 15.86% at March 31, 2022, as compared to 16.15% at December 31, 2021.

The common equity tier 1 ("CET1") risk based capital ratio was 14.74% at March 31, 2022, as compared to 15.02% at December 31, 2021.

The tier 1 risk based capital ratio was 14.74% at March 31, 2022, as compared to 15.02% at December 31, 2021.

The tier 1 leverage ratio was 9.93% at March 31, 2022, as compared to 10.19% at December 31, 2021.

Capital ratios based on common equity also declined as rising rates created unrealized losses on securities AFS, which negatively impacted common equity and tangible common equity.

The ratio of common equity to total assets was 11.40% at March 31, 2022, as compared to 11.40% at December 31, 2021.

Book value per share was $39.89 at March 31, 2022, a 5.7% decrease over $42.28 at December 31, 2021.

In addition, the tangible common equity ratio was 10.57% at March 31, 2022, as compared to 10.60% at December 31, 2021.

Tangible book value per share was $36.19 at March 31, 2022, a 7.1% decrease over $38.97 at December 31, 2021.

The total risk based capital ratio was 15.70% at June 30, 2022, as compared to 16.15% at December 31, 2021.

The common equity tier 1 ("CET1") risk based capital ratio was 14.58% at June 30, 2022, as compared to 15.02% at December 31, 2021.

The tier 1 risk based capital ratio was 14.58% at June 30, 2022, as compared to 15.02% at December 31, 2021.

The tier 1 leverage ratio was 10.68% at June 30, 2022, as compared to 10.19% at December 31, 2021.

The ratio of common equity to total assets was 11.45% at June 30, 2022, as compared to 11.40% at December 31, 2021 as declines in interest-bearing deposits with banks and other short-term investments outpaced an increase in unrealized losses on investment securities AFS over the six months ended June 30, 2022.

Book value per share was $39.05 at June 30, 2022, a 7.6% decrease over $42.28 at December 31, 2021.

In addition, the tangible common equity ratio was 10.60% at June 30, 2022, as compared to 10.60% at December 31, 2021.

Tangible book value per share was $35.80 at June 30, 2022, a 8.1% decrease over $38.97 at December 31, 2021.

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

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Loan Portfolio

Loans, net of amortized deferred fees and costs, at March 31, 2022 and December 31, 2021 by major category are summarized below.

March 31, 2022 December 31, 2021

Loans, net of amortized deferred fees and costs, at June 30, 2022 and December 31, 2021 by major category are summarized below.

June 30, 2022 December 31, 2021

(dollars in thousands) Amount % Amount %

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$ 7,082,021 $ 6,990,633

(1) Excludes accrued interest receivable of $36.9 million and $38.6 million at March 31, 2022 and December 31, 2021 , respectively, which is recorded in other assets.

(1) Excludes accrued interest receivable of $34.4 million and $38.6 million at June 30, 2022 and December 31, 2021 , respectively, which is recorded in other assets.

In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank.

Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.

Loans outstanding were $7.1 billion at March 31, 2022, an increase of $48.2 million, or 0.7%, from the balance at December 31, 2021.

PPP loans outstanding were $35.7 million at March 31, 2022, a decrease of $15.4 million, or 30%, from the $51.1 million at December 31, 2021.

With PPP loans excluded, loans outstanding were $7.1 billion at March 31, 2022, an increase of $63.6 million from December 31, 2021.

Loans outstanding were $7.2 billion at June 30, 2022, an increase of $89.1 million, or 1.3%, from the balance at December 31, 2021.

PPP loans outstanding were $9.0 million at June 30, 2022, a decrease of $42.1 million, or 82.4%, from the $51.1 million at December 31, 2021.

With PPP loans excluded, loans outstanding were $7.1 billion at June 30, 2022, an increase of $131.2 million from December 31, 2021.

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

After decreases in the loans outstanding over the year ended December 31, 2021, the loan portfolio in total has stabilized to some degree.

The modest increases in the portfolio in the first quarter of 2022 were primarily attributable to our CRE and C&I loans.

Market interest rates have increased in connection with rate increases implemented by the Federal Reserve.

The loan portfolio continued to grow in the second quarter of 2022, due primarily to our CRE and C&I loan originations.

Market interest rates continue to increase in connection with rate increases implemented by the Federal Reserve.

Notwithstanding an increased supply of residential (rental) units, for sale single family residential properties and multi-family commercial real estate leasing in the Bank's market area have held up well, particularly for well-located projects close to the District of Columbia.

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Valuations associated with the moderately priced housing market have generally been increasing, with well-located, Metro-accessible properties garnering a premium.

We believe that there are opportunities for growth in the commercial real estate market, as evidenced by the increase in CRE and C&I loans over the quarter.

The following table sets forth the time to contractual maturity of the loan portfolio as of March 31, 2022:

As of March 31, 2022

We continue to believe that there are opportunities for growth in the commercial real estate market, as evidenced by the increase in CRE and C&I loans over the quarter.

The following table sets forth the time to contractual maturity of the loan portfolio as of June 30, 2022:

June 30, 2022

(dollars in thousands) Total One Year or Less Over One Year to Five Years Over Five Years to Fifteen Years Over Fifteen Years

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

To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Banks (the "FHLB"), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC ("IntraFi").

For the three months ended March 31, 2022, noninterest bearing deposits decreased by $326.4 million as compared to December 31, 2021, while interest bearing deposits decreased by $68.9 million during the same period.

To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the Federal Home Loan Bank of Atlanta (the "FHLB"), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and IntraFi Network, LLC ("IntraFi").

For the three months ended June 30, 2022, noninterest bearing deposits decreased by $446.0 million as compared to December 31, 2021, while interest bearing deposits decreased by $363.9 million during the same period primarily as a result of an increase of disintermediation driven primarily by a decrease in deposits facilitated by IntraFi.

From time to time, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi.

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The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit ("IND").

At March 31, 2022, total deposits included $2.5 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 26.1% of total deposits.

At June 30, 2022, total deposits included $2.6 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 27.9% of total deposits.

At December 31, 2021, total brokered deposits (excluding the CDARS and ICS two-way) were $2.6 billion, or 26.5% of total deposits.

The CDARS and ICS two-way component represented $694.0 million, or 7.2%, of total deposits and $701.5 million, or 7.0%, of total deposits at March 31, 2022 and December 31, 2021, respectively.

The CDARS and ICS two-way component represented $741.7 million, or 8.1%, of total deposits and $701.5 million, or 7.0%, of total deposits at June 30, 2022 and December 31, 2021, respectively.

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

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

At March 31, 2022, the Company had $2.95 billion in noninterest bearing demand deposits, representing 31% of total deposits, compared to $3.3 billion of noninterest bearing demand deposits at December 31, 2021, or 33% of total deposits.

Average noninterest bearing deposits of total deposits for the three months ended March 31, 2022 and 2021 were 36% and 34%.

At June 30, 2022, the Company had $2.8 billion in noninterest bearing demand deposits, representing 31% of total deposits, compared to $3.3 billion of noninterest bearing demand deposits at December 31, 2021, or 33% of total deposits.

Average noninterest bearing deposits of total deposits for the three months ended June 30, 2022 and 2021 were 38% and 33%.

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

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

The balances in these accounts were $28.3 million at March 31, 2022 compared to $23.9 million at December 31, 2021.

The balances in these accounts were $26.5 million at June 30, 2022 compared to $23.9 million at December 31, 2021.

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

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This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

At March 31, 2022 the Company had $698.5 million in time deposits a decrease of $30.6 million from year end December 31, 2021.

At June 30, 2022 the Company had $613.1 million in time deposits a decrease of $116.0 million from year end December 31, 2021.

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

In March, the Bank raised rates in most of its time deposit accounts in response to the raising rate environment and the desire to lock in some term funding.

At March 31, 2022 and December 31, 2021, the Company had time deposits that were in excess of the FDIC's $250 thousand insurance limit totaling $493.5 million and $152.5 million, respectively.

The Company h ad no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2022 and December 31, 2021.

At March 31, 2022 and December 31, 2021, the Company had $150 million and $300 million of FHLB short-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

In March, the Bank raised rates in most of its time deposit accounts in response to the raising rate environment and the desire to maintain stability in its short term funding.

At June 30, 2022 and December 31, 2021, the Company had time deposits that were in excess of the FDIC's $250 thousand insurance limit totaling $102.6 million and $152.5 million, respectively.

The Company h ad no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at June 30, 2022 and December 31, 2021.

At June 30, 2022 and December 31, 2021, the Company had $280 million and $300 million, respectively, of FHLB short-term advances borrowed as part of the overall asset liability strategy and to support loan growth.

Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at March 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Long-term borrowings outstanding at June 30, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Liquidity Management

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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.

Approximately 61% of the Company'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 c an purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at March 31, 2022, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $362 thousand outstanding at March 31, 2022.

The Bank also has a commitment from IntraFi to place up to $1.8 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $1.5 billion at March 31, 2022.

At March 31, 2022, the Bank was also eligible to make advances from the FHLB up to $1.3 billion based on loans pledged as collateral to the FHLB, of which there was $150 million outstanding at March 31, 2022.

Additionally, the Bank c an purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at June 30, 2022, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.6 billion, against which there was $515 thousand outstanding at June 30, 2022.

At June 30, 2022, the Bank was also eligible to make advances from the FHLB up to $1.2 billion based on loans pledged as collateral to the FHLB, of which there was $280 million outstanding at June 30, 2022.

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.

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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.

As evidenced by recent increases in market rates, there is 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.

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Our primary and secondary sources of liquidity remain strong.

Average deposits increased 13.3% for the first three months of 2022 as compared to the same period in 2021.

Average deposits increased 10.1% for the first half of 2022 as compared to the first half of 2021.

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

In the first quarter of 2022, average short term liquidity was $2.4 billion, which is above EagleBank's average needs, and secondary sources of liquidity at March 31, 2022 were $3.4 billion.

At March 31, 2022, under the Bank's liquidity formula, it had $5.6 billion of primary and secondary liquidity sources.

In the first half of 2022, average short term liquidity was $1.8 billion, which is above EagleBank's average needs, and secondary sources of liquidity at June 30, 2022 were $2.8 billion.

At June 30, 2022, under the Bank's liquidity formula, it had $4.7 billion of primary and secondary liquidity sources.

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

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at March 31, 2022 are as follows:

Loan commitments outstanding and lines and letters of credit at June 30, 2022 are as follows:

(dollars in thousands)

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

As of March 31, 2022, unfunded loan commitments included $44.3 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

As of June 30, 2022, unfunded loan commitments included $25.2 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

The pipeline of loan commitments remains strong.

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

During the three months ended March 31, 2022, the Company was able to produce a net interest margin of 2.65% as compared to 2.98% during the same period in 2021, and continue to manage its overall interest rate risk position .

During the three months ended June 30, 2022, the Company was able to produce a net interest margin of 2.94% as compared to 3.04% during the same period in 2021, and continue to manage its overall interest rate risk position .

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

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agency investment portfolio.

At March 31, 2022, the investment portfolio increased by $1.6 billion, or 114%, as compared to balance at March of 2021.

The cash received from deposit growth alon g with cash flows from the investment and loan portfolio were deployed primarily into cash and new investments, as loan balances have declined.

The percentage mix of municipal securities was 5% of total investments at March 31, 2022 and 6% at December 31, 2021 .

The portion of the portfolio invested in residential mortgage-backed secur ities was 65% at March 31, 2022 and 64% at December 31, 2021.

At June 30, 2022, the investment portfolio increased by $1.2 billion, or 72%, as compared to the balance at June 30, 2021.

The cash received from deposit growth alon g with cash flows from the investment and loan portfolio were deployed primarily into cash and new investments, as loan balances have declined over that same period.

The percentage mix of municipal securities was 5% of total investments at June 30, 2022 and December 31, 2021 .

The portion of the portfolio invested in mortgage-backed secur ities was 64% at June 30, 2022 and December 31, 2021.

The portion of the portfolio invested in U.S.

agency investments was 24% at March 31, 2022 and December 31, 2021.

Shorter duration floating rate corporate bonds were 5% of total investments at March 31, 2022 and December 31, 2021 .

treasury bonds were 2% of total investments at March 31, 2022 and December 31, 2021.

The duration of the investment portfolio increased to 4.9 years at March 31, 2022 from 4.3 years at December 31, 2021 .

The re-pricing duration of the loan portfolio wa s 15 mo nths at March 31, 2022 and 18 months at December 31, 2021 with fixed rate loans amounting to 42% of total loans at March 31, 2022 and 43% at December 31, 2021 .

Variable and adjustable rate loans comprised 58% of total loans at March 31, 2022 and 57% at December 31, 2021 , respectively.

agency investments was 24% at June 30, 2022 and December 31, 2021.

Shorter duration floating rate corporate bonds were 5% of total investments at June 30, 2022 and December 31, 2021 .

treasury bonds were 2% of total investments at June 30, 2022 and December 31, 2021.

The duration of the investment portfolio increased to 5.1 years at June 30, 2022 from 4.3 years at December 31, 2021 .

The re-pricing duration of the loan portfolio wa s 15 mo nths at June 30, 2022 and 18 months at December 31, 2021 with fixed rate loans amounting to 42 % of total loans at June 30, 2022 and 43% at December 31, 2021 .

Variable and adjustable rate loans comprised 58 % of total loans at June 30, 2022 and 57% at December 31, 2021 , respectively.

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

Treasu ry interest rate.

The duration of the deposit portfolio decreased as rates rose, measuring 33 mo nths at March 31, 2022 and 41 months at December 31, 2021.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $97.8 million and $18.6 million at March 31, 2022 and December 31, 2021, respectively.

The duration of the deposit portfolio decreased as rates rose, measuring 29 mo nths at June 30, 2022 and 41 months at December 31, 2021.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $142.7 million and $18.6 million at June 30, 2022 and December 31, 2021, respectively.

The change is primarily due to higher interest rates.

At March 31, 2022, the net unrealized loss posit ion represented 3% of the investment portfolio's book value.

At June 30, 2022, the net unrealized loss posit ion represented 5% of the investment portfolio's book value.

There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.

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The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from March 31, 2022.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from June 30, 2022.

In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate "ramps" is also performed.

This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

For the analysis presented below, at March 31, 2022, the simulation assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor 10 basis points in the same analysis as of March 31, 2021), and assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

The floor rate in the analysis was lowere d due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points.

The beta factors were lowered from prior period analysis to reflect the Bank's historical experience and the determination that the build-up of excess liquidity would allow the Bank not to raise deposit rates as aggressively as it might under different circumstances.

The Company's analysis at March 31, 2022 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.

For the analysis presented below, at June 30, 2022, the simulation assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor 10 basis points in the same analysis as of June 30, 2021), and assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates.

This had the effect of making the overall measure of the correlation between deposit costs and market rate changes be measured at 65%.

The Company's analysis at June 30, 2022 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points.

This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative dura tions.

The repricing duration of the investment portfolio at March 31, 2022 is 4.9 years, the loan portfolio 1.3 years, the interest bearing deposit portfolio 2.8 years, and the borrowed funds portfolio 5.7 years.

The following table reflects the result of simulation analysis on the March 31, 2022 asset and liabilities balances:

The repricing duration of the investment portfolio at June 30, 2022 is 5.1 years, the loan portfolio 1.2 years, the interest bearing deposit portfolio 2.4 years, and the borrowed funds portfolio 0.5 years.

The following table reflects the result of simulation analysis on the June 30, 2022 asset and liabilities balances:

Change in interest

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For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change.

Management has determined that due to the level of market rates at March 31, 2022, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2022 are not considered to be excessive.

The impact of 1.9% in net interest income and 3.0 % in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while deposits remain at expected floor rates and are not expected to have lower interest rates.

In the first quarter of 2022 , t he Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

The interest rate risk position at March 31, 2022, was relatively similar to the December 31, 2021 position for both the up and down rate scenarios, though we are showing greater asset sensitivity owing from the change in beta factors described above.

Management has determined that due to the level of market rates at June 30, 2022, interest rate shocks of -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at June 30, 2022 are not considered to be excessive.

The impact of 0.4% increase in net interest income and 0.7 % increase in net income given a 100 basis point decrease in market interest rates reflects in large measure the ability to quickly reprice deposits downward while the new loans we have book recently would take time to re-price or would remain at floor rates.

In the first h of 2022 , t he Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates.

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Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

During the first quarter of 2022 , average market interest rates increased across the yield curve as compared to the 2021 year end.

During the first half of 2022 , average market interest rates increased across the yield curve as compared to the 2021 year end.

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

Net interest income represented 92% and 89% of the Company's revenue for the first quarter of 2022 and 2021, respectively.

Net interest income represented 93% and 89% of the Company's revenue for the first half of 2022 and 2021, respectively.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or gap.

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While a positive gap indicates the degree to which the volume of repriceable assets exceeds repriceable liabilities in given time periods.

At March 31, 2022, the Company had a negative gap position of approximately $1,174 million or 10.5% of total assets, out to three months, and a negative cumulative gap position of $648 million, or 5.78% of total assets out to twelve months.

At June 30, 2022, the Company had a negative gap position of approximately $1.3 billion or 12.27% of total assets, out to three months, and a negative cumulative gap position of $1.1 billion, or 9.76% of total assets out to twelve months.

At December 31, 2021 , the Company had a negative gap position of approximately $267 million or 2.25% of total assets out to three months and a positive cumulative gap position of $102 million or 0.86% of tot al assets out to 12 months.

The change in the gap position at March 31, 2022 as compared to December 31, 2021 was due to reduction in cash relative to securities holdings.

The change in the gap position at June 30, 2022 as compared to December 31, 2021 was due to reduction in cash relative to securities holdings.

Such a change in the gap position is not deemed material to the Company's overall interest rate risk position, which relies more heavily on simulation analysis that captures the full opportunity within the balance sheet.

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

March 31, 2022

June 30, 2022

(dollars in thousands)

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Cumulative gap as percent of total assets (12.27) % (9.76) % 1.51 % 6.03 % 8.86 %

(1) Excludes loans held for sale

(1) Net of allowance for credit losses;

Includes loans held for sale

(2) Nonaccrual loans are included in the over 60 months category

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

At March 31, 2022, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

At June 30, 2022, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

Construction, land and land development loans represent 108% of total risk based capital.

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If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S.

The FRB and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S.

banks (commonly known as Basel III).

Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%.

At March 31, 2022, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

The Company announced a regular quarterly cash dividend on March 21, 2022 of $0.40 per share to shareholders of record on April 11, 2022 and payable on April 29, 2022.

The actual capital amounts and ratios for the Company and Bank as of March 31, 2022 and December 31, 2021 are presented in the table below.

At June 30, 2022, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain a capital conservation buffer of 2.5% of CET1 capital for capital adequacy purposes.

The Company announced a regular quarterly cash dividend on June 16, 2022 of $0.45 per share to shareholders of record on July 11, 2022 and payable on July 29, 2022.

The actual capital amounts and ratios for the Company and Bank as of June 30, 2022 and December 31, 2021 are presented in the table below.

Company Bank Minimum

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(dollars in thousands) Amount Ratio Amount Ratio Purposes Regulations*

As of March 31, 2022

As of June 30, 2022

CET1 capital (to risk weighted assets) $ 1,260,103 14.58 % $ 1,267,980 14.76 % 7.00 % 6.50 %

9 unchanged sentences

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.

At March 31, 2022 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.

At June 30, 2022 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above.

In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020.

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GAAP Reconciliation

(dollars in thousands except per share data) March 31, 2022 December 31, 2021

(dollars in thousands except per share data) June 30, 2022 December 31, 2021

Common shareholders' equity $ 1,252,720 $ 1,350,775

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Tangible common equity ratio 10.60 % 10.60 %

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(dollars in thousands) 2022 2021 2022 2021

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Annualized return on average tangible common equity 5.35 % 16.25 % 10.26 % 15.80 %

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(dollars in thousands except per share data) 2022 2021 2022 2021

7 unchanged sentences

The Company considers this information important to shareholders as total loans, excluding loans held for sale and PPP loans is a measure that removes fluctuations associated with the activity related to the non-core business and management of the PPP portfolio.

(dollars in thousands) March 31, 2022 December 31, 2021

(dollars in thousands) June 30, 2022 December 31, 2021

Total loans, excluding loans held for sale (GAAP) $ 7,154,686 $ 7,065,598

5 unchanged sentences

The Adjusted Salaries and Employee Benefits non-GAAP measure provides investors insight into how salaries and employee benefits changed during the first quarter of 2022 exclusive of the one-time accrual reduction, and allows investors to better compare the Company's performance against historical periods.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(dollars in thousands) 2022 2021 2022 2021

2 unchanged sentences

Adjusted salaries and employee benefits (non-GAAP) $ 21,805 $ 19,876 $43,842 $41,645

Adjusted net income and adjusted earnings per share (diluted) are non-GAAP financial measures derived from GAAP based amounts.

The Company calculates adjusted net income by excluding from net income the $13.4 million accrual of non-tax deductible expenses during the quarter to cover the Company's civil money penalty and disgorgement, plus prejudgment interest, in connection with the Company's agreement in principle with the SEC and $9.5 million accrual in connection with expected penalties from the FRB to resolve the previously disclosed investigation with respect to the Company.

The Company calculates adjusted earnings per share (diluted) by dividing the total $22.9 million accrual by the weighted average shares outstanding (diluted) in the second quarter of 2022.

The Company considers this information important to shareholders because adjusted net income and adjusted earnings per share (diluted) provides investors insight into how Company earnings changed exclusive of the costs related to the agreement in principle with the SEC, and allow investors to better compare the Company's performance against historical periods.

The table below provides a reconciliation of adjusted net income and adjusted earnings per share (diluted) to the nearest GAAP measure.

Three Months Ended June 30,

(dollars in thousands) 2022 2021

Net Income $ 15,696 $ 47,993

Reversal of penalties, disgorgement & prejudgment interest 22,874 —

Adjusted net income (non-GAAP) $ 38,570 $ 47,993

Earnings per share (diluted) $ 0.49 $ 1.50

Reversal of penalties, disgorgement & prejudgment interest per share (diluted) 0.42 —

Adjusted earnings per share (diluted) (non-GAAP) $ 0.91 $ 1.50

The decline in adjusted net income over the comparative three months ended June 30, 2022 and 2021 was primarily attributable to decreases in gains on sales of loans and other income in connection with the reduced activity in the residential lending business and an increase in the provision for expected credit losses during the three months ended June 30, 2022 as compared to a reversal of expected credit losses during the three months ended June 30, 2021.

Quantitative and Qualitative Disclosures about Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis