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Item 2. Management’s Discussion and Analysis

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the "Company") and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. 
 This report contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "can," "anticipates," "believes," "expects," "plans," "estimates," "potential," "assume," "probable," "possible," "continue," "should," "could," "would," "strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," "likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel," "typically," "judgment," "subjective" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus ("COVID-19") pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company's past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters' performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason. 
 
 GENERAL 
 The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland. The Company provides general commercial and consumer banking services through EagleBank (the "Bank"), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of sixteen branch offices, including five in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C. The Bank also operates five lending offices, with one in Northern Virginia, three in Suburban Maryland and one in Washington, D.C. 
 The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank's market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of Small Business Administration ("SBA") loans. 
 
 
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 The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and/or mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including but not limited to overall market volumes of mortgage loan originations, forecasted "pull-through" rates of origination, loan closing operational considerations, pricing differentials between the two methods, and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline. The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks. 
 The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA") loans through the Department of Housing and Urban Development's Multifamily Accelerated Program ("MAP"). The Company securitizes these loans through the Government National Mortgage Association ("Ginnie Mae") MBS I program and shortly thereafter sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned ("OREO") assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. 
 Settlement of Legal Matters 
 On June 1, 2022, the Company reached an agreement in principle with the SEC staff to resolve the SEC's investigation with respect 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. On August 16, 2022, the SEC approved the settlement, pursuant to which the Company consented, 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 agreed to pay a civil money penalty of $10.0 million and $2.6 million in disgorgement, plus prejudgment interest. On October 6, 2022, the SEC staff informed our Chief Financial Officer that it had concluded its related investigation as to him and does not intend to recommend an enforcement action against him. No additional contingent liabilities were recorded in the third quarter of 2022 in connection with the SEC's approval and public announcement of the settlement. 
 On August 2, 2022, the Bank reached an agreement in principle with the staff of the Board of Governors of the Federal Reserve System ("FRB") to resolve the FRB's investigation with respect to the Bank. As previously disclosed, 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. On August 16, 2022, the FRB approved the settlement, pursuant to which the Company consented, without admitting or denying the FRB's allegations, to the entry of a consent order for violations of Regulation O, 12 C.F.R. §§ 215 et seq., and unsafe and unsound banking practices, due to internal control deficiencies relating to loans involving its former Chief Executive Officer and an inadequate third-party risk management program, in each case from 2015 to 2018, and would pay a civil money penalty of approximately $9.5 million. No additional contingent liabilities were recorded in the third quarter of 2022 in connection with the FRB's approval and public announcement of the settlement. 
 Impact of COVID-19 
 The spread of COVID-19 created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the U.S. and globally, including the markets that we serve. As the COVID-19 pandemic is still ongoing and dynamic in nature, there are many uncertainties, including its severity, duration, impact to our customers, employees and vendors, impact to the financial services and banking industry, impact to the economy as a whole and the level of governmental intervention (both economic and health-related). COVID-19 has negatively affected, and may continue to negatively affect the Company. 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. 
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 CRITICAL ACCOUNTING POLICIES 
 The Company's Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 except as indicated in "Investment Securities," "Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity" and "Accounting Standards Adopted in 2022" in Note 1 to the Consolidated Financial Statements in this report. 
 
 RESULTS OF OPERATIONS 
 Earnings Summary 
 Three Months Ended September 30, 2022 vs. Three Months Ended September 30, 2021 
 Net income for the three months ended September 30, 2022 was $37.3 million compared to $43.6 million for the same period in 2021, a decrease of $6.3 million, or 14.5%. 
 The decrease in net income of $6.3 million for the three months ended September 30, 2022 relative to the same period in 2021 was due primarily to an increase in provision for credit losses of $11.2 million and a decrease in noninterest income of $3.0 million, which were partially offset by an increase in net interest income of $4.9 million and a decrease in income taxes of $2.9 million. Noninterest income decreased due to decreases in gain on sale of residential loans of $2.5 million and a decrease in gain on sale of investment securities of $1.5 million, which were partially offset by an increase on other income of $911 thousand. 
 Total revenue (i.e. net interest income plus noninterest income) was $89.2 million for the three months ended September 30, 2022 as compared to $87.3 million for the same period in 2021. The most significant portion of revenue is net interest income, which was $83.9 million for the three months ended September 30, 2022, compared to $79.0 million for the same period in 2021. Net interest income increased due to increased income on investments and loans, due to higher average investment and loan balances and variable rate loans adjusting upwards as rates increased, which was partially offset by the decrease in total deposits, increased interest expense due to higher rates on deposits and faster rate adjustments on money market and savings accounts. 
 The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 3.02% for the three months ended September 30, 2022 and 2.73% 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 September 30, 2022 decreased to $5.3 million from $8.3 million for the same period in 2021, a 36.0% decrease. Noninterest income was lower due to decreases in gain on sale of residential and securitized loans and gain on sale of investment securities. 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 September 30, 2022 was $821 thousand compared to $3.3 million for the same period in 2021, a decrease of 75.4%. The continuing rise in interest rates for residential mortgages in 2022 had a substantial negative impact on the volume of residential mortgage originations (down 79.44% compared to the third quarter of 2021) and in turn the sale of residential mortgages declined. 
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 Other income for the three months ended September 30, 2022 increased to $2.5 million from $1.6 million for the same period in 2021, a 56.9% increase. This increase was primarily attributable to an increase in other loan income of $543 thousand, gain on sale of loans securitized of $248 thousand, and $189 thousand increase in miscellaneous income. 
 Noninterest expenses totaled $36.2 million for the three months ended September 30, 2022, as compared to $36.4 million for same period in 2021, a 0.5% decrease. See the "Noninterest Expense" section for further detail on the components and drivers of the change. 
 Income tax expenses were $11.9 million for the three months ended September 30, 2022, a decrease of 19.8%, 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 40.59% for the three months ended September 30, 2022, as compared to 41.65% for the same period in 2021. The improvement in the efficiency ratio was driven primarily by an increase in net interest income of $4.9 million which was partially offset by a $3.0 million decrease in noninterest income. 
 For the three months ended September 30, 2022, the Company reported an annualized return on average assets ("ROAA") of 1.29%, as compared to 1.46% for the same period in 2021. Total shareholders' equity was $1.2 billion at September 30, 2022, compared to $1.3 billion a year earlier. The annualized return on average common equity ("ROACE") for the three months ended September 30, 2022 was 11.64% as compared to 13.00% for the same period in 2021. The annualized return on average tangible common equity ("ROATCE") for the three months ended September 30, 2022 was 12.67% as compared to 14.11% for the same period in 2021. The decline in returns was driven primarily by a decrease in net income. 
 Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021 
 Net income for the nine months ended September 30, 2022 was $98.7 million as compared to $135.1 million for the same period in 2021, a decrease of $36.3 million, or 26.9%. 
 The decrease in net income of $36.3 million for the nine months ended September 30, 2022 relative to the same period in 2021 was due to an increase in provision for credit losses of $15.1 million, a decrease in noninterest income of $11.5 million and an increase in noninterest expenses of $16.3 million, which were partially offset by an increase in net interest income of $939 thousand and a reduction of income tax expense of $7.5 million. Non interest income decreased primarily due to a decrease in gain on sale of residential and securitized loans. During the nine months ended September 30, 2022, the Company closed residential mortgage locked commitments of $286.2 million, down from $831.4 million for the nine months ended September 30, 2021. Noninterest expenses increased primarily in connection with the accrual of settlement expenses in the second quarter of 2022 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 $3.4 million, legal and professional fees of $2.5 million and $2.3 million in FDIC insurance. Additional detail is provided in "Noninterest Expense" section below. 
 Total revenue (i.e. net interest income plus noninterest income) was $265.6 million for the nine months ended September 30, 2022 as compared to $276.1 million for the same period in 2021. The most significant portion of revenue is net interest income, which was $247.3 million for the nine months ended September 30, 2022, compared to $246.3 million for the same period in 2021. Net interest income increased due to increased average balances and income on investments and lower average balance on deposits and borrowings which was partially offset by lower average loan balances , increased interest rates on deposits and faster rate adjustments on money market and savings accounts . The primary driver for the reduction in noninterest income was a decrease 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 2.86% for the nine months ended September 30, 2022 and 2.91% 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 nine months ended September 30, 2022 decreased to $18.3 million from $29.8 million for the same period in 2021, a 38.5% decrease. Noninterest income was lower due to decreases in gain on sale of investment securities and 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 nine months ended September 30, 2022 was $3.2 million compared to $12.0 million for the same period in 2021, a decrease of 73.6%. The rise in interest rates for residential mortgages in 2022 has had a substantial negative impact on the volume of residential mortgage originations and in turn the sale of residential mortgages declined. 
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 Other income for the nine months ended September 30, 2022 decreased to $9.5 million from $11.0 million for the same period in 2021, a 14.2% decrease. This decrease was primarily attributable to a reduction in gains on the sale of securitized loans of $2.5 million which was partially offset by an increase in other loan income of $972 thousand. 
 Noninterest expense totaled $126.2 million for the nine months ended September 30, 2022, as compared to $109.9 million or same period in 2021, a 14.9% increase. The increase in non-interest expense was due to the $22.9 million accrual of settlement expenses which 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 expense. See the "Noninterest Expense" section for further detail on the components and drivers of the change. 
 Income tax expenses were $38.6 million for the nine months ended September 30, 2022, a decrease of 16.2%, 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 was 47.51% for the nine months ended September 30, 2022, as compared to 39.78% 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 expense, 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 expense. 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 nine months ended September 30, 2022, the Company reported an annualized ROAA of 1.11%, as compared to 1.56% for the same period in 2021. The annualized ROACE for the nine months ended September 30, 2022 was 10.17% as compared to 13.98% for the same period in 2021. The annualized ROATCE for the nine months ended September 30, 2022 was 11.06% as compared to 15.21% or the same period in 2021. The decline in returns was attributable primarily to the $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. 
 Net Interest Income and Net Interest Margin 
 Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments. The cost of funds 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 $83.9 million for the three months ended September 30, 2022, as compared to $79.0 million for the same period in 2021. Net interest income increased for the three months ended September 30, 2022 primarily due to an increase in average loans balances and yields (5.10% compared to 4.59%) and higher average investment balances and yields and on other average earning assets, which was partially offset by lower average deposit and borrowing balances with an increased interest rate as compared to September 30, 2021. 
 The net interest margin was 3.02% for the three months ended September 30, 2022 and 2.73% for the same period in 2021. The increase reflects the impact of the change in yields on earning assets which repriced primarily due to rate increases, which more than offset the increase in rates for and faster rate adjustments on interest bearing liabilities. 
 Net interest income was $247.3 million for the nine months ended September 30, 2022, as compared to $246.3 million for the same period in 2021. Net interest income increased for the nine months ended September 30, 2022 due to an increase in higher yielding earning assets, which was partially offset by lower loan volumes and increased rates on interest bearing deposits, as compared to September 30, 2021. 
 The net interest margin was 2.86% for the nine months ended September 30, 2022 and 2.91% for the same period in 2021. The decline reflects the impact of an increase in average earning assets and yields which was more than offset by an increase in the cost of funds. 
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 Net interest margin decreased by 5 basis points from the first nine months of 2021 as compared to the first nine months of 2022 (from 2.91% to 2.86%). The yield on earning assets increased by 13 basis points (from 3.29% to 3.42%) while cost of funds increased 18 basis points (from 0.38% to 0.56%). Average interest bearing deposits with other banks and other short term investments were $1.4 billion nine months ended September 30, 2022 compared to $2.3 billion for the same period in 2021. Overall yields and rates moved higher in the first nine months of 2022 as compared to same period in 2021, 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 nine months ended September 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. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. 
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 Eagle Bancorp, Inc. 
 Consolidated Average Balances, Interest Yields And Rates (Unaudited) 
 (dollars in thousands) 
 
 Three Months Ended September 30, 
 2022 2021 
 Average
Balance Interest Average
Yield/Rate Average
Balance Interest Average
Yield/Rate 
 ASSETS 
 Interest earning assets: 
 Interest bearing deposits with other banks and other short-term investments $ 771,063 $ 4,100 2.11 % $ 2,668,265 $ 1,083 0.16 % 
 Loans held for sale (1) 
 11,586 150 5.18 % 56,866 642 4.52 % 
 Loans (1) (2) 
 7,282,589 93,594 5.10 % 7,055,621 81,540 4.59 % 
 Investment securities available-for-sale (2) 
 1,782,859 7,587 1.69 % 1,670,723 5,877 1.40 % 
 Investment securities held-to-maturity (2) 
 1,128,943 5,876 2.06 % — — — % 
 Federal funds sold 53,630 220 1.63 % 34,805 10 0.11 % 
 Total interest earning assets 11,030,670 111,527 4.01 % 11,486,280 89,152 3.08 % 
 
 Total noninterest earning assets 475,581 432,215 
 Less: allowance for credit losses 75,141 92,169 
 Total noninterest earning assets 400,440 340,046 
 TOTAL ASSETS $ 11,431,110 $ 11,826,326 
 
 LIABILITIES AND SHAREHOLDERS' EQUITY 
 Interest bearing liabilities: 
 Interest bearing transaction $ 960,970 $ 1,891 0.78 % $ 842,086 $ 402 0.19 % 
 Savings and money market 4,504,216 21,711 1.91 % 4,971,866 3,645 0.29 % 
 Time deposits 633,241 2,523 1.58 % 763,513 2,543 1.32 % 
 Total interest bearing deposits 6,098,427 26,125 1.70 % 6,577,465 6,590 0.40 % 
 Customer repurchase agreements 26,546 55 0.82 % 27,348 14 0.20 % 
 Other short-term borrowings 61,703 412 2.67 % 300,003 506 0.67 % 
 Long-term borrowings 69,752 1,038 5.95 % 121,346 2,997 9.88 % 
 Total interest bearing liabilities 6,256,428 27,630 1.75 % 7,026,162 10,107 0.57 % 
 
 Noninterest bearing liabilities: 
 Noninterest bearing demand 3,809,070 3,370,649 
 Other liabilities 93,859 98,493 
 Total noninterest bearing liabilities 3,902,929 3,469,142 
 
 Shareholders' Equity 1,271,753 1,331,022 
 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,431,110 $ 11,826,326 
 
 Net interest income $ 83,897 $ 79,045 
 Net interest spread 2.26 % 2.51 % 
 Net interest margin 3.02 % 2.73 % 
 Cost of funds 0.99 % 0.35 % 

 (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $3.4 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively. 
 (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 
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 Nine Months Ended September 30, 
 2022 2021 
 Average
Balance Interest Average
Yield/Rate Average
Balance Interest Average
Yield/Rate 
 ASSETS 
 Interest earning assets: 
 Interest bearing deposits with other banks and other short-term investments $ 1,449,800 $ 7,608 0.70 % $ 2,288,660 $ 2,239 0.13 % 
 Loans held for sale (1) 
 18,216 548 4.01 % 79,264 1,936 3.26 % 
 Loans (1) (2) 
 7,147,844 249,168 4.66 % 7,385,733 258,188 4.67 % 
 Investment securities available for sale (2) 
 2,119,822 25,888 1.63 % 1,506,996 15,878 1.41 % 
 Investment securities held-to-maturity (2) 
 774,135 12,002 2.07 % — — — % 
 Federal funds sold 37,907 269 0.95 % 32,146 25 0.10 % 
 Total interest earning assets 11,547,724 295,483 3.42 % 11,292,799 278,266 3.29 % 
 
 Total noninterest earning assets 466,661 408,167 
 Less: allowance for credit losses 74,390 100,756 
 Total noninterest earning assets 392,271 307,411 
 TOTAL ASSETS $ 11,939,995 $ 11,600,210 
 
 LIABILITIES AND SHAREHOLDERS’ EQUITY 
 Interest bearing liabilities: 
 Interest bearing transaction $ 858,152 $ 2,843 0.44 % $ 819,033 $ 1,217 0.20 % 
 Savings and money market 4,926,766 34,207 0.93 % 4,842,621 11,312 0.31 % 
 Time deposits 670,708 6,972 1.39 % 826,790 8,759 1.42 % 
 Total interest bearing deposits 6,455,626 44,022 0.91 % 6,488,444 21,288 0.44 % 
 Customer repurchase agreements 25,765 90 0.47 % 22,240 34 0.20 % 
 Other short-term borrowings 131,253 992 1.01 % 300,003 1,502 0.67 % 
 Long-term borrowings 69,722 3,112 5.95 % 197,090 9,114 6.17 % 
 Total interest bearing liabilities 6,682,366 48,216 0.96 % 7,007,777 31,938 0.61 % 
 
 Noninterest bearing liabilities: 
 Noninterest bearing demand 3,863,283 3,206,250 
 Other liabilities 96,176 93,960 
 Total noninterest bearing liabilities 3,959,459 3,300,210 
 
 Shareholders’ Equity 1,298,170 1,292,223 
 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 11,939,995 $ 11,600,210 
 
 Net interest income $ 247,267 $ 246,328 
 Net interest spread 2.46 % 2.68 % 
 Net interest margin 2.86 % 2.91 % 
 Cost of funds 0.56 % 0.38 % 

 (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $11.5 million and $26.3 million for the six months ended September 30, 2022 and 2021, respectively. 
 (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 
 
 
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 Rate/Volume Analysis of Net Interest Income 
 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 September 30, 2022 Compared With Three Months Ended September 30, 2021 
 (dollars in thousands) Change
Due to
Volume Change
Due to
Rate Total
Increase
(Decrease) 
 Interest earned on 
 Loans $ 2,623 $ 9,431 $ 12,054 
 Loans held for sale (511) 19 (492) 
 Investment securities available-for-sale 394 1,316 1,710 
 Investment securities held-to-maturity 3,972 1,904 5,876 
 Interest bearing bank deposits (770) 3,787 3,017 
 Federal funds sold 5 205 210 
 Total interest income 5,713 16,662 22,375 
 
 Interest paid on 
 Interest bearing transaction 57 1,432 1,489 
 Savings and money market (343) 18,409 18,066 
 Time deposits (434) 414 (20) 
 Customer repurchase agreements — 41 41 
 Other borrowings (1,676) (377) (2,053) 
 Total interest expense (2,396) 19,919 17,523 
 
 Net interest income $ 8,109 $ (3,257) $ 4,852 

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 Nine Months Ended September 30, 2022 Compared With Nine Months Ended September 30, 2021 
 (dollars in thousands) Change
Due to
Volume Change
Due to
Rate Total
Increase
(Decrease) 
 Interest earned on 
 Loans $ (8,316) $ (704) $ (9,020) 
 Loans held for sale (1,491) 103 (1,388) 
 Investment securities available-for-sale 6,457 3,553 10,010 
 Investment securities held-to-maturity 8,156 3,846 12,002 
 Interest bearing bank deposits (821) 6,190 5,369 
 Federal funds sold 4 240 244 
 Total interest income 3,989 13,228 17,217 
 
 Interest paid on 
 Interest bearing transaction 58 1,568 1,626 
 Savings and money market 197 22,698 22,895 
 Time deposits (1,654) (133) (1,787) 
 Customer repurchase agreements 5 51 56 
 Other borrowings (6,735) 223 (6,512) 
 Total interest expense (8,129) 24,407 16,278 
 
 Net interest income $ 12,118 $ (11,179) $ 939 

 
 
 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 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 consolidated statements of income. This provision considers the probability that unfunded commitments will fund among other 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. 
 47 

 
 

 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. 
 During the three months ended September 30, 2022, the ACL on loans reflected a provision of $3.0 million and $56 thousand in net recoveries. The provision for credit losses on loans for the same period in 2021 reflected a reversal of $8.3 million and $1.3 million in net charge-offs. During the nine months ended September 30, 2022, the ACL on loans reflected a provision of $532 thousand and net recoveries of $270 thousand. The provision for credit losses on loans for the same nine month period in 2021 was a reversal of $14.5 million in ACL and $12.2 million in net charge-offs. For the first nine months of 2022, the provisions were 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. 
 As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. 
 The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower's business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. 
 48 

 
 

 The following table sets forth activity in the allowance for credit losses for the periods indicated. 
 
 
 Nine Months Ended September 30, 
 (dollars in thousands) 2022 2021 
 Balance at beginning of period $ 74,965 $ 109,579 
 Charge-offs: 
 Commercial (604) (7,691) 
 Income producing - commercial real estate — (5,216) 
 Owner occupied - commercial real estate (1,356) — 
 
 Construction - commercial and residential — (206) 
 
 
 Other consumer (74) (1) 
 Total charge-offs (2,034) (13,114) 
 Recoveries: 
 Commercial 648 326 
 Income producing - commercial real estate — 97 
 Owner occupied - commercial real estate 25 — 
 
 Construction - commercial and residential 1,627 499 
 
 
 Other consumer 4 17 
 Total recoveries 2,304 939 
 Net recoveries (charge-offs) 270 (12,175) 
 Provision for (reversal of) credit losses- loans 532 (14,498) 
 Balance at end of period $ 75,767 $ 82,906 
 
 Annualized ratio of net (recovery) charge-offs during the period to average loans outstanding during the period — % 0.22 % 

 
 
 
 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. 
 
 
 
 September 30, 2022 December 31, 2021 
 (dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans 
 Commercial $ 15,873 21 % 19 % $ 14,475 19 % 19 % 
 PPP loans — — % — % — — % 1 % 
 Income producing - commercial real estate 36,327 48 % 50 % 38,287 51 % 48 % 
 Owner occupied - commercial real estate 12,581 16 % 15 % 12,146 16 % 15 % 
 Real estate mortgage - residential 810 1 % 1 % 449 1 % 1 % 
 Construction - commercial and residential 9,514 13 % 12 % 9,099 12 % 13 % 
 Construction - C&I (owner occupied) — — % 2 % — — % 2 % 
 Home equity 624 1 % 1 % 474 1 % 1 % 
 Other consumer 38 — % — % 35 — % — % 
 Total allowance $ 75,767 100 % 100 % $ 74,965 100 % 100 % 

 
 
 
 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 include the nonperforming portion of TDRs and OREO, totaled $9.6 million at September 30, 2022 representing 0.09% of total assets, as compared to $30.8 million of nonperforming assets, or 0.26% of total assets, at December 31, 2021. 
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 At September 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 1.04% of total loans at September 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. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on nonaccrual status and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. The continuing payments are discounted over the expected life at the loan's original contract rate and include adjustments for risk of default. 
 Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business that suggests a temporary interest-only period on an amortizing loan; (2) there may be delays in absorption on a real estate project that reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires 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 five TDRs at September 30, 2022 totaling approximately $24.5 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 nine months of 2022 there were no TDRs that defaulted on their modified terms. During the nine months ended September 30, 2022, four loans that had been modified as TDRs with a balance of $30.3 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. No TDRs were sold during the three months ended September 30, 2021. For the first nine months of 2021, one performing TDR loan, with a balance of $101 thousand, defaulted on its modified terms and was placed on nonaccrual status and charged off. In addition, the collateral for one previously nonperforming restructured loan was sold, and all of the loan's principal and part of its delinquent interest were collected; and one restructured loan that was purchased as part of the 2014 acquisition of Virginia Heritage Bank was collected at its full carrying value. 
 Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. 
 Total nonperforming loans amounted to $7.6 million at September 30, 2022 (0.10% 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. OREO properties had a lower of cost or fair market value of $2.0 million and $1.6 million at September 30, 2022 and December 31, 2021, respectively. During the three and nine months ended September 30, 2022, an OREO property was sold, generating proceeds of $241 thousand. There were no sales of OREO property during the three or nine months ended September 30, 2021. 
 50 

 
 

 The following table shows the amounts of nonperforming assets at the dates indicated. 
 
 (dollars in thousands) September 30, 2022 December 31, 2021 
 Nonaccrual Loans: 
 Commercial $ 3,018 $ 8,876 
 PPP loans — 1,365 
 Income producing - commercial real estate 2,645 13,456 
 Owner occupied - commercial real estate 21 42 
 Real estate mortgage - residential 1,917 2,010 
 Construction - commercial and residential — 3,093 
 
 Home equity — 366 
 
 Accruing loans-past due 90 days — — 
 Total nonperforming loans 7,601 29,208 
 Other real estate owned 1,962 1,635 
 Total nonperforming assets $ 9,563 $ 30,843 
 
 Coverage ratio, allowance for credit losses to total nonperforming loans 997 % 257 % 
 Ratio of nonperforming loans to total loans 0.10 % 0.41 % 
 Ratio of nonperforming assets to total assets 0.09 % 0.26 % 

 Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio. 
 At September 30, 2022, there were $89.7 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. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. 
 Noninterest Income 
 Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, FHA multi-family income, income from bank owned life insurance ("BOLI") and other income. 
 Total noninterest income for the three months ended September 30, 2022 decreased to $5.3 million from $8.3 million for the three months ended September 30, 2021, a 36.0% decrease. Gain on sale of loans for the three months ended September 30, 2022 decreased to $821 thousand from $3.3 million for the three months ended September 30, 2021, a 75.4% decrease. Gains on the sale of investment securities decreased to $4 thousand from $1.5 million, or 99.7% for the three months ended September 30, 2022. Residential mortgage loan locked commitments were $57.5 million for the three months ended September 30, 2022 as compared to $279.8 million for the same period in 2021, a 79.4% decrease. The rise in interest rates for residential mortgages in 2022 has 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 September 30, 2022 increased to $2.5 million from $1.6 million for the three months ended September 30, 2021, a 56.9% increase. This increase was primarily attributable to the $543 thousand increase in other loan income, $189 thousand increase in miscellaneous income and $248 increase in gains on the sale of securitized loans. 
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 Service charges on deposits for the three months ended September 30, 2022 increased to $1.3 million from $1.2 million for the three months ended September 30, 2021. 
 Gain on sale of investment securities was $4 thousand for the three months ended September 30, 2022 compared to a $1.5 million net gain on sale of investment securities for the same period in 2021, primarily due to market volatility period over period. 
 Total noninterest income for the nine months ended September 30, 2022 decreased to $18.3 million from $29.8 million for the nine months ended September 30, 2021, a 38.5% decrease. Gain on sale of loans for the nine months ended September 30, 2022 decreased to $3.2 million from $12.0 million for the nine months ended September 30, 2021, a 73.6% decrease. The decreases in gains on the sale of residential mortgage loans and gains on sale of investment securities primarily drove the decline between the two periods. Residential mortgage loan locked commitments were $286.2 million for the nine months ended September 30, 2022 as compared to $831.4 million for the same period in 2021, a 65.6% decrease. The rise in interest rates for residential mortgages in the first nine 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 nine months ended September 30, 2022 decreased to $9.5 million from $11.0 million for the nine months ended September 30, 2021, a 14.2% decrease. This decrease was primarily attributable to the $2.5 million reduction in gains on the sale of securitized loans. 
 Service charges on deposits for the nine months ended September 30, 2022 increased to $4.0 million from $3.3 million for the nine months ended September 30, 2021. 
 Loss on sales of investment securities was $172 thousand for the nine months ended September 30, 2022 compared to a $2.1 million 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. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. To the extent the mortgage loans underlying the Company's servicing portfolio experience delinquencies, the Company would be requir ed to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. 
 The Company originates residential mortgage loans and, pending market conditions and other factors outlined above, may utilize either or both "mandatory delivery" and "best efforts" forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the nine months ended September 30, 2022. The reserve amounted to $37 thousand at September 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 $59 thousand of income from this source for the three months ended September 30, 2022 and $249 thousand for the nine months ended September 30, 2022 compared to $9 thousand and $291 thousand for the three and nine months ended September 30, 2021. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. 
 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. 
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 Total noninterest expense totaled $36.2 million for the three months ended September 30, 2022, as compared to $36.4 million for the three months ended September 30, 2021, a 0.5% decrease. Total noninterest expense totaled $126.2 million for the nine months ended September 30, 2022, as compared to $109.9 million for the nine months ended September 30, 2021, a 14.9% increase. 
 Salaries and employee benefits were $21.5 million for the three months ended September 30, 2022, as compared to $22.1 million for the same period in 2021, a decrease of $0.6 million or 2.7%. Salaries and employee benefits were $60.4 million for the nine months ended September 30, 2022, as compared to $63.8 million for the nine months ended September 30, 2021, a decrease of 5.4%. The primary reason for decrease for the first nine 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. At September 30, 2022, the Company's full time equivalent staff numbered 495 as compared to 509 at September 30, 2021. 
 Premises and equipment for the three and nine months ended September 30, 2022 and 2021, were $3.3 million and $9.9 million compared to $3.9 million and $11.1 million, respectively, of which premises expenses were $2.6 million and $7.9 million compared to $3.2 million and $9.3 million, respectively. 
 Marketing and advertising expenses totaled $1.2 million for the three months ended September 30, 2022 and $1.0 million for the same period in 2021. For the nine months ended September 30, 2022, marketing and advertising expense was $3.4 million compared to $2.9 million for the nine month period ended September 30, 2021. The increase for both the three and nine month periods were due to additional advertising, promotions and sponsorships. 
 Data processing expenses were $3.4 million and $9.1 million for the three and nine months ended September 30, 2022, respectively, compared to $2.9 million and $8.5 million for the same periods in 2021, respectively. 
 Legal, accounting and professional fees were $2.3 million and $6.0 million for the three and nine months ended September 30, 2022, respectively, compared to $2.0 million and $8.5 million for the three and nine months ended September 30, 2021, respectively, an increase of $311 thousand and a decrease of $2.5 million for the comparative periods, respectively. Legal fees and expenditures were $227 thousand and $357 thousand for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and September 30, 2021 legal fees and expenditures were $723 thousand and $3.1 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 nine months ended September 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 $1.3 million for the three months ended September 30, 2022 compared to $1.5 million for the same period in 2021, a 16.9% decrease. For the nine months ended September 30, 2022, FDIC expenses were $3.3 million compared to $5.6 million for the nine months ended September 30, 2021. The decreases for the first three and nine 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 $3.1 million and $34.1 million for the three and nine months ended September 30, 2022, respectively, from $2.9 million and $9.5 million for the same periods in 2021, respectively, for increases of 8.5% and 259.0%, respectively. The increase in the nine months ended September 30, 2022 as compared to the same nine month period in 2021 was primarily due to the increase in noninterest expense associated with the $22.9 million settlement expense 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 40.59% for the third quarter of 2022, as compared to 41.65% for the third quarter of 2021. For the first nine months of 2022, the efficiency ratio was 47.51% as compared to 39.78% 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 increase in the nine months ended September 30, 2022 as compared to the same nine month period in 2021 was primarily due to the increase in noninterest expense associated with the $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. 
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 As a percentage of average assets, total noninterest expense (annualized) was 1.27% for the three months ended September 30, 2022 as compared to 1.23% for the same period in 2021. As a percentage of average assets, total noninterest expense (annualized) was 1.41% for the nine months ended September 30, 2022 as compared to 1.26% for the same period in 2021. The increase for the nine month period was 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 September 30, 2022 and 2021 was 24.2% and 25.4%, respectively. The total tax provision for the three months ended September 30, 2022 was $11.9 million, compared to $14.8 million for the three months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 28.1% as compared to 25.4% for the same period in 2021. The total tax provision for the nine months ended September 30, 2022 was $38.6 million, compared to $46.1 million for the nine months ended September 30, 2021. The increase in the effective tax rates over the comparative nine months ended September 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 nine months ended September 30, 2022, and 2021 due to decreases in pre-tax income period over period. 
 The Inflation Reduction Act of 2022 was signed into law by president Biden on August 16, 2022 which makes significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the “adjusted financial statement income” of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. The Company currently does not expect the tax-related provision of the Inflation Reduction Act to have a material impact on our financial results. 
 
 FINANCIAL CONDITION 
 Summary 
 Total assets at September 30, 2022 and December 31, 2021 were $10.7 billion and $11.8 billion, respectively. The decrease in total assets over the nine months ended September 30, 2022 was primarily due to the decrease in total interest-bearing deposits with banks and other short-term investments. The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.3 billion at September 30, 2022, a 3.4% increase from the balance at December 31, 2021. The increase in loans over the nine months ended September 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 $7.2 million at September 30, 2022 through the forgiveness process. Loans held for sale were $9.4 million at September 30, 2022, compared to $47.2 million at December 31, 2021, a 80.1% decrease due to a decline in production. 
 Investment securities, at amortized cost net of the allowance for credit losses, totaled $3.0 billion at September 30, 2022 as compared to $2.6 billion at December 31, 2021, an increase of 13.1%, 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 first quarter of 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 September 30, 2022, $61.1 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 Community Reinvestment Act credit, and mortgage-backed securities with longer final maturity dates. At quarter-end, $1.1 billion, or 37.3% of the securities portfolio, was classified as securities HTM. 
 In terms of funding, total deposits at September 30, 2022 were $8.8 billion down from $10.0 billion at December 31, 2021, a decline of 12.2%. Total borrowed funds (excluding customer repurchase agreements) were $584.8 million and $369.7 million at September 30, 2022 and December 31, 2021, respectively, the increase of which was driven by loan growth and deposit outflows as a result of an increase in disintermediation driven primarily by an increase in interest rates. 
 Total shareholders' equity was $1.2 billion as of September 30, 2022 , as compared to $1.4 billion as of December 31, 2021, a decrease of $131.0 million. The decrease in shareholders' equity was primarily 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 nine months ended September 30, 2022, other comprehensive loss was increased by $196.4 million. This reduction was partially offset by retained earnings which included earnings of $98.7 million less dividends declared of $41.6 million. 
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 The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements. 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 16.10% at September 30, 2022, as compared to 16.15% at December 31, 2021. The common equity tier 1 ("CET1") risk based capital ratio was 15.11% at September 30, 2022, as compared to 15.02% at December 31, 2021. The tier 1 risk based capital ratio was 15.11% at September 30, 2022, as compared to 15.02% at December 31, 2021. The tier 1 leverage ratio was 11.55% at September 30, 2022, as compared to 10.19% at December 31, 2021. 
 The ratio of common equity to total assets was 11.39% at September 30, 2022, as compared to 11.40% at December 31, 2021 as an increase in unrealized losses on investment securities AFS offset retained earnings growth over the nine months ended September 30, 2022. Book value per share was $38.02 at September 30, 2022, a 10.1% decrease over $42.28 at December 31, 2021 also owing to the increase in unrealized losses on investment securities AFS between the the period. In addition, the tangible common equity ratio was 10.52% at September 30, 2022, as compared to 10.60% at December 31, 2021. Tangible book value per share was $34.77 at September 30, 2022, a 10.8% decrease from $38.97 at December 31, 2021. At September 30, 2022 and December 31, 2021, excluding the impact of the balance of accumulated other comprehensive losses, adjusted book value per share was $44.59 and $42.73, respectively, and adjusted tangible book value per share was $41.34 and $39.42, respectively. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. 
 In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital required to engage in capital distribution. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. 
 Loan Portfolio 
 Loans, net of amortized deferred fees and costs, at September 30, 2022 and December 31, 2021 by major category are summarized below. 
 
 
 September 30, 2022 December 31, 2021 
 (dollars in thousands) Amount % Amount % 
 Commercial $ 1,415,998 19 % $ 1,354,317 19 % 
 PPP loans 7,241 — % 51,105 1 % 
 Income producing - commercial real estate 3,668,720 50 % 3,385,298 48 % 
 Owner occupied - commercial real estate 1,091,283 15 % 1,087,776 15 % 
 Real estate mortgage - residential 71,731 1 % 73,966 1 % 
 Construction - commercial and residential 858,100 12 % 896,319 13 % 
 Construction - C&I (owner occupied) 139,238 2 % 159,579 2 % 
 Home equity 51,396 1 % 55,811 1 % 
 Other consumer 791 — % 1,427 — % 
 Total loans 7,304,498 100 % 7,065,598 100 % 
 Less: allowance for credit losses (75,767) (74,965) 
 Net loans (1) 
 $ 7,228,731 $ 6,990,633 

 (1) Excludes accrued interest receivable of $37.1 million and $38.6 million at September 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. 
 55 

 
 

 Loans outstanding were $7.3 billion at September 30, 2022, an increase of $238.9 million, or 3.4%, from the balance at December 31, 2021. PPP loans outstanding were $7.2 million at September 30, 2022, a decrease of $43.9 million, or 85.8%, from the $51.1 million at December 31, 2021. With PPP loans excluded, loans outstanding were $7.3 billion at September 30, 2022, an increase of $282.8 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. 
 The loan portfolio continued to grow in the third 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. 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. Overall, commercial real estate values have generally held up well, but we continue to be cautious of the capitalization rates at which some assets are trading and as a result we are being cautious with our valuations. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Valuations associated with the moderately priced housing market have generally been increasing, with well-located, Metro-accessible properties garnering a premium. We 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 September 30, 2022: 
 
 September 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 
 Commercial $ 1,415,998 $ 527,404 $ 716,502 $ 164,510 $ 7,582 
 PPP loans 7,241 2,457 4,784 — — 
 Income producing - commercial real estate 3,668,720 1,444,005 1,730,828 493,887 — 
 Owner occupied - commercial real estate 1,091,283 50,621 411,787 487,002 141,873 
 Real estate mortgage - residential 71,731 12,357 44,429 2,961 11,984 
 Construction - commercial and residential 858,100 368,826 446,636 27,259 15,379 
 Construction - C&I (owner occupied) 139,238 15,258 32,397 65,111 26,472 
 Home equity 51,396 2,978 5,895 906 41,617 
 Other consumer 791 264 358 — 169 
 Total loans $ 7,304,498 $ 2,424,170 $ 3,393,616 $ 1,241,636 $ 245,076 
 Loans with: 
 Predetermined fixed interest rate $ 2,910,601 $ 670,316 $ 1,434,121 $ 701,519 $ 104,645 
 Floating or Adjustable interest rate 4,393,897 1,753,854 1,959,495 540,117 140,431 
 Total loans $ 7,304,498 $ 2,424,170 $ 3,393,616 $ 1,241,636 $ 245,076 

 
 
 
 Deposits and Other Borrowings 
 The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as brokered deposits from regional and national brokerage firms and IntraFi Network, LLC ("IntraFi"), secured borrowings from the Federal Home Loan Bank of Atlanta (the "FHLB"), and federal funds purchased lines of credit from correspondent banks. 
 For the three months ended September 30, 2022, total deposits decreased by $1.2 billion as compared to December 31, 2021. The decline consists of $349.2 million in noninterest bearing deposits and in $869.0 million in interest bearing deposits as a result of an increase of disintermediation driven primarily by an increase in interest rates. 
 56 

 
 

 The Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the "CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit ("IND"). At September 30, 2022, total deposits included $2.5 billion of brokered deposits (excluding the CDARS and ICS two-way) which represented 28.0% 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 $728.7 million, or 8.3%, of total deposits and $701.5 million, or 7.0%, of total deposits at September 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. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding. 
 At September 30, 2022, the Company had $2.9 billion in noninterest bearing demand deposits, representing 33% 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 September 30, 2022 and 2021 were 38% and 34%, respectively. 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 $21.5 million at September 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. agency securities and/or U.S. agency backed mortgage-backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. 
 At September 30, 2022 the Company had $649.2 million in time deposits a decrease of $79.8 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. Throughout the year, 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 September 30, 2022 and December 31, 2021, the Company had time deposits that were in excess of the FDIC's $250 thousand insurance limit totaling $93.2 million and $152.5 million, respectively. 
 The Company h ad an outstanding balance of $15 million under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2022 and no outstanding balance at December 31, 2021. At September 30, 2022 and December 31, 2021, the Company had $500 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 September 30, 2022 and December 31, 2021 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024. 
 57 

 
 

 Liquidity Management 
 Liquidity is a measure of the Company's and Bank's ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank's primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 60% 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 $15 million outstanding at September 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 $19.5 million outstanding at September 30, 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 $1.4 billion at September 30, 2022. At September 30, 2022, the Bank was also eligible to make advances from the FHLB up to $1.1 billion based on loans pledged as collateral to the FHLB, of which there was $500 million outstanding at September 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. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond ("Federal Reserve Bank"). This facility, which amounts to approximately $668 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. 
 The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. 
 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. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank (the "ALCO") and the full Board of Directors of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding. 
 The Company maintains sufficient primary and secondary sources of liquidity to fund its operations. Average deposits increased 6 .4% for the first nine months of 2022 as compared to the same period in 2021. We also maintain a liquid investment portfolio outside of our Held-to-Maturity investments, including overnight liquidity. In the first nine months of 2022, average short term liquidity was $1.4 billion , which is above EagleBank's average needs, and secondary sources of liquidity at September 30, 2022 were $2.6 billion. 
 At September 30, 2022, under the Bank's liquidity formula, it had $4.3 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs. 
 58 

 
 
 

 Commitments and Contractual Obligations 
 Loan commitments outstanding and lines and letters of credit at September 30, 2022 are as follows: 
 
 (dollars in thousands) 
 Unfunded loan commitments $ 2,223,503 
 Unfunded lines of credit 109,217 
 Letters of credit 101,407 
 Total $ 2,434,127 

 
 
 Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of September 30, 2022, unfunded loan commitments included $17.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature. The pipeline of loan commitments remains strong. 
 Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. 
 Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank's customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. 
 Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk 
 A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank's net income is largely dependent on net interest income. The Bank's ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company's profit objectives. 
 During the nine months ended September 30, 2022, the Company was able to produce a net interest margin of 2.86% as compared to 2.91% 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. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio o f mortgage-backed securities. Further, the Company has been managing the investment portfolio to provide liquidity and some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. At September 30, 2022, the investment portfolio increased by $345.9 million, or 13.1%, as compared to the balance at December 31, 2021. 
 59 

 
 

 The percentage mix of municipal securities was 5% of total investments at September 30, 2022 and December 31, 2021 . The portion of the portfolio invested in mortgage-backed secur ities was 64% at September 30, 2022 and December 31, 2021. The portion of the portfolio invested in U.S. agency investments was 25% and 24% at September 30, 2022 and December 31, 2021, respectively. Shorter duration floating rate corporate bonds were 4% and 5% of total investments at September 30, 2022 and December 31, 2021, respectively . U.S. treasury bonds were 2% of total investments at September 30, 2022 and December 31, 2021. The duration of the investment portfolio increased to 4.8 years at September 30, 2022 from 4.3 years at December 31, 2021 . 
 The re-pricing duration of the loan portfolio wa s 14 mo nths at September 30, 2022 and 18 months at December 31, 2021 with fixed rate loans amounting to 40 % of total loans at September 30, 2022 and 43% at December 31, 2021 . Variable and adjustable rate loans comprised 60% of total loans at September 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 30 mo nths at September 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 $224.1 million and $18.6 million at September 30, 2022 and December 31, 2021, respectively. The change is primarily due to higher interest rates. At September 30, 2022, the net unrealized loss posit ion represented 8% of the investment portfolio's book value. 
 Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy. 
 In a normal rising interest rate environment, the Company expects its interest income on variable and adjustable rate loans to increase and the interest expense on its deposit liabilities to increase based on our funding needs, market conditions and certain contractual obligations. Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded. The weighted average rate of the Company's variable rate loans increased by approximately 179 basis points from December 31, 2021 to September 30, 2022 in connection with the 300 basis points in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank. At December 31, 2021, the Company had a portfolio of $2.8 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 4.30%. At September 30, 2022, only $278.4 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date. Additionally, the Company’s cost of interest bearing deposits increased by 157 basis points across its interest-bearing deposits, which comprise 67% of its total deposits, at September 30, 2022. 
 One of the tools used by the Company to manage its interest rate risk is the static gap analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, deposit decay rates, and the level of noninterest income and noninterest expense. The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve period from September 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. 
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 For the analysis presented below, at September 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 September 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 70%. 
 The Company's analysis at September 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 down 100, 200, and 300 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 September 30, 2022 is 4.5 years, the loan portfolio 1.2 years, the interest bearing deposit portfolio 2.5 years, and the borrowed funds portfolio 0.4 years. 
 
 The following table reflects the result of simulation analysis on the September 30, 2022 asset and liabilities balances: 
 
 Change in interest
rates (basis points) Percentage change in net
interest income Percentage change in
net income Percentage change in
market value of portfolio
equity 
 + 400 19.5% 33.1% 5.1% 
 + 300 14.9% 25.3% 4.6% 
 + 200 10.3% 17.5% 3.8% 
 + 100 5.7% 9.7% 2.6% 
 — — — — 
 - 100 (4.9)% (8.3)% (4.3)% 
 - 200 (10.2)% (17.3)% (11.5)% 
 - 300 (13.5)% (22.9)% (21.8)% 

 
 The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2022 are not considered to be excessive. The impact of -4.9% in net interest income and -8.3 % 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. In the first three quarters 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. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. 
 During the first three quarters of 2022 , average market interest rates increased across the yield curve as compared to the 2021 year end. 
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 Gap Position 
 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 93% and 89% of the Company's revenue for the first three quarters of 2022 and the last three quarters 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. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or gap. 
 The gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The table below provides an indication of the sensitivity of the Company to changes in interest rates. A negative gap ind icates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods. While a positive gap indicates the degree to which the volume of repriceable assets exceeds repriceable liabilities in given time periods. 
 At September 30, 2022, the Company had a negative gap position of approximately $1.1 billion or 10.55% of total assets, out to three months, and a negative cumulative gap position of $742 million, or 6.93% 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 September 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. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to the actual results. 
 Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies remain appropriate to current economic and interest rate trends. 
 If interest rates increase by 100 basis points, the Company's net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets more than offsetting the assumption of an increase in money market interest rates. 
 If interest rates decline by 100 basis points, the Company's net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities. 
 Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management's expectations. 
 62 

 
 
 

 Gap Analysis 
 September 30, 2022 
 (dollars in thousands) 
 
 
 Repriceable in: 0-3
months 4-12
months 13-36
months 37-60
months Over 60
months Total
Rate
Sensitive Non Sensitive Total 
 RATE SENSITIVE ASSETS: 
 Investment securities $ 224,038 $ 307,157 $ 715,867 $ 527,796 $ 988,980 $ 2,763,838 
 Loans (1)(2) 
 3,978,093 665,154 1,245,209 778,417 571,244 7,238,117 
 Fed funds and other short-term investments 116,940 — — — — 116,940 
 Other earning assets 110,678 — — — — 110,678 
 Total $ 4,429,749 $ 972,311 $ 1,961,076 $ 1,306,213 $ 1,560,224 $ 10,229,573 $ 483,471 $ 10,713,044 
 
 RATE SENSITIVE LIABILITIES: 
 Noninterest bearing demand $ 104,409 $ 290,556 $ 631,418 $ 466,623 $ 1,435,767 $ 2,928,773 
 Interest bearing transaction 964,567 — — — — 964,567 
 Savings and money market 3,805,768 — — — 415,000 4,220,768 
 Time deposits 148,917 294,219 184,358 18,617 3,130 649,241 
 Customer repurchase agreements and fed funds purchased 21,465 — — — — 21,465 
 Other borrowings 515,000 — 69,763 — — 584,763 
 Total $ 5,560,126 $ 584,775 $ 885,539 $ 485,240 $ 1,853,897 $ 9,369,577 $ 123,696 $ 9,493,273 
 Gap $ (1,130,377) $ 387,536 $ 1,075,537 $ 820,973 $ (293,673) $ 859,996 
 Cumulative Gap $ (1,130,377) $ (742,841) $ 332,696 $ 1,153,669 $ 859,996 
 
 Cumulative gap as percent of total assets (10.55) % (6.93) % 3.11 % 10.77 % 8.03 % 
 
 
 
 
 
 
 
 
 

 
 
 (1) Net of allowance for credit losses; Includes loans held for sale. 
 (2) Nonaccrual loans are included in the over 60 months category. 
 Capital Resources and Adequacy 
 The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company's current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. 
 The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At September 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 109% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteri a with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Capital Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. 
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 The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 
 The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. 
 The 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 September 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 September 20, 2022 of $0.45 per share to shareholders of record on October 10, 2022 and was paid on October 31, 2022. 
 
 The actual capital amounts and ratios for the Company and Bank as of September 30, 2022 and December 31, 2021 are presented in the table below. 
 
 
 Company Bank Minimum
Required For
Capital To Be Well
Capitalized
Under Prompt
Corrective 
 Actual Actual Adequacy Action 
 (dollars in thousands) Amount Ratio Amount Ratio Purposes Regulations* 
 As of September 30, 2022 
 CET1 capital (to risk weighted assets) $ 1,332,545 15.11 % $ 1,340,156 15.30 % 7.00 % 6.50 % 
 Total capital (to risk weighted assets) 1,419,639 16.10 % 1,412,912 16.13 % 10.50 % 10.00 % 
 Tier 1 capital (to risk weighted assets) 1,332,545 15.11 % 1,340,156 15.30 % 8.50 % 8.00 % 
 Tier 1 capital (to average assets) 1,332,545 11.55 % 1,340,156 11.67 % 4.00 % 5.00 % 
 
 As of December 31, 2021 
 CET1 capital (to risk weighted assets) $ 1,269,329 15.02 % $ 1,261,518 15.01 % 7.00 % 6.50 % 
 Total capital (to risk weighted assets) 1,365,117 16.15 % 1,329,306 15.82 % 10.50 % 10.00 % 
 Tier 1 capital (to risk weighted assets) 1,269,329 15.02 % 1,261,518 15.01 % 8.50 % 8.00 % 
 Tier 1 capital (to average assets) 1,269,329 10.19 % 1,261,518 10.16 % 4.00 % 5.00 % 

 * Applies to Bank only 
 
 Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At September 30, 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. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the March 2020 interim final rule. 
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 Use of Non-GAAP Financial Measures 
 The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP. 
 Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, tangible book value per common share excluding accumulated other comprehensive loss ("AOCI"), the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. To calculate the tangible book value per common share excluding the AOCI, tangible common equity is reduced by the loss on the AOCI before dividing by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank's overhead as a percentage of its revenue. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. 
 GAAP Reconciliation 
 
 (dollars in thousands except per share data) September 30, 2022 December 31, 2021 
 Common shareholders' equity $ 1,219,771 $ 1,350,775 
 Less: Intangible assets (104,240) (105,793) 
 Tangible common equity $ 1,115,531 $ 1,244,982 
 
 Book value per common share $ 38.02 $ 42.28 
 Less: Intangible book value per common share (3.25) (3.31) 
 Tangible book value per common share $ 34.77 $ 38.97 
 
 Book value per common share $ 38.02 $ 42.28 
 Add: AOCI book value per common share 6.57 0.45 
 Adjusted book value excluding AOCI per common share $ 44.59 $ 42.73 
 
 Tangible book value per common share $ 34.77 $ 38.97 
 Add: AOCI book value per common share 6.57 0.45 
 Adjusted tangible book value excluding AOCI per common share $ 41.34 $ 39.42 
 
 Total assets $ 10,713,044 $ 11,847,310 
 Less: Intangible assets (104,240) (105,793) 
 Tangible assets $ 10,608,804 $ 11,741,517 
 Tangible common equity ratio 10.52 % 10.60 % 

 
 
 65 

 
 

 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (dollars in thousands) 2022 2021 2022 2021 
 Average common shareholders' equity $ 1,271,753 $ 1,331,022 $ 1,298,170 $ 1,292,223 
 Less: Average intangible assets (104,253) (105,126) (104,252) (105,151) 
 Average tangible common equity $ 1,167,500 $ 1,225,896 $ 1,193,918 $ 1,187,072 
 
 Net income available to common shareholders $ 37,297 $ 43,609 $ 98,737 $ 135,071 
 Average tangible common equity 1,167,500 1,225,896 1,193,918 1,187,072 
 Annualized return on average tangible common equity 12.67 % 14.11 % 11.06 % 15.21 % 

 
 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 (dollars in thousands) 2022 2021 2022 2021 
 Net interest income $ 83,897 $ 79,045 $ 247,267 $ 246,328 
 Noninterest income 5,308 8,299 18,325 29,811 
 Revenue $ 89,205 $ 87,344 $ 265,592 $ 276,139 
 
 Noninterest expense $ 36,206 $ 36,375 $ 126,180 $ 109,856 
 Efficiency ratio 40.59 % 41.65 % 47.51 % 39.78 % 

 Total loans, excluding loans held for sale and PPP loans is a non-GAAP financial measures derived from GAAP-based amounts. The Company calculates total loans, excluding loans held for sale and PPP loans by excluding the balance of the PPP loans from the total loans. The Company considers this information important to shareholders as total loans, excluding loans 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) September 30, 2022 December 31, 2021 
 Total loans, excluding loans held for sale (GAAP) $ 7,304,498 $ 7,065,598 
 Less: PPP loans (7,241) (51,105) 
 Total loans, excluding loans held for sale and PPP loans (Non-GAAP) $ 7,297,257 $ 7,014,493 
 

 
 
 Adjusted Salaries and Employee Benefits is a non-GAAP financial measure derived from GAAP based amounts. The Company calculates Adjusted Salaries and Employee Benefits by subtracting from total salaries and employee benefits the one-time accrual reduction of $5.0 million related to share-based compensation awards and deferred compensation for the Company's former CEO and Chairman in the first quarter of 2022. The Company considers this information important to shareholders because the accrual reduction was a one-time event that occurred during the first quarter of 2022. 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 September 30, Nine Months Ended September 30, 
 (dollars in thousands) 2022 2021 2022 2021 
 Salaries and employee benefits $ 21,538 $ 22,145 $ 60,362 $ 63,790 
 Accrual reduction for former CEO and Chairman — — 5,018 — 
 Adjusted salaries and employee benefits (non-GAAP) $ 21,538 $ 22,145 $ 65,380 $ 63,790 

 
 
 66 

 
 

 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) for the nine months ended September 30, 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 September 30, Nine Months Ended September 30, 
 (dollars in thousands) 2022 2021 2022 2021 
 Net Income $ 37,297 $ 43,609 $ 98,737 $ 135,071 
 Reversal of penalties, disgorgement & prejudgment interest — — 22,874 — 
 Adjusted net income (non-GAAP) $ 37,297 $ 43,609 $ 121,611 $ 135,071 
 
 Earnings per share (diluted) $ 1.16 $ 1.36 $ 3.07 $ 4.22 
 Reversal of penalties, disgorgement & prejudgment interest per share (diluted) — — 0.71 — 
 Adjusted earnings per share (diluted) (non-GAAP) $ 1.16 $ 1.36 $ 3.78 $ 4.22 

 
 
 The decline in adjusted net income over the comparative three months ended September 30, 2022 and 2021 was primarily attributable to decreases in gains on sales of loan and other income in connection with the reduced activity in the residential lending business, decreases in gains on the sales of investments and an increase in the provision for expected credit losses during the three months ended September 30, 2022 as compared to a reversal of expected credit losses during the three months ended September 30, 2021. 
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk 
 Please refer to Item 2 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk."
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
EAGLE BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis
