EAGLE BANCORP INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1. Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) Shareholders and the Board of Directors of Eagle Bancorp, Inc. Bethesda, Maryland Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Eagle Bancorp, Inc. (the "Company") as of December 31, 2022 and 2021 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flow for each of the years in the two-year period ended December 31, 2022 and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 76 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance and Provision for Credit Losses on Loans The allowance for credit losses (the “ACL”) is an accounting estimate of the expected credit losses in the loans held for investment portfolio over the life of an exposure (or pool of exposures). Expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans as described in Notes 1 and 4 of the consolidated financial statements. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company estimates expected credit losses for loans using a methodology based on a loan-level probability of default (“PD”) and Loss Given Default (“LGD”) cash flow method that is applied using an exposure at default model. Cash flow projections are at the loan level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The expected prepayment speeds are based on historical internal data. These historical loss rates are then modified to incorporate a reasonable and supportable forecast of future losses at the portfolio segment level. The ACL estimation process for loans applies economic forecast scenarios over a reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the application processes, including the need to involve our valuation services specialists. The principal considerations resulting in our determination included the following: • Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecasts of economic variables and reasonableness of other model assumptions. • Significant auditor judgment and effort in evaluating the reasonableness of the qualitative adjustments used in the model computation. • Significant audit effort related to the completeness and accuracy of the high volume of data used to develop assumptions and in the model computation. Our audit procedures to address the critical audit matter included: Testing the effectiveness of internal controls over: • The Company’s significant model assumptions and judgments, reasonable and supportable forecasts, and information systems. • The Company’s preparation and review of the allowance for credit losses calculation, including the relevance and reliability of data used as the basis for adjustments related to the qualitative factors, the development and reasonableness of qualitative adjustments, and the mathematical accuracy and appropriateness of the overall calculation. • The completeness and accuracy of historical inputs, loan data used in the development of the PD and LGD assumptions, and the use of third-party data in the computation. 77 Table of Contents Substantively testing management’s estimate, which included: • Assessing the reasonableness of assumptions and judgments related to the PD and LGD rates, with the assistance of our valuation specialists, by comparing the resulting historical loss experience to a group of the Company’s peers. • Evaluating the reasonableness of management’s judgments in the selection and application of reasonable and supportable forecasts of economic variables. • Evaluating management’s process for developing the qualitative factors, including evaluating management’s judgments and assumptions for reasonableness. • Assessing the relevance and reliability of data used to develop qualitative factors. • Evaluating the mathematical accuracy of the PD and LGD rates on a pooled loan level with the assistance of valuation specialists, including the completeness and accuracy of loan data used in the model. /s/ Crowe LLP We have served as the Company's auditor since 2021. Washington, D.C. March 1, 2023 2. Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of Eagle Bancorp, Inc. Bethesda, Maryland Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows of Eagle Bancorp, Inc. and Subsidiaries (the "Company") for the year ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ FORVIS LLP (Formerly Dixon Hughes Goodman LLP) We have served as the Company’s auditor from 2016 to 2021. Charlotte, North Carolina March 1, 2021 78 Table of Contents EAGLE BANCORP, INC. Consolidated Balance Sheets (dollars in thousands, except per share data) Assets December 31, 2022 December 31, 2021 Cash and due from banks $ 12,655 $ 12,886 Federal funds sold 33,927 20,391 Interest bearing deposits with banks and other short-term investments 265,272 1,680,945 Investment securities available-for-sale, at fair value (net of allowance for credit losses of $ 17 and $ 620 as of December 31, 2022 and December 31, 2021, respectively). 1,598,666 2,623,408 Investment securities held-to-maturity (fair value of $ 968,707 , and $ 0 , net of allowance for credit losses of $ 766 and $ 0 , as of December 31, 2022 and December 31, 2021, respectively) 1,093,374 — Federal Reserve and Federal Home Loan Bank stock 65,067 34,153 Loans held for sale 6,734 47,218 Loans 7,635,632 7,065,598 Less allowance for credit losses ( 74,444 ) ( 74,965 ) Loans, net 7,561,188 6,990,633 Premises and equipment, net 13,475 14,557 Operating lease right-of-use assets 24,544 30,555 Deferred income taxes 96,567 43,174 Bank owned life insurance 110,998 108,789 Goodwill and intangible assets, net 104,233 104,255 Other real estate owned 1,962 1,635 Other assets 162,192 134,711 Total Assets $ 11,150,854 $ 11,847,310 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest bearing demand $ 3,150,751 $ 3,277,956 Interest bearing transaction 1,138,235 777,255 Savings and money market 3,640,697 5,197,247 Time deposits 783,499 729,082 Total deposits 8,713,182 9,981,540 Customer repurchase agreements 35,100 23,918 Other short-term borrowings 975,001 300,000 Long-term borrowings 69,794 69,670 Operating lease liabilities 29,267 35,501 Reserve for unfunded commitments 5,857 4,379 Other liabilities 94,332 81,527 Total Liabilities 9,922,533 10,496,535 Shareholders’ Equity Common stock, par value $ 0.01 per share; shares authorized 100,000,000 , shares issued and outstanding 31,346,903 and 31,950,092 , respectively 310 316 Additional paid in capital 412,303 434,640 Retained earnings 1,015,215 930,061 Accumulated other comprehensive (loss) ( 199,507 ) ( 14,242 ) Total Shareholders’ Equity 1,228,321 1,350,775 Total Liabilities and Shareholders’ Equity $ 11,150,854 $ 11,847,310 See Notes to Consolidated Financial Statements. 79 Table of Contents EAGLE BANCORP, INC. Consolidated Statements of Income Years Ended December 31, (dollars in thousands, except per share data) 2022 2021 2020 Interest Income Interest and fees on loans $ 358,967 $ 337,749 $ 368,854 Interest and dividends on investment securities 51,481 23,205 18,440 Interest on balances with other banks and short-term investments 13,304 3,511 2,601 Interest on federal funds sold 861 31 91 Total interest income 424,613 364,496 389,986 Interest Expense Interest on deposits 83,261 27,772 53,566 Interest on customer repurchase agreements 356 51 293 Interest on short-term borrowings 3,980 2,008 1,869 Interest on long-term borrowings 4,149 10,151 12,696 Total interest expense 91,746 39,982 68,424 Net Interest Income 332,867 324,514 321,562 Provision (reversal) for Credit Losses 266 ( 20,821 ) 45,571 Provision (reversal) for Unfunded Commitments 1,477 ( 1,119 ) 1,380 Net Interest Income After Provision For Credit Losses 331,124 346,454 274,611 Noninterest Income Service charges on deposits 5,399 4,562 4,416 Gain on sale of loans 3,702 14,045 22,089 Gain (loss) on sale of investment securities ( 169 ) 2,964 1,815 Increase in the cash surrender value of bank owned life insurance 2,547 2,059 2,071 Other income 12,175 16,755 15,305 Total noninterest income 23,654 — 40,385 — 45,696 Noninterest Expense Salaries and employee benefits 84,053 88,398 74,440 Premises and equipment expenses 13,218 14,876 15,715 Marketing and advertising 4,721 4,165 4,278 Data processing 12,171 11,709 10,702 Legal, accounting and professional fees 8,583 11,510 16,406 FDIC insurance 4,969 5,897 7,941 SEC/FRB Penalties 22,977 — — Other expenses 14,406 12,610 14,680 Total noninterest expense 165,098 149,165 144,162 Income Before Income Tax Expense 189,680 237,674 176,145 Income Tax Expense 48,750 60,983 43,928 Net Income $ 140,930 $ 176,691 $ 132,217 Earnings Per Common Share Basic $ 4.40 $ 5.53 $ 4.09 Diluted $ 4.39 $ 5.52 $ 4.09 See Notes to Consolidated Financial Statements. 80 Table of Contents EAGLE BANCORP, INC. Consolidated Statements of Comprehensive Income Years Ended December 31, (dollars in thousands) 2022 2021 2020 Net Income $ 140,930 $ 176,691 $ 132,217 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities available for sale ( 140,926 ) ( 27,923 ) 14,422 Reclassification adjustment for net (gains) losses included in net income 111 ( 2,203 ) ( 1,363 ) Total unrealized gain (loss) on investment securities ( 140,815 ) ( 30,126 ) 13,059 Unrealized (loss) on securities transferred to held-to-maturity ( 49,095 ) — — Amortization of unrealized loss on securities transferred to held-to-maturity 4,361 — — Total unrealized loss recognized (remaining) on investment securities held-to-maturity ( 44,734 ) — — Unrealized gain (loss) on derivatives 284 — ( 1,378 ) Reclassification adjustment for gain included in net income — 384 860 Total unrealized gain (loss) on derivatives 284 384 ( 518 ) Other comprehensive income (loss) ( 185,265 ) ( 29,742 ) 12,541 Comprehensive (Loss) Income $ ( 44,335 ) $ 146,949 $ 144,758 See Notes to Consolidated Financial Statements. 81 Table of Contents EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity (dollars in thousands except share data) Common Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount Balance January 1, 2020 33,241,496 $ 331 $ 482,286 $ 705,105 $ 2,959 $ 1,190,681 Net Income — — — 132,217 — 132,217 Cumulative effect adjustment due to the adoption of ASC 326, net of tax — — — ( 10,931 ) — ( 10,931 ) Other comprehensive loss, net of tax — — — — 12,541 12,541 Stock-based compensation expense — — 5,324 — — 5,324 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 3,300 — 63 — — 63 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 28,811 ) — ( 1 ) — — ( 1 ) Vesting of performance based stock awards, net of shares withheld for payroll taxes 4,126 — — — — — Time based stock awards granted 176,252 — — — — — Issuance of common stock related to employee stock purchase plan 24,210 — 760 — — 760 Cash dividends declared ( $ 0.88 per share) — — — ( 28,330 ) — ( 28,330 ) Common stock repurchased ( 1,640,910 ) ( 16 ) ( 61,416 ) — — ( 61,432 ) Balance December 31, 2020 31,779,663 315 427,016 798,061 15,500 1,240,892 Net Income — — — 176,691 — 176,691 Other comprehensive loss, net of tax — — — — ( 29,742 ) ( 29,742 ) Stock-based compensation expense — — 7,811 — — 7,811 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes — — — — — — Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 24,429 ) 1 ( 1 ) — — — Vesting of performance based stock awards, net of shares withheld for payroll taxes 15,686 — — — — — Time based stock awards granted 179,624 — — — — — Issuance of common stock related to employee stock purchase plan 12,723 — 496 — — 496 Cash dividends declared ($ 1.40 per share) — — — ( 44,691 ) — ( 44,691 ) Common stock repurchased ( 13,175 ) — ( 682 ) — — ( 682 ) Balance December 31, 2021 31,950,092 316 434,640 930,061 ( 14,242 ) 1,350,775 Net Income — — — 140,930 — 140,930 Other comprehensive loss, net of tax — — — — ( 185,265 ) ( 185,265 ) Stock-based compensation expense — — 9,899 — — 9,899 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 3,289 — 97 — — 97 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 70,286 ) 2 ( 2 ) — — — Vesting of performance based stock awards, net of shares withheld for payroll taxes 21,026 — — — — — Time based stock awards granted 166,471 — — — — — Issuance of common stock related to employee stock purchase plan 14,611 — 748 — — 748 Cash dividends declared ($ 1.75 per share) — — — ( 55,776 ) — ( 55,776 ) Common stock repurchased ( 738,300 ) ( 8 ) ( 33,079 ) — — ( 33,087 ) December 31, 2022 31,346,903 $ 310 $ 412,303 $ 1,015,215 $ ( 199,507 ) $ 1,228,321 See Notes to Consolidated Financial Statements. 82 Table of Contents EAGLE BANCORP, INC. Consolidated Statements of Cash Flows (dollars in thousands) Years Ended December 31, 2022 2021 2020 Cash Flows From Operating Activities: Net Income $ 140,930 $ 176,691 $ 132,217 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 266 ( 20,821 ) 45,571 Provision for unfunded commitments 1,477 ( 1,119 ) 1,380 Depreciation and amortization 3,319 5,874 4,696 Gains on sale of loans ( 3,702 ) ( 14,045 ) ( 22,089 ) Gain on MSRs ( 837 ) ( 679 ) #REF! ( 667 ) Securities premium amortization (discount accretion), net 9,011 4,031 8,196 Origination of loans held for sale ( 299,317 ) ( 1,156,281 ) ( 1,240,682 ) Proceeds from sale of loans held for sale 343,503 1,211,313 1,231,273 Deferred income tax (benefit) expense 6,560 5,770 ( 8,332 ) Net gain on sale of other real estate owned ( 248 ) ( 1,266 ) ( 1,180 ) Net increase in cash surrender value of BOLI ( 2,547 ) ( 2,059 ) ( 2,071 ) Net (gain)/loss on sale of investment securities 169 ( 2,964 ) ( 1,815 ) Stock-based compensation expense 9,899 7,811 5,324 Net tax benefits from stock compensation — — 118 Increase (decrease) in other assets ( 26,162 ) 1,358 ( 28,626 ) Increase in other liabilities 12,581 24,823 9,826 Net cash provided by operating activities 194,902 238,437 133,139 Cash Flows From Investing Activities: Purchases of available-for-sale investment securities ( 425,263 ) ( 2,029,434 ) ( 739,955 ) Proceeds from maturities of available-for-sale securities 261,999 313,921 302,471 Proceeds from sale/call of available-for-sale securities 6,225 201,034 124,144 Purchase of held to maturity investment securities ( 290,740 ) — — Proceeds from maturities from held to maturity securities 115,777 — — Proceeds from call of held-to-maturity securities 8,350 — — Purchases of Federal Reserve and Federal Home Loan Bank stock ( 30,914 ) ( 218 ) ( 9,160 ) Proceeds from redemption of Federal Reserve and Federal Home Loan Bank stock — 6,169 4,250 Net change in loans ( 570,977 ) 511,120 ( 240,911 ) Proceeds from sale of SBA PPP loans — 170,154 — Redemption (purchase) of BOLI 338 ( 30,000 ) — Proceeds from sale of other real estate owned 241 4,618 4,430 Purchases of premises and equipment ( 2,113 ) ( 5,286 ) ( 2,945 ) Net cash used in investing activities ( 927,077 ) ( 857,922 ) ( 557,676 ) Cash Flows From Financing Activities: Increase (decrease) in deposits ( 1,268,358 ) 792,337 1,964,812 Increase (decrease) in customer repurchase agreements 11,182 ( 2,808 ) ( 4,254 ) Increase in short-term borrowings 675,001 — 50,000 Increase in long-term borrowings — — 50,000 Repayment of long-term borrowings — ( 200,000 ) — Proceeds from exercise of equity compensation plans 97 — 63 Proceeds from employee stock purchase plan 748 496 760 Common stock repurchased ( 33,087 ) ( 682 ) ( 61,432 ) Tax equivalent shares withheld on exercise of equity comp plans — — — Cash dividends paid ( 55,776 ) ( 44,691 ) ( 28,330 ) Net cash (used in) provided by financing activities ( 670,193 ) 544,652 1,971,619 Net (Decrease) Increase In Cash and Cash Equivalents ( 1,402,368 ) ( 74,833 ) 1,547,082 Cash and Cash Equivalents at Beginning of Period 1,714,222 1,789,055 241,973 Cash and Cash Equivalents at End of Period $ 311,854 $ 1,714,222 $ 1,789,055 Supplemental Cash Flows Information: Interest paid $ 90,590 $ 30,989 $ 70,183 Income taxes paid $ 23,453 $ 54,363 $ 37,400 Non-Cash Investing Activities Initial recognition of operating lease right-of-use assets $ — $ 9,146 $ 1,696 Transfers of investment securities from available-for-sale to held-to-maturity $ 922,975 $ — $ — Transfers from loans to other real estate owned $ 475 $ 149 $ 6,750 83 Table of Contents See Notes to Consolidated Financial Statements. 84 Table of Contents Eagle Bancorp, Inc. Notes to Consolidated Financial Statements Note 1 – Summary of Significant Accounting Policies The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the “Company”) with all significant intercompany transactions eliminated. EagleBank (the “Bank”), a Maryland chartered commercial bank, is the Company’s principal subsidiary. The investment in subsidiaries is recorded on the Company’s books (Parent Only) on the basis of its equity in the net assets of the subsidiary (see Note 25 "Parent Company Financial Information" for further detail). The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“GAAP”) and to general practices in the banking industry. The following is a summary of the significant accounting policies. Nature of Operations The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank was previously active in the origination and sale of residential mortgage loans, the origination of small business loans and the origination, securitization and sale of multifamily Federal Housing Administration (“FHA”) loans. Starting in the first quarter 2023 the Company will no longer originate residential mortgages for sale as the decision has been made to exit this line of business (See Note 26 of the Consolidated Financial Statements for further details). The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. As of December 31, 2022, the Bank offers its products and services through sixteen banking offices, five lending centers and various electronic capabilities, including remote deposit services and mobile banking services. 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. 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest bearing deposits with other banks that have an original maturity of three months or less. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds purchased, repurchase agreements and other short-term borrowings. Interest Bearing Deposits in Other Financial Institutions Interest-bearing deposits in other financial institutions mature within one year and are carried at cost. Loans Held for Sale The Company regularly engaged in sale of residential mortgage loans held for sale in 2022 and engages in the sale of the guaranteed portion of SBA loans originated by the Bank. Starting in the first quarter of 2023, the Company will no longer originate residential mortgages for sale as the strategic decision has been made to exit that business (See Note 26 of the Consolidated Financial Statements for further details). The Company has elected to carry loans held for sale at fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Income. The Company’s current practice is to sell residential mortgage loans held for sale on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing as of December 31, 2022 and December 31, 2021. 85 Table of Contents The Company entered into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilized either or both “best efforts” and “mandatory delivery” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a “best efforts” contract, the Company committed to deliver an individual mortgage loan of a specified principal amount and quality to an investor. The investor committed to a price, representing a premium on the day the borrower committed to an interest rate, at which it would purchase the loan from the Company if the loan to the underlying borrower closed, with the intent that the buyer/investor had assumed the interest rate risk on the loan as the Company protected itself from changes in interest rates. As a result, the Bank was not generally exposed to losses on loans sold utilizing best efforts, nor would it realize gains related to rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts were not readily ascertainable with precision because rate lock commitments and best efforts contracts were not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, very little gain or loss should have occurred on the interest rate lock commitments. Under a “mandatory delivery” contract, the Company committed to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company failed to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it was obligated to pay the investor a “pair-off” fee, based on then-current market prices, to compensate the investor for the shortfall. The Company managed the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage-backed securities, whereby the Company obtained the right to deliver securities to investors in the future at a specified price. Such contracts were accounted for as derivatives and were recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities, with changes in fair value recorded in other income within the Consolidated Statements of Income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranged from 30 to 90 days under recent market conditions. The gross gains on loan sales were recognized based on new loan commitments with adjustments for price and pair-off activity. Commission expenses on loans held for sale were recognized based on loans closed. In circumstances where the Company did not deliver the whole loan to an investor, but rather elected to retain the loan in its portfolio, the loan was transferred from held for sale to loans at fair value at the date of transfer. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an excess servicing asset, which is computed on a loan by loan basis with the unamortized amount being included in intangible assets in the Consolidated Balance Sheets. This excess servicing asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other income in the Consolidated Statements of Income. The Company originates multifamily FHA loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (”Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business and periodically bundles and sells the servicing rights. When servicing is retained on multifamily FHA loans securitized and sold, the Company computes an excess servicing asset on a loan by loan basis. Unamortized multifamily FHA mortgage servicing rights ("MSRs") totaled $ 2.4 million as of December 31, 2022 and $ 1.5 million as of December 31, 2021. Noninterest Income includes gains from the sale of the Ginnie Mae securities and net revenues earned on the servicing of multifamily FHA loans underlying the Ginnie Mae securities. Revenue from servicing commercial multifamily FHA mortgages is recognized as earned based on the specific contractual terms of the underlying servicing agreements, along with amortization of and changes in impairment of MSRs. Investment Securities The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. 86 Table of Contents Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Income. Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency or a significant deterioration in the financial condition of the issuer. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include the: (1) magnitude of the decline in value; (2) financial condition of the issuer or issuers; and (3) structure of the security. Premiums and discounts on investment securities held-to-maturity, like available-for-sale securities, are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality. Interest income included amortization of $ 13.6 million, which was partially offset by accretion of $ 4.6 million for the period ended December 31, 2022. Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security. For the impairment of investment securities please see "Allowance for Credit Losses - Available-for-Sale Debt Securities" and "Allowance for Credit Losses - Held-to-Maturity Debt Securities" below. Loans Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs are being amortized on the interest method over the term of the loan. Allowance for Credit Losses The Company adopted the current expected credit loss model under Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) on January 1, 2020 using the modified retrospective approach. The Company recorded a net reduction of retained earnings of $ 14.7 million upon adoption. The transition adjustment included an increase in the allowance for credit losses on loans of $ 10.6 million, in addition to an increase of $ 4.1 million to the reserve for unfunded commitments. In accordance with the adoption of CECL, the initial January 1, 2020 cumulative-effect adjustment was to retained earnings (net of taxes) under the modified retrospective approach. The following table presents a breakdown of the current provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands): For the Year Ended (dollars in thousands) December 31, 2022 December 31, 2021 December 31, 2020 Provision/(Reversal) for credit losses- loans $ 103 $ ( 21,275 ) $ 45,404 Provision for credit losses - HTM debt securities 766 — — (Reversal) Provision for credit losses - AFS debt securities ( 603 ) 454 167 Total provision for credit losses $ 266 $ ( 20,821 ) $ 45,571 87 Table of Contents Allowance for Credit Losses - Loans The ACL - Loans is an estimate of the expected credit losses in the loans held for investment portfolio. ASC 326 replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Reserves on loans that do not share risk characteristics are evaluated on an individual basis (e.g., nonaccrual loans, TDRs). Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes and a loan-level probability of default (“PD”) / Loss Given Default (“LGD”) cash flow method is applied using an exposure at default (“EAD”) model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period. The Company uses a loan-level PD/LGD cash flow method with an EAD model to estimate expected credit losses. In accordance with ASC 326, expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The bank groups collectively assessed loans using a call report code. Some unique loan types, such as PPP loans, are grouped separately due to their specific risk characteristics. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default. For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. In 2022, the improvement in economic conditions, which impacted the unemployment projections, which inform our CECL economic forecast, along with improvements in credit quality and charge offs, resulted in a proportional decrease in our ACL during 2022. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. 88 Table of Contents A summary of our primary portfolio segments is as follows: Commercial . The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Income producing – commercial real estate . Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who have a demonstrated a record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates. Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities. Real Estate Mortgage – Residential. Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home and rental residential real property. Construction – commercial and residential . The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for renovation, new construction and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing. Construction – commercial and industrial ("C&I") (owner occupied) . The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants and office buildings. Home Equity . The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property. Other Consumer . The other consumer portfolio comprises consumer loans not secured by real property, including personal lines of credit and loans, overdraft lines and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual. Classified loans represent the sum of loans graded substandard and doubtful. 89 Table of Contents The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and in specific reserves assigned on an individual basis as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Director’s Loan Committee, the Audit Committee of the Board of Directors ("Audit Committee"), and the Board of Directors. The committees' reports to the Board are part of the Board's review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a loan will be in a troubled debt restructuring ("TDR"). We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status. Collateral Dependent Financial Assets Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. Allowance for Credit Losses - Available-for-Sale Debt Securities Although ASC 326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount by which the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment. 90 Table of Contents The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in other comprehensive income, net of deferred taxes. Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in accrued interest and other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. Allowance for Credit Losses - Held-to-Maturity Debt Securities The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in the RUC on the Company’s Consolidated Balance Sheet. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to seven years for furniture, fixtures and equipment, three to five years for computer software and hardware and five to twenty years for leasehold improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Income. Other Real Estate Owned (OREO) Assets acquired through loan foreclosure are held for sale and are recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by appraisals that are generally no more than twelve months old. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through noninterest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in market conditions or appraised values. 91 Table of Contents Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired, including other intangible assets. Other intangible assets include purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives. All intangible assets are subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually or upon the occurrence of a triggering event. The Company has determined that it has a single reporting unit. If the fair values of the reporting unit exceed the book value, no write-down of recorded goodwill is required. If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be recorded through a reduction of goodwill or other intangible asset and an offsetting charge to noninterest expense. The Company performs impairment testing at any quarter-end when events or changes in circumstances indicate the assets might be impaired, or at least annually as of December 31. The Company performs a qualitative impairment assessment to determine whether it is more likely than not that the fair value of the only reporting unit is less than its carrying amount. The Company assesses qualitative factors at least on an annual basis. Based on the assessment of these qualitative factors, if it is determined that it is more likely than not that the fair value of a reporting unit is not less than the carrying value, then performing the impairment process is not necessary. However, if it is determined that it is more likely than not that the carrying value exceeds the fair value, a quantified analysis is required to determine whether an impairment exists. Based on the results of qualitative assessments of the reporting unit, the Company concluded that no impairment existed at December 31, 2022. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Interest Rate Swap Derivatives As required by ASC Topic 815, " Derivatives and Hedging ", the Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Revenue Recognition The majority of our revenue-generating transactions are not subject to ASC 606 "Revenue from Contracts with Customers", including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Substantially all of the Company’s revenue is generated from contracts with customers. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows: • Service charges on deposit accounts (i.e. ATM fees) - These represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations is generally received at the time the performance obligations are satisfied. 92 Table of Contents • Other Fees (i.e. insurance commissions, investment advisory fees, credit card fees, interchange fees) – Generally, the Company receives compensation when a customer that it refers opens an account with certain third-parties. • Sale of OREO – The Company assesses whether it is “probable” that it will collect the consideration to which it will be entitled in exchange for transferring the asset to the customer. Customer Repurchase Agreements The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees. Marketing and Advertising Marketing and advertising costs are generally expensed as incurred. Income Taxes The Company employs the asset and liability method of accounting for income taxes as required by ASC 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e. temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax valuation allowance. In accordance with ASC 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain. The Company’s policy is to recognize interest and penalties on income taxes in other noninterest expenses. The Company remains subject to examination of income tax returns by the Internal Revenue Service, as well as all of the states where it conducts business, for the years ending after December 31, 2019. There are currently no examinations in process as of December 31, 2022. Transfer of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances. Stock-Based Compensation In accordance with ASC Topic 718, “Compensation,” the Company records as salaries and employee benefits expense on its Consolidated Statements of Income an amount equal to the amortization (over the remaining service period) of the fair value of option and restricted stock awards computed at the date of grant. Salary and employee benefits expense on variable stock grants (i.e., performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 17 - "Stock-Based Compensation" for a description of stock-based compensation awards, activity and expense for the years ended December 31, 2022, 2021 and 2020. The Company records the discount from the fair market value of shares issued under its Employee Share Purchase Plan as a component of Salaries and employee benefits expense in its Consolidated Statement of Income. 93 Table of Contents Earnings per Common Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period including the potential dilutive effects of common stock equivalents. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, debt securities held to maturity, and derivatives, net of taxes. Other comprehensive income (loss) is recognized as a separate component of equity. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe such matters exist that will have a material effect on the financial statements. Segment Reporting While the chief operating decision-maker monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial services operations are considered by management to be aggregated in one reportable operating segment. New Authoritative Accounting Guidance Accounting Standards Adopted in 2022 ASU No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06") simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share ("EPS") calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. ASU 2020-06 did not have a material impact on the Company's consolidated financial statements for fiscal year 2022. ASU No. 2020-04, "Reference Rate Reform (Topic 848)" ("ASU 2020-04") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. ASU 2020-04 did not have a material impact on the Company's consolidated financial statements for fiscal year 2022 94 Table of Contents Accounting Standards Pending Adoption ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02") eliminates the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted ASC 326, the amendments in the ASU are effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. The impact of ASU 2022-02 should be applied prospectively, or, for the recognition and measurement of TDRs, with a modified retrospective transition method. We are currently in the process of evaluating this guidance. Note 2 – Cash and Due from Banks Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank of Richmond ("Federal Reserve Bank") based principally on the type and amount of their deposits. During 2022, the Bank maintained balances at the Federal Reserve sufficient to meet reserve requirements, as well as excess reserves, on which interest is paid. The average daily balance maintained in 2022 was $ 1.3 billion and in 2021 was $ 2.3 billion. Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank ("FHLB") of Atlanta and noninterest bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank. ` Note 3 – Investment Securities Amortized cost and estimated fair value of securities available-for-sale and held-to-maturity are summarized as follows: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Estimated Fair Value (dollars in thousands) Credit Losses Investment securities available-for-sale: U.S. treasury bonds $ 49,793 $ — $ ( 3,466 ) $ — $ 46,327 U.S. agency securities 747,777 — ( 78,049 ) — 669,728 Residential mortgage-backed securities 937,557 18 ( 117,072 ) — 820,503 Commercial mortgage-backed securities 56,071 — ( 5,858 ) — 50,213 Municipal bonds 10,700 45 ( 658 ) — 10,087 Corporate bonds 2,000 — ( 175 ) ( 17 ) 1,808 Total available-for-sale securities $ 1,803,898 $ 63 $ ( 205,278 ) $ ( 17 ) $ 1,598,666 December 31, 2022 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated (dollars in thousands) Fair Value Investment securities held-to-maturity: Residential mortgage-backed securities $ 741,057 $ — $ ( 88,390 ) $ 652,667 Commercial mortgage-backed securities 92,557 — ( 11,993 ) 80,564 Municipal bonds 128,273 — ( 12,092 ) 116,181 Corporate bonds 132,253 — ( 12,958 ) 119,295 1,094,140 $ — $ ( 125,433 ) $ 968,707 Allowance for credit losses ( 766 ) Total held-to-maturity securities, net of ACL $ 1,093,374 95 Table of Contents December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Estimated Fair Value (dollars in thousands) Credit Losses Investment securities available-for-sale: U.S. treasury bonds $ 49,693 $ 22 $ ( 257 ) $ — $ 49,458 U.S. agency securities 629,273 736 ( 7,622 ) — 622,387 Residential mortgage-backed securities 1,634,421 4,053 ( 20,447 ) — 1,618,027 Commercial mortgage-backed securities 58,352 1,644 ( 350 ) — 59,646 Municipal bonds 141,916 3,865 ( 347 ) ( 3 ) 145,431 Corporate bonds 129,012 648 ( 584 ) ( 617 ) 128,459 $ 2,642,667 $ 10,968 $ ( 29,607 ) $ ( 620 ) $ 2,623,408 In addition, at December 31, 2022 and December 31, 2021, the Company held $ 65.1 million and $ 34.2 million in non marketable equity securities, respectively, in a combination of FRB and FHLB stocks, which are required to be held for regulatory purposes. The stocks are both carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $ 1.1 billion of mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $ 237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized. At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through the provision for credit losses. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $ 66.2 million was included in other comprehensive loss at the time of transfer and, as of December 31, 2022, $ 59.1 million remains in accumulated other comprehensive loss, to be amortized out through interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer. Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities. Accrued interest receivable on investment securities totaled $ 7.8 million and $ 6.0 million at December 31, 2022 and December 31, 2021, respectively. The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets. The unrealized losses that exist at December 31, 2022 are generally the result of changes in market interest rates and interest spread relationships since the investment securities were originally purchased, rather than credit quality concerns. However, as of December 31, 2022 and 2021, the Company determined that certain of the unrealized loss positions in available-for-sale and held-to-maturity corporate and municipal bonds were evidence of expected credit losses. An allowance for credit losses of $ 17 thousand was recorded for AFS securities and $ 766 thousand for HTM securities in 2022. The weighted average duration of debt securities, which comprise 100 % of total investment securities, is 4.8 years. Provision recorded for credit losses for securities was $ 163 thousand as of December 31, 2022. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not intend to sell the held-to-maturity investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity. 96 Table of Contents Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position as of December 31, 2022 and 2021 are as follows: Investment securities available-for-sale: Less than 12 Months 12 Months or Greater Total December 31, 2022 Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) U.S. treasury bonds 2 $ — $ — $ 46,327 $ ( 3,466 ) $ 46,327 $ ( 3,466 ) U.S. agency securities 85 490,699 ( 58,437 ) 179,029 ( 19,612 ) 669,728 ( 78,049 ) Residential mortgage-backed securities 157 3,994 — 808,697 ( 117,073 ) 812,691 ( 117,073 ) Commercial mortgage-backed securities 14 471 ( 2 ) 49,742 ( 5,855 ) 50,213 ( 5,857 ) Municipal bonds 1 — — 8,299 ( 658 ) 8,299 ( 658 ) Corporate bonds 1 — — 1,825 ( 175 ) 1,825 ( 175 ) 260 $ 495,164 $ ( 58,439 ) $ 1,093,919 $ ( 146,839 ) $ 1,589,083 $ ( 205,278 ) Investment securities held-to-maturity: Less than 12 Months 12 Months or Greater Total December 31, 2022 Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) Residential mortgage-backed securities 143 $ — $ — $ 652,667 $ ( 88,390 ) $ 652,667 $ ( 88,390 ) Commercial mortgage-backed securities 16 — — 80,564 ( 11,993 ) $ 80,564 ( 11,993 ) Municipal bonds 43 3,110 ( 45 ) 113,071 ( 12,047 ) $ 116,181 ( 12,092 ) Corporate bonds 30 20,771 ( 3,183 ) 86,451 ( 9,775 ) $ 107,222 ( 12,958 ) 232 $ 23,881 $ ( 3,228 ) $ 932,753 $ ( 122,205 ) $ 956,634 $ ( 125,433 ) Investment securities available-for-sale Less than 12 Months 12 Months or Greater Total December 31, 2021 Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (dollars in thousands) U.S. treasury bonds 1 $ 24,593 $ ( 257 ) $ — $ — $ 24,593 $ ( 257 ) U.S. agency securities 64 452,966 ( 6,256 ) 68,977 ( 1,366 ) 521,943 ( 7,622 ) Residential mortgage-backed securities 149 1,327,519 $ ( 16,841 ) 84,500 ( 3,606 ) 1,412,019 ( 20,447 ) Commercial mortgage-backed securities 4 — — 23,561 ( 350 ) 23,561 ( 350 ) Municipal bonds 8 20,181 $ ( 347 ) — — 20,181 ( 347 ) Corporate bonds 13 66,051 $ ( 584 ) — $ — 66,051 ( 584 ) 239 $ 1,891,310 $ ( 24,285 ) $ 177,038 $ ( 5,322 ) $ 2,068,348 $ ( 29,607 ) The amortized cost and estimated fair value of investments available-for-sale at December 31, 2022 and 2021 by contractual maturity are shown in the table below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 97 Table of Contents Investment securities available-for-sale: December 31, 2022 December 31, 2021 (dollars in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value U.S. agency securities maturing: One year or less $ 549,137 $ 490,699 $ 425,597 $ 421,347 After one year through five years 111,742 100,297 141,537 140,785 Five years through ten years 73,886 68,180 62,092 60,255 After ten years 13,012 10,552 Residential mortgage-backed securities 937,557 820,503 1,634,468 1,618,027 Commercial mortgage-backed securities 56,071 50,213 58,352 59,646 Municipal bonds maturing: One year or less 300 300 4,806 4,861 After one year through five years 1,444 1,488 25,457 26,816 Five years through ten years 8,956 8,299 97,945 99,960 After ten years — — 13,708 13,797 Corporate bonds maturing: One year or less — — 18,924 18,991 After one year through five years 2,000 1,825 54,630 54,833 Five years through ten years — — 55,458 55,252 After ten years — — — — U.S. treasury 49,793 46,327 49,693 49,458 1,803,898 1,598,683 2,642,667 2,624,028 Allowance for credit losses — ( 17 ) — ( 620 ) $ 1,803,898 $ 1,598,666 $ 2,642,667 $ 2,623,408 Investment securities held-to-maturity: December 31, 2022 December 31, 2021 (dollars in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Residential mortgage-backed securities $ 741,057 $ 652,667 $ — $ — Commercial mortgage-backed securities 92,557 80,564 Municipal bonds maturing: One year or less 3,139 3,110 — — After one year through five years 35,579 33,743 — — Five years through ten years 77,262 67,945 — — After ten years 12,293 11,383 — — Corporate bonds maturing: One year or less 23,954 20,771 — — After one year through five years 84,953 77,997 — — Five years through ten years 23,346 20,527 — — 1,094,140 968,707 — — Allowance for credit losses ( 766 ) — — — $ 1,093,374 $ 968,707 $ — $ — 98 Table of Contents In 2022, gross realized gains on sales of investment securities were $ 18 thousand and gross realized losses on sales of investment securities were $ 187 thousand. In 2021, gross realized gains on sales of investment securities were $ 3.2 million and gross realized losses on sales of investment securities were $ 187 thousand. In 2020, gross realized gains on sales of investment securities were $ 1.9 million and gross realized losses on sales of investment securities were $ 46 thousand. Proceeds from sales and calls of investment securities for 2022, 2021 and 2020 were $ 14.6 million, $ 201.0 million and $ 124.1 million, respectively. The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase and certain lines of credit with correspondent banks at December 31, 2022 was $ 220.1 million and $ 261.0 million at December 31, 2021, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of December 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders’ equity. 99 Table of Contents Note 4 – Loans and Allowance for Credit Losses The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets. Loans, net of unamortized net deferred fees, at December 31, 2022 and 2021 are summarized by type as follows: December 31, 2022 December 31, 2021 (dollars in thousands) Amount % Amount % Commercial $ 1,487,349 19 % $ 1,354,317 19 % PPP loans 3,256 — % 51,105 1 % Income producing - commercial real estate 3,919,941 51 % 3,385,298 48 % Owner occupied - commercial real estate 1,110,325 15 % 1,087,776 15 % Real estate mortgage - residential 73,001 1 % 73,966 1 % Construction - commercial and residential 877,755 12 % 896,319 13 % Construction - C&I (owner occupied) 110,479 1 % 159,579 2 % Home equity 51,782 1 % 55,811 1 % Other consumer 1,744 — 1,427 — Total loans 7,635,632 100 % 7,065,598 100 % Less: allowance for credit losses ( 74,444 ) ( 74,965 ) Net loans $ 7,561,188 $ 6,990,633 Unamortized net deferred fees amounted to $ 29.2 million and $ 26.9 million at December 31, 2022 and 2021. As of December 31, 2022 and 2021, the Bank serviced $ 361.5 million and $ 351.1 million, respectively, of multifamily FHA loans, SBA loans and other loan participations, which are not reflected as loan balances on the Consolidated Balance Sheets. Real estate loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects. Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures; and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition. Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The 100 Table of Contents debt service coverage ratio is ordinarily at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels. Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between five to seven years , with amortization to a maximum of 25 years. The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $ 1.5 billion at December 31, 2022. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 56 % of the outstanding ADC loan portfolio at December 31, 2022. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves. The following tables detail activity in the ACL by portfolio segment for the years ended December 31, 2022, 2021 and 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. 101 Table of Contents (dollars in thousands) Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Real Estate Mortgage - Residential Construction - Commercial and Residential Home Equity Other Consumer Total Year Ended December 31, 2022 Allowance for credit losses: Balance at beginning of period $ 14,475 $ 38,287 $ 12,146 $ 449 $ 9,099 $ 474 $ 35 $ 74,965 Loans charged-off ( 1,561 ) ( 1,355 ) — — — — ( 79 ) ( 2,995 ) Recoveries of loans previously charged-off 713 25 — — 1,627 — 6 2,371 Net loans charged-off ( 848 ) ( 1,330 ) — — 1,627 — ( 73 ) ( 624 ) Provision for credit losses 2,028 ( 1,269 ) 556 520 ( 1,925 ) 81 112 103 Ending balance $ 15,655 $ 35,688 $ 12,702 $ 969 $ 8,801 $ 555 $ 74 $ 74,444 Year Ended December 31, 2021 Allowance for credit losses: Balance at beginning of period prior to adoption of ASC 326 $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579 Impact of adopting ASC 326 — — — — — — — — Loans charged-off ( 8,788 ) — ( 5,444 ) — ( 206 ) — ( 1 ) ( 14,439 ) Recoveries of loans previously charged-off 486 — 97 — 499 — 18 1,100 Net loans (charged-off) recoveries ( 8,302 ) — ( 5,347 ) — 293 — 17 ( 13,339 ) Provision for credit losses ( 3,792 ) ( 17,098 ) 3,493 ( 571 ) ( 2,723 ) ( 565 ) ( 19 ) ( 21,275 ) Ending balance $ 14,475 $ 38,287 $ 12,146 $ 449 $ 9,099 $ 474 $ 35 $ 74,965 Year Ended December 31, 2020 Allowance for credit losses: Balance at beginning of period prior to adoption of ASC 326 $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658 Impact of adopting ASC 326 892 11,230 4,674 ( 301 ) ( 6,143 ) 245 17 10,614 Loans charged-off ( 12,082 ) ( 4,300 ) ( 20 ) ( 815 ) ( 2,947 ) ( 92 ) ( 3 ) ( 20,259 ) Recoveries of loans previously charged-off 130 — — — 4 — 28 162 Net loans (charged-off) recoveries ( 11,952 ) ( 4,300 ) ( 20 ) ( 815 ) ( 2,943 ) ( 92 ) 25 ( 20,097 ) Provision for credit losses 18,797 19,190 3,508 579 3,130 230 ( 30 ) 45,404 Ending balance $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579 102 Table of Contents The following table presents the ending allowance balance attributable to loans individually and collectively evaluated, as well as associated loan balances, as of December 31, 2022 and 2021: (dollars in thousands) Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Real Estate Mortgage - Residential Construction - Commercial and Residential Home Equity Other Consumer Total Year Ended December 31, 2022 Allowance for credit losses: Ending Allowance Balance Attributable to loans: Individually evaluated for impairment $ 1,644 $ 3,198 $ — $ 294 $ — $ — $ 47 $ 5,183 Collectively evaluated for impairment 14,011 32,490 12,702 675 8,801 555 27 69,261 Total Allowance Ending Balance $ 15,655 $ 35,688 $ 12,702 $ 969 $ 8,801 $ 555 $ 74 $ 74,444 Loans: Loans Individually evaluated for impairment $ 3,434 $ 6,328 $ 19,187 $ 1,698 $ — $ — $ 50 $ 30,697 Loans Collectively evaluated for impairment 1,487,171 3,913,613 1,091,138 71,303 988,234 51,782 1,694 7,604,935 Total Ending Loans Balance $ 1,490,605 $ 3,919,941 $ 1,110,325 $ 73,001 $ 988,234 $ 51,782 $ 1,744 $ 7,635,632 Year Ended December 31, 2021 Allowance for credit losses: Ending Allowance Balance Attributable to loans: Individually evaluated for impairment $ 1,799 $ 5,156 $ — $ — $ — $ — $ — $ 6,955 Collectively evaluated for impairment 12,676 33,131 12,146 449 9,099 474 35 68,010 Total Allowance Ending Balance $ 14,475 $ 38,287 $ 12,146 $ 449 $ 9,099 $ 474 $ 35 $ 74,965 Loans: Loans Individually evaluated for impairment $ 11,284 $ 22,570 $ 42 $ 1,779 $ 3,093 $ 366 $ — $ 39,134 Loans Collectively evaluated for impairment 1,394,138 3,362,728 1,087,734 72,187 1,052,805 55,445 1,427 7,026,464 Total Ending Loans Balance $ 1,405,422 $ 3,385,298 $ 1,087,776 $ 73,966 $ 1,055,898 $ 55,811 $ 1,427 $ 7,065,598 103 Table of Contents The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (dollars in thousands) Business/Other Assets Real Estate Business/Other Assets Real Estate Commercial $ 1,563 $ 1,871 $ 3,098 $ 6,821 PPP loans — — 1,365 — Income-producing-commercial real estate 2,000 4,328 3,193 19,378 Owner occupied - commercial real estate — 19,187 — 42 Real estate mortgage- residential — 1,698 — 1,779 Construction - commercial and residential — — — 3,093 Home Equity — — — 366 Other consumer 50 — — — Total $ 3,613 $ 27,084 $ 7,656 $ 31,479 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicator is an internal credit risk rating system that categorizes loans into pass, watch, special mention or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment. The following are the definitions of the Company’s credit quality indicators: Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. Watch: Loan is paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time. Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention. Classified: Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. 104 Table of Contents Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. The Company’s credit quality indicators are updated on an ongoing basis along with our credits rated watch or below reviews. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of December 31, 2022 and 2021. The data is further defined by year of loan origination. December 31, 2022 (dollars in thousands) Prior 2018 2019 2020 2021 2022 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total Commercial Pass $ 177,307 $ 45,510 $ 56,011 $ 60,010 $ 234,258 $ 143,636 $ 708,201 $ 8,570 $ 1,433,503 Watch 6,022 1,883 250 4,153 2,888 754 27,889 — 43,839 Special Mention — — — — — 82 5,475 — 5,557 Substandard 1,332 351 276 — — — 1,344 1,147 4,450 Total 184,661 47,744 56,537 64,163 237,146 144,472 742,909 9,717 1,487,349 PPP loans Pass — — — 2,479 777 — 3,256 Total — — — 2,479 777 — — — 3,256 Income producing - commercial real estate Pass 778,683 434,031 480,474 298,458 542,143 744,328 192,089 358 3,470,564 Watch 237,846 5,190 — 35,707 — — — — 278,743 Special Mention 44,195 5,206 4,209 6,735 — — 47,676 — 108,021 Substandard 60,613 2,000 — — — — — — 62,613 Total 1,121,337 446,427 484,683 340,900 542,143 744,328 239,765 358 3,919,941 Owner occupied - commercial real estate Pass 444,153 180,142 106,902 40,562 206,595 41,765 24,181 13,238 1,057,538 Watch 16,876 11,504 4,595 — — — 59 — 33,034 Substandard 19,753 — — — — — — — 19,753 Total 480,782 191,646 111,497 40,562 206,595 41,765 24,240 13,238 0 1,110,325 Real estate mortgage - residential Pass 13,930 12,438 8,219 2,640 16,307 14,731 — — 68,265 Watch 3,038 — — — — — — — 3,038 Substandard 1,698 — — — — — — — 1,698 Total 18,666 12,438 8,219 2,640 16,307 14,731 — — 73,001 Construction - commercial and residential Pass 40,113 18,669 90,560 189,023 191,127 159,771 90,911 — 780,174 Watch 44,409 53,172 — — — — — — 97,581 Total 84,522 71,841 90,560 189,023 191,127 159,771 90,911 — 877,755 Construction - C&I (owner occupied) Pass 13,792 4,906 4,367 33,854 653 34,679 6,507 — 98,758 Watch 1,024 3,254 7,443 — — — — — 11,721 Total 14,816 8,160 11,810 33,854 653 34,679 6,507 — 110,479 Home Equity 105 Table of Contents Pass 1,695 — — 98 551 — 48,182 906 51,432 Watch 52 — — — — — 196 — 248 Substandard — — 41 — — — 61 — 102 Total 1,747 — 41 98 551 — 48,439 906 51,782 Other Consumer Pass 4 — — — — 126 1,561 3 1,694 Watch — — — — — — — — — Substandard — — — — — — — 50 50 Total 4 — — — — 126 1,561 53 1,744 Total Recorded Investment $ 1,906,535 $ 778,256 $ 763,347 $ 673,719 $ 1,195,299 $ 1,139,872 $ 1,154,332 $ 24,272 $ 7,635,632 December 31, 2021 (dollars in thousands) Prior 2017 2018 2019 2020 2021 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total Commercial Pass $ 180,877 $ 58,693 $ 103,058 $ 90,874 $ 87,515 $ 211,563 $ 549,055 $ 6,023 $ 1,287,658 Watch 5,896 6,567 1,020 996 4,268 3,137 18,336 627 40,847 Special Mention — 9,515 363 — — — 901 — 10,779 Substandard 4,205 778 1,850 437 — — 7,763 — 15,033 Total 190,978 75,553 106,291 92,307 91,783 214,700 576,055 6,650 1,354,317 PPP loans Pass — — — — 16,840 32,900 — — 49,740 — — — — 1,365 — — — 1,365 Total — — — — 18,205 32,900 — — 51,105 Income producing - commercial real estate Pass 572,550 333,394 418,489 495,808 337,178 549,356 198,210 — 2,904,985 Watch 58,334 73,760 — 43,561 35,094 — — — 210,749 Special Mention 101,580 — 41,936 4,264 — — 47,692 — 195,472 Substandard 60,059 — 8,491 5,542 — — — — 74,092 Total 792,523 407,154 468,916 549,175 372,272 549,356 245,902 — 3,385,298 Owner occupied - commercial real estate Pass 353,471 127,687 210,348 81,604 41,135 184,529 16,838 1,922 1,017,534 Watch 22,710 4,581 11,783 7,026 — — 62 — 46,162 Special Mention — — — 2,122 — — — — 2,122 Substandard 21,958 — — — — — — — 21,958 Total 398,139 132,268 222,131 90,752 41,135 184,529 16,900 1,922 1,087,776 Real estate mortgage - residential Pass 14,645 5,854 12,956 15,546 3,436 16,495 — — 68,932 Watch 3,255 — — — — — — — 3,255 Substandard 1,698 — — 81 — — — — 1,779 Total 19,598 5,854 12,956 15,627 3,436 16,495 — — 73,966 Construction - commercial and residential Pass 32,815 139,756 171,152 142,599 160,952 71,799 127,956 1,773 848,802 Watch 506 43,918 — — — — — — 44,424 106 Table of Contents Substandard — — — 3,093 — — — — 3,093 Total 33,321 183,674 171,152 145,692 160,952 71,799 127,956 1,773 896,319 Construction - C&I (owner occupied) Pass 19,710 1,754 25,163 39,803 61,408 768 6,648 — 155,254 Watch 680 390 3,255 — — — — — 4,325 Total 20,390 2,144 28,418 39,803 61,408 768 6,648 — 159,579 Home Equity Pass 1,474 — — — 70 702 52,077 883 55,206 Watch 193 — — — — — — — 193 Substandard 46 — — 45 — — 58 263 412 Total 1,713 — — 45 70 702 52,135 1,146 55,811 Other Consumer Pass 370 — — — — — 1,002 — 1,372 Substandard — — — — — — 55 — 55 Total 370 — — — — — 1,057 — 1,427 Total Recorded Investment $ 1,457,032 $ 806,647 $ 1,009,864 $ 933,401 $ 749,261 $ 1,071,249 $ 1,026,653 $ 11,491 $ 7,065,598 Nonaccrual and Past Due Loans Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following table presents, by class of loan, information related to nonaccrual loans as of December 31, 2022 and 2021. December 31, 2022 (dollars in thousands) Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Commercial $ 101 $ 2,387 $ 2,488 Income producing - commercial real estate — 2,000 2,000 Owner occupied - commercial real estate 17 — 17 Real estate mortgage - residential — 1,913 1,913 Other Consumer — 50 50 Total nonaccrual loans (1)(2) (3) $ 118 $ 6,350 $ 6,468 107 Table of Contents December 31, 2021 (dollars in thousands) Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans Commercial $ 5,806 $ 3,070 $ 8,876 PPP 1,365 — 1,365 Income producing - commercial real estate 3,920 9,536 13,456 Owner occupied - commercial real estate 42 — 42 Real estate mortgage - residential 1,779 231 2,010 Construction - commercial and residential 3,093 — 3,093 Home equity 366 — 366 Total nonaccrual loans (1)(2) (3) $ 16,371 $ 12,837 $ 29,208 (1) Excludes TDRs that were performing under their restructured terms totaling $ 24.4 million at December 31, 2022 and $ 10.2 million at December 31, 2021. (2) Gross interest income of $ 0.6 million, $ 1.7 million and $ 3.7 million would have been recorded for 2022, 2021 and 2020, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $ 17 thousand, $ 101 thousand and $ 679 thousand at December 31, 2022 2021 and 2020, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status. (3) The CARES Act created the PPP, a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. 108 Table of Contents The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of December 31, 2022 and 2021. (dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans December 31, 2022 Commercial $ 697 $ 643 $ — $ 1,340 $ 1,483,521 $ 2,488 $ 1,487,349 PPP loans — — — — 3,256 — 3,256 Income producing - commercial real estate — — — — 3,917,941 2,000 3,919,941 Owner occupied - commercial real estate — 279 — 279 1,110,029 17 1,110,325 Real estate mortgage – residential — — — — 71,088 1,913 73,001 Construction - commercial and residential 531 — — 531 877,224 — 877,755 Construction - C&I (owner occupied) — — — — 110,479 — 110,479 Home equity — 52 — 52 51,730 — 51,782 Other consumer — 1 — 1 1,693 50 1,744 Total $ 1,228 $ 975 $ — $ 2,203 $ 7,626,961 $ 6,468 $ 7,635,632 December 31, 2021 Commercial $ 1,462 $ 672 $ — $ 2,134 $ 1,343,307 $ 8,876 $ 1,354,317 PPP loans 1,765 825 — 2,590 47,150 1,365 51,105 Income producing - commercial real estate — — — — 3,371,842 13,456 3,385,298 Owner occupied - commercial real estate 419 19,108 — 19,527 1,068,207 42 1,087,776 Real estate mortgage – residential 1,372 — — 1,372 70,584 2,010 73,966 Construction - commercial and residential — — — — 893,226 3,093 896,319 Construction - C&I (owner occupied) — — — — 159,579 — 159,579 Home equity 33 187 — 220 55,225 366 55,811 Other consumer — — — — 1,427 — 1,427 Total $ 5,051 $ 20,792 $ — $ 25,843 $ 7,010,547 $ 29,208 $ 7,065,598 Loan Modifications A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral, a co-borrower or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. As of December 31, 2022, all performing TDRs were categorized as interest-only modifications. Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. 109 Table of Contents In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain loans, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. The outstanding balance of loans with active COVID-related modifications, that were not considered TDRs under the Coronavirus Aid, Relief, and Economic Security Act, as amended by Section 541 of the Consolidated Appropriations Act, totaled $ 0 and $ 13.3 million at December 31, 2022 and 2021, respectively. The following tables present, by class, the recorded investment of loans modified in TDRs held by the Company during the years ended December 31, 2022, 2021, and 2020. As of December 31, 2022 (dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total Troubled debt restructurings Restructured accruing 5 $ 946 $ 4,328 $ 19,170 $ — $ 24,444 Restructured nonaccruing — — — — — Total 5 $ 946 $ 4,328 $ 19,170 $ — $ 24,444 Specific allowance $ 87 $ 2,140 $ 2,227 Restructured and subsequently defaulted $ — $ — $ — $ — As of December 31, 2021 (dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total Troubled debt restructurings Restructured accruing 5 $ 1,043 $ 9,116 $ — $ — $ 10,159 Restructured nonaccruing 2 — 6,342 — — 6,342 Total 7 $ 1,043 $ 15,458 $ — $ — $ 16,501 Specific allowance $ 140 $ 3,216 $ 3,356 Restructured and subsequently defaulted $ — $ 6,342 $ — $ — $ 6,342 110 Table of Contents As of December 31, 2020 (dollars in thousands) Number of Contracts Commercial Income Producing - Commercial Real Estate Owner Occupied - Commercial Real Estate Construction - Commercial Real Estate Total Troubled debt restructurings Restructured accruing 7 $ 1,276 $ 9,183 $ 13 $ — $ 10,472 Restructured nonaccruing 3 — 6,342 2,370 — 8,712 Total 10 $ 1,276 $ 15,525 $ 2,383 $ — $ 19,184 Specific allowance $ 733 $ 2,989 $ — $ — $ 3,722 Restructured and subsequently defaulted $ — $ 6,342 $ 2,370 $ — $ 8,712 During 2022, no TDRs defaulted on their modified terms that were reclassified to nonperforming loans, as compared to one performing TDR loans during 2021 totaling approximately $ 101 thousand that defaulted on their modified terms and either charged-off or were reclassified to nonperforming loans. During 2020, two performing TDR loans totaling approximately $ 6.3 million that defaulted on their modified terms and either charged-off or were reclassified to nonperforming loans. A default is considered to have occurred once the TDR is past due 90 days or more, or has been placed on nonaccrual. At December 31, 2022, all five TDR loans, totaling $24.4 million, were performing under their modified terms, as compared to December 31, 2021, when there were five of TDR loans, totaling $ 10.2 million, performing under their modified terms, and December 31, 2020, when there were seven performing TDR loans totaling approximately $ 10.5 million. During 2022, three restructured loans, two of which totaling approximately $ 11.1 million that had their collateral property sold to a third party and a charge off of $ 1.4 million was recognized on the sale. During 2021, one previously nonperforming restructured loan had its collateral sold and all principal collected along with partial collection of delinquent interest; one restructured loan purchased as part of the 2014 acquisition of Virginia Heritage Bank had its full carrying value collected, while additional payments are expected to recover previously written off principal and interest; and, the aforementioned performing TDR totaling $ 101 thousand that defaulted in 2021 was subsequently charged off later in the year. During 2020, there were two restructured loans totaling approximately $ 870 thousand that had their collateral property sold and were paid in full, and one TDR loan totaling $ 138 thousand that had previously defaulted was charged off. 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 loss. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. During 2022, there was one loan totaling $ 19.2 million that was modified in a TDR, during 2021, there were no loans modified in a TDR, and during 2020, there were two loans totaling $ 572 thousand. Related Party Loans Certain directors and executive officers of the Company and the Bank and certain affiliated entities of such directors and executive officers have had loan transactions with the Company. All of such loans are either fully repaid or performing and none of such loans are nonaccrual, past due, restructured or, rated substandard or worse (not on nonaccrual). The following table summarizes changes in amounts of loans outstanding, both direct and indirect, to those persons during 2022 and 2021. Amounts in the “Additions due to Changes in Related Parties” reflect existing outstanding loans that transitioned to being related party loans between January 1, 2022 and December 31, 2022 as a result of changes in related party status with respect to certain of the Company’s directors who are affiliated with the related borrowers. 111 Table of Contents (dollars in thousands) 2022 2021 Balance at January 1, $ 150,822 $ 72,956 Additions 173 301 Repayments ( 33,220 ) ( 4,750 ) Additions due to Changes in Related Parties 1,423 82,315 Balance at December 31, $ 119,198 $ 150,822 112 Table of Contents Note 5 – Premises and Equipment Premises and equipment include the following at December 31: (dollars in thousands) 2022 2021 Leasehold improvements $ 32,126 $ 32,825 Furniture and equipment 34,424 33,065 Less accumulated depreciation and amortization ( 53,075 ) ( 51,333 ) Total premises and equipment, net $ 13,475 $ 14,557 Total depreciation and amortization expense for the years ended December 31, 2022, 2021 and 2020 was $ 3.2 million, $ 4.3 million and $ 4.0 million, respectively. Note 6 – Leases A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations and corporate office space. All of our leases are classified as operating leases and are included in operating lease right-of-use ("ROU") assets and operating lease liabilities in the consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. In determining the present value of the lease payments, we use the implicit lease rate if available. If the implicit lease rate is not available, we use the incremental borrowing rate at commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. As of December 31, 2022, the Company had $ 24.5 million of operating lease ROU assets and $ 29.3 million of operating lease liabilities compared to $ 30.6 million of operating lease ROU assets and $ 35.5 million of operating lease liabilities at December 31, 2021 on the Company’s Consolidated Balance Sheet. The Company has elected not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less or equipment leases (deemed immaterial) on the Consolidated Balance Sheets. Our leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90 % probability that the Company will exercise the option. If these criteria are not met, the options are not included in our ROU assets and lease liabilities. As of December 31, 2022, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. In 2022, the Company did not enter into new leases or renew/extend any leases and had two leases expire (two branches were closed). 113 Table of Contents The following table presents lease costs and other lease information. Years Ended (dollars in thousands) December 31, 2022 December 31, 2021 Lease cost Operating lease cost (cost resulting from lease payments) $ 7,145 $ 8,104 Variable lease cost (cost excluded from lease payments) 1,008 876 Sublease income ( 241 ) ( 348 ) Net lease cost $ 7,912 $ 8,632 Operating lease - operating cash flows (fixed payments) $ 7,368 $ 6,046 Right-of-use assets - operating leases $ 24,544 $ 30,555 Operating lease liabilities $ 29,267 $ 35,501 Weighted average lease term - operating leases 5.5 yrs 6.26 yrs Weighted average discount rate - operating leases 2.91 % 3.05 % Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2022 were as follows: (dollars in thousands) Twelve Months Ended: December 31, 2023 $ 7,256 December 31, 2024 6,890 December 31, 2025 5,987 December 31, 2026 2,894 December 31, 2027 2,502 Thereafter 5,776 Total Future Minimum Lease Payments 31,305 Amounts Representing Interest ( 2,038 ) Present Value of Net Future Minimum Lease Payments $ 29,267 114 Table of Contents Note 7 – Intangible Assets Intangible assets are included in the Consolidated Balance Sheets as a separate line item, net of accumulated amortization and consist of the following items: (dollars in thousands) Gross Intangible Assets Additions Accumulated Amortization FHA MSR Sales Net Intangible Assets December 31, 2022 Goodwill $ 104,168 $ — $ — $ — $ 104,168 Core deposit — — — — — Excess servicing (1) 87 67 ( 89 ) 65 Non-compete agreements — — — — — $ 104,255 $ 67 $ ( 89 ) $ — $ 104,233 December 31, 2021 Goodwill $ 104,168 $ — $ — $ — $ 104,168 Core deposit 7,070 — ( 7,070 ) — — Excess servicing (1) 139 130 ( 182 ) 87 Non-compete agreements 345 — ( 345 ) — — $ 111,722 $ 130 $ ( 7,597 ) $ — $ 104,255 (1) The Company recognizes a servicing asset for the computed value of servicing fees on the sale of multifamily FHA loans and the sale of the guaranteed portion of SBA loans. Assumptions related to loan terms and amortization are made to arrive at the initial recorded values, which are included in other assets. The aggregate amortization expense was $ 89 thousand, $ 132 thousand and $ 292 thousand for the years ended December 31, 2022, 2021 and 2020, respectively. The future estimated annual amortization expense is presented below: Years Ending December 31: (dollars in thousands) Amount 2023 $ 9 2024 9 2025 9 2026 9 2027 9 Thereafter 20 Total annual amortization $ 65 Note 8 – Other Real Estate Owned The activity within OREO for the years ended December 31, 2022 and 2021 is presented in the table below. There were no properties in the process of foreclosure as of December 31, 2022 and 2021. For the years ended December 31, 2022 and 2021, there were one and one sales of OREO, respectively. Years Ended December 31, (dollars in thousands) 2022 2021 Beginning Balance $ 1,635 $ 4,987 Real estate acquired from borrowers 475 148 Properties sold ( 148 ) ( 3,500 ) Ending Balance $ 1,962 $ 1,635 115 Table of Contents `Note 9 – Mortgage Banking Derivatives As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments, best efforts and mandatory delivery contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair values of the mortgage banking derivatives are recorded as freestanding assets or liabilities with the change in value being recognized in current earnings during the period of change. At December 31, 2022 the Bank had mortgage banking derivative financial instruments with a notional value of $ 7.0 million related to its interest rate lock commitments. The fair value of these mortgage banking derivative instruments at December 31, 2022 was $ 93 thousand included in other assets . At December 31, 2021 the Bank had mortgage banking derivative financial instruments with a notional value of $ 56.3 million related to its forward contracts. The fair value of these mortgage banking derivative instruments at December 31, 2021 was $ 636 thousand included in other assets . Included in gain on sale of loans for the year ended December 31, 2022, 2021 and 2020 was a net loss of $ 209 thousand, a net gain of $ 209 thousand and a net loss of $ 309 thousand, respectively, relating to mortgage banking derivative instruments. The amount included in gain on sale of loans for year ended December 31, 2022, 2021 and 2020 pertaining to its mortgage banking hedging activities was a net realized gain of $ 18 thousand, a net realized loss of $ 18 thousand and a net realized gain of $ 27 thousand, respectively. Note 10 – Other Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Cash Flow Hedges of Interest Rate Risk The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments. For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction 116 Table of Contents affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did no t have any designated cash flow hedge interest rate swap transaction outstanding, which were associated with the Company's variable rate deposits at December 31, 2022, 2021 or 2020. Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The Company entered into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts in exchange for a fee. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Credit-risk-related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate swap counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The designated interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; and 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. As of December 31 2022, the aggregate fair value of derivative contracts with credit risk contingent features (i.e. containing collateral posting or termination provisions based on our capital status) that was in a net asset position totaled $ 1.9 million. The aggregate fair value of all derivative contracts with credit risk contingent features that were a net liability position totaled $ 2.4 million as of December 31, 2021. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. As of December 31, 2022 the Company did no t post any funds with its derivative counterparties against its obligations under these agreements because these agreements were in a net asset position. At December 31, 2021, the Company posted $ 2.9 million with its derivative counterparties against its obligations under these agreements because these agreements were in a net liability position. If the Company had breached any provisions under the agreements at December 31, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value. 117 Table of Contents The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of December 31, 2022 and December 31, 2021. (dollars in thousands) December 31, 2022 December 31, 2021 Notional Amount Fair Value Balance Sheet Category Notional Amount Fair Value Balance Sheet Category Derivatives not designated as hedging instruments Interest rate product $ 396,024 $ 31,039 Other Assets $ 272,825 $ 5,273 Other Assets Mortgage banking derivatives — — Other Assets 56,331 636 Other Assets $ 396,024 $ 31,039 31039000 Other Assets $ 329,156 $ 5,909 Other Assets Derivatives designated as hedging instruments Interest rate product — $ — Other Liabilities $ — $ — Other Liabilities Derivatives not designated as hedging instruments Interest rate product $ 396,024 $ 30,065 Other Liabilities $ 272,825 $ 5,223 Other Liabilities Other Contracts 25,902 2 Other Liabilities 26,417 47 Other Liabilities Mortgage banking derivatives — — Other Liabilities — — Other Liabilities $ 421,926 $ 30,067 Other Liabilities $ 299,242 $ 5,270 Other Liabilities Net derivatives on the balance sheet 972 639 Cash and other collateral (1) — 2,930 Net derivative Amounts $ 972 $ ( 2,291 ) (1) Collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the years ended December 31, 2022, 2021 and 2020. The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income Amount of Gain or (Loss) Recognized in OCI on Derivative Year Ended December 31, Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Year Ended December 31, Derivatives in ASC 815-20 Hedging Relationships (dollars in thousands) 2022 2021 2020 2022 2021 2020 Derivatives in cash flow hedging relationships Interest rate products $ — $ — $ ( 1,510 ) Interest expense $ — $ ( 516 ) $ ( 1,145 ) 118 Table of Contents The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020. The Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income Year Ended December 31, 2022 2021 2020 Interest Expense Interest Expense Interest Expense Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded $ — $ ( 516 ) $ ( 1,145 ) Gain or (loss) on cash flow hedging relationships in ASC 815-20 Interest contracts Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ — $ ( 516 ) $ ( 1,145 ) Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring $ — $ — $ — Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component $ — $ ( 516 ) $ ( 1,145 ) Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income Derivatives Not Designated as Hedging Instruments under ASC 815-20 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative Year Ended December 31, 2022 2021 2020 Interest rate products Other income / (expense) $ 3,057 $ 2,797 $ 153 Mortgage banking derivatives Other income 671 636 5,213 Other contracts Other income / (expense) — — 32 Total $ 3,728 $ 3,433 $ 5,398 Balance Sheet Offsetting : Our interest rate swap derivatives are eligible for offset in the Consolidated Balance Sheet and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes. Note 11 – Deposits The following table provides information regarding the Bank’s deposit composition at December 31, 2022 and 2021 as well as the average rate being paid on interest bearing deposits for the month of December 2022 and 2021. 119 Table of Contents December 31, (dollars in thousands) 2022 2021 Noninterest bearing demand $ 3,150,751 $ 3,277,956 Interest bearing transaction 1,138,235 777,255 Savings and money market 3,640,697 5,197,247 Time deposits 783,499 729,082 Total $ 8,713,182 $ 9,981,540 The remaining maturity of time deposits at December 31, 2022 and 2021 are as follows: (dollars in thousands) 2022 2021 2022 $ — $ 478,057 2023 463,393 168,279 2024 152,898 58,908 2025 157,320 18,454 2026 2,628 2,254 2027 4,130 — Thereafter 3,130 3,130 Total $ 783,499 $ 729,082 (dollars in thousands) 2022 2021 Three months or less $ 159,820 $ 97,937 More than three months through six months 99,044 171,508 More than six months through twelve months 204,529 208,612 Over twelve months 320,106 251,025 Total $ 783,499 $ 729,082 Interest expense on deposits for the years ended December 31, 2022, 2021 and 2020 is as follows: (dollars in thousands) 2022 2021 2020 Interest bearing transaction $ 6,721 $ 1,609 $ 3,190 Savings and money market 65,777 15,000 26,272 Time deposits 10,763 11,163 24,104 Total $ 83,261 $ 27,772 $ 53,566 Related Party deposits totaled $ 31.8 million and $ 71.1 million at December 31, 2022 and 2021, respectively. Deposits in excess if the FDIC's $250 thousand relationship insurance limits were $ 6.1 billion and $ 7.5 billion at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, time deposit accounts in excess of $ 250 thousand are as follows: 120 Table of Contents Time deposits $250,000 or more (dollars in thousands) 2022 2021 Three months or less $ 87,959 $ 16,663 More than three months through six months 51,746 56,619 More than six months through twelve months 108,877 48,271 Over twelve months 269,200 30,907 Total $ 517,782 $ 152,460 At December 31, 2022, total deposits included $ 2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 26 % of total deposits. At December 31, 2021, total brokered deposits (excluding the CDARS and ICS two-way) were $ 2.6 billion, or 27 % of total deposits. Note 12 – Affordable Housing Projects Tax Credit Partnerships Included in Other Assets, the Company makes equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing products offerings and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity. The Company is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated third party general partner who exercises significant control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve and use of working capital reserve funds. Except for limited rights granted to the limited partner(s) relating to the approval of certain transactions, the limited partner(s) may not participate in the operation, management or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties. The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. The Company accounts for its affordable housing tax credit investments using the proportional amortization method. The Company’s net affordable housing tax credit investments were $ 36.1 million and related unfunded commitments were $ 13.7 million as of December 31, 2022 and are included in Other Assets and Other Liabilities, respectively, in the Consolidated Balance Sheets. For tax purposes, the Company recognized low income housing tax credits of $ 5.0 million, $ 4.2 million and $ 3.6 million for the years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively, and low income housing investment expense of $ 3.7 million, $ 3.1 million and $ 2.7 million, respectively. The Company recognizes low income housing investment expenses as a component of income tax expense. 121 Table of Contents As of December 31, 2022, the expected payments for unfunded affordable housing commitments were as follows: Years Ending December 31: (dollars in thousands) Amount 2023 $ 6,363 2024 4,062 2025 1,598 2026 446 2027 322 Thereafter 931 Total unfunded commitments $ 13,722 Note 13 – Borrowings Information relating to short-term and long-term borrowings is as follows for the years ended December 31: 2022 2021 (dollars in thousands) Amount Rate Amount Rate Short-term: At Year-End: Customer repurchase agreements and federal funds purchased $ 35,100 2.55 % $ 23,918 0.20 % Federal Home Loan Bank – current portion 975,001 4.29 % 300,000 0.67 % Total $ 1,010,101 $ 323,918 Average Daily Balance: Customer repurchase agreements and federal funds purchased $ 30,745 1.16 % $ 24,887 0.20 % Federal Home Loan Bank – current portion 172,717 2.30 % 300,000 0.67 % Total $ 203,462 $ 324,887 Maximum Month-end Balance: Customer repurchase agreements and federal funds purchased $ 57,953 2.63 % $ 29,401 0.20 % Federal Home Loan Bank – current portion 975,001 4.57 % 300,000 0.67 % Total $ 1,032,954 $ 329,401 Long-term: At Year-End: Subordinated Notes $ 69,794 5.75 % $ 69,670 5.84 % Average Daily Balance: Subordinated Notes $ 69,737 5.75 % $ 156,340 6.39 % FHLB Advance — — % 8,630 1.84 % Maximum Month-end Balance: Subordinated Notes $ 69,794 5.75 % $ 218,081 5.36 % FHLB Advance — — % 50,000 1.84 % The Company offers its business customers a repurchase agreement sweep account in which it collateralizes these funds with U.S. agency and mortgage-backed securities segregated in its investment portfolio for this purpose. By entering into the agreement, the customer agrees to have the Bank repurchase the designated securities on the business day following the 122 Table of Contents initial transaction in consideration of the payment of interest at the rate prevailing on the day of the transaction. The Bank can purchase up to $ 155 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2022 and can place brokered funds under one-way CDARS and ICS deposits in the amount of $ 1.8 billion, against which there was $ 67,000 thousand outstanding at December 31, 2022. The Bank also has a commitment at December 31, 2022 from IntraFi to place up to $ 1.8 billion of brokered deposits from its Insured Network Deposits (“IND”) program in amounts requested by the Bank, as compared to an actual balance of $ 1.1 billion at December 31, 2022. At December 31, 2022, the Bank was also eligible to take advances from the FHLB up to $ 1.1 billion based on collateral at the FHLB, of which there was $ 975 million outstanding at December 31, 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. This facility, which amounts to approximately $ 607.0 million, is collateralized with specific loan assets pledged to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. Long-term borrowings were $ 69.8 million at December 31, 2022 and $ 69.7 million at December 31, 2021. On August 5, 2014, the Company completed the sale of $ 70 million of its 5.75 % subordinated notes, due September 1, 2024 (the “2024 Notes”). The Notes were offered to the public at par. The 2024 Notes qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $ 68.8 million, which includes $ 1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes. On July 26, 2016, the Company completed the sale of $ 150 million of its 5.00 % Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualified as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $ 147.4 million, which includes $ 2.6 million in deferred financing costs which is being amortized over the life of the 2026 Notes. This note was redeemed by the Company on August 2, 2021 to reduce ongoing interest expense and to reduce excess common equity at the Bank level. On February 26, 2020, the Bank borrowed $ 50 million dollars under its borrowing arrangement with the Federal Home Loan Bank of Atlanta at a fixed rate of 1.81 % with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth. The advance was repaid March of 2021, as it became clear that the excess on balance sheet liquidity was not necessary. Note 14 – Income Taxes Federal and state income tax expense consists of the following for the years ended December 31: (dollars in thousands) 2022 2021 2020 Current federal income tax expense $ 37,182 $ 39,865 $ 40,201 Current state income tax expense 5,008 15,348 12,059 Total current tax expense 42,190 55,213 52,260 Deferred federal income tax expense (benefit) 3,532 5,185 ( 5,212 ) Deferred state income tax benefit 3,028 585 ( 3,120 ) Total deferred tax expense (benefit) 6,560 5,770 ( 8,332 ) Total income tax expense $ 48,750 $ 60,983 $ 43,928 The Company had net deferred tax assets (deferred tax assets in excess of deferred tax liabilities) of $ 96.6 million and $ 43.2 million for the years ended at December 31, 2022 and 2021, respectively, which related primarily to our unrealized loss on securities, allowance for credit losses and loan origination fees. Management believes it is more likely than not that all of the deferred tax assets will be realized with the exception of certain state net operating losses. 123 Table of Contents Temporary timing differences between the amounts reported in the Consolidated Financial Statements and the tax bases of assets and liabilities result in deferred taxes. The table below summarizes significant components of our deferred tax assets and liabilities as of December 31, 2022 and 2021: (dollars in thousands) 2022 2021 Deferred tax assets Allowance for credit losses $ 18,490 $ 19,736 Deferred loan fees and costs 6,736 6,559 Leases 7,195 9,283 Stock-based compensation 1,796 1,132 Net operating loss 7,736 7,623 Unrealized loss on securities available-for-sale 50,442 4,987 Unrealized loss on securities held-to-maturity 14,366 — SERP 2,495 5,631 Premises and equipment ( 205 ) 1,328 Other assets 1,344 2,011 Valuation allowances ( 7,008 ) ( 6,724 ) Total deferred tax assets 103,387 51,566 Deferred tax liabilities Excess servicing ( 589 ) ( 402 ) Leases ( 6,034 ) ( 7,990 ) Other liabilities ( 197 ) — Total deferred tax liabilities ( 6,820 ) ( 8,392 ) Net deferred income tax assets $ 96,567 $ 43,174 As of December 31, 2022. the Company has $ 3.6 million of federal net operating loss carryforward in conjunction with the Fidelity acquisition, that is subject to annual limits under Section 382 of the Internal Revenue Code and expires in 2027. The Company has concluded, based on the weight of available positive and negative evidence, a portion of its state net operating loss deferred tax asset is not more likely than not to be realized and accordingly, a valuation allowance of $ 7.0 million and $ 6.7 million is carried as of December 31, 2022 and 2021, respectively. A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31, 2022, 2021 and 2020 follows: 2022 2021 2020 Statutory federal income tax rate 21.00 % 21.00 % 21.00 % Increase (decrease) due to: State income taxes 3.28 % 5.45 % 5.04 % Non-deductible fines and penalties 2.54 % — % — % Tax-exempt interest and dividend income ( 1.57 ) % ( 0.91 ) % ( 0.75 ) % Stock-based compensation expense 0.19 % 0.44 % 0.25 % Other 0.26 % ( 0.32 ) % ( 0.63 ) % Effective tax rate 25.70 % 25.66 % 24.91 % The Company remains subject to examination by taxing authorities for the years ending after December 31, 2018. Management has identified no uncertain tax positions at December 31, 2022. 124 Table of Contents Note 15 – Net Income per Common Share The calculation of net income per common share for the years ended December 31 was as follows: (dollars and shares in thousands, except per share data) 2022 2021 2020 Basic: Net income $ 140,930 $ 176,691 $ 132,217 Average common shares outstanding 32,004 31,936 32,334 Basic net income per common share $ 4.40 $ 5.53 $ 4.09 Diluted: Net income $ 140,930 $ 176,691 $ 132,217 Average common shares outstanding 32,004 31,936 32,334 Adjustment for common share equivalents 74 67 28 Average common shares outstanding-diluted 32,078 32,003 32,362 Diluted net income per common share $ 4.39 $ 5.52 $ 4.09 Anti-dilutive shares 3 3 26 Note 16 – Related Party Transactions The EagleBank Foundation, a 501(c)(3) non-profit, seeks to improve the well-being of our community by providing financial support to local charitable organizations that help foster and strengthen vibrant, healthy, cultural and sustainable communities. The Company paid $ 113 thousand, $ 134 thousand and $ 185 thousand to the EagleBank Foundation for the years ended December 31, 2022, 2021 and 2020, respectively. Certain directors and executive officers of the Company and the Bank and certain affiliated entities of such directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with outsiders. Please see further detail regarding Related Party Loans in Note 4 "Loans and Allowance for Credit Losses" and Related Party Deposits in Note 11 "Deposits." Note 17 – Stock-Based Compensation The Company maintains the 2021 Stock Plan ("2021 Plan"), the 2016 Stock Plan (“2016 Plan”), the 2006 Stock Plan (“2006 Plan”), the 2021 Employee Stock Purchase Plan ("2021 ESPP") and the 2011 Employee Stock Purchase Plan (“2011 ESPP”). In connection with the acquisition of Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the “Virginia Heritage Plans”). No additional options may be granted under the 2016 Plan, 2006 Plan or the Virginia Heritage Plans. The Company adopted the 2021 Plan upon approval by the shareholders at the 2021 Annual Meeting held on May 20, 2021. The 2021 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights. Under the 2021 Plan, 1,300,000 shares of common stock were initially reserved for issuance. For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model. For restricted stock awards granted under the 2021 Plan, fair value is based on the Company’s closing price on the date of grant. For awards that are performance-based, compensation expense is initially recorded based on the probability of achievement of the goals underlying the grant at target. 125 Table of Contents In February 2022, the Company awarded 165,248 shares of time vested restricted stock to senior officers, directors and certain employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant. In February 2022, the Company awarded senior officers a targeted number of 37,155 performance vested restricted stock units (“PRSUs”). The vesting of PRSUs is 100 % after three years with payouts based on threshold, target or maximum average performance targets over a three year period. There are two performance metrics: 1) total shareholder's return; and 2) return on average assets. In February 2022, the 2019 performance award vested and 620 incremental shares were awarded. In March 2022, the Company awarded 168 shares of time vested restricted stock to an employee. The shares vest in three substantially equal installments beginning on February 14, 2023. In June 2022, the Company awarded 1,055 shares of time vested restricted stock to an employee. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant. The Company has unvested restricted stock awards and PRSU grants of 432,003 shares at December 31, 2022. Unrecognized stock based compensation expense related to restricted stock awards and PRSU grants totaled $ 11.6 million at December 31, 2022. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.84 years. The following tables summarize the unvested restricted stock awards at December 31, 2022, 2021 and 2020. Years Ended December 31, 2022 2021 2020 Performance Awards Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Unvested at beginning 118,568 $ 44.71 90,642 $ 49.11 58,780 $ 57.74 Issued 37,775 53.97 51,564 42.97 44,741 40.19 Forfeited ( 1,966 ) 55.76 ( 580 ) 60.45 ( 8,586 ) 54.89 Vested ( 24,522 ) 55.76 ( 23,058 ) 60.45 ( 4,293 ) 62.70 Unvested at end 129,855 $ 45.15 118,568 $ 44.71 90,642 $ 49.11 Years Ended December 31, 2022 2021 2020 Time Vested Awards Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Shares Weighted- Average Grant Date Fair Value Unvested at beginning 300,792 $ 46.24 218,031 $ 45.89 110,714 $ 57.84 Issued 166,471 59.72 179,624 47.63 176,252 42.51 Forfeited ( 12,064 ) 53.10 ( 8,489 ) 47.38 ( 18,385 ) 50.06 Vested ( 153,051 ) 45.54 ( 88,374 ) 48.10 ( 50,550 ) 58.76 Unvested at end 302,148 $ 53.75 300,792 $ 46.24 218,031 $ 45.89 126 Table of Contents Below is a summary of stock option activity for the twelve months ended December 31, 2022 , 2021 and 2020. The information excludes restricted stock units and awards. Years Ended December 31, 2022 2021 2020 Shares Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Shares Weighted- Average Exercise Price Beginning balance 5,789 $ 36.96 5,789 $ 36.96 6,589 $ 19.99 Issued — — — — 2,500 47.96 Exercised ( 3,289 ) 28.60 — — ( 3,300 ) 11.40 Forfeited — — — — — — Ending balance 2,500 $ 47.95 5,789 $ 36.96 5,789 $ 36.96 Exercisable end of year 1,666 $ 47.95 4,122 $ 32.51 3,289 $ 28.60 There were no grants of stock options during the years ended December 31, 2022 and 2021. For 2020, there was one grant to an executive officer for 2,500 incentive stock options in January 2020, which has a ten-year term and vests in three equal installments beginning on the first anniversary of the date of grant. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions shown in the table below used for the grants during 2020. Year Ended December 31, 2020 Expected volatility 42.3 % Weighted-Average volatility 42.3 % Expected dividends — Expected term (in years) 6.5 Risk-free rate 1.67 % Weighted-average fair value (grant date) $ 21.06 The expected lives were based on the "simplified" method allowed by ASC 718 "Compensation," whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The total intrinsic value of outstanding stock options was $ 0 and $ 123 thousand, respectively, at December 31, 2022 and 2021. The total fair value of stock options vested was $ 18 thousand, $ 18 thousand and $ 6 thousand, for 2022, 2021 and 2020, respectively. At December 31, 2022, there is no unrecognized stock-based compensation expense related to stock options. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Proceeds from stock options exercised $ 97 $ — $ 63 Tax benefits realized from stock compensation 3 — 24 Intrinsic value of stock options exercised 98 — 91 Approved by shareholders in May 2021, the 2021 ESPP reserved 200,000 shares of common stock for issuance to employees. Whole shares are sold to participants in the plan at 85 % of the lower of the stock price at the beginning or end of each quarterly offering period. The 2021 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $ 10 per pay period to a maximum of $ 25,000 annually (not to exceed more than 10 % of compensation per pay period). At December 31, 2022, the 2021 ESPP had 179,415 shares reserved for issuance. 127 Table of Contents Included in salaries and employee benefits in the accompanying Consolidated Statements of Income, the Company recognized $ 6.0 million, $ 7.8 million and $ 5.3 million in stock-based compensation expense for 2022, 2021 and 2020, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Note 18 – Employee Benefit Plans The Company has a qualified 401(k) Plan which covers all employees who have reached the age of 18 years and have completed at least 1 month of service as defined by the Plan. The Company makes contributions to the Plan based on a matching formula, which is reviewed annually. For the years 2022, 2021 and 2020, the Company recognized $ 1.8 million, $ 1.8 million and $ 1.5 million in expense associated with this benefit, respectively. These amounts are included in salaries and employee benefits in the accompanying Consolidated Statements of Income. Note 19 – Supplemental Executive Retirement Plan The Bank has entered into Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain of the Bank’s executive officers, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the five years preceding retirement, assuming retirement at age 67 . The SERP Agreements provide that (a) the benefits vest ratably over six years of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving 180 monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative 180 monthly installments. The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with four insurance carriers in 2013 totaling $ 11.4 million and two insurance carriers in 2019 totaling $ 2.6 million. These annuity contracts have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. The cash surrender value of the annuity contracts was $ 13.9 million and $ 14.2 million at December 31, 2022 and 2021, respectively, and was included in other assets on the Consolidated Balance Sheet. For the years ended December 31, 2022, 2021 and 2020 the Company recorded benefit expense accruals of $ 513 thousand, $ 338 thousand and $ 428 thousand, respectively, for this post retirement benefit. Upon death of a named executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively finance payments (up to a 15 year certain amount) to the executives’ named beneficiaries. Note 20 – Financial Instruments with Off-Balance Sheet Risk Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company’s loans outstanding. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 128 Table of Contents Loan commitments outstanding and lines and letters of credit at December 31, 2022 and 2021 are as follows: (dollars in thousands) 2022 2021 Unfunded loan commitments $ 2,335,735 $ 1,763,247 Unfunded lines of credit 107,919 108,209 Letters of credit 100,196 112,509 Interest rate lock commitments 6,963 56,331 Total $ 2,550,813 $ 2,040,296 Because most of the Company’s business activity is with customers located in the Washington, D.C. metropolitan area, a geographic concentration of credit risk exists within the loan portfolio, the performance of which will be influenced by the economy of the region. As of December 31, 2022, the total reserve for unfunded commitments was $ 5.9 million as compared to $ 4.4 million at December 31, 2021 and is accounted for as a liability on the Consolidated Statements of Financial Condition. See Note 1 of the Consolidated Financial Statements for more information on the accounting policy for the allowance for unfunded commitments. The Bank maintains a reserve for the potential repurchase of residential mortgage loans, which amounted to $ 25 thousand at December 31, 2022 and $ 125 thousand at December 31, 2021. These amounts are included in other liabilities in the accompanying Consolidated Balance Sheets. The Bank recently announced that it plans to cease originating residential mortgages for sale in the first quarter of 2023 (See Note 26 of the Consolidated Financial Statements for further details). Additions to the reserve are a component of other expenses in the accompanying Consolidated Statements of Income. The reserve is available to absorb losses on the repurchase of loans sold related to document and other fraud, early payment default and early payoff. Through December 31, 2022, no reserve charges have occurred related to fraud. The Company enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The residential mortgage division either locks in the loan and rate with an investor and commits to deliver the loan if settlement occurs under best efforts or commits to deliver the locked loan in a binding mandatory delivery program with an investor. Certain loans under rate lock commitments are covered under forward sales contracts of mortgage-backed securities as a hedge of any interest rate risk. Forward sales contracts of mortgage-backed securities are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts and mandatory contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates while taking into consideration the probability that the rate lock commitments will close or will be funded. These transactions are further detailed in Note 9 "Mortgage Banking Derivatives". Note 21 – Commitments and Contingent Liabilities The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. Except for its loan commitments, as shown in Note 20 "Financial Instruments With Off Balance Sheet Risk" the following table shows details on these fixed and determinable obligations as of December 31, 2022 in the time period indicated. 129 Table of Contents (dollars in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total Deposits without a stated maturity (1) $ 7,929,683 $ — $ — $ — $ 7,929,683 Time deposits (1) 463,393 310,218 6,758 3,130 783,499 Borrowed funds (2) 1,010,101 69,794 — — 1,079,895 Operating lease obligations 6,916 12,198 4,717 5,436 29,267 Outside data processing (3) 3,600 1,625 — — 5,225 George Mason sponsorship (4) 675 1,363 1,400 5,375 8,813 LIHTC investments (5) 6,363 5,660 768 931 13,722 Other (6) 2,000 — — — 2,000 Total $ 9,422,731 $ 400,858 $ 13,643 $ 14,872 $ 9,852,104 (1) Excludes accrued interest payable at December 31, 2022. (2) Borrowed funds include customer repurchase agreements and other short-term and long-term borrowings. (3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2024 and one other vendor arrangement that relates to network infrastructure and data center services that expires in December 2023. (4) The Bank has the option of terminating the George Mason agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030). Should the Bank elect to exercise its right to terminate the George Mason contract, contractual obligations would decrease $ 3.5 million and $ 3.6 million for the first option period (years 11 - 15 ) and the second option period (years 16 - 20 ), respectively. (5) LIHTC expected payments for unfunded affordable housing commitments. (6) As disclosed in the 8-K dated January 25, 2021, pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to invest an additional $ 2.0 million incremental spend above 2020 levels by the end of 2023 to enhance its corporate governance and risk and compliance controls and infrastructure. An accrual is recorded when it is both (a) probable that a loss has occurred and (b) the amount of loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings with respect to accruals, as well as the estimated range of possible losses. From time to time, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such legal proceedings will have a material effect on the financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation. Certain legal proceedings involving us are described below. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, on February 10, 2022, the United States District Court for the Southern District of New York (the "SDNY") approved the settlement agreement of a putative class action lawsuit filed against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer. The settlement included a total payment covered by the Company's insurance carrier of $ 7.5 million in exchange for the release of all of the defendants from all alleged claims in the class action suit, without any admission or concession of wrongdoing by the Company or the other defendants. 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 liabilities were recorded in the fourth quarter of 2022 in connection with the SEC's approval and public announcement of the settlement. 130 Table of Contents 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 liabilities were recorded in the third quarter of 2022 in connection with the FRB's approval and public announcement of the settlement. As previously disclosed, the Company maintains director and officer insurance policies ("D&O Insurance Policies") that provide coverage for certain legal defense costs. When claims are covered by D&O Insurance Policies, the Company records a corresponding receivable against the incurred legal defense cost expense when the claim is paid. If the D&O Insurance Policies are exhausted, the Company will be responsible for paying the defense cost associated with any investigations and litigations for itself and on behalf of any current and former Officers and Directors entitled to indemnification from the Company. The Company cannot predict with any certainty the amount f defense costs that the Company may incur in the future in connection with currently ongoing and any future investigations and legal proceedings, as they are dependent on various factors, many of which are outside of the Company's control. Note 22 – Regulatory Matters The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Total capital, Tier 1 capital and CET1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined), referred to as the Leverage Ratio. Management believes, as of December 31, 2022 and 2021, that the Company and Bank met all capital adequacy requirements to which they are subject. 131 Table of Contents The actual capital amounts and ratios for the Company and Bank as of December 31, 2022 and 2021 are presented in the table below: Company Bank Minimum Required For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Regulations * (dollars in thousands) Actual Amount Ratio Actual Amount Ratio As of December 31, 2022 CET1 capital (to risk weighted assets) $ 1,329,971 14.03 % $ 1,341,347 14.23 % 7.000 % 6.5 % Total capital (to risk weighted assets) 1,415,854 14.94 % 1,412,904 14.99 % 10.500 % 10.0 % Tier 1 capital (to risk weighted assets) 1,329,971 14.03 % 1,341,347 14.23 % 8.500 % 8.0 % Tier 1 capital (to average assets) 1,329,971 11.63 % 1,341,347 11.78 % 4.000 % 5.0 % As of December 31, 2021 CET1 capital (to risk weighted assets) $ 1,269,329 14.63 % $ 1,261,518 14.62 % 7.000 % 6.5 % Total capital (to risk weighted assets) 1,365,117 15.74 % 1,329,306 15.41 % 10.500 % 10.0 % Tier 1 capital (to risk weighted assets) 1,269,329 14.63 % 1,261,518 14.62 % 8.500 % 8.0 % Tier 1 capital (to average assets) 1,269,329 10.19 % 1,261,518 10.16 % 4.000 % 5.0 % * Applies to Bank only Federal bank and holding company regulations, as well as Maryland law, impose certain restrictions on capital distributions, including dividend payments and share repurchases by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At December 31, 2022, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained capital ratios above the required minimums and the capital conservation buffer. As a result the Company may be restricted in paying dividends. 132 Table of Contents Note 23 – Other Comprehensive Income The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020. (dollars in thousands) Before Tax Tax Effect Net of Tax Year Ended December 31, 2022 Net unrealized gain (loss) on securities available-for-sale $ ( 186,439 ) $ 45,513 $ ( 140,926 ) Less: Reclassification adjustment for net loss included in net income 169 ( 58 ) 111 Total unrealized gain (loss) ( 186,270 ) 45,455 ( 140,815 ) Net unrealized gain on securities held-to-maturity ( 66,193 ) 17,098 $ ( 49,095 ) Amortization of unrealized loss on securities transferred to held-to-maturity 7,093 ( 2,732 ) $ 4,361 Total unrealized gain (loss) ( 59,100 ) 14,366 ( 44,734 ) Net unrealized gain on derivatives 284 — 284 Less: Reclassification adjustment for gain (loss) included in net income — — — Total unrealized gain 284 — 284 Other comprehensive income (loss) $ ( 245,086 ) $ 59,821 $ ( 185,265 ) Year Ended December 31, 2021 Net unrealized gain (loss) on securities available-for-sale $ ( 37,669 ) $ 9,746 $ ( 27,923 ) Less: Reclassification adjustment for net gain (loss) included in net income ( 2,964 ) 761 ( 2,203 ) Total unrealized gain (loss) ( 40,633 ) 10,507 ( 30,126 ) Net unrealized gain (loss) on derivatives — — — Less: Reclassification adjustment for gain (loss) included in net income 516 ( 132 ) 384 Total unrealized gain (loss) 516 ( 132 ) 384 Other comprehensive income (loss) $ ( 40,117 ) $ 10,375 $ ( 29,742 ) Year Ended December 31, 2020 Net unrealized gain (loss) on securities available-for-sale $ 19,637 $ ( 5,215 ) $ 14,422 Less: Reclassification adjustment for net loss included in net income ( 1,815 ) 452 ( 1,363 ) Total unrealized gain (loss) 17,822 ( 4,763 ) 13,059 Net unrealized gain (loss) on derivatives ( 2,049 ) 671 ( 1,378 ) Less: Reclassification adjustment for gain (loss) included in net income 1,145 ( 285 ) 860 Total unrealized gain (loss) ( 904 ) 386 ( 518 ) Other comprehensive income (loss) $ 16,918 $ ( 4,377 ) $ 12,541 133 Table of Contents The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2022, 2021 and 2020. (dollars in thousands) Securities Available For Sale Held-to-Maturity Securities Derivatives Accumulated Other Comprehensive Income (Loss) Year Ended December 31, 2022 Balance at Beginning of Period $ ( 13,958 ) $ — $ ( 284 ) $ ( 14,242 ) Other comprehensive income (loss) before reclassifications ( 140,926 ) — 284 ( 140,642 ) Transfer of securities from AFS to HTM ( 49,095 ) ( 49,095 ) Amounts reclassified from accumulated other comprehensive income 111 4,361 — 4,472 Net other comprehensive income (loss) during period ( 140,815 ) ( 44,734 ) 284 ( 185,265 ) Balance at End of Period $ ( 154,773 ) $ ( 44,734 ) $ — $ ( 199,507 ) Year Ended December 31, 2021 Balance at Beginning of Period $ 16,168 $ — $ ( 668 ) $ 15,500 Other comprehensive income (loss) before reclassifications ( 27,923 ) — — ( 27,923 ) Amounts reclassified from accumulated other comprehensive income ( 2,203 ) — 384 ( 1,819 ) Net other comprehensive income (loss) during period ( 30,126 ) — 384 ( 29,742 ) Balance at End of Period $ ( 13,958 ) $ — $ ( 284 ) $ ( 14,242 ) Year Ended December 31, 2020 Balance at Beginning of Period $ 3,109 $ — $ ( 150 ) $ 2,959 Other comprehensive income (loss) before reclassifications 14,422 — ( 1,378 ) 13,044 Amounts reclassified from accumulated other comprehensive income ( 1,363 ) — 860 ( 503 ) Net other comprehensive income (loss) during period 13,059 — ( 518 ) 12,541 Balance at End of Period $ 16,168 $ — $ ( 668 ) $ 15,500 The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020. Details about Accumulated Other Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Comprehensive Income Components Year Ended December 31, (dollars in thousands) 2022 2021 2020 Realized gain (loss) on sale of investment securities $ ( 169 ) $ 2,964 $ 1,815 Gain (loss) on sale of investment securities Gain / (loss) on derivatives — ( 516 ) ( 1,145 ) Interest on deposits Income tax (expense) benefit 58 ( 629 ) ( 167 ) Income tax expense Total Reclassifications for the Period $ ( 111 ) $ 1,819 $ 503 Net Income 134 Table of Contents Note 24 – Fair Value Measurements The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Quoted prices in active exchange markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments and residential mortgage loans held for sale. Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations and certain collateralized debt obligations. 135 Table of Contents Assets and Liabilities Recorded at Fair Value on a Recurring Basis The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021: (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2022 Assets: Investment securities available-for-sale: U.S. treasury bonds $ — $ 46,326 $ — $ 46,326 U.S. agency securities — 669,728 — 669,728 Residential mortgage-backed securities — 820,502 — 820,502 Corporate mortgage-backed securities — 50,214 — 50,214 Municipal bonds — 10,088 — 10,088 Corporate bonds — 1,808 — 1,808 Loans held for sale — 6,734 — 6,734 Interest rate caps — 31,039 — 31,039 Mortgage banking derivatives — — 93 93 Total assets measured at fair value on a recurring basis as of December 31, 2022 $ — $ 1,636,439 $ 93 $ 1,636,532 Liabilities: Interest rate swap derivatives $ — $ — $ — $ — Credit risk participation agreements — 2 — 2 Interest rate caps — 30,065 — 30,065 Total liabilities measured at fair value on a recurring basis as of December 31, 2022 $ — $ 30,067 $ — $ 30,067 December 31, 2021 Assets: Investment securities available-for-sale: U.S. treasury bonds $ — $ 49,458 $ — $ 49,458 U.S. agency securities — 622,387 — 622,387 Residential mortgage-backed securities — 1,677,673 — 1,677,673 Municipal bonds — 145,431 — 145,431 Corporate bonds — 118,459 10,000 128,459 Loans held for sale — 47,218 — 47,218 Interest rate caps — 5,197 — 5,197 Mortgage banking derivatives — — 636 636 Total assets measured at fair value on a recurring basis as of December 31, 2021 $ — $ 2,665,823 $ 10,636 $ 2,676,459 Liabilities: Interest rate swap derivatives $ — $ — $ — $ — Credit risk participation agreements — 47 — 47 Interest rate caps — 5,147 — 5,147 Total liabilities measured at fair value on a recurring basis as of December 31, 2021 $ — $ 5,194 $ — $ 5,194 136 Table of Contents Investment Securities Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange and money market funds. Level 2 securities include U.S. agency debt securities, mortgage-backed securities issued by Government Sponsored Entities (“GSE’s”), U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value. Loans held for sale : The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation. The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of December 31, 2022 and 2021. December 31, 2022 (dollars in thousands) Fair Value Aggregate Unpaid Principal Balance Difference Loans held for sale $ 6,734 $ 6,775 $ ( 41 ) December 31, 2021 (dollars in thousands) Fair Value Aggregate Unpaid Principal Balance Difference Loans held for sale $ 47,218 $ 46,623 $ 595 No residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of December 31, 2022 or December 31, 2021. Interest rate swap derivatives: These derivative instruments consist of interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer credit rating deterioration. Credit risk participation agreements : The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2. 137 Table of Contents Interest rate caps: The Company entered into an interest rate cap agreement (“cap”) with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap’s strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the cap falls within Level 2. The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3): (dollars in thousands) Investment Securities Mortgage Banking Derivatives Total Assets: Beginning balance at January 1, 2022 $ 10,000 $ 636 $ 10,636 Realized loss included in earnings — ( 543 ) ( 543 ) Reclassified to investment securities held-to-maturity ( 10,000 ) — ( 10,000 ) Principal redemption — — — Ending balance at December 31, 2022 $ — $ 93 $ 93 (dollars in thousands) Investment Securities Mortgage Banking Derivatives Total Assets: Beginning balance at January 1, 2021 $ 1,500 $ 5,213 $ 6,713 Realized loss included in earnings — ( 4,577 ) ( 4,577 ) Reclass Level 2 to 3 10,000 — 10,000 Principal redemption ( 1,500 ) — ( 1,500 ) Ending balance at December 31, 2021 $ 10,000 $ 636 $ 10,636 Liabilities: Beginning balance at January 1, 2021 $ — $ — $ — Realized gain included in earnings — — — Ending balance at December 31, 2021 $ — $ — $ — Level 3 assets measured at fair value on a recurring or nonrecurring basis as of December 31, 2022 and 2021, the significant unobservable inputs used in the fair value measurements were as follows: December 31, 2022 December 31, 2021 (dollars in thousands) Valuation Technique Description Range Weighted Average (1) Fair Value Weighted Average (1) Fair Value Mortgage banking derivatives Pricing Model Pull Through Rate 84 % - 100 % 83.80 % $ 93 86.40 % $ 636 (1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount. Mortgage banking derivatives for loans settled on a mandatory basis: The Company relied on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the 138 Table of Contents forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing. Mortgage banking derivative for loans settled best efforts basis: The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets. Loans The fair value of individually assessed loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those individually assessed loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2022, substantially all of the Company’s individually assessed loans were evaluated based upon the fair value of the collateral. In accordance with ASC 820, individually assessed loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. Other real estate owned : OREO is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below: There were no liabilities measured at fair value on a non-recurring basis at December 31, 2022 and 2021. (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2022 Individually assessed loans: Commercial $ — $ — $ 1,790 $ 1,790 Income producing - commercial real estate — — 3,131 3,131 Owner occupied - commercial real estate — — 19,187 19,187 Real estate mortgage - residential — — 1,404 1,404 Consumer — — 3 3 Other real estate owned — — 1,962 1,962 Total assets measured at fair value on a nonrecurring basis as of December 31, 2022 $ — $ — $ 27,477 $ 27,477 139 Table of Contents (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total (Fair Value) December 31, 2021 Individually assessed loans: Commercial $ — $ — $ 8,121 $ 8,121 Income producing - commercial real estate — — 17,415 17,415 Owner occupied - commercial real estate — — 42 42 Real estate mortgage - residential — — 1,779 1,779 Construction - commercial and residential — — 3,093 3,093 Home equity — — 366 366 PPP loans 1,365 1,365 Other real estate owned — — 1,635 1,635 Total assets measured at fair value on a nonrecurring basis as of December 31, 2021 $ — $ — $ 33,816 $ 33,816 Fair Value of Financial Instruments The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists. Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole. 140 Table of Contents Estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021 are as follows: Fair Value Measurements (dollars in thousands) Carrying Value Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) December 31, 2022 Assets Cash and due from banks $ 12,655 $ 12,655 $ 12,655 $ — Federal funds sold 33,927 33,927 — 33,927 — Interest bearing deposits with other banks 265,272 265,272 — 265,272 — Investment securities available-for-sale 1,598,666 1,598,666 — 1,598,666 — Investment securities held-to-maturity 1,093,374 967,940 — 967,940 — Federal Reserve and Federal Home Loan Bank stock 65,067 N/A — — — Loans held for sale 6,734 6,734 — 6,734 — Loans 7,635,632 7,501,484 — 7,501,484 Bank owned life insurance 110,998 110,998 — 110,998 — Annuity investment 13,869 13,869 — 13,869 — Mortgage banking derivatives 93 93 — 93 Interest rate caps 31,039 31,039 — 31,039 — Liabilities Noninterest bearing deposits 3,150,751 3,150,751 — 3,150,751 — Interest bearing deposits 4,778,932 4,778,932 — 4,778,932 — Time deposits 783,499 790,418 — 790,418 — Customer repurchase agreements 35,100 35,100 — 35,100 — Borrowings 1,044,795 1,049,459 — 1,049,459 — Credit risk participation agreements 2 2 — 2 — Interest rate caps 30,065 30,065 — 30,065 — December 31, 2021 Assets Cash and due from banks $ 12,886 $ 12,886 $ 12,886 $ — $ — Federal funds sold 20,391 20,391 — 20,391 — Interest bearing deposits with other banks 1,680,945 1,680,945 — 1,680,945 — Investment securities available-for-sale 2,623,408 2,623,408 — 2,611,408 10,000 Federal Reserve and Federal Home Loan Bank stock 34,153 N/A — — — Loans held for sale 47,218 47,218 — 47,218 — Loans 7,065,598 6,930,929 — — 6,930,929 Mortgage banking derivatives 636 636 — — 636 Interest rate swap derivatives 5,197 5,197 — 5,197 — Liabilities Noninterest bearing deposits 3,277,956 3,277,956 — 3,277,956 — Interest bearing deposits 5,974,502 5,974,502 — 5,974,502 — Time deposits 729,082 736,001 — 736,001 — Customer repurchase agreements 23,918 23,918 — 23,918 — Borrowings 369,670 374,326 — 374,326 — Credit risk participation agreements, 47 47 — 47 — Interest rate caps 5,147 5,147 — 5,147 — 141 Table of Contents Note 25 – Parent Company Financial Information Condensed financial information for Eagle Bancorp, Inc. (Parent Company only) is as follows: (dollars in thousands) December 31, 2022 December 31, 2021 Assets Cash $ 21,540 $ 41,997 Investment securities available-for-sale, at fair value, net of allowance for credit loss of $0 in 2021 — 43,680 Investment securities held-to-maturity, net allowance for credit loss of $326 thousand in 2022 44,673 — Investment in subsidiaries 1,240,473 1,342,784 Other assets 9,065 5,150 Total Assets $ 1,315,751 $ 1,433,611 Liabilities Other liabilities $ 17,636 $ 13,166 Long-term borrowings 69,794 69,670 Total liabilities 87,430 82,836 Shareholders’ Equity Common stock 310 316 Additional paid in capital 412,303 434,640 Retained earnings 1,015,215 930,061 Accumulated other comprehensive loss ( 199,507 ) ( 14,242 ) Total Shareholders’ Equity 1,228,321 1,350,775 Total Liabilities and Shareholders’ Equity $ 1,315,751 $ 1,433,611 142 Table of Contents Years Ended December 31, (dollars in thousands) 2022 2021 2020 Income Other interest and dividends $ 87,781 $ 170,741 $ 141,982 Gain on sale of investment securities — 93 — Other income (loss) ( 24 ) ( 46 ) — Total Income 87,757 170,788 141,982 Expenses Interest expense 4,149 9,993 11,915 Legal and professional 894 2,617 2,842 Directors compensation 643 589 500 Provision for credit losses 326 — — Other 14,746 1,250 1,306 Total Expenses 20,758 14,449 16,563 Income Before Income Tax Benefit and Equity in Undistributed Income of Subsidiaries 66,999 156,339 125,419 Income Tax Benefit ( 1,183 ) ( 2,903 ) ( 607 ) Income Before Equity in Undistributed Income of Subsidiaries 68,182 159,242 126,026 Equity in Undistributed Income of Subsidiaries 72,748 17,449 6,191 Net Income $ 140,930 $ 176,691 $ 132,217 143 Table of Contents Years Ended December 31, (dollars in thousands) 2022 2021 2020 Cash Flows From Operating Activities Net Income $ 140,930 $ 176,691 $ 132,217 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed income of subsidiary ( 72,748 ) ( 17,449 ) ( 6,191 ) Net tax benefits from stock compensation 9,899 7,811 118 Securities premium amortization, net ( 54 ) 5 6 Provision for credit losses for investment securities held-to-maturity 326 — — Depreciation and amortization — — 390 Decrease (increase) in other assets ( 12,909 ) 66,598 ( 48,966 ) Increase (decrease) in other liabilities 4,593 ( 681 ) 6,823 Net cash provided by operating activities 70,037 232,975 84,397 Cash Flows From Investing Activities Purchases of available-for-sale investment securities — ( 40,000 ) ( 10,000 ) Proceeds from maturities of available-for-sale securities — 13,031 613 Purchases of held-to-maturities investment securities ( 3,976 ) — — Proceeds from maturities of held-to-maturities securities 1,500 — — Net cash used in by investing activities ( 2,476 ) ( 26,969 ) ( 9,387 ) Cash Flows From Financing Activities Repayment of long term debt — ( 148,407 ) — Proceeds from exercise of stock options 97 — 63 Proceeds from employee stock purchase plan 748 496 760 Common stock repurchased ( 33,087 ) ( 682 ) ( 61,432 ) Cash dividends paid ( 55,776 ) ( 44,691 ) ( 28,330 ) Net cash used in financing activities ( 88,018 ) ( 193,284 ) ( 88,939 ) Net (Decrease) Increase in Cash ( 20,457 ) 12,722 ( 13,929 ) Cash and Cash Equivalents at Beginning of Year 41,997 29,275 43,204 Cash and Cash Equivalents at End of Year $ 21,540 $ 41,997 $ 29,275 Non-Cash Investing Activities Transfers of investment securities from available-for-sale to held-to-maturity $ 42,467 $ — $ — Note 26 - Subsequent Event In early 2023, the Company made the strategic decision to cease originating first lien residential mortgage loans for secondary sale, due to diminishing residential mortgage production volumes in the face of a higher interest rate environment and increasing costs associated with regulatory compliance and risk management. The Company currently anticipates that the exit of the residential mortgage origination and secondary sale banking activities will be completed in the third quarter of 2023, following the expected closure of the residential first lien mortgage loans currently in the origination pipeline by the end of the first quarter of 2023, and the expected sale of all of the remaining residential mortgage loans held for sale by the end of the third quarter of 2023. 144 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.