EAGLE BANCORP INC 10-Q

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the "Company") and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Caution About Forward Looking Statements . This report contains forward looking statements. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and are typically identified with words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume,” “probable,” “possible,” “continue,” “should,” “could,” “would,” “strive,” “seeks,” “deem,” “projections,” “forecast,” “consider,” “indicative,” “uncertainty,” “likely,” “unlikely,” “likelihood,” “unknown,” “attributable,” “depends,” “intends,” “generally,” “feel,” “typically,” “judgment,” “subjective” and similar words or phrases. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. These forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. The Company's past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters' performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason. GENERAL The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland. The Company provides general commercial and consumer banking services through EagleBank (the "Bank"), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of fifteen branch offices, including four in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C. The Bank also operates five lending offices, with one in Northern Virginia, three in Suburban Maryland and one in Washington, D.C. In March 2023, we closed our Alexandria, Virginia branch as it had an expiring lease. The branch's clients will be served from other Virginia and D.C. branches, and through digital channels. The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank's market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, consumer loans, and cash management services. The Bank is also active in the origination of Small Business Administration ("SBA") loans. The Bank made the strategic decision to cease originating first lien residential mortgage loans for secondary sale in the first quarter of 2023, 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 residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. 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 sale of all of the remaining residential mortgage loans held for sale by the end of the third quarter of 2023. 34 The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA") loans through the Department of Housing and Urban Development's Multifamily Accelerated Program ("MAP"). The Company securitizes these loans through the Government National Mortgage Association ("Ginnie Mae") MBS I program and shortly thereafter sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned ("OREO") assets. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 except as indicated in "Accounting Standards Adopted in 2023" in Note 1 to the Consolidated Financial Statements in this report. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. If our results of operations remain in line with the first quarter of 2023 or decline or the trading price for our common stock remains significantly below book value per share for a prolonged period, or we experience continued economic uncertainty and stress in the banking sector, the Company will likely be required to conduct an interim goodwill impairment test in 2023, which could result in a material non-cash goodwill impairment. RESULTS OF OPERATIONS Three Months Ended March 31, 2023 vs. Three Months Ended March 31, 2022 Earnings Summary Net income for the three months ended March 31, 2023 was $24.2 million as compared to $45.7 million for the same period in 2022, a decrease of $21.5 million, or 47.0%. The decrease in net income of $21.5 million for the three months ended March 31, 2023 relative to the same period in 2022 was due to a decrease net interest income of $5.4 million, an increase in provision for credit losses of $9.0 million, a decrease in noninterest income of $3.8 million and an increase in noninterest expenses of $9.6 million, which was partially offset by a reduction of income tax expense of $7.1 million. Net interest income decreased primarily due to a rapid increase in interest rates impacting deposits and funding costs. The provision increased as the ACL required a reversal in first quarter of 2022 and a provision in the first quarter of 2023. The provision was driven by loan growth and qualitative and economic factors. Non interest income decreased primarily due to a decrease in fees associated with residential loans and a decrease in gain on sale of residential loans. During the three months ended March 31, 2023, the Company closed residential mortgage locked commitments of $32.8 million, down from $136.7 million for the three months ended March 31, 2022. Noninterest expenses increased primarily due to increases in salaries and benefits of $7.2 million and legal and professional fees of $1.7 million. Additional detail is provided in "Noninterest Expense" section below. 35 Total revenue (i.e. net interest income plus noninterest income) was $78.7 million for the three months ended March 31, 2023 as compared to $87.9 million for the same period in 2022. The most significant portion of revenue is net interest income, which was $75.0 million for the three months ended March 31, 2023, compared to $80.5 million for the same period in 2022. Net interest income decreased primarily due to increased interest rates on deposits and borrowings which was partially offset by an increase in interest income on loans. The primary driver for the reduction in noninterest income was a decrease in gain on sale of residential loans and fees associated with residential mortgage loans. The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.77% for the three months ended March 31, 2023 and 2.65% for the same period in 2022. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below. Total noninterest income for the three months ended March 31, 2023 decreased to $3.7 million from $7.5 million for the same period in 2022, a 50.4% decrease. Noninterest income was lower due to decreases in gain on sale of residential loans and fees associated with residential mortgage loans. For further information on the components and drivers of these changes see "Noninterest Income" section below. Gain on sale of loans for the three months ended March 31, 2023 was $305 thousand compared to $1.5 million for the same period in 2022, a decrease of 79.6%. The decline in gains on sale of loan is due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced earlier this quarter. Other income for the three months ended March 31, 2023 decreased to $1.3 million from $4.1 million for the same period in 2022, a 69.3% decrease. This decrease was primarily attributable to reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand, mark-to-market rate cap of $744 thousand, other loan income of $497 thousand and credit card income of $304 thousand, which were partially offset by an increase in BOLI income of $531 thousand. Noninterest expense totaled $40.6 million for the three months ended March 31, 2023, as compared to $31.0 million for same period in 2022, a 30.9% increase. The increase in noninterest expense was due to an increase in salaries and benefits of $7.2 million and an increase of $1.7 million in legal and professional fees. See the "Noninterest Expense" section for further detail on the components and drivers of the change. Income tax expenses were $6.9 million for the three months ended March 31, 2023, a decrease of 50.6%, compared to the same period in 2022. The components and drivers of the change are discussed in the "Income Tax Expense" section below. The efficiency ratio was 51.55% for the three months ended March 31, 2023, as compared to 35.28% for the same period in 2022. The adverse change in the efficiency ratio was driven by increased interest expense, an increase in noninterest expense and a reduction in noninterest income. For the three months ended March 31, 2023, the Company reported an annualized ROAA of 0.86%, as compared to 1.46% for the same period in 2022. The annualized ROACE for the three months ended March 31, 2023 was 7.92% as compared to 13.83% for the same period in 2022. The annualized ROATCE for the three months ended March 31, 2023 was 8.65% as compared to 14.99% for the same period in 2022. The decline in returns was primarily attributable to a reduction in net income. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments. The cost of funds includes interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. Net interest income was $75.0 million for the three months ended March 31, 2023, as compared to $80.5 million for the same period in 2022. Net interest income decreased for the three months ended March 31, 2023 primarily due to increases in average deposit rates (3.63% compared to 0.37% and other short-term borrowings (4.77% compared to 0.67%), which were partially offset by higher average loan balances and yields (6.35% compared to 4.35%) as compared to March 31, 2022. The net interest margin was 2.77% for the three months ended March 31, 2023 and 2.65% for the same period in 2022. The increase reflects the impact of the change in yields on earning assets which repriced primarily due to rate increases which more than offset the reduction in average interest earning assets and the increase in rates for interest bearing liabilities. 36 Net interest margin increased by 12 basis points from the first three months of 2022 as compared to the first three months of 2023 (from 2.65% to 2.77%). The yield on earning assets increased by 226 basis points (from 2.91% to 5.17%) while cost of funds increased 214 basis points (from 0.26% to 2.40%). Average interest bearing deposits with other banks and other short term investments were $526.5 million in the three months ended March 31, 2023 compared to $2.4 billion for the same period in 2022. Additionally, average borrowings increased from $346.4 million in the three months ended March 31, 2022 to $1.32 billion in the three months ended March 31, 2023. Overall yields and rates moved higher in the first three months of 2023 as compared to same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors. The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three months ended March 31, 2023 and 2022. Included in the table are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. 37 Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) Three Months Ended March 31, 2023 2022 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate ASSETS Interest earning assets: Interest bearing deposits with other banks and other short-term investments $ 526,506 $ 5,774 4.45 % $ 2,403,017 $ 1,057 0.18 % Loans held for sale (1) 4,093 60 5.86 % 26,887 219 3.26 % Loans (1) (2) 7,712,023 120,790 6.35 % 7,053,701 75,611 4.35 % Investment securities available-for-sale (2) 1,660,258 7,811 1.91 % 2,794,681 11,280 1.64 % Investment securities held-to-maturity (2) 1,087,047 5,734 2.14 % 24,011 150 2.53 % Federal funds sold 14,890 78 2.12 % 24,176 4 0.07 % Total interest earning assets 11,004,817 140,247 5.17 % 12,326,473 88,321 2.91 % Total noninterest earning assets 495,889 449,784 Less: allowance for credit losses 74,650 75,105 Total noninterest earning assets 421,239 374,679 TOTAL ASSETS $ 11,426,056 $ 12,701,152 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Interest bearing transaction $ 1,065,421 $ 6,107 2.32 % $ 754,833 $ 322 0.17 % Savings and money market 3,326,807 33,274 4.06 % 5,476,721 3,723 0.28 % Time deposits 1,078,227 9,573 3.60 % 722,646 2,314 1.30 % Total interest bearing deposits 5,470,455 48,954 3.63 % 6,954,200 6,359 0.37 % Customer repurchase agreements 38,257 302 3.20 % 25,628 13 0.21 % Other short-term borrowings 1,251,392 14,930 4.77 % 276,669 460 0.67 % Long-term borrowings 69,814 1,037 5.94 % 69,690 1,037 5.95 % Total interest bearing liabilities 6,829,918 65,223 3.87 % 7,326,187 7,869 0.44 % Noninterest bearing liabilities: Noninterest bearing demand 3,263,670 3,920,776 Other liabilities 91,490 112,404 Total noninterest bearing liabilities 3,355,160 4,033,180 Shareholders' Equity 1,240,978 1,341,785 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,426,056 $ 12,701,152 Net interest income $ 75,024 $ 80,452 Net interest spread 1.30 % 2.47 % Net interest margin 2.77 % 2.65 % Cost of funds 2.40 % 0.26 % (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $3.71 million and $3.68 million for the three months ended March 31, 2023 and 2022, respectively. (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 38 Rate/Volume Analysis of Net Interest Income The rate/volume table below presents the composition of the change in net interest income for the period indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates. Three Months Ended March 31, 2023 Compared With Three Months Ended March 31, 2022 (dollars in thousands) Change Due to Volume Change Due to Rate Total Increase (Decrease) Interest earned on Loans $ 7,057 $ 38,122 $ 45,179 Loans held for sale (186) 27 (159) Investment securities available-for-sale (4,579) 1,110 (3,469) Investment securities held-to-maturity 6,641 (1,057) 5,584 Interest bearing bank deposits (825) 5,542 4,717 Federal funds sold (2) 76 74 Total interest income 8,106 43,820 51,926 Interest paid on Interest bearing transaction 132 5,653 5,785 Savings and money market (1,461) 31,012 29,551 Time deposits 1,139 6,120 7,259 Customer repurchase agreements 6 283 289 Other borrowings 1,623 12,847 14,470 Total interest expense 1,439 55,915 57,354 Net interest income $ 6,667 $ (12,095) $ (5,428) Provision for Credit Losses The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available-for-sale and held-to-maturity investment securities. The amount of the ACL on loans is based on management's assessment of current expected credit losses in the portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank. The provision for unfunded commitments is presented separately on the consolidated statements of income. This provision considers the probability that unfunded commitments will fund among other factors. Management has developed a comprehensive analytical process to monitor the adequacy of the ACL. The ACL is estimated using a CECL model. Our methodology for determining our allowance was developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The process is being continually enhanced and refined based on periodic reviews. The maintenance of a high quality loan portfolio, with an adequate ACL, will continue to be a primary management objective for the Company. We develop our estimate of the ACL from several sources: (i) a quantitative model that determines expected credit losses using a probability of default ("PD") / Loss Given Default ("LGD") cash flow methodology, using internal and third-party provided peer historical loss data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics, i.e., call codes; (ii) individual evaluation of any loans that exhibit evidence of credit deterioration, excluded from the quantitative model; and (iii) the application of qualitative and environmental factors as determined by management. 39 We utilize the following qualitative and environmental factors in our CECL methodology: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and reevaluates all of its factors quarterly. Refer to additional detail regarding these forecasts in the "Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements. During the three months ended March 31, 2023, the ACL on loans reflected a provision of $4.9 million and $975 thousand in net charge-offs. The provision for credit losses on loans for the same period in 2022 reflected a reversal of $3.0 million and $459 thousand in net charge-offs. For the first three months of 2023, the provisions were primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, changes in the qualitative and economic ("Q&E") component of the model associated with commercial real estate office properties, as well as the increase in total loans. The increases were offset by improvements in the quality of the assets associated with individually assessed loans that were deemed impaired. The reversal in the same period in 2022 was driven by the improved macroeconomic outlook, improvement of credits in the loan portfolio. Additionally, the ACL on securities reflected a provision of $1.3 million of the total first quarter 2023 provision related to several corporate bonds in the securities portfolio. At March 31, 2023, the ACL for loans represented 1.01% of loans outstanding, as compared to 0.97% at December 31, 2022. The ACL represented 1,160% of nonperforming loans at March 31, 2023, as compared to 1,151% at December 31, 2022. As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower's business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. 40 The following table sets forth activity in the allowance for credit losses for the periods indicated. Three Months Ended March 31, (dollars in thousands) 2023 2022 Balance at beginning of period $ 74,444 $ 74,965 Charge-offs: Commercial (868) (514) Construction - commercial and residential (136) — Other consumer (50) — Total charge-offs (1,054) (514) Recoveries: Commercial 76 54 Other consumer 3 1 Total recoveries 79 55 Net charge-offs (975) (459) Provision for (reversal of) credit losses- loans 4,908 (3,001) Balance at end of period $ 78,377 $ 71,505 Annualized ratio of net charge-offs during the period to average loans outstanding during the period 0.05 % 0.03 % The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. March 31, 2023 December 31, 2022 (dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans Commercial $ 15,775 20 % 19 % $ 15,655 21 % 19 % Income producing - commercial real estate 38,140 49 % 51 % 35,688 48 % 51 % Owner occupied - commercial real estate 12,457 16 % 14 % 12,702 17 % 15 % Real estate mortgage - residential 1,002 1 % 1 % 969 1 % 1 % Construction - commercial and residential 10,383 13 % 14 % 8,801 12 % 12 % Home equity 593 1 % 1 % 555 1 % 1 % Other consumer 27 — % — % 74 — % 1 % Total allowance $ 78,377 100 % 100 % $ 74,444 100 % 100 % Nonperforming Assets As shown in the table below, the Company's level of nonperforming assets, which comprise loans delinquent 90 days or more and nonaccrual loans, which include the nonperforming portion of loan restructurings and OREO, totaled $8.7 million at March 31, 2023 representing 0.08% of total assets, as compared to $8.4 million of nonperforming assets, or 0.08% of total assets, at December 31, 2022. At March 31, 2023, the Company had no accruing loans 90 days or more past due. Management remains attentive to early signs of deterioration in borrowers' financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.01% of total loans at March 31, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date. 41 On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. A loan that is considered a restructured loan may be subject to an individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company. During the first quarter of 2023, the Bank had seven new loan restructurings totaling approximately $108.3 million (1.4% of the loan portfolio). These loans received extensions of three to twelve months, and are performing under their modified terms. Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Total nonperforming loans amounted to $6.8 million at March 31, 2023 (0.09% of total loans) compared to $6.5 million at December 31, 2022 (0.08% of total loans). OREO properties are carried at the lower of cost or fair value less estimated costs to sell. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. OREO properties had a lower of cost or fair market value of $2.0 million at March 31, 2023 and December 31, 2022. There were no sales of OREO property during the three months ended March 31, 2023 or March 31, 2022. The following table shows the amounts of nonperforming assets at the dates indicated. (dollars in thousands) March 31, 2023 December 31, 2022 Nonaccrual Loans: Commercial $ 2,294 $ 2,488 Income producing - commercial real estate 2,000 2,000 Owner occupied - commercial real estate 14 17 Real estate mortgage - residential 1,915 1,913 Construction - commercial and residential 533 — Other consumer — 50 Accruing loans-past due 90 days — — Total nonperforming loans 6,756 6,468 Other real estate owned 1,962 1,962 Total nonperforming assets $ 8,718 $ 8,430 Coverage ratio, allowance for credit losses to total nonperforming loans 1,160 % 1,151 % Ratio of nonperforming loans to total loans 0.09 % 0.08 % Ratio of nonperforming assets to total assets 0.08 % 0.08 % Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio. 42 At March 31, 2023, there were $88.0 million of Substandard loans. Substandard loans are considered potential or actual problem loans due to known information about possible or actual credit problems which causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in the reclassification to the past due, nonaccrual or restructured loan categories, as appropriate. Based upon their status as potential or actual problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Noninterest Income Total noninterest income includes service charges on deposits, gain on sale of loans, gains and losses on sale of investment securities, FHA multi-family income, income from bank owned life insurance ("BOLI") and other income. Total noninterest income for the three months ended March 31, 2023 decreased to $3.7 million from $7.5 million for the three months ended March 31, 2022, a 50.4% decrease. Service charges on deposits for the three months ended March 31, 2023 increased to $1.5 million from $1.3 million for the three months ended March 31, 2022 Gain on sale of loans for the three months ended March 31, 2023 decreased to $305 thousand from $1.5 million for the three months ended March 31, 2022, a 79.6% decrease. This decrease was primarily driven by a reduction in the volume of residential mortgage loan commitments. Residential mortgage loan locked commitments were $32.8 million for the three months ended March 31, 2023 as compared to $136.7 million for the same period in 2022, a 76.0% decrease. The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. 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 sale of all of the remaining residential mortgage loans held for sale by the end of the third quarter of 2023. For the three months ended March 31, 2023, the loss on the sale of investments was $21 thousand compared to a loss of $25 thousand for the three months ended March 31, 2022. The loss was due to the sale of 12 securities for a loss of $26 thousand which was partially offset by $5 thousand in gains on partial calls. Other income for the three months ended March 31, 2023 decreased to $1.3 million from $4.1 million for the three months ended March 31, 2022, a 69.3% decrease. This decrease was primarily attributable to reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand, mark-to-market rate cap of $744 thousand, other loan income of $497 thousand and credit card income of $304 thousand, which was partially offset by an increase of BOLI income of $531 thousand. Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. To the extent the mortgage loans underlying the Company's servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds, as well as incur additional administrative costs related to increases in collection efforts. The Company is a long-time originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was $45 thousand of income from this source for the three months ended March 31, 2023 compared to $181 thousand for the three months ended March 31, 2022. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. Noninterest Expense Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses. Total noninterest expense totaled $40.6 million for the three months ended March 31, 2023, as compared to $31.0 million for the three months ended March 31, 2022, a 30.9% increase. 43 Salaries and employee benefits were $24.2 million for the three months ended March 31, 2023, as compared to $17.0 million for the same period in 2022, an increase of $7.2 million or 42.0%. The primary reason for the difference between quarters was the one-time accrual reduction in the first three months of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. At March 31, 2023, the Company's full time equivalent staff numbered 486 as compared to 509 at March 31, 2022. Premises and equipment for the three months ended March 31, 2023 and 2022, were $3.3 million compared to $3.1 million, respectively, of which premises expenses were $2.8 million compared to $2.6 million, respectively. Marketing and advertising expenses totaled $636 thousand for the three months ended March 31, 2023 and $1.1 million for the same period in 2022. The decrease for the three month period was due to a reduction in advertising and promotions. Data processing expenses were $3.1 million for the three months ended March 31, 2023, compared to $2.9 million for the same period in 2022. Legal, accounting and professional fees were $3.3 million for the three months ended March 31, 2023, compared to $1.6 million for the three months ended March 31, 2022, an increase of $1.7 million. Legal fees and expenditures were $1.6 million and $205 thousand for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily due to a $959 thousand reversal of legal fees receivable relating to the previously settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted. FDIC insurance expenses were $1.5 million for the three months ended March 31, 2023 compared to $1.1 million for the same period in 2022, a 40.5% increase. The major components of other expenses include franchise taxes, director compensation and insurance expense. Other expenses increased to $4.6 million for the three months ended March 31, 2023, from $4.3 million for the same period in 2022, an increase of 7.3%. The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 51.55% for the first quarter of 2023, as compared to 35.28% for the first quarter of 2022. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The adverse change in the efficiency ratio for the three months ended March 31, 2023 as compared to the same three month period in 2022 was driven by increased interest expense due to higher interest rates and an increase in noninterest expense which is partially associated with the salary accrual reduction in the first quarter of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. As a percentage of average assets, total noninterest expense (annualized) was 1.44% for the three months ended March 31, 2023 as compared to 0.99% for the same period in 2022. The increase from the first quarter of 2022 was primarily due to the salary accrual reduction in the first quarter of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. Income Tax Expense The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended March 31, 2023 and 2022 was 22.1% and 23.4%, respectively. The total tax provision for the three months ended March 31, 2023 was $6.9 million, compared to $13.9 million for the three months ended March 31, 2022. The decreases in the effective tax rate and tax provision over the comparative three months ended March 31, 2023 and 2022 were due to a reduction in earnings before taxes and an update to our apportionment of revenues among the states in which we operate. The Inflation Reduction Act of 2022 was signed into law by president Biden on August 16, 2022 which makes significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the “adjusted financial statement income” of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. The Company currently does not expect the tax-related provisions of the Inflation Reduction Act to have a material impact on our financial results. 44 FINANCIAL CONDITION Summary Total assets at March 31, 2023 and December 31, 2022 were $11.1 billion and $11.2 billion, respectively. The decrease in total assets over the three months ended March 31, 2023 was primarily due to the decrease in total interest-bearing deposits with banks and other short-term investments. The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.7 billion at March 31, 2023, a 1.3% increase from the balance at December 31, 2022. The increase in loans over the three months ended March 31, 2023, was driven by growth from CRE loans and commercial and residential construction loans. Additionally, the Bank reduced its PPP loans from $3.3 million at December 31, 2022 to $709 thousand at March 31, 2023 through the forgiveness process. Loans held for sale were $6.5 million at March 31, 2023, compared to $6.7 million at December 31, 2022, a 3.7% decrease due to a decline in production. Investment securities, at amortized cost net of the allowance for credit losses, totaled $2.8 billion at March 31, 2023 as compared to $2.9 billion at December 31, 2022, a decrease of $58.6 million, or 2%, primarily driven by the pay down of principal on mortgage-backed securities and sales and calls of securities. During the first quarter of 2022, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as available-for-sale ("AFS") to held-to-maturity ("HTM"), including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized. The securities transferred with unrealized losses of $66.2 million, and, as of March 31, 2023, $57.1 million remains in accumulated other comprehensive loss, and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss. The securities transferred were generally municipal bonds, corporate bonds, bonds that qualify for Community Reinvestment Act credit, and mortgage-backed securities with longer final maturity dates. At quarter-end, $1.1 billion, or 40.5% of the securities portfolio, was classified as securities HTM. The fair value of HTM securities was $111.5 million less than carrying value at March 31, 2023 compared to a difference of $125.4 million at December 31, 2022. In terms of funding, total deposits at March 31, 2023 were $7.5 billion down from $8.7 billion at December 31, 2022, a decline of 14.3%. Total borrowed funds (excluding customer repurchase agreements) were $2.2 billion and $1.0 billion at March 31, 2023 and December 31, 2022, respectively. The increase in borrowings was primarily to meet funding needs, including to fund loan growth, given the decrease in deposits. Total shareholders' equity was $1.2 billion as of March 31, 2023 , and December 31, 2022. The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements. Regulatory ratios based on risk-weighted assets declined from the prior quarter as zero percent-risk weighted cash was moved into higher risk-weighted securities and loans. The total risk based capital ratio was 14.74% at March 31, 2023, as compared to 14.94% at December 31, 2022. The common equity tier 1 ("CET1") risk based capital ratio was 13.75% at March 31, 2023, as compared to 14.03% at December 31, 2022. The tier 1 risk based capital ratio was 13.75% at March 31, 2023, as compared to 14.03% at December 31, 2022. The tier 1 leverage ratio was 11.42% at March 31, 2023, as compared to 11.63% at December 31, 2022. The ratio of common equity to total assets was 11.20% at March 31, 2023, as compared to 11.02% at December 31, 2022 as common equity levels remained almost constant while total assets decreased as a result of decreases in deposits and other short-term investments over the three months ended March 31, 2023. Book value per share was $39.92 at March 31, 2023, a 1.9% increase over $39.18 at December 31, 2022 owing to adjustments to unrealized losses on investment securities AFS in the period. In addition, the tangible common equity ratio was 10.36% at March 31, 2023, as compared to 10.18% at December 31, 2022. Tangible book value per share was $36.57 at March 31, 2023, a 2.0% decrease from $35.86 at December 31, 2022. At March 31, 2023 and December 31, 2022, excluding the impact of the balance of accumulated other comprehensive losses, adjusted book value per share was $45.73 and $45.54, respectively, and adjusted tangible book value per share was $42.38 and $42.22, respectively. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. 45 Loan Portfolio Loans, net of amortized deferred fees and costs, at March 31, 2023 and December 31, 2022 by major category are summarized below. March 31, 2023 December 31, 2022 (dollars in thousands, except amounts in the footnote) Amount % Amount % Commercial $ 1,482,983 19 % $ 1,487,349 19 % PPP loans 709 — % 3,256 — % Income producing - commercial real estate 3,970,903 51 % 3,919,941 51 % Owner occupied - commercial real estate 1,095,699 14 % 1,110,325 15 % Real estate mortgage - residential 73,677 1 % 73,001 1 % Construction - commercial and residential 948,877 13 % 877,755 12 % Construction - C&I (owner occupied) 109,013 1 % 110,479 1 % Home equity 53,829 1 % 51,782 1 % Other consumer 1,986 — % 1,744 — % Total loans 7,737,676 100 % 7,635,632 100 % Less: allowance for credit losses (78,377) (74,444) Net loans (1) $ 7,659,299 $ 7,561,188 (1) Excludes accrued interest receivable of $43.9 million and $43.5 million at March 31, 2023 and December 31, 2022, respectively, which is recorded in other assets. In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality. Loans outstanding were $7.7 billion at March 31, 2023, an increase of $102.0 million, or 1.3%, from the balance at December 31, 2022. PPP loans outstanding were $709 thousand at March 31, 2023, a decrease of $2.5 million, or 78.2%, from the $3.3 million outstanding at December 31, 2022. The loan portfolio continued to grow in the first quarter of 2023, due primarily to our income producing and commercial and residential construction CRE loan originations and fundings. Market interest rates continue to increase in connection with rate increases implemented by the Federal Reserve. Multi-family commercial real estate leasing in the Bank's market area have held up well. Although, commercial real estate values have generally held up well, we continue to be cautious of the capitalization rates at which some assets are trading and as a result we are being cautious with our valuations. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Valuations associated with the moderately priced housing market have generally been increasing albeit at a slower pace. Well-located and Metro-accessible properties continue to garner a premium. We continue to see opportunities for growth in the commercial real estate market; as always we prudently evaluate each of these transactions. The Company's loan portfolio is substantially concentrated with borrowers or on collateral located in the Washington, D.C. metro area, including "Suburban Washington, D.C.," which comprises Prince George's and Montgomery counties in Maryland and Alexandria, Arlington, Fairfax, Frederick, Loudoun and Prince William counties in Virginia. At March 31, 2023, 50.7%, 32.5%, 5.5% and 11.2% of the loan portfolio, as a percentage of total principal, was concentrated in Suburban Washington, D.C., Washington, D.C., other Maryland counties and other locations in the United States, respectively. At December 31, 2022, 49.5%, 33.3%, 5.8% and 11.5% of the loan portfolio was concentrated in Suburban Washington, D.C., Washington, D.C., other Maryland counties and other locations in the United States, respectively. 46 The following table sets forth the time to contractual maturity of the loan portfolio as of March 31, 2023: March 31, 2023 (dollars in thousands) Total One Year or Less Over One Year to Five Years Over Five Years to Fifteen Years Over Fifteen Years Commercial $ 1,482,983 $ 607,311 $ 711,872 $ 160,119 $ 3,681 PPP loans 709 — 709 — — Income producing - commercial real estate 3,970,903 1,384,881 2,104,085 481,937 — Owner occupied - commercial real estate 1,095,699 54,169 455,676 438,808 147,046 Real estate mortgage - residential 73,677 16,213 42,918 3,286 11,260 Construction - commercial and residential 948,877 489,208 392,370 44,144 23,155 Construction - C&I (owner occupied) 109,013 9,107 10,414 36,351 53,141 Home equity 53,829 4,393 3,764 1,827 43,845 Other consumer 1,986 1,099 235 — 652 Total loans $ 7,737,676 $ 2,566,381 $ 3,722,043 $ 1,166,472 $ 282,780 Loans with: Predetermined fixed interest rate $ 2,855,610 $ 644,917 $ 1,432,612 $ 677,562 $ 100,519 Floating or Adjustable interest rate 4,882,066 1,921,464 2,289,431 488,910 182,261 Total loans $ 7,737,676 $ 2,566,381 $ 3,722,043 $ 1,166,472 $ 282,780 Deposits and Other Borrowings The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts, and certificates of deposits. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs, including during periods of high loan demand and seasonal variations in core deposits, the Bank regularly utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms. Additionally, the Bank has participated in borrowing from the BTFP established by Federal Reserve Bank in March 2023. For the three months ended March 31, 2023, total deposits decreased by $1.2 billion as compared to December 31, 2022. The decline consists of $903.0 million in noninterest bearing deposits and $346.9 million in interest bearing deposits as a result of an increase of disintermediation driven primarily by an increase in interest rates. Deposits have stabilized as of April 30, 2023 compared to March 31, 2023. No single depositor represented more than 10% of total deposits as of March 31, 2023. The ten largest depositors not associated with brokered pass-through relationships represented approximately 11% of total deposits in the aggregate as of March 31, 2023. The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances. 47 From time to time, when appropriate in order to fund strong loan demand or account for increased deposit outflow, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm and other national brokerage networks, including IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the "CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The total of reciprocal deposits at March 31, 2023 was $841.8 million (11.3% of total deposits) as compared to $782.2 million (9.0% of total deposits) at December 31, 2022. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit ("IND"). The Bank had $702.4 million and $1.1 billion of IND brokered deposits as of March 31, 2023 and December 31, 2022, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, or if aggregate funding available to banks change due to changes in the marketplace, we may experience an outflow of brokered deposits or difficulty in obtaining them in the future. In that event we would be required to obtain alternate sources for funding, which may increase our cost of funds and negatively impact our net interest margin. At March 31, 2023 and December 31, 2022, total deposits included $2.1 billion and $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 28.5% and 26.5% of total deposits, respectively. At March 31, 2023 and December 31, 2022, total deposits included estimated totals of $3.2 billion and $4.4 billion of uninsured deposits, which represented 43% and 51% of total deposits, respectively. The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits. At March 31, 2023, the Company had $2.2 billion in noninterest bearing demand deposits, representing 30.1% of total deposits, compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36.2% of total deposits. T he decrease was primarily attributable to outflows from noninterest bearing deposits and savings/money market accounts which was partially offset by the increase in time deposits. Average noninterest bearing deposits of total deposits for the three months ended March 31, 2023 and 2022 were 37.4% and 36.1%, respectively. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets. As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or "customer repurchase agreement," allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $37.9 million at March 31, 2023 compared to $35.1 million at December 31, 2022. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed mortgage-backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. At March 31, 2023 the Company had $1.3 billion in time deposits an increase of $554.3 million from year end December 31, 2022. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning. Throughout the year, the Bank raised rates in most of its time deposit accounts in response to the increased disintermediation of deposits, and the current rate environment with continued rate increases. The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, the Company had $1.3 billion and $975.0 million, respectively, of FHLB short-term advances borrowed as well as an $800.0 million one year fixed rate advance, maturing on March 26, 2024 from the BTFP as part of the overall asset liability strategy and to support loan growth. Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities and a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios. Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities. Long-term borrowings outstanding at March 31, 2023 and December 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024. 48 Liquidity Management Liquidity is a measure of the Company's and Bank's ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank's primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 59% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. The following table summarizes the Company's secondary sources of liquidity in use and available at March 31, 2023: (dollars in thousands, except amount in the footnotes) Secondary Sources of Liquidity in Use Secondary Sources of Liquidity Available March 31, 2023: Unsecured brokered deposits (1) $ 1,069,510 $ 1,688,929 FHLB secured borrowings 1,313,801 653,946 FRB: BTFP secured borrowings 800,000 37,182 Discount window secured borrowings — 606,201 Federal funds lines — 155,000 Customer repurchase agreements 37,854 — Raymond James repurchase agreement — 18,050 Unpledged assets: (2) Interest-bearing deposits with banks N/A 41,731 Investment securities N/A 1,075,303 Total $ 3,221,165 $ 4,276,342 (1) The available liquidity from the unsecured brokered deposits represents unsecured funds under one-way CDARS and ICS brokered deposits that would require then current market rates and be dependent on the availability of funds in those networks. (2) Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing. The Bank can purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no outstanding amount at March 31, 2023, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $53.2 million outstanding at March 31, 2023. The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $702.4 million of brokered deposits at March 31, 2023. At March 31, 2023, the Bank was also eligible to draw on advances from the FHLB up to $2.0 billion based on assets pledged as collateral to the FHLB, of which there was $1.3 billion outstanding at March 31, 2023. The Bank had posted additional collateral to the FHLB in the first quarter of 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize and expand this source of funding in the future. In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP. The BTFP provides eligible depository institutions, including the Bank, an additional source of liquidity. At March 31, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $837.2 million on assets that have been pledged, of which $800.0 million was outstanding. This alternative source of liquidity will be utilized for balance sheet optimization. The program permits advances to be requested until March 2024, unless extended by the Federal Reserve Bank. There can be no assurance, however, that the opportunity to further borrow from the BTFP will continue to be available beyond March 2024. Once the BTFP program terminates, we may be required to rely on other, potentially more expensive, sources of liquidity. 49 The Bank's aggregate borrowing capacity at March 31, 2023 was $1.7 billion which consists of $688.9 million of additional aggregate capacity to borrow from the Federal Home Loan Bank of Atlanta ("FHLB") and Bank Term Funding Program ("BTFP") on assets that have been pledged. The Bank also has unencumbered securities totaling approximately $1.1 billion available for pledging to the FHLB or the BTFP for additional borrowing capacity. 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 $606.2 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates from alternative savings and investment sources. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive. There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run, but the use of such sources may negatively impact our net interest margin and our earnings, as the use of such sources did in the first quarter of 2023, and there can be no assurance that they will be adequate to meet our liquidity needs. However, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment. Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships.. The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank’s interest expense and net interest margin, as the transfer of some noninterest-bearing deposits to interest-bearing deposits did in the first quarter of 2023. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The ALCO has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations. We maintain a liquid investment portfolio outside of our held-to-maturity investments, including overnight liquidity. In the first three months of 2023, average short term liquidity was $2.2 billion, which is above the Bank's average needs. Secondary sources of liquidity at March 31, 2023 were $4.3 billion, which include the FHLB, BTFP, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window. At March 31, 2023, the Company held total unpledged securities with a fair value of $1.1 billion, including $488.8 million of available-for-sale securities and $630.5 million of held-to-maturity securities. Commitments and Contractual Obligations Loan commitments outstanding and lines and letters of credit at March 31, 2023 are as follows: (dollars in thousands) Unfunded loan commitments $ 2,332,199 Unfunded lines of credit 110,355 Letters of credit 93,469 Total $ 2,536,023 Unfunded loan commitments are agreements whereby the Bank has made a commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract and the borrower has accepted the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of March 31, 2023, unfunded loan commitments included $2.2 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature. The pipeline of loan commitments remains strong. 50 Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since lines of credit may expire without being drawn, the total unfunded line of credit amount does not necessarily represent future cash requirements. Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank's customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank's net income is largely dependent on net interest income. The Bank's ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and overseen by the Audit Committee and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide net interest income growth consistent with the Company's profit objectives. During the three months ended March 31, 2023, the Company was able to produce a net interest margin of 2.77% as compared to 2.65% during the same period in 2022 and continues to manage its overall interest rate risk position. The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio of mortgage-backed securities. Further, the Company has been principally collecting cash flows off of the investment portfolio to provide liquidity. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. At March 31, 2023, the amortized cost less allowance of the investment portfolio decreased by $58.6 million, or 2.0%, as compared to the balance at December 31, 2022. The percentage mix of municipal securities was 5% of total investments at March 31, 2023 and December 31, 2022. The portion of the portfolio invested in mortgage-backed securities was 63% at March 31, 2023 and December 31, 2022. The portion of the portfolio invested in U.S. agency investments was 26% and 25% at March 31, 2023 and December 31, 2022, respectively. Shorter duration floating rate corporate bonds were 5% of total investments at March 31, 2023 and December 31, 2022. At March 31, 2023, these corporate bonds included $95.8 million of subordinated debt issued by 23 banking organizations. If any of these banking organizations were to enter into bankruptcy or other insolvency proceedings, we could experience losses that may be material to our results of operations and financial condition. U.S. treasury bonds were 2% of total investments at March 31, 2023 and December 31, 2022. The duration of the investment portfolio decreased to 4.7 years at March 31, 2023 from 4.8 years at December 31, 2022. The re-pricing duration of the loan portfolio was 13 months at March 31, 2023 and 13 months at December 31, 2022 with fixed rate loans amounting to 37% of total loans at March 31, 2023 and 38% at December 31, 2022. Variable and adjustable rate loans comprised 63% of total loans at March 31, 2023 and 62% at December 31, 2022, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, SOFR, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. The duration of the deposit portfolio increased as rates rose, measuring 36 months at March 31, 2023 and 29 months at December 31, 2022. The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $181.2 million and $205.2 million at March 31, 2023 and December 31, 2022, respectively. The change is primarily due to improved market conditions and related economic factors. At March 31, 2023, the net unrealized loss position represented 10.3% of the investment portfolio's book value. 51 Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy. Although the Company has experienced net interest margin compression during the three months ended March 31, 2023, the Company's interest rate risk modeling shows net interest margin expansion in an increasing rate environment. The model's prediction is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations with no changes in the mix of assets or liabilities. Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded. The weighted average rate of the Company's variable rate loans increased by approximately 41 basis points from December 31, 2022 to March 31, 2023 in connection with the 50 basis points in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank. At December 31, 2022, the Company had a portfolio of $3.1 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.08%. At March 31, 2023, only $233.0 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date. Additionally, the Company’s cost of interest bearing deposits increased by 91 basis points across its interest-bearing deposits, which comprise 70% of its total deposits, at March 31, 2023. The Company employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, deposit decay rates, and the level of noninterest income and noninterest expense. The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100, 200, and 300 basis points, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve period from March 31, 2023. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate "ramps" is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes. For the analysis presented below, at March 31, 2023, the simulation assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 10 basis points in the same analysis as of March 31, 2022), and assumes a 45 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates. Thus, the overall measure of the correlation between deposit costs and market rate changes was approximately 70%. The Company's analysis at March 31, 2023 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. The repricing duration of the investment portfolio at March 31, 2023 is 4.7 years, the loan portfolio 1.1 years, the interest bearing deposit portfolio 3.0 years, and the borrowed funds portfolio 0.4 years. 52 The following table reflects the result of simulation analysis on the March 31, 2023 asset and liabilities balances: Change in interest rates (basis points) Percentage change in net interest income Percentage change in net income Percentage change in market value of portfolio equity + 400 26.9% 56.4% 2.6% + 300 20.9% 43.7% 2.5% + 200 15% 31.4% 2.3% + 100 9% 18.7% 1.5% — — — — - 100 (1.3)% (2.6)% (2.5)% - 200 (4.3)% (8.8)% (7.2)% - 300 (6.4)% (13.3)% (15.2)% The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2023 are not believed to be excessive. The impact of -1.3% in net interest income and -2.6% in net income given a 100 basis point decrease in market interest rates reflects in large measure the ability to quickly reprice deposits downward while recently booked loans would take time to re-price. In the first three quarters of 2023, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. During the first quarter of 2023, average market interest rates increased across the yield curve as compared to the 2022 year end. Capital Resources and Adequacy The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company's current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. 53 The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At March 31, 2023, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 109% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Capital Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. The FRB and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At March 31, 2023, the Company and the Bank meet all these requirements. The Company’s capital position remained strong for the three months ended March 31, 2023 as a result of good earnings, improved economic conditions and strong asset quality. As a result of the Company’s strong capital position and earnings, we were able to continue our quarterly dividend. Additionally, the Company was active in share repurchase activity as we repurchased 400,000 shares at an average price of $45.65 per share during three months ended March 31, 2023. On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program to take effect starting January 2, 2023, after the expiration of the previous repurchase program on December 31, 2022. The Board of Directors authorized the repurchase of 1,600,000 shares of common stock, or approximately 5% of the Company's outstanding shares of common stock, under the 2023 Repurchase Program, which will expire on December 31, 2023, unless earlier terminated by the Board of Directors. The 2023 Repurchase Program does not limit the number of shares that can be repurchased each quarter. Though the Company repurchased 400,000 shares of its common stock in the quarter ended March 31, 2023, we expect the pace of share repurchases to increase beginning in the second quarter of 2023. The Company announced a regular quarterly cash dividend on March 16, 2023 of $0.45 per share to shareholders of record on April 6, 2023 and was paid on April 28, 2023. 54 The capital amounts and ratios for the Company and Bank as of March 31, 2023 and December 31, 2022 are presented in the table below. Company Bank Minimum Required Basel III To Be Well-Capitalized Under Prompt Corrective Action Regulations (1) Actual Actual (dollars in thousands) Amount Ratio Amount Ratio March 31, 2023 CET1 capital (to risk weighted assets) $ 1,322,895 13.75 % $ 1,309,828 13.68 % 7.00 % 6.50 % Total capital (to risk weighted assets) 1,417,883 14.74 % 1,389,370 14.51 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) 1,322,895 13.75 % 1,309,828 13.68 % 8.50 % 8.00 % Tier 1 capital (to average assets) 1,322,895 11.42 % 1,309,828 11.36 % 4.00 % 5.00 % December 31, 2022 CET1 capital (to risk weighted assets) $ 1,329,971 14.03 % $ 1,341,347 14.23 % 7.00 % 6.50 % Total capital (to risk weighted assets) 1,415,854 14.94 % 1,412,904 14.99 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) 1,329,971 14.03 % 1,341,347 14.23 % 8.50 % 8.00 % Tier 1 capital (to average assets) 1,329,971 11.63 % 1,341,347 11.78 % 4.00 % 5.00 % (1) Applies to the Bank only. Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At March 31, 2023 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above. In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the option provided by the March 2020 interim final rule. Use of Non-GAAP Financial Measures The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP. Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, tangible book value per common share excluding accumulated other comprehensive loss ("AOCI"), the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. To calculate the tangible book value per common share excluding the AOCI, tangible common equity is reduced by the loss on the AOCI before dividing by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank's overhead as a percentage of its revenue. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. 55 GAAP Reconciliation (dollars in thousands except per share data) March 31, 2023 December 31, 2022 Common shareholders' equity $ 1,241,958 $ 1,228,321 Less: Intangible assets (104,226) (104,233) Tangible common equity $ 1,137,732 $ 1,124,088 Book value per common share $ 39.92 $ 39.18 Less: Intangible book value per common share (3.35) (3.32) Tangible book value per common share $ 36.57 $ 35.86 Book value per common share $ 39.92 $ 39.18 Add: AOCI book value per common share 5.81 6.36 Adjusted book value excluding AOCI per common share $ 45.73 $ 45.54 Tangible book value per common share $ 36.57 $ 35.86 Add: AOCI book value per common share 5.81 6.36 Adjusted tangible book value excluding AOCI per common share $ 42.38 $ 42.22 Total assets $ 11,088,867 $ 11,150,854 Less: Intangible assets (104,226) (104,233) Tangible assets $ 10,984,641 $ 11,046,621 Tangible common equity ratio 10.36 % 10.18 % Three Months Ended March 31, (dollars in thousands) 2023 2022 Average common shareholders' equity $ 1,240,978 $ 1,341,785 Less: Average intangible assets (104,231) (104,246) Average tangible common equity $ 1,136,747 $ 1,237,539 Net income available to common shareholders $ 24,234 $ 45,744 Average tangible common equity 1,136,747 1,237,539 Annualized return on average tangible common equity 8.65 % 14.99 % Three Months Ended March 31, (dollars in thousands) 2023 2022 Net interest income $ 75,024 $ 80,452 Noninterest income 3,700 7,453 Revenue $ 78,724 $ 87,905 Noninterest expense $ 40,584 $ 31,012 Efficiency ratio 51.55 % 35.28 % Item 3. Quantitative and Qualitative Disclosures about Market Risk Please refer to Item 2 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk." 56