What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 324 added, 329 removed, 607 unchanged (52% of the section changed)

22 unchanged sentences

The Bank also operates four lending offices, with one in Northern Virginia, two in Suburban Maryland and one in Washington, D.C.

During the first six months of 2023, three branches were closed as they had expiring leases.

During the first nine months of 2023, three branches were closed as they had expiring leases.

The branches' clients will be served from our other branches, and through digital channels.

33 unchanged sentences

If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.

During the six months ended June 30, 2023, Management determined that a triggering event had occurred as a result of a sustained decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget for the remainder of 2023 due primarily to the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent events in the banking sector.

As a result, the Company performed a qualitative assessment and quantitative impairment test on its only reporting unit as of May 31, 2023.

The Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company.

During the second quarter of 2023, Management determined that a triggering event had occurred as a result of a sustained decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget for the remainder of 2023 due primarily to the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent events in the banking sector.

The Company performed a qualitative assessment and quantitative impairment test on its only reporting unit as of May 31, 2023.

The Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2023.

A combination of a risk-weighted income valuation methodology, comprising a discounted cash flow analysis, and a market valuation methodology, comprising the guideline public company method, was employed.

2 unchanged sentences

Actual future cash flows may differ from forecasted results based on the assumptions used.

In performing the discount cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations.

In performing the discounted cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations.

The long-term growth rate used in the calculation of fair value was derived from published projections of the inflation rate and GDP, along with Management estimates.

1 unchanged sentence

The market approach considers a combination of price to tangible book value and price to earnings, adjusted based on companies similar to the reporting unit and adjusted for selected multiples, along with a control premium based on a review of transactions in the banking industry in order to calculate the indicated value of the Company's equity on a control, marketable basis.

The resulting calculation of fair value exceeded the carrying amount of the Company by approximately 17%, which resulted in no impairment loss.

The resulting calculation of fair value exceeded the carrying amount of the Company by approximately 17% as of May 31, 2023, which resulted in no impairment loss.

Future events could cause the Company to conclude that the Company’s goodwill has become impaired, which would result in recording an impairment loss.

Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Management will continue evaluating the economic conditions at future reporting periods for triggering events.

Management has evaluated and will continue to evaluate economic conditions in interim periods for triggering events.

RESULTS OF OPERATIONS

Earnings Summary

Three Months Ended June 30, 2023 vs.

Three Months Ended June 30, 2022

Net income for the three months June 30, 2023 was $28.7 million as compared to $15.7 million for the same period in 2022, a $13.0 million increase, or 82.8%.

The increase in net income of $13.0 million for the three months ended June 30, 2023 relative to the same period in 2022 was due to a decrease in noninterest expenses of $21.0 million, an increase in noninterest income of $3.0 million and a reduction of income tax expense of $4.6 million which were partially offset by a decrease in net interest income of $11.1 million and an increase in provision for credit losses of $4.7 million.

Net interest income decreased primarily due to an increase in interest rates impacting deposits and funding costs that exceed the increase in total interest income.

The decrease in noninterest expense is primarily due to the accrual in the second quarter of 2022 of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million.

The accrual was partially offset by an increase in FDIC insurance of $1.7 million.

Three Months Ended September 30, 2023 vs.

Three Months Ended September 30, 2022

Net income for the three months September 30, 2023 was $27.4 million as compared to $37.3 million for the same period in 2022, a $9.9 million decrease, or 26.6%.

The decrease in net income of $9.9 million for the three months ended September 30, 2023 relative to the same period in 2022 was due to a decrease in net interest income of $13.2 million, an increase in provision for credit losses of $2.6 million, and an increase in noninterest expenses of $1.4 million, the total of which was partially offset by a reduction of income tax expense of $4.7 million, a decrease in the provision for unfunded commitments of $1.6 million, and an increase in noninterest income of $1.0 million.

Net interest income decreased primarily due to an increase in interest rates impacting deposits and funding costs that exceeded the increase in total interest income, which in part was affected by the reversal of $1.6 million of interest income during the three months ended September 30, 2023 on a loan that entered nonperforming status.

Noninterest expenses included an increase in FDIC insurance assessments of $2.1 million.

Noninterest income increased primarily due to an increase in other income of $1.5 million.

The Company did not close any residential mortgage locked commitments for the three months ended June 30, 2023 compared to $92.0 million for the three months ended June 30, 2022.

The increase in the provision was primarily driven by the fluctuations in the qualitative and economic factors of the credit model in the second quarter of 2023 compared to the second quarter of 2022.

Additional details on the accrual for the agreements and other noninterest expenses are provided in the "Noninterest Expense" section below.

The increase in the provision was primarily driven by the fluctuations in the qualitative and economic factors of the credit model in the third quarter of 2023 compared to the third quarter of 2022.

Additional details on other noninterest expenses are provided in the "Noninterest Expense" section below.

Total revenue (i.e.

net interest income plus noninterest income) was $80.4 million for the three months ended June 30, 2023 as compared to $88.5 million for the same period in 2022.

The most significant portion of revenue is net interest income, which was $71.8 million for the three months ended June 30, 2023, compared to $82.9 million for the same period in 2022.

net interest income plus noninterest income) was $77.1 million for the three months ended September 30, 2023 as compared to $89.2 million for the same period in 2022.

The most significant portion of revenue is net interest income, which was $70.7 million for the three months ended September 30, 2023, compared to $83.9 million for the same period in 2022.

Net interest income decreased primarily due to an increase in interest expense from increased interest rates on deposits and borrowings, which was partially offset by an increase in interest income on loans.

The primary driver for the increase in noninterest income was income from an SBIC fund and an increase in swap fee income that was partially offset by a decrease in gain on sale of residential loans and fees associated with residential mortgage loans.

The increase in interest income on loans included the impact of the reversal of interest income on the loan that entered nonperforming status during the three months ended September 30, 2023.

The primary driver for the increase in noninterest income was an increase in swap fee income that was partially offset by a decrease from a gain to a loss on the sales 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 2.49% for the three months ended June 30, 2023 and 2.94% for the same period in 2022.

net interest income) as a percentage of earning assets, was 2.43% for the three months ended September 30, 2023 and 3.02% for the same period in 2022.

The $1.6 million reversal of interest income on a loan that entered nonperforming status during the three months ended September 30, 2023 reduced the net interest margin by 0.06%.

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

Total noninterest income for the three months ended June 30, 2023 increased to $8.6 million from $5.6 million for the same period in 2022, a 54.5% increase.

Noninterest income increased primarily due to an increase in other income driven by $2.8 million in income from an investment in an SBIC fund and an increase in swap fee income of $623 thousand, which was partially offset by a decrease in gain on sale of residential 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 June 30, 2023 was $95 thousand compared to $855 thousand for the same period in 2022, a decrease of $760 thousand.

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.

Other income for the three months ended June 30, 2023 increased to $6.2 million from $2.9 million for the same period in 2022, a 115.9% increase.

This increase was primarily attributable to $2.8 million in income from an investment in an SBIC fund and an increase in swap fee income of $623 thousand.

Noninterest expense totaled $38.0 million for the three months ended June 30, 2023, as compared to $59.0 million for same period in 2022, a $21.0 million decrease.

The decrease in noninterest expense was primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million.

No such penalty fees were incurred in 2023.

The accrual was partially offset by an increase in FDIC insurance of $1.7 million.

Additional details on the accrual for the agreements and other noninterest expenses are provided in "Noninterest Expense" section below.

Income tax expenses were $8.2 million for the three months ended June 30, 2023, a reduction of 36.0%, compared to the same period in 2022.

Total noninterest income for the three months ended September 30, 2023 increased to $6.3 million from $5.3 million for the same period in 2022, a 19.6% increase.

Noninterest income increased primarily due to an increase in other income driven by an increase in swap fee income of $1.2 million, which was partially offset by a decrease from a gain to a loss on sales of residential loans.

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

Other income for the three months ended September 30, 2023 increased to $4.0 million from $2.5 million for the same period in 2022, a 61.0% increase.

This increase was primarily attributable to an increase in swap fee income of $1.2 million.

Loss on sale of loans for the three months ended September 30, 2023 was $5 thousand compared to an $821 thousand gain for the same period in 2022, a decrease to earnings of $826 thousand.

The decline from a gain to a loss on sales of loans was due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced.

Noninterest expense totaled $37.6 million for the three months ended September 30, 2023, as compared to $36.2 million for same period in 2022, a $1.4 million increase.

The increase in noninterest expense was primarily due to an increase in FDIC insurance assessments of $2.1 million.

Additional details on other noninterest expenses are provided in "Noninterest Expense" section below.

Income tax expenses were $7.2 million for the three months ended September 30, 2023, a reduction of 39.1%, 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 47.23% for the three months ended June 30, 2023, as compared to 66.64% for the same period in 2022.

The improvement in the efficiency ratio was primarily driven by the decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million.

The efficiency ratio was 48.83% for the three months ended September 30, 2023, as compared to 40.59% for the same period in 2022.

The adverse change in the efficiency ratio was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings.

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

For the three months ended June 30, 2023, the Company reported an annualized return on average assets ("ROAA") of 0.96%, as compared to 0.54% for the same period in 2022.

The annualized return on average common equity ("ROACE") for the three months ended June 30, 2023 was 9.24% as compared to 4.91% for the same period in 2022.

The annualized return on average tangible common equity ("ROATCE") for the three months ended June 30, 2023 was 10.08% as compared to 5.35% for the same period in 2022.

The increase in returns was primarily attributable to the increase in net income.

For the three months ended September 30, 2023, the Company reported an annualized return on average assets ("ROAA") of 0.91%, as compared to 1.29% for the same period in 2022.

The annualized return on average common equity ("ROACE") for the three months ended September 30, 2023 was 8.80% as compared to 11.64% for the same period in 2022.

The annualized return on average tangible common equity ("ROATCE") for the three months ended September 30, 2023 was 9.61% as compared to 12.67% for the same period in 2022.

The adverse change in returns was primarily attributable to the 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.

Six Months Ended June 30, 2023 vs.

Six Months Ended June 30, 2022

Net income for the six months ended June 30, 2023 was $52.9 million as compared to $61.4 million for the same period in 2022, a decrease of $8.5 million, or 13.9%.

The decrease in net income of $8.5 million for the six months ended June 30, 2023 relative to the same period in 2022 was due to a decrease net interest income of $16.5 million, an increase in provision for credit losses of $13.7 million and a decrease in noninterest income of $722 thousand.

These were offset by a decrease in noninterest expenses of $11.4 million, and a reduction of income tax expense of $11.6 million.

Nine Months Ended September 30, 2023 vs.

Nine Months Ended September 30, 2022

Net income for the nine months ended September 30, 2023 was $80.3 million as compared to $98.7 million for the same period in 2022, a decrease of $18.4 million, or 18.7%.

The decrease in net income of $18.4 million for the nine months ended September 30, 2023 relative to the same period in 2022 was due to a decrease in net interest income of $29.7 million and an increase in provision for credit losses of $16.3 million.

These were offset by a decrease in the provision for unfunded commitments of $1.0 million, a decrease in noninterest expenses of $10.0 million, and a reduction of income tax expense of $16.3 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 the first six months of 2022, while there was a provision in the first six months of 2023.

The provision was driven by loan growth and a higher allowance for CRE office properties.

Noninterest income decreased primarily due to decreases in fees associated with residential loans and gain on sale of residential loans which were partially offset by income from an SBIC fund and swap fee income.

During the six months ended June 30, 2023, the Company closed residential mortgage locked commitments of $32.8 million, down from $228.7 million for the six months ended June 30, 2022.

Noninterest expenses decreased primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million.

The decrease in noninterest expenses was offset by increase in salaries and benefits of $7.3 million and legal and professional fees of $2.2 million and FDIC insurance of $2.1 million.

These increases in interest expense exceeded the increase to interest income driven by rate growth during the comparative period.

The provision for credit losses increased to $17.0 million during the nine months ended September 30, 2023 from $730 thousand during the nine months ended September 30, 2022.

Noninterest income increased primarily due to an increase in swap fee income which was partially offset by a decrease in gain on the sales of residential loans and fees associated with residential mortgage loans.

During the nine months ended September 30, 2023, the Company closed residential mortgage locked commitments of $32.8 million, down from $286.2 million for the nine months ended September 30, 2022.

Noninterest expenses decreased $10.0 million primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million.

This was offset by an increase in salaries and benefits of $7.3 million and legal and professional fees of $2.1 million and FDIC insurance assessments of $4.2 million.

Additional details on the accrual for the agreements and other noninterest expenses are provided in "Noninterest Expense" section below.

Total revenue (i.e.

net interest income plus noninterest income) was $159.1 million for the six months ended June 30, 2023 as compared to $176.4 million for the same period in 2022.

The most significant portion of revenue is net interest income, which was $146.8 million for the six months ended June 30, 2023, compared to $163.4 million for the same period in 2022.

net interest income plus noninterest income) was $236.2 million for the nine months ended September 30, 2023 as compared to $265.6 million for the same period in 2022.

The most significant portion of revenue is net interest income, which was $217.6 million for the nine months ended September 30, 2023, compared to $247.3 million for the same period in 2022.

Net interest income decreased primarily due to increased interest expense due to higher 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 mortgage loans and fees associated with residential mortgage loans.

The primary driver for the increase in noninterest income was an increase in swap fees which was partially offset by a decrease in gain on the sales of residential mortgage 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 2.63% for the six months ended June 30, 2023 and 2.79% for the same period in 2022.

net interest income) as a percentage of earning assets, was 2.56% for the nine months ended September 30, 2023 and 2.86% 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 six months ended June 30, 2023 decreased to $12.3 million from $13.0 million for the same period in 2022, a 5.5% decrease.

Noninterest income decreased primarily due to a decline in gain on sale of residential loans.

Total noninterest income for the nine months ended September 30, 2023 increased to $18.6 million from $18.3 million for the same period in 2022, a 1.7% increase.

Noninterest income increased primarily due to an increase in swap fees that was partially offset by a decline in gain on the sales of residential loans.

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

Gain on sale of loans for the six months ended June 30, 2023 was $400 thousand compared to $2.3 million for the same period in 2022, a decrease of 83.0%.

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.

Other income for the six months ended June 30, 2023 increased to $7.5 million from $7.0 million for the same period in 2022, a 7.4% increase.

Noninterest income increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund and BOLI income of $846 thousand which was partially offset by reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand and credit card income of $646 thousand.

Noninterest expense totaled $78.6 million for the six months ended June 30, 2023, as compared to $90.0 million for same period in 2022, a 12.7% decrease.

This decrease was partially offset by increases in salaries and benefits of $7.3 million, legal and professional fees of $2.2 million and $2.1 million in FDIC insurance.

Other income for the nine months ended September 30, 2023 increased to $11.5 million from $9.5 million for the same period in 2022, a 21.7% increase.

Noninterest income increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund, $1.5 million in swap fees, and BOLI income of $846 thousand, the total of which was partially offset by reductions in credit card income of $1.5 million, mortgage servicing fees of $887 thousand, and other loan fees of $808 thousand.

Gain on sale of loans for the nine months ended September 30, 2023 was $395 thousand compared to $3.2 million for the same period in 2022, a decrease of 87.5%.

The decline in gain on the sales of loans is due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced.

Noninterest expense totaled $116.2 million for the nine months ended September 30, 2023, as compared to $126.2 million for same period in 2022, a 7.9% decrease.

The decrease in noninterest expense was primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million.

This was partially offset by increases in salaries and benefits of $7.3 million, legal and professional fees of $2.1 million and $4.2 million in FDIC insurance assessments.

Additional details on the accrual for the agreements and other noninterest expenses are provided in "Noninterest Expense" section below.

Income tax expenses were $15.1 million for the six months ended June 30, 2023, a reduction of 43.6%, compared to the same period in 2022.

Income tax expenses were $22.3 million for the nine months ended September 30, 2023, a reduction of 42.2%, 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 49.37% for the six months ended June 30, 2023, as compared to 51.01% for the same period in 2022.

The improvement in the efficiency ratio was driven by a decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million, partially offset by an increase in interest expense, and a reduction in noninterest income.

The efficiency ratio was 49.19% for the nine months ended September 30, 2023, as compared to 47.51% for the same period in 2022.

The adverse change in the efficiency ratio was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings which was partially offset by the decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million.

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

For the six months ended June 30, 2023, the Company reported an annualized ROAA of 0.91%, as compared to 1.02% for the same period in 2022.

The annualized ROACE for the six months ended June 30, 2023 was 8.58% as compared to 9.45% for the same period in 2022.

The annualized ROATCE for the six months ended June 30, 2023 was 9.37% as compared to 10.26% for the same period in 2022.

For the nine months ended September 30, 2023, the Company reported an annualized ROAA of 0.91%, as compared to 1.11% for the same period in 2022.

The annualized ROACE for the nine months ended September 30, 2023 was 8.66% as compared to 10.17% for the same period in 2022.

The annualized ROATCE for the nine months ended September 30, 2023 was 9.45% as compared to 11.06% for the same period in 2022.

The decline in returns was primarily attributable to a reduction in net income.

6 unchanged sentences

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 $71.8 million for the three months ended June 30, 2023, as compared to $82.9 million for the same period in 2022.

Net interest income decreased for the three months ended June 30, 2023 primarily due to increases in average deposit rates (4.00% compared to 0.73%) and other short-term borrowings (4.80% compared to 0.83%), which were partially offset by higher average loan balances and yields (6.64% compared to 4.51%) as compared to June 30, 2022.

The net interest margin decreased by 45 basis points from three months ended June 30, 2022 as compared to the three months ended June 30, 2023 (from 2.94% to 2.49%).

Net interest income was $70.7 million for the three months ended September 30, 2023, as compared to $83.9 million for the same period in 2022.

Net interest income decreased for the three months ended September 30, 2023 primarily due to increases in average deposit rates (4.20% compared to 1.70%) and other short-term borrowings (4.68% compared to 2.65%), which were partially offset by higher average loan balances and yields (6.73% compared to 5.10%) as compared to September 30, 2022.

The net interest margin decreased by 59 basis points from three months ended September 30, 2023, as compared to the three months ended September 30, 2022, (from 3.02% to 2.43%).

The $1.6 million reversal of interest income during the three months ended September 30, 2023 reduced the net interest margin by 0.06%.

The yield on earning assets increased by 153 basis points (from 4.01% to 5.54%) while cost of funds increased 230 basis points (from 1.09% to 3.39%), refer to footnote 3 in the Consolidated Average Balances, Interest Yields and Rates tables below for additional information.

Average loans (excluding loans held for sale) were $7.8 billion for the three months ended June 30, 2023 compared to $7.1 billion for the same period in 2022.

Additionally, average borrowings increased from $127.5 million in the three months ended June 30, 2022 to $2.1 billion in the three months ended June 30, 2023.

Overall yields and rates moved higher during the three months ended June 30, 2023 as compared to the same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.

Net interest income was $146.8 million for the six months ended June 30, 2023, as compared to $163.4 million for the same period in 2022.

Net interest income decreased for the six months ended June 30, 2023 primarily due to increases in average deposit rates (3.89% compared to 0.54%) and other short-term borrowings (4.78% compared to 0.70%), which were partially offset by higher average loan balances and yields (6.50% compared to 4.43%) as compared to June 30, 2022.

The net interest margin decreased by 16 basis points from six months ended June 30, 2022 as compared to the six months ended June 30, 2023 (from 2.79% to 2.63%).

The yield on earning assets increased by 217 basis points (from 3.14% to 5.31%) while cost of funds increased 254 basis points (from 0.38% to 2.92%), due in part to a change in the methodology of calculation, see the tables below.

Average loans (excluding loans held for sale) were $7.8 billion for the six months ended June 30, 2023 compared to $7.1 billion for the same period in 2022.

Additionally, average borrowings increased from $236.3 million in the six months ended June 30, 2022 to $1.7 billion in the six months ended June 30, 2023.

Overall yields and rates moved higher during the six months ended June 30, 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 tables below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three and six months ended June 30, 2023 and 2022.

Average loans (excluding loans held for sale) were $7.8 billion for the three months ended September 30, 2023 compared to $7.3 billion for the same period in 2022.

Additionally, average borrowings increased from $131.5 million in the three months ended September 30, 2022 to $1.6 billion in the three months ended September 30, 2023.

Overall yields and rates moved higher during the three months ended September 30, 2023 as compared to the same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.

Net interest income was $217.6 million for the nine months ended September 30, 2023, as compared to $247.3 million for the same period in 2022.

Net interest income decreased for the nine months ended September 30, 2023 primarily due to increases in average deposit rates (4.03% compared to 0.91%) and other short-term borrowings (4.78% compared to 1.01%), which were partially offset by higher average loan balances and yields (6.58% compared to 4.66%) as compared to September 30, 2022.

The net interest margin decreased by 30 basis points from nine months ended September 30, 2022 as compared to the nine months ended September 30, 2023 (from 2.86% to 2.56%).

The yield on earning assets increased by 197 basis points (from 3.42% to 5.39%) while cost of funds increased 247 basis points (from 0.61% to 3.08%).

Average loans (excluding loans held for sale) were $7.8 billion for the nine months ended September 30, 2023 compared to $7.1 billion for the same period in 2022.

Additionally, average borrowings increased from $201.0 million in the nine months ended September 30, 2022 to $1.7 billion in the nine months ended September 30, 2023.

Overall yields and rates moved higher during the nine months ended September 30, 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 tables below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three and nine months ended September 30, 2023 and 2022.

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

6 unchanged sentences

(dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Balance Interest Average

39 unchanged sentences

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

Net loan fees and late charges included in interest income on loans totaled $4.2 million and $4.3 million for the three months ended June 30, 2023 and 2022, respectively.

Net loan fees and late charges included in interest income on loans totaled $4.1 million and $3.4 million for the three months ended September 30, 2023 and 2022, respectively.

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

1 unchanged sentence

Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin.

Under the current methodology, the cost of funds for the first quarter 2023 was 2.62%, the fourth quarter 2022 was 1.74% and the third quarter 2022 was 1.09%.

The cost of funds for the three months ended September 30, 2022 has been recalculated using the current methodology.

Eagle Bancorp, Inc.

1 unchanged sentence

(dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest Average

39 unchanged sentences

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

Net loan fees and late charges included in interest income on loans totaled $7.9 million and $8.0 million for the six months ended June 30, 2023 and 2022, respectively.

Net loan fees and late charges included in interest income on loans totaled $12.0 million and $11.5 million for the nine months ended September 30, 2023 and 2022, respectively.

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

1 unchanged sentence

Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin.

The cost of funds for the nine months ended September 30, 2022 has been recalculated using the current methodology.

Rate/Volume Analysis of Net Interest Income

The rate/volume tables below presents the composition of the change in net interest income for the period indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates.

Three Months Ended June 30, 2023

Compared With

Three Months Ended June 30, 2022

Three Months Ended September 30, 2023

Compared With The

Three Months Ended September 30, 2022

(dollars in thousands) Change

16 unchanged sentences

Net interest income $ (3,443) $ (9,735) $ (13,178)

Six Months Ended June 30, 2023

Compared With

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023

Compared With The

Nine Months Ended September 30, 2022

(dollars in thousands) Change

19 unchanged sentences

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.

The provision for credit losses 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.

20 unchanged sentences

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 June 30, 2023, the ACL on loans reflected a provision of $5.3 million and $5.6 million in net charge-offs, which were primarily from two office properties outside of Washington, D.C.

The provision for credit losses on loans for the same period in 2022 reflected a provision of $486 thousand and $674 thousand in net recoveries.

During the six months ended June 30, 2023, the ACL on loans reflected a provision of $10.2 million and $6.6 million in net charge-offs.

During the same period in 2022, we recorded a reversal of credit losses of $2.5 million and $215 thousand in net recoveries.

For the first six 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.

These adjustments 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 and improvement of credits in the loan portfolio.

Additionally, the ACL on securities reflected a provision of $1.2 million for the first six months ended June 30, 2023 related to several corporate bonds in the held-to-maturity securities portfolio.

At June 30, 2023, the ACL for loans represented 1.00% of loans outstanding, as compared to 0.97% at December 31, 2022.

The ACL represented 268% of nonperforming loans at June 30, 2023, as compared to 1,151% at December 31, 2022.

During the three months ended September 30, 2023, the Company recorded a provision for credit losses of $5.6 million on its loan portfolio and incurred $340 thousand in net charge-offs to its ACL.

The provision for credit losses on loans for the same period in 2022 was $3.0 million and there were $56 thousand of net recoveries in its ACL.

During the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $15.8 million on its loan portfolio and incurred $6.9 million in net charge-offs to its ACL.

The provision for credit losses on loans for the same period in 2022 was $532 thousand and there were $270 thousand of net recoveries in its ACL.

For the three and nine months ended September 30, 2023, the provisions for credit losses were primarily driven by adjustments to the qualitative components of the CECL model combined with smaller increases in the quantitative components.

The increase in qualitative components was driven by increases in early-stage past due and perceived weakness in the commercial real estate market, in addition 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.

The increase in the quantitative components was due to continued increases in total loans during the nine months ended September 30, 2023, particularly in longer-life categories that carry corresponding higher reserves as well as slowing prepayment speeds in certain loan categories due to higher interest rates.

The increase in quantitative components was partially offset by modest improvements in the unemployment forecast.

These adjustments were also offset by improvements in the quality of the assets associated with individually assessed loans that were deemed impaired.

The provisions for credit losses during the three and nine months ended September 30, 2022 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, partially offset by improvements in asset quality.

A provision for credit losses on the securities portfolio of $1 thousand was recorded during the three months ended September 30, 2023, as compared to a reversal of credit losses of $24 thousand during the three months ended September 30, 2022.

During the nine months ended September 30, 2023, a provision for credit losses of $1.2 million was recorded, primarily on several corporate bonds in the held-to-maturity securities portfolio, while a net provision for credit losses of $198 thousand was recorded during the nine months ended September 30, 2022.

At September 30, 2023, the ACL for loans represented 1.05% of loans outstanding, as compared to 0.97% at December 31, 2022.

The ACL represented 119% of nonperforming loans at September 30, 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.

6 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands) 2023 2022

11 unchanged sentences

Total recoveries 406 2,304

Net charge-offs (6,573) 215

Provision for (reversal of) credit losses- loans 10,158 (2,515)

Net (charge-offs) recoveries (6,914) 270

Provision for credit losses - loans 15,802 532

Balance at end of period $ 83,332 $ 75,767

Annualized ratio of net charge-offs during the period to average loans outstanding during the period 0.17 % (0.01) %

Annualized ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period 0.12 % — %

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.

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

4 unchanged sentences

Construction - commercial and residential 8,633 10 % 11 % 7,195 10 % 12 %

Construction - C&I (owner-occupied) 1,894 2 % 2 % 1,606 2 % 1 %

Home equity 634 1 % 1 % 555 1 % 1 %

2 unchanged sentences

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 $30.6 million at June 30, 2023 representing 0.28% of total assets, as compared to $8.4 million of nonperforming assets, or 0.08% of total assets, at December 31, 2022.

As shown in the table below, the Company's level of nonperforming assets, which comprise the amortized cost of loans delinquent 90 days or more and nonaccrual loans, which include the nonperforming portion of loan restructurings, and the carrying value of OREO, totaled $71.6 million at September 30, 2023 representing 0.64% of total assets, as compared to $8.4 million of nonperforming assets, or 0.08% of total assets, at December 31, 2022.

The increase is primarily due to the increase in nonperforming loans discussed below.

At June 30, 2023, the Company had no accruing loans 90 days or more past due.

At September 30, 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 1.00% of total loans at June 30, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date.

Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.05% of total loans at September 30, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date.

On January 1, 2023, the Company adopted the accounting guidance in ASU No.

8 unchanged sentences

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

During the three months ended June 30 2023, the Bank modified eleven loans with a total amortized cost of $186.6 million at June 30, 2023 (2.4% of the loan portfolio).

These loans received extended loan terms of between approximately one to six months.

Three loans received a weighted average interest rate reduction of approximately 2.90%.

All loans are performing under their modified terms.

During the six months ended June 30 2023, the Bank modified thirteen loans with a total amortized cost of $196.0 million at June 30, 2023 (2.5% of the loan portfolio).

These loans received extended loan terms of between approximately one to twelve months.

Three loans received a weighted average interest rate reduction of approximately 2.90%.

One loan that was modified during the first quarter of 2023 was moved to nonaccrual status and incurred a $2.1 million charge-off in the second quarter of 2023, resulting in an amortized cost basis of $2.2 million at June 30, 2023.

During the three months ended September 30, 2023, the Bank modified 13 loans with a total amortized cost of $225.7 million at September 30, 2023 (2.9% of the loan portfolio).

These loans received extended loan terms of between approximately one to 36 months.

Two loans received a weighted average interest rate reduction of approximately 1.89%.

During the nine months ended September 30, 2023, the Bank modified 17 loans with a total amortized cost of $242.0 million at September 30, 2023 (3.1% of the loan portfolio).

These loans received extended loan terms of between approximately one to 36 months.

Five loans received a weighted average interest rate reduction of approximately 2.55%.

As of September 30, 2023, three loans that were modified in the preceding twelve months, including two loans with a total amortized cost of $44.9 million that were 30 to 89 days past due and one loan with an amortized cost of $20.4 million that was on nonaccrual status, experienced a subsequent payment default during the nine months ended September 30, 2023.

One loan with an amortized cost of $2.2 million at September 30, 2023, which was modified during the first quarter of 2023, moved to nonaccrual status and incurred a $2.1 million charge-off in the second quarter of 2023.

In October 2023, the loan was sold.

All other loans are performing under their modified terms.

1 unchanged sentence

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 $1.5 million and $2.0 million at June 30, 2023 and December 31, 2022, respectively.

One OREO property was sold during the three and six months ended June 30, 2023, and another property was sold in the three and six months ended June 30, 2022, generating proceeds of $609 thousand and $241 thousand, respectively.

Total nonperforming loans amounted to $29.1 million at June 30, 2023 (0.37% of total loans) compared to $6.5 million at December 31, 2022 (0.08% of total loans).

The increase was primarily from one commercial office note in Northern Virginia, of which a portion was charged off during the second quarter of 2023.

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

(dollars in thousands) June 30, 2023 December 31, 2022

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 carrying value of $1.5 million and $2.0 million at September 30, 2023 and December 31, 2022, respectively.

One OREO property was sold during the nine months ended September 30, 2023 and one OREO property was sold during the nine months ended September 30, 2022, generating proceeds of $609 thousand and $241 thousand, respectively.

Total nonperforming loans amounted to an amortized cost of $70.2 million at September 30, 2023 (0.89% of total loans) compared to $6.5 million at December 31, 2022 (0.08% of total loans).

The increase was primarily from one income producing CRE office note in Northern Virginia, of which approximately $3.2 million was charged off during the second quarter of 2023, and one construction - commercial and residential note in Washington, D.C.

The following table shows the amounts of nonperforming assets, including loans at amortized cost and OREO at the lower of cost or fair value less estimated costs to sell, at the dates indicated.

(dollars in thousands) September 30, 2023 December 31, 2022

Nonaccrual Loans:

4 unchanged sentences

Construction - commercial and residential 39,695 —

Home equity 245 —

Other consumer — 50

Accruing loans-past due 90 days — —

Total nonperforming loans 70,158 6,468

5 unchanged sentences

Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.

At June 30, 2023, there were $219.0 million of Substandard loans.

At September 30, 2023, there were $219.0 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.

2 unchanged sentences

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 June 30, 2023 increased to $8.6 million from $5.6 million for the three months ended June 30, 2022, a 54.5% increase.

Total noninterest income for the six months ended June 30, 2023 decreased to $12.3 million from $13.0 million for the six months ended June 30, 2022, a 5.5% decrease.

Service charges on deposits for the three months ended June 30, 2023 increased to $1.6 million from $1.3 million for the three months ended June 30, 2022.

Service charges on deposits for the six months ended June 30, 2023 increased to $3.1 from $2.6 million for the six months ended June 30, 2022.

Gain on sale of loans for the three months ended June 30, 2023 decreased to $95 thousand from $855 thousand for the three months ended June 30, 2022, an 88.9% decrease.

Gain on sale of loans for the six months ended June 30, 2023 decreased to $400 thousand from $2.3 million for the six months ended June 30, 2022, a $1.9 million, or 83.0% decrease.

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.

There were no residential mortgage loan locked commitments for the three months ended June 30, 2023 as compared to $92.0 million for the same period in 2022, a 100.00% decrease.

Residential mortgage loan locked commitments were $32.8 million for the six months ended June 30, 2023 as compared to $228.7 million for the same period in 2022, a 85.7% decrease.

Total noninterest income for the three months ended September 30, 2023 increased to $6.3 million from $5.3 million for the three months ended September 30, 2022, a 19.6% increase.

Total noninterest income for the nine months ended September 30, 2023 increased to $18.6 million from $18.3 million for the nine months ended September 30, 2022, a 1.7% increase.

Service charges on deposits for the three months ended September 30, 2023 increased to $1.6 million from $1.3 million for the three months ended September 30, 2022.

Service charges on deposits for the nine months ended September 30, 2023 increased to $4.8 million from $4.0 million for the nine months ended September 30, 2022.

Loss on the sales of loans for the three months ended September 30, 2023 was $5 thousand as compared to a gain of $821 thousand for the three months ended September 30, 2022, a 100.6% decrease.

Gain on sale of loans for the nine months ended September 30, 2023 decreased to $395 thousand from $3.2 million for the nine months ended September 30, 2022, a $2.8 million, or 87.5% decrease.

The reduction from a gain on the sales of loans to a loss for the comparative three months ended September 30, 2023 and 2022 and decline in the gain on the sales of loans for the comparative nine months ended September 30, 2023 and 2022 were due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced.

There were no residential mortgage loan locked commitments for the three months ended September 30, 2023 as compared to $57.5 million for the same period in 2022.

Residential mortgage loan locked commitments were $32.8 million for the nine months ended September 30, 2023 as compared to $286.2 million for the same period in 2022, a 88.5% decrease.

The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria.

The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023.

The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the first quarter of 2023.

The Company completed origination and sales activities as of the end of the second quarter of 2023.

Gain on the sale of investments for the three months ended June 30, 2023, was $2 thousand compared to a loss of $151 thousand for the three months ended June 30, 2022.

Loss on the sale of investments for the six months ended June 30, 2023, was $19 thousand compared to a loss of $176 thousand for the six months ended June 30, 2022.

The loss for the six months ended June 30, 2023 was due to the sale of 12 securities for a loss of $26 thousand which was partially offset by $7 thousand in gains on partial calls.

Other income for the three months ended June 30, 2023 increased to $6.2 million from $2.9 million for the three months ended June 30, 2022, a 115.9% increase.

Other income for the six months ended June 30, 2023 increased to $7.5 million from $7.0 million for the six months ended June 30, 2022, a $518 thousand increase.

Other interest income increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund and BOLI income of $846 thousand which was partially offset by reductions in mortgage servicing fees of $887 thousand, FHA fees of $614 thousand and credit card income of $646 thousand.

Gain on the sale of investments for the three months ended September 30, 2023, was $5 thousand compared to a gain of $4 thousand for the three months ended September 30, 2022.

Loss on the sale of investments for the nine months ended September 30, 2023, was $14 thousand compared to a loss of $172 thousand for the nine months ended September 30, 2022.

The loss for the nine months ended September 30, 2023 was due to the sale of 12 securities for a loss of $27 thousand, which was partially offset by $13 thousand in gains on partial calls.

Other income for the three months ended September 30, 2023 increased to $4.0 million from $2.5 million for the three months ended September 30, 2022, a 61.0% increase, primarily attributable to an increase in swap fee income of $1.2 million.

Other income for the nine months ended September 30, 2023 increased to $11.5 million from $9.5 million for the nine months ended September 30, 2022, a 21.7% increase.

Other interest income during the comparative nine months ended September 30, 2023 and 2022 increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund, $1.5 million in swap fee income, and BOLI income of $846 thousand, which was partially offset by reductions in credit card income of $1.5 million, mortgage servicing fees of $887 thousand, and other loan income of $808 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.

5 unchanged sentences

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 $0 and $45 thousand of income from this source for both the three and six months ended June 30, 2023, respectively, compared to $10 thousand and $191 thousand for the three and six months ended June 30, 2022, respectively.

There was $0 and $45 thousand of income from this source for the three and nine months ended September 30, 2023, respectively, compared to $59 thousand and $249 thousand for the three and nine months ended September 30, 2022, respectively.

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 $38.0 million for the three months ended June 30, 2023, as compared to $59.0 million for the three months ended June 30, 2022, a 35.6% decrease.

Total noninterest expense totaled $78.6 million for the six months ended June 30, 2023, as compared to $90.0 million for the six months ended June 30, 2022, a 12.7% decrease.

Salaries and employee benefits were $22.0 million for the three months ended June 30, 2023, as compared to $21.8 million for the same period in 2022, a 0.7% or $0.2 million increase.

Salaries and employee benefits were $46.1 million for the six months ended June 30, 2023, as compared to $38.8 million for the six months ended June 30, 2022, an 18.8% increase.

The primary reason for the difference for the first six months expense 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 June 30, 2023, the Company's full time equivalent staff numbered 465 as compared to 506 at June 30, 2022.

Additionally, the Company implemented a reduction-in-force early in the third quarter that along with other expense reductions is expected to generate cost savings of $2.4 million in the second half of 2023 plus an additional reduction of $5.8 million in 2024.

Premises and equipment for the three and six months ended June 30, 2023 and 2022, were $3.2 million and $6.5 million compared to $3.5 million and $6.7 million, respectively, of which premises expenses were $1.9 million and $2.0 million compared to $2.8 million and $5.3 million, respectively.

Marketing and advertising expenses totaled $884 thousand for the three months ended June 30, 2023 and $1.2 million for the same period in 2022.

For the six months ended June 30, 2023, marketing and advertising expense was $1.5 million compared to $2.3 million for the six month period ended June 30, 2022.

The decrease for both the three and six month periods were due to a reduction in advertising and promotions.

Data processing expenses were $3.4 million and $6.5 million for the three and six months ended June 30, 2023, respectively, compared to $2.7 million and $5.6 million for the same periods in 2022, respectively.

Legal, accounting and professional fees were $2.6 million and $5.9 million for the three and six months ended June 30, 2023, respectively, compared to $2.1 million and $3.7 million for the three and six months ended June 30, 2022, respectively, an increase of $512 thousand and an increase of $2.2 million for the comparative periods, respectively.

Legal fees and expenditures were $841 thousand and $291 thousand for the three months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023 and June 30, 2022 legal fees and expenditures were $2.5 million and $496 thousand, respectively.

The increase was primarily due to a $959 thousand reversal of legal fees receivable relating to the previously disclosed settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted.

FDIC insurance expenses were $2.6 million for the three months ended June 30, 2023 compared to $906 thousand for the same period in 2022, a 184.9% increase.

For the six months ended June 30, 2023, FDIC expenses were $4.1 million compared to $2.0 million for the six months ended June 30, 2022.

Total noninterest expense totaled $37.6 million for the three months ended September 30, 2023, as compared to $36.2 million for the three months ended September 30, 2022, a 3.9% increase.

Total noninterest expense totaled $116.2 million for the nine months ended September 30, 2023, as compared to $126.2 million for the nine months ended September 30, 2022, a 7.9% decrease.

Salaries and employee benefits were $21.5 million for both three months ended September 30, 2023 and September 30, 2022.

Salaries and employee benefits were $67.7 million for the nine months ended September 30, 2023, as compared to $60.4 million for the nine months ended September 30, 2022, a 12.1% increase.

The primary reason for the difference for the first nine months expense 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 September 30, 2023, the Company's full time equivalent staff numbered 452 as compared to 495 at September 30, 2022.

Premises and equipment for the three and nine months ended September 30, 2023 and 2022, were $3.1 million and $9.6 million compared to $3.3 million and $9.9 million, respectively, of which premises expenses were $1.8 million and $5.6 million compared to $2.0 million and $6.0 million, respectively.

Marketing and advertising expenses totaled $768 thousand for the three months ended September 30, 2023 and $1.2 million for the same period in 2022.

For the nine months ended September 30, 2023, marketing and advertising expense was $2.3 million compared to $3.4 million for the nine month period ended September 30, 2022.

The decrease for both the three and nine month periods were due to a reduction in advertising and promotions.

Data processing expenses were $3.2 million and $9.6 million for the three and nine months ended September 30, 2023, respectively, compared to $3.4 million and $9.1 million for the same periods in 2022, respectively.

Legal, accounting and professional fees were $2.2 million and $8.1 million for the three and nine months ended September 30, 2023, respectively, compared to $2.3 million and $6.0 million for the three and nine months ended September 30, 2022, respectively, a decrease of $170 thousand and an increase of $2.1 million for the comparative periods, respectively.

Legal fees and expenditures were $446 thousand and $227 thousand for the three months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023 and September 30, 2022 legal fees and expenditures were $2.9 million and $723 thousand, respectively.

The decrease was primarily due to a $959 thousand reversal of legal fees receivable relating to the previously disclosed settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted.

FDIC insurance assessments were $3.3 million for the three months ended September 30, 2023 compared to $1.3 million for the same period in 2022, a 159.7% increase.

For the nine months ended September 30, 2023, FDIC insurance assessments were $7.4 million compared to $3.3 million for the nine months ended September 30, 2022.

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

Other expenses decreased to $3.3 million and $7.9 million for the three and six months ended June 30, 2023, respectively, from $26.7 million and $31.0 million for the same periods in 2022, respectively, decreases of 87.5% and 74.3%, respectively.

The decrease in other expenses over the comparative three and six months ended June 30, 2023 and 2022 was primarily due to the SEC and FRB penalties totaling $22.9 million.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 47.23% for the second quarter of 2023, as compared to 66.64% for the second quarter of 2022.

For the first six months of 2023, the efficiency ratio was 49.37% as compared to 51.01% for the same period in 2022.

Other expenses increased to $3.5 million from $3.1 million, or 11.9%, for the three months ended September 30, 2023, compared to the same three month period in 2022.

For the nine month period ended September 30, 2023 other expenses decreased to $11.5 million from $34.1 million, or 66.4%, for the same period in 2022.

The decrease in other expenses over the comparative nine months ended September 30, 2023 and 2022 was primarily due to the SEC and FRB penalties totaling $22.9 million.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 48.83% for the third quarter of 2023, as compared to 40.59% for the third quarter of 2022.

For the first nine months of 2023, the efficiency ratio was 49.19% as compared to 47.51% for the same period in 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 improvement in the efficiency ratio for the three and six months ended June 30, 2023 as compared to the same three and six month period in 2022 was primarily driven by the decrease in noninterest expense which was partially offset by increased interest expense due to higher interest rates.

The decrease in noninterest expense for the three and six month period ended June 30, 2023 was primarily due to the accrual of the $22.9 million of settlement expenses associated with previously disclosed government investigations in the second quarter of 2022.

As a percentage of average assets, total noninterest expense (annualized) was 1.27% for the three months ended June 30, 2023 as compared to 2.02% for the same period in 2022.

As a percentage of average assets, total noninterest expense (annualized) was 1.35% for the six months ended June 30, 2023 as compared to 1.49% for the same period in 2022.

The decrease for the three and six month period ended June 30, 2023 was primarily due to the accrual of the $22.9 million of settlement expenses in the second quarter of 2022.

The decrease for the six month period ended June 30, 2023 was partially offset by 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.

The adverse change in the efficiency ratio for the three and nine months ended September 30, 2023 as compared to the same three and nine month period in 2022 was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings which was partially offset by the decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million of settlement expenses associated with previously disclosed government investigations in the second quarter of 2022.

As a percentage of average assets, total noninterest expense (annualized) was 1.25% for the three months ended September 30, 2023 as compared to 1.27% for the same period in 2022.

As a percentage of average assets, total noninterest expense (annualized) was 1.32% for the nine months ended September 30, 2023 as compared to 1.41% for the same period in 2022.

The decrease for the nine month period ended September 30, 2023 was primarily due to the accrual of the $22.9 million of settlement expenses in the second quarter of 2022.

The decrease for the nine month period ended September 30, 2023 was partially offset by 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 June 30, 2023 and 2022 was 22.2% and 44.9%, respectively.

The total tax provision for the three months ended June 30, 2023 was $8.2 million, compared to $12.8 million for the three months ended June 30, 2022.

The effective tax rate for the six months ended June 30, 2023 was 22.2% as compared to 30.3% for the same period in 2022.

The total tax provision for the six months ended June 30, 2023 was $15.1 million, compared to $26.7 million for the six months ended June 30, 2022.

The decreases in the effective tax rate and tax provision over the comparative three and six months ended June 30, 2023 and 2022 were primarily due to the SEC and FRB penalties totaling $22.9 million associated with previously disclosed investigations that are not deductible for tax purposes.

Tax provisions declined over the comparative six months ended June 30, 2023 and 2022 due to decreases in net income period over period.

The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended September 30, 2023 and 2022 was 20.9% and 24.2%, respectively.

The total tax provision for the three months ended September 30, 2023 was $7.2 million, compared to $11.9 million for the three months ended September 30, 2022.

The effective tax rate for the nine months ended September 30, 2023 was 21.7% as compared to 28.1% for the same period in 2022.

The total tax provision for the nine months ended September 30, 2023 was $22.3 million, compared to $38.6 million for the nine months ended September 30, 2022.

The decreases in the effective tax rate and tax provision over the comparative three months ended September 30, 2023 and 2022 were primarily due to decreases in pre-tax income period over period.

The decrease in the effective tax rate and tax provisions over the comparative nine months ended September 30, 2023 and 2022 was primarily due to the SEC and FRB penalties totaling $22.9 million and decreases in pre-tax income period over period.

The penalties associated with the previously disclosed investigations are not deductible for tax purposes.

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.

3 unchanged sentences

FINANCIAL CONDITION

Total assets at June 30, 2023 and December 31, 2022 were $11.0 billion and $11.2 billion, respectively.

The decrease in total assets over December 31, 2022 was primarily due to the decrease in total interest-bearing deposits with banks and other short-term investments and investment securities which was partially offset by an increase in loans.

The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.8 billion at June 30, 2023, a 1.7% increase from the balance at December 31, 2022.

The increase in loans over the six months ended June 30, 2023, was driven primarily by growth from CRE loans.

There were no loans held for sale at June 30, 2023, compared to $6.7 million at December 31, 2022, a 100.0% decrease as a result of higher interest rates as well as the cessation in origination of residential mortgages as previously announced.

Investment securities, at amortized cost net of the allowance for credit losses, totaled $2.8 billion at June 30, 2023 as compared to $2.9 billion at December 31, 2022, a decrease of $109.4 million, or 4%, primarily driven by the pay down of principal on mortgage-backed securities and sales and calls of securities.

Total assets were $11.2 billion at September 30, 2023 and December 31, 2022.

Total assets remained consistent over the nine months ended September 30, 2023, as a result of an increase in loan balances which were partially offset by decreases in investment securities and other short-term investments.

The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.9 billion at September 30, 2023, a 3.7% increase from the balance at December 31, 2022.

The increase in loans over the nine months ended September 30, 2023, was driven primarily by growth from CRE and construction loans.

There were no loans held for sale at September 30, 2023, compared to $6.7 million at December 31, 2022, as a result of the cessation in origination of residential mortgages as previously announced.

Investment securities, at amortized cost net of the allowance for credit losses, totaled $2.7 billion at September 30, 2023 as compared to $2.9 billion at December 31, 2022, a decrease of $164.6 million, or 5.7%, 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 June 30, 2023, $55.3 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 with unrealized losses of $66.2 million, and, as of September 30, 2023, $53.5 million remains in accumulated other comprehensive loss, and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss.

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

At quarter-end, $1.0 billion, or 41.2% of the securities portfolio, was classified as securities HTM.

The fair value of HTM securities was $133.9 million less than carrying value at June 30, 2023 compared to a difference of $125.4 million at December 31, 2022.

In terms of funding, total deposits at June 30, 2023 were $7.7 billion down from $8.7 billion at December 31, 2022, a decline of 11.4%.

Total borrowed funds (excluding customer repurchase agreements) were $1.9 billion and $1.0 billion at June 30, 2023 and December 31, 2022, respectively.

The fair value of HTM securities was $159.8 million less than carrying value at September 30, 2023 compared to a difference of $125.4 million at December 31, 2022.

In terms of funding, total deposits at September 30, 2023 were $8.4 billion down from $8.7 billion at December 31, 2022, a decline of 3.9%.

Total borrowed funds (excluding customer repurchase agreements) were $1.4 billion and $1.0 billion at September 30, 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 June 30, 2023 , and December 31, 2022.

Total shareholders' equity was $1.2 billion as of September 30, 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 December 31, 2022 due to an increase in average assets and a decline in Tier 1 and risk based capital .

The total risk based capital ratio was 14.52% at June 30, 2023, as compared to 14.94% at December 31, 2022.

The common equity tier 1 ("CET1") risk based capital ratio was 13.55% at June 30, 2023, as compared to 14.03% at December 31, 2022.

The tier 1 risk based capital ratio was 13.55% at June 30, 2023, as compared to 14.03% at December 31, 2022.

The tier 1 leverage ratio was 10.84% at June 30, 2023, as compared to 11.63% at December 31, 2022.

The ratio of common equity to total assets was 11.05% at June 30, 2023, as compared to 11.02% at December 31, 2022 as common equity levels remained almost constant over the six months ended June 30, 2023, while total assets decreased slightly as a result of decreases in deposits, investment securities, and other short-term investments which were partially offset by increases in loan balances.

Book value per share was $40.78 at June 30, 2023, a 4.1% increase over $39.18 at December 31, 2022 as a result of share repurchases of 1,600,000 of the Company's common stock during the six months ended June 30, 2023 under the 2023 Repurchase Program.

The repurchases, at prices below book and tangible book values, reduced the number of shares outstanding as of June 30, 2023 , The Company has reached the maximum number of shares that may be purchased under the 2023 Repurchase Program.

In addition, the tangible common equity ratio was 10.21% at June 30, 2023, as compared to 10.18% at December 31, 2022.

Tangible book value per share was $37.29 at June 30, 2023, a 4.0% increase from $35.86 at December 31, 2022.

At June 30, 2023 and December 31, 2022, excluding the impact of the balance of accumulated other comprehensive losses, adjusted book value per share was $47.18 and $45.54, respectively, and adjusted tangible book value per share was $43.69 and $42.22, respectively.

Regulatory ratios based on risk-weighted assets experienced decreases of less than 2% from December 31, 2022 to September 30, 2023.

The decreases were primarily due to an increase in average assets and also due to minor declines in Tier 1 and risk based capital.

The total risk based capital ratio was 14.54% at September 30, 2023, as compared to 14.94% at December 31, 2022.

The common equity tier 1 ("CET1") risk based capital ratio was 13.68% at September 30, 2023, as compared to 14.03% at December 31, 2022.

The tier 1 risk based capital ratio was 13.68% at September 30, 2023, as compared to 14.03% at December 31, 2022.

The tier 1 leverage ratio was 10.96% at September 30, 2023, as compared to 11.63% at December 31, 2022.

The ratio of common equity to total assets was 10.89% at September 30, 2023, as compared to 11.02% at December 31, 2022 as common equity levels remained almost constant over the nine months ended September 30, 2023.

Book value per share was $40.64 at September 30, 2023, a 3.7% increase over $39.18 at December 31, 2022 primarily as a result of share repurchases of 1,600,000 of the Company's common stock during the nine months ended September 30, 2023 under the 2023 Repurchase Program.

The repurchases, at prices below book and tangible book values, reduced the number of shares outstanding as of September 30, 2023.

The Company has reached the maximum number of shares that may be purchased under the 2023 Repurchase Program.

In addition, the tangible common equity ratio was 10.04% at September 30, 2023, as compared to 10.18% at December 31, 2022.

Tangible book value per share was $37.12 at September 30, 2023, a 3.5% increase from $35.86 at December 31, 2022.

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

3 unchanged sentences

Loan Portfolio

Loans, net of amortized deferred fees and costs, at June 30, 2023 and December 31, 2022 by major category are summarized below.

June 30, 2023 December 31, 2022

Loans, net of amortized deferred fees and costs, at September 30, 2023 and December 31, 2022 by major category are summarized below.

September 30, 2023 December 31, 2022

(dollars in thousands, except amounts in the footnote) Amount % Amount %

12 unchanged sentences

$ 7,833,059 $ 7,561,188

(1) Excludes accrued interest receivable of $44.1 million and $43.5 million at June 30, 2023 and December 31, 2022, respectively, which is recorded in other assets.

(1) Excludes accrued interest receivable of $45.4 million and $43.5 million at September 30, 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 $7.8 billion at June 30, 2023, an increase of $131.1 million, or 1.7%, from the balance at December 31, 2022.

The loan portfolio continued to grow in the six months ended June 30, 2023, due primarily to our income producing CRE loan originations and fundings, along with increases in our owner occupied CRE loans and construction C&I (owner occupied) loans.

Loans outstanding were $7.9 billion at September 30, 2023, an increase of $280.8 million, or 3.7%, from the balance at December 31, 2022.

The loan portfolio continued to grow in the nine months ended September 30, 2023, due primarily to our income producing CRE loan originations and fundings, along with increases in our owner occupied CRE loans, and to a lesser extent, construction - commercial and residential loans and construction C&I (owner occupied) loans.

Amidst this growth, we have remained cognizant of the volatility in our industry, capital markets and interest rate markets.

3 unchanged sentences

The Company's overall loan portfolio is substantially concentrated with borrowers located in the Washington, D.C.

metro area, including "Suburban Washington, D.C.," which comprises Frederick, Prince George's and Montgomery counties in Maryland and Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties in Virginia.

At June 30, 2023, 50.9%, 30.8%, 6.3% and 12.0% of the loan portfolio, as a percentage of total principal, was concentrated in Suburban Washington D.C., Washington D.C., other counties in Maryland and other locations in the United States, respectively.

At December 31, 2022, 49.5%, 33.2% 5.8% and 11.5% of the loan portfolio in Suburban Washington D.C., Washington D.C., other counties in Maryland and other locations in the United States, respectively.

metro area, including "Washington's Maryland Suburbs," which comprise Frederick, Prince George's and Montgomery counties and "Northern Virginia," which comprises Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties.

At September 30, 2023, 30.8%, 26.8%, 24.6%, 6.0% and 11.8% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively.

At December 31, 2022, 33.2%, 25.8%, 23.7%, 5.8% and 11.5% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively.

While we remain cautious with regard to CRE market conditions, principally office, the strength of the Washington D.C.

metro area in certain sectors, particularly multi-family commercial real estate and the housing market, continue to drive premiums for well-located properties.

As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.0 billion and $5.8 billion, or 76.8% and 76.2% of total loans, outstanding at June 30, 2023 and December 31, 2022, respectively.

As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.1 billion and $5.8 billion, or 77.5% and 76.2% of total loans, outstanding at September 30, 2023 and December 31, 2022, respectively.

Management meets regularly in order to monitor its existing CRE loan portfolio and to evaluate the pipeline for CRE loan investment.

While the overall commercial real estate portfolio remains healthy, particularly multi-family properties, the Company has remained focused on sectors that have been impacted by the ramifications of the COVID-19 pandemic, particularly income producing CRE loans collateralized by office properties, which comprised approximately $976.3 million and $937.2 million, or 12.6% and 12.3% of total loans, at June 30, 2023 and December 31, 2022, respectively.

Office loans within Washington D.C.

and Suburban Washington D.C.

were $898.3 million and $851.9 million, or 11.6% and 11.2% of total loans, at June 30, 2023 and December 31, 2022, respectively.

Additionally, at June 30, 2023, income producing CRE loans with offices as collateral located in Northern Virginia, Washington's Maryland Suburbs, Washington, D.C,.

and other markets comprised 34.9%, 33.0%, 24.1%, and 8.0%, respectively, of total income producing CRE office loans.

The following table sets forth the time to contractual maturity of the loan portfolio as of June 30, 2023:

June 30, 2023

The Company has remained focused on monitoring sectors that have been impacted by the ramifications of the COVID-19 pandemic, particularly income producing CRE loans collateralized by office properties, which comprised approximately $950.1 million and $937.2 million, or 12.0% and 12.3% of total loans, at September 30, 2023 and December 31, 2022, respectively.

Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $877.7 million and $851.9 million, or 11.1% and 11.2% of total loans, at September 30, 2023 and December 31, 2022, respectively.

As a percentage of total income producing - CRE office loans, 34.0%, 33.9% and 24.5% were located in Northern Virginia, Washington's Maryland Suburbs and Washington, D.C.

at September 30, 2023.

At September 30, 2023, $181.9 million of principal of loans collateralized by office properties were criticized or classified.

The following table sets forth the time to contractual maturity of the loan portfolio as of September 30, 2023:

September 30, 2023

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

13 unchanged sentences

Total loans $ 7,916,391 $ 2,366,640 $ 4,115,137 $ 1,066,187 $ 368,427

(1) Income producing CRE office loans, which had total principal of $976.3 million at June 30, 2023 and are included within income producing - commercial real estate, had principal of $307.0 million, $611.2 million, and $58.1 million aggregated with one year or less, over one year to five years, and over five years to fifteen years remaining until contractual maturity, respectively.

Approximately $207.6 million and $413.3 million of income producing CRE office loans as of June 30, 2023 were due to mature within three months and eighteen months, respectively.

(1) Income producing CRE office loans, which had total principal of $950.1 million at September 30, 2023 and are included within income producing - commercial real estate, had principal of $249.9 million, $652.6 million, $47.6 million aggregated with one year or less, over one year to five years, and over five years to fifteen years remaining until contractual maturity, respectively.

Approximately $94.8 million and $393.3 million of income producing CRE office loans as of September 30, 2023 were due to mature within three months and 18 months, respectively.

Deposits and Other Borrowings

3 unchanged sentences

Additionally, the Bank has participated in the BTFP established by Federal Reserve Bank in March 2023.

For the six months ended June 30, 2023, total deposits decreased by $995.1 million as compared to December 31, 2022.

The decline was primarily attributable to a $1.1 billion reduction in noninterest bearing deposits and a $849.7 million reduction in savings and money market accounts as a result of an increase of disintermediation driven primarily by an increase in interest rates, partially offset by a $1.2 billion increase in interest bearing deposits.

The growth in interest bearing deposits was driven by the increased utilization of brokered deposits, particularly brokered time deposits, during the second quarter of 2023.

During the six months ended June 30, 2023, brokered time deposits increased by approximately $1.1 billion, while other interest bearing broker deposits decreased by approximately $948 million.

No single depositor represented more than 10% of total deposits as of June 30, 2023.

The ten largest depositors not associated with brokered pass-through relationships represented approximately 14% of total deposits in the aggregate as of June 30, 2023.

For the nine months ended September 30, 2023, total deposits decreased by $336.9 million as compared to December 31, 2022.

The decline was primarily attributable to a $1.1 billion reduction in noninterest bearing deposits and a $510.9 million reduction in savings and money market accounts as a result of an increase of disintermediation driven primarily by an increase in interest rates, partially offset by a $1.5 billion increase in interest bearing time deposits.

The growth in interest bearing deposits was driven by the increased utilization of brokered deposits, particularly brokered time deposits, during the nine months ended September 30, 2023.

During the nine months ended September 30, 2023, brokered time deposits increased by approximately $1.2 billion, while other interest bearing brokered deposits decreased by approximately $1.1 billion.

No single depositor represented more than 10% of total deposits as of September 30, 2023.

The ten largest depositors not associated with brokered pass-through relationships represented approximately 17% of total deposits in the aggregate as of September 30, 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.

1 unchanged sentence

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 June 30, 2023 was $1.1 billion (14.7% of total deposits) as compared to $782.2 million (9.0% of total deposits) at December 31, 2022.

The total of reciprocal deposits at September 30, 2023 was $1.5 billion (18.2% 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 Program ("IND").

The Bank had $630.4 million and $1.1 billion of IND brokered deposits as of June 30, 2023 and December 31, 2022, respectively.

The Bank had $648.3 million and $1.1 billion of IND brokered deposits as of September 30, 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 June 30, 2023 and December 31, 2022, total deposits included $2.5 billion and $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 32.1% and 26.5% of total deposits, respectively.

At June 30, 2023 and December 31, 2022, total deposits included estimated totals of $2.3 billion and $4.4 billion of uninsured deposits, which represented 29.4% and 50.5% of total deposits, respectively.

At September 30, 2023 and December 31, 2022, total deposits included $2.4 billion and $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 29.1% and 26.5% of total deposits, respectively.

At September 30, 2023 and December 31, 2022, total deposits included estimated totals of $2.5 billion and $4.4 billion of uninsured deposits, which represented 29.6% and 50.5% 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 June 30, 2023, the Company had $2.0 billion in noninterest bearing demand deposits, representing 26.0% of total deposits, compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36.2% of total deposits.

At September 30, 2023, the Company had $2.1 billion in noninterest bearing demand deposits, representing 24.7% of total deposits, compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36.2% of total deposits.

The 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 six months ended June 30, 2023 and 2022 were 30.1% and 37.9%, respectively.

Average noninterest bearing deposits of total deposits for the nine months ended September 30, 2023 and 2022 were 31.9% and 38.4%, 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 $37.0 million at June 30, 2023 compared to $35.1 million at December 31, 2022.

The balances in these accounts were $25.7 million at September 30, 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.

4 unchanged sentences

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 June 30, 2023 the Company had $2.0 billion in time deposits an increase of $1.2 billion from year end December 31, 2022.

At September 30, 2023 the Company had $2.2 billion in time deposits an increase of $1.5 billion 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 June 30, 2023 and December 31, 2022.

At June 30, 2023 and December 31, 2022, the Company had $536.8 million and $975.0 million, respectively, of FHLB short-term advances borrowed.

Additionally, at June 30, 2023, the Company had a $1.3 billion 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.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2023 and December 31, 2022.

At September 30, 2023 and December 31, 2022, the Company had $0 and $975.0 million, respectively, of FHLB short-term advances borrowed.

Additionally, at September 30, 2023, the Company had a $1.3 billion 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 June 30, 2023 and December 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Long-term borrowings outstanding at September 30, 2023 and December 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Liquidity Management

2 unchanged sentences

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.

As of June 30, 2023, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity.

As of September 30, 2023, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity.

However, these securities are utilized as pledged assets that provide secondary liquidity through the form of additional available borrowings.

1 unchanged sentence

The Company's primary sources of liquidity 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 June 30, 2023:

The following table summarizes the Company's secondary sources of liquidity in use and available at September 30, 2023:

(dollars in thousands, except amount in the footnotes) Secondary Sources of Liquidity in Use Secondary Sources of Liquidity Available

June 30, 2023:

September 30, 2023:

Unsecured brokered deposits (1)

12 unchanged sentences

(2) Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing.

The funding mix has continued to change in the six months ended June 30, 2023.

Deposits at quarter-end were $7.7 billion and $8.7 billion at June 30, 2023 and December 31, 2022, respectively.

The decline in deposits was primarily attributable to a decrease in noninterest bearing deposits, offset by an increase in interest bearing deposits primarily due to the increased utilization of brokered deposits as discussed in "Deposits and Other Borrowings" above.

Short-term borrowings at quarter-end were $1.8 billion and $1.0 billion at June 30, 2023 and December 31, 2022, respectively.

The increase in borrowings was due to the utilization of BTFP borrowings during the six months ended June 30, 2023.

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 June 30, 2023, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.8 billion, against which there was $892.9 million outstanding at June 30, 2023.

The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $630.4 million of brokered deposits at June 30, 2023.

At June 30, 2023, the Bank was also eligible to draw on advances from the FHLB up to $1.8 billion based on assets pledged as collateral to the FHLB, of which there was $536.8 million outstanding at June 30, 2023.

The Bank had posted additional collateral to the FHLB in the first six months of 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize this source of funding in the future.

The funding mix has continued to change in the nine months ended September 30, 2023.

Deposits at quarter-end were $8.4 billion and $8.7 billion at September 30, 2023 and December 31, 2022, respectively.

The decline in deposits was primarily attributable to a decrease in noninterest bearing deposits and savings and money market accounts, offset by an increase in interest bearing deposits primarily due to the increased utilization of brokered deposits as discussed in "Deposits and Other Borrowings" above.

Short-term borrowings at quarter-end were $1.3 billion and $975.0 million at September 30, 2023 and December 31, 2022, respectively.

The increase in borrowings was due to the utilization of BTFP borrowings during the nine months ended September 30, 2023.

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 September 30, 2023, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.8 billion, against which there was $873.4 million outstanding at September 30, 2023.

The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $648.3 million of brokered deposits at September 30, 2023.

At September 30, 2023, the Bank was also eligible to draw on advances from the FHLB up to $1.7 billion based on assets pledged as collateral to the FHLB, against which there was no outstanding amount at September 30, 2023.

The Bank had FHLB borrowings of $975.0 million outstanding at December 31, 2022, which were repaid during the nine months ended September 30, 2023.

The Bank posted additional collateral to the FHLB during the nine months ended September 30, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize 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 June 30, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $1.6 billion on assets that have been pledged, of which $1.3 billion was outstanding.

This alternative source of liquidity will be utilized for balance sheet optimization.

At September 30, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $1.6 billion on assets that have been pledged, of which $1.3 billion was outstanding.

This alternative source of liquidity is being utilized for balance sheet optimization.

The program permits advances to be requested until March 2024, unless extended by the Federal Reserve Bank.

1 unchanged sentence

Once the BTFP program terminates, we may be required to rely on other, potentially more expensive, sources of liquidity.

The Bank's aggregate borrowing capacity at June 30, 2023 was $1.8 billion which consists of $1.6 billion of additional aggregate capacity to borrow from the Federal Home Loan Bank of Atlanta ("FHLB") and BTFP on assets that have been pledged.

The Bank's aggregate borrowing capacity at September 30, 2023 was $2.3 billion which consists of $2.0 billion of additional aggregate capacity to borrow from the Federal Home Loan Bank of Atlanta ("FHLB") and BTFP on assets that have been pledged.

The Bank also has unencumbered securities totaling approximately $269.9 million available for pledging to the FHLB or the BTFP for additional borrowing capacity.

6 unchanged sentences

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 six months of 2023, and there can be no assurance that they will be adequate to meet our liquidity needs.

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 continue 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 nine months of 2023, and there can be no assurance that they will be adequate to meet our liquidity needs.

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 six months of 2023.

Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits.

3 unchanged sentences

We maintain a liquid investment portfolio outside of our held-to-maturity investments, including overnight liquidity.

In the first six months of 2023, average short term liquidity was $2.4 billion, which is above the Bank's average needs.

Secondary sources of liquidity at June 30, 2023 were $4.6 billion, which include the FHLB, BTFP, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window.

At June 30, 2023, the Company held total unpledged securities with a fair value of $428.2 million, including $106.4 million of available-for-sale securities and $321.8 million of held-to-maturity securities.

In the first nine months of 2023, average short term liquidity was $2.5 billion, which is above the Bank's average needs.

Secondary sources of liquidity at September 30, 2023 were $4.9 billion, which include the FHLB, BTFP, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window.

At September 30, 2023, the Company held total securities available to be pledged with a par balance of $269.9 million.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at June 30, 2023 are as follows:

Loan commitments outstanding and lines and letters of credit at September 30, 2023 are as follows:

(dollars in thousands)

22 unchanged sentences

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 six months ended June 30, 2023, the Company was able to produce a net interest margin of 2.63% as compared to 2.79% during the same period in 2022 and continues to manage its overall interest rate risk position.

During the nine months ended September 30, 2023, the Company was able to produce a net interest margin of 2.56% as compared to 2.86% 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.

Further, the Company has been principally collecting cash flows from the investment portfolio to provide liquidity.

Additionally, the Company has limited call risk in its U.S.

agency investment portfolio.

At June 30, 2023, the amortized cost less allowance of the investment portfolio decreased by $109.4 million, or 3.8%, as compared to the balance at December 31, 2022.

The percentage mix of municipal securities was 5% of total investments at June 30, 2023 and December 31, 2022.

The portion of the portfolio invested in mortgage-backed securities was 62% at June 30, 2023 and December 31, 2022.

At September 30, 2023, the amortized cost less allowance of the investment portfolio decreased by $164.6 million, or 5.7%, as compared to the balance at December 31, 2022.

The percentage mix of municipal securities was 5% of total investments at September 30, 2023 and December 31, 2022.

The portion of the portfolio invested in mortgage-backed securities was 61% at September 30, 2023 and 62% at December 31, 2022.

The portion of the portfolio invested in U.S.

agency investments was 27% and at June 30, 2023 and December 31, 2022.

Shorter duration floating rate corporate bonds were 5% of total investments at June 30, 2023 and December 31, 2022.

At June 30, 2023, these corporate bonds included $82 million of subordinated debt issued by 25 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.

treasury bonds were 2% of total investments at June 30, 2023 and December 31, 2022.

The duration of the investment portfolio decreased to 4.7 years at June 30, 2023 from 4.8 years at December 31, 2022.

The re-pricing duration of the loan portfolio was 13 months at June 30, 2023 and December 31, 2022 with fixed rate loans amounting to 38% of total loans at June 30, 2023 and December 31, 2022.

Variable and adjustable rate loans comprised 62% of total loans at June 30, 2023 and December 31, 2022.

agency investments was 28% at September 30, 2023 and 26% at December 31, 2022.

Corporate bonds made up 5% of total investments at September 30, 2023 and December 31, 2022.

treasury bonds were 2% of total investments at September 30, 2023 and December 31, 2022.

The duration of the investment portfolio decreased to 4.6 years at September 30, 2023 from 4.8 years at December 31, 2022.

At September 30, 2023, $80.3 million of corporate bonds were subordinated debt from other financial institutions.

Corporate bonds generally, and subordinated debt in particular, pose credit risk such that if any of these issuers were to enter bankruptcy or insolvency proceedings, we could experience losses that may be material to operating results and our financial condition.

The re-pricing duration of the loan portfolio was 11 and 13 months at September 30, 2023 and December 31, 2022, respectively, with fixed rate loans amounting to 38% of total loans at September 30, 2023 and December 31, 2022.

Variable and adjustable rate loans comprised 62% of total loans at September 30, 2023 and December 31, 2022.

Variable rate loans are generally indexed to either the one month LIBOR interest rate (prior to the June 30, 2023 LIBOR cessation date), SOFR, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.

1 unchanged sentence

The few remaining loans that were still tied to LIBOR based rates on June 30, 2023 were transitioned to their appropriate fallback rate on July 3, 2023.

The duration of the deposit portfolio increased as rates rose, measuring 40 months at June 30, 2023 and 29 months at December 31, 2022.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $197.1 million and $205.3 million at June 30, 2023 and December 31, 2022, respectively.

The change is primarily due to improved market conditions and related economic factors.

At June 30, 2023, the net unrealized loss position represented 11.38% of the investment portfolio's book value.

The duration of the deposit portfolio decreased as rates rose, measuring 24 months at September 30, 2023 and 29 months at December 31, 2022.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $225.3 million and $205.3 million at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the net unrealized loss position represented 13.25% of the investment portfolio's book value.

Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above.

1 unchanged sentence

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 six months ended June 30, 2023, the Company's interest rate risk modeling shows net interest margin expansion in an increasing rate environment.

Although the Company has experienced net interest margin compression during the nine months ended September 30, 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 but with no changes in the mix of assets or liabilities or the spreads we are able to earn.

2 unchanged sentences

however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded, though this is not relevant for the current rate environment with most variable rate loans well above their floor rate.

The weighted average rate of the Company's variable rate loans increased by approximately 64 basis points from December 31, 2022 to June 30, 2023 in connection with the 75 basis points in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank.

At June 30, 2023, the Company had a portfolio of $4.8 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.51%.

At June 30, 2023, only $250.6 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 87 basis points across its interest-bearing deposits, which comprise 74.0% of its total deposits, at June 30, 2023.

The weighted average rate of the Company's variable rate loans increased by approximately 92 basis points from December 31, 2022 to September 30, 2023 in connection with the increase in 100 basis points for the same period in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank.

At September 30, 2023, the Company had a portfolio of $4.9 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.79%.

At September 30, 2023, only $224.5 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 108 basis points across its interest-bearing deposits, which comprise 75.3% of its total deposits, at September 30, 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.

1 unchanged sentence

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 12 months from June 30, 2023.

The results are analyzed as to the impact on net interest income, net income and the market equity over the next 12 months from September 30, 2023.

In addition to analysis of simultaneous changes in interest rates along the yield curve, an analysis of 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 June 30, 2023, the simulation assumes an increasing correlation between the change in interest rates on offered interest bearing deposit products for each 100 basis point change in market interest rates in a rate shock scenario with a floor of 0 basis points.

Those correlations range from 45% in 100 basis points shocks to 90% in 400 basis point shock scenarios.

For the analysis presented below at September 30, 2023, the simulation assumes a high degree of correlation between the change in interest rates on offered interest bearing deposit products for each 100 basis point change in market interest rates in a rate shock scenario with a floor of 0 basis points.

Those correlations range from 75% for interest bearing checking to 100% for savings and money market demand accounts.

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 depends on the rate scenario in question and can range from 70% to 95%.

The Company's analysis at June 30, 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.

Thus, the overall measure of the correlation between deposit costs and market rate changes is modeled at 95%.

At December 31, 2022, the Company assumed a 70 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates, with a floor of 10 basis points and 0 basis points on decreasing and increasing rate shock scenarios, respectively.

The Company's analysis at September 30, 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 June 30, 2023 is 4.7 years, the loan portfolio 1.1 years, the interest bearing deposit portfolio 3.3 years, and the borrowed funds portfolio 0.6 years.

The following table reflects the result of simulation analysis on the June 30, 2023 asset and liabilities balances:

The repricing duration of the investment portfolio at September 30, 2023 is 4.6 years, the loan portfolio 0.9 years, the interest bearing deposit portfolio 1.0 years, and the borrowed funds portfolio 0.5 years.

The following table reflects the result of simulation analysis on the September 30, 2023 asset and liabilities balances:

Change in interest

13 unchanged sentences

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 June 30, 2023 are not believed to be excessive.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2023 are not believed to be excessive.

The impact of 0.9% in net interest income and 2% 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 six months ended June 30, 2023, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above.

In the nine months ended September 30, 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.

3 unchanged sentences

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

During the six months ended June 30, 2023, average market interest rates increased across the yield curve as compared to the 2022 year end.

During the nine months ended September 30, 2023, average market interest rates increased across the yield curve as compared to the 2022 year end.

Capital Resources and Adequacy

7 unchanged sentences

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 June 30, 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.

At September 30, 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 106% of total risk based capital.

12 unchanged sentences

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 June 30, 2023, the Company and the Bank meet all these requirements.

The Company’s capital position remained strong for the six months ended June 30, 2023 as a result of good earnings, continued improvements in economic conditions and strong asset quality.

At September 30, 2023, the Company and the Bank meet all these requirements.

The Company’s capital position remained strong for the nine months ended September 30, 2023 as a result of good earnings, continued improvements in economic conditions and strong asset quality.

As a result of the Company’s strong capital position and earnings, we were able to continue with our quarterly dividend.

The Company announced a regular quarterly cash dividend on June 29, 2023 of $0.45 per share to shareholders of record on July 20, 2023 and it was paid on July 28, 2023.

Additionally, the Company was active in share repurchase activity as we repurchased 1,600,000 shares of the Company's common stock at an average price of $29.77 per share (including commissions) during the six months ended June 30, 2023.

The Company announced a regular quarterly cash dividend on September 27, 2023 of $0.45 per share to shareholders of record on October 20, 2023 and it was paid on October 31, 2023.

On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program which took 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.

In the six months ended June 30, 2023, the Company reached the maximum number of shares that may be purchased under the 2023 Repurchase Program.

The capital amounts and ratios for the Company and Bank as of June 30, 2023 and December 31, 2022 are presented in the table below.

In June 2023, the Company completed the repurchase of authorized shares of common stock under the 2023 Stock Repurchase Plan.

The Company paid an average price of $29.77 per share (including commissions) to repurchase the shares in 2023.

No shares were repurchased in the third quarter of 2023.

The capital amounts and ratios for the Company and Bank as of September 30, 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)

1 unchanged sentence

(dollars in thousands) Amount Ratio Amount Ratio

June 30, 2023

September 30, 2023

CET1 capital (to risk weighted assets) $ 1,326,400 13.68 % $ 1,323,915 13.73 % 7.00 % 6.50 %

9 unchanged sentences

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

At June 30, 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.

At September 30, 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.

5 unchanged sentences

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, the annualized return on average tangible common equity, the efficiency ratio, adjusted net income and adjusted earnings per share are non-GAAP financial measures derived from GAAP-based amounts.

Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and the 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.

1 unchanged sentence

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 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.

The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income.

1 unchanged sentence

The Company believes that reporting the non-GAAP efficiency ratio more closely measures its effectiveness of controlling operational activities.

Adjusted net income is a non-GAAP financial measure calculated by reversing the penalty, disgorgement and prejudgment interest incurred during the three and six months ended June 30, 2022 against net income.

The Company considers this information important to shareholders because it illustrates net income excluding the impact of non-recurring items.

Adjusted earnings per share is a non-GAAP financial measure calculated by dividing the penalty, disgorgement and prejudgment interest incurred during the three and six months ended June 30, 2022 by the weighted average common shares outstanding (diluted) then adding the result to GAAP earnings per share.

The Company considers this information important to shareholders because it illustrates earnings on a per share basis excluding the impact of non-recurring items.

The following tables reconcile the GAAP financial measures to the associated non-GAAP financial measures:

GAAP Reconciliation

(dollars in thousands except per share data) June 30, 2023 December 31, 2022

(dollars in thousands except per share data) September 30, 2023 December 31, 2022

Common shareholders' equity $ 1,215,884 $ 1,228,321

8 unchanged sentences

Tangible common equity ratio 10.04 % 10.18 %

Three Months Ended June 30,

Six Months Ended June 30,

(dollars and shares in thousands) 2023

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

2022 2023 2022

7 unchanged sentences

Noninterest income 6,347 5,308 18,642 18,325

Revenue $ 80,406 $ 88,482 $ 159,130 $ 176,387

Operating revenue

$ 77,066 $ 89,205 $ 236,196 $ 265,592

Noninterest expense $ 37,633 $ 36,206 $ 116,195 $ 126,180

Penalty, disgorgement and prejudgment interest — (22,874) — (22,874)

Adjusted noninterest expense 37,978 36,088 78,562 67,100

Efficiency ratio 48.83 % 40.59 % 49.19 % 47.51 %

Adjusted efficiency ratio 47.23 % 40.79 % 49.37 % 38.04 %

Income before income tax expense $ 36,872 $ 28,472 $ 68,000 $ 88,163

Penalty, disgorgement and prejudgment interest — 22,874 — 22,874

Adjusted income before income tax expense 36,872 51,346 68,000 111,037

Income tax expense (1)

8,180 12,776 15,074 26,723

Adjusted net income $ 28,692 $ 38,570 $ 52,926 $ 84,314

Earnings per common share diluted $ 0.94 $ 0.49 $ 1.72 $ 1.91

Penalty, disgorgement and prejudgment interest per common share diluted — 0.71 — 0.71

Adjusted earnings per common share diluted $ 0.94 $ 1.20 $ 1.72 $ 2.62

Weighted average common shares outstanding - diluted 30,505 32,143 30,832 32,126

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis