EAGLE BANCORP INC 10-Q

Item 1 – Financial Statements EAGLE BANCORP, INC. Consolidated Balance Sheets (Unaudited) (dollars in thousands, except share and per share data) September 30, 2023 December 31, 2022 Assets Cash and due from banks $ 8,625 $ 12,655 Federal funds sold 13,611 33,927 Interest-bearing deposits with banks and other short-term investments 235,819 265,272 Investment securities available-for-sale (amortized cost of $ 1,700,233 and $ 1,803,898 , respectively, and allowance for credit losses of $ 17 and $ 17 , respectively). 1,474,945 1,598,666 Investment securities held-to-maturity, net of allowance for credit losses of $ 2,010 and $ 766 , respectively (fair value of $ 872,710 and $ 968,707 , respectively) 1,032,485 1,093,374 Federal Reserve and Federal Home Loan Bank stock 25,689 65,067 Loans held for sale — 6,734 Loans 7,916,391 7,635,632 Less: allowance for credit losses ( 83,332 ) ( 74,444 ) Loans, net 7,833,059 7,561,188 Premises and equipment, net 11,216 13,475 Operating lease right-of-use assets 20,151 24,544 Deferred income taxes 98,987 96,567 Bank-owned life insurance 112,234 110,998 Goodwill and other intangible assets, net 105,239 104,233 Other real estate owned 1,487 1,962 Other assets 190,667 162,192 Total Assets $ 11,164,214 $ 11,150,854 Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing demand $ 2,072,665 $ 3,150,751 Interest-bearing transaction 932,779 1,138,235 Savings and money market 3,129,773 3,640,697 Time 2,241,089 783,499 Total deposits 8,376,306 8,713,182 Customer repurchase agreements 25,689 35,100 Other short-term borrowings 1,300,001 975,001 Long-term borrowings 69,887 69,794 Operating lease liabilities 24,422 29,267 Reserve for unfunded commitments 6,183 5,857 Other liabilities 145,842 94,332 Total Liabilities 9,948,330 9,922,533 Shareholders' Equity Common stock, par value $ 0.01 per share; shares authorized 100,000,000 , shares issued and outstanding 29,917,982 and 31,346,903 , respectively 296 310 Additional paid-in capital 372,394 412,303 Retained earnings 1,054,699 1,015,215 Accumulated other comprehensive loss ( 211,505 ) ( 199,507 ) Total Shareholders' Equity 1,215,884 1,228,321 Total Liabilities and Shareholders' Equity $ 11,164,214 $ 11,150,854 See Notes to Consolidated Financial Statements. 3 EAGLE BANCORP, INC. Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest Income Interest and fees on loans $ 132,273 $ 93,744 $ 382,116 $ 249,716 Interest and dividends on investment securities 13,732 13,463 41,518 37,890 Interest on balances with other banks and short-term investments 15,067 4,100 34,070 7,608 Interest on federal funds sold 77 220 202 269 Total interest income 161,149 111,527 457,906 295,483 Interest Expense Interest on deposits 70,929 26,125 179,305 44,022 Interest on customer repurchase agreements 311 55 946 90 Interest on other short-term borrowings 18,152 412 56,989 992 Interest on long-term borrowings 1,038 1,038 3,112 3,112 Total interest expense 90,430 27,630 240,352 48,216 Net Interest Income 70,719 83,897 217,554 247,267 Provision for Credit Losses 5,644 3,022 17,046 730 (Reversal of) Provision for Credit Losses for Unfunded Commitments ( 839 ) 774 327 1,316 Net Interest Income After (Reversal of) Provision for Credit Losses 65,914 80,101 200,181 245,221 Noninterest Income Service charges on deposits 1,631 1,339 4,767 3,970 (Loss) gain on sale of loans ( 5 ) 821 395 3,168 Net gain (loss) on sale of investment securities 5 4 ( 14 ) ( 172 ) Increase in the cash surrender value of bank-owned life insurance 669 631 1,972 1,889 Other income 4,047 2,513 11,522 9,470 Total noninterest income 6,347 5,308 18,642 18,325 Noninterest Expense Salaries and employee benefits 21,549 21,538 67,680 60,362 Premises and equipment expenses 3,095 3,275 9,639 9,926 Marketing and advertising 768 1,181 2,288 3,431 Data processing 3,194 3,445 9,647 9,054 Legal, accounting and professional fees 2,162 2,332 8,065 6,030 FDIC insurance 3,342 1,287 7,409 3,251 Other expenses 3,523 3,148 11,467 34,126 Total noninterest expense 37,633 36,206 116,195 126,180 Income Before Income Tax Expense 34,628 49,203 102,628 137,366 Income Tax Expense 7,245 11,906 22,319 38,629 Net Income $ 27,383 $ 37,297 $ 80,309 $ 98,737 Earnings Per Common Share Basic $ 0.91 $ 1.16 $ 2.63 $ 3.08 Diluted $ 0.91 $ 1.16 $ 2.63 $ 3.07 See Notes to Consolidated Financial Statements. 4 EAGLE BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net Income $ 27,383 $ 37,297 $ 80,309 $ 98,737 Other Comprehensive (Loss) Income, Net of Tax: Unrealized (loss) gain on securities available-for-sale ( 21,314 ) ( 60,029 ) ( 15,452 ) ( 151,453 ) Reclassification adjustment for (gain) loss included in net income ( 4 ) ( 3 ) 10 114 Total unrealized (loss) gain on investment securities available-for-sale ( 21,318 ) ( 60,032 ) ( 15,442 ) ( 151,339 ) Unrealized loss on securities transferred to held-to-maturity (1) — — — ( 49,095 ) Amortization of unrealized loss on securities transferred to held-to-maturity 1,400 1,762 3,444 3,753 Total unrealized gain (loss) on investment securities held-to-maturity 1,400 1,762 3,444 ( 45,342 ) Unrealized gain on derivatives — — — 284 Other comprehensive (loss) income ( 19,918 ) ( 58,270 ) ( 11,998 ) ( 196,397 ) Comprehensive Income (Loss) $ 7,465 $ ( 20,973 ) $ 68,311 $ ( 97,660 ) (1) Represents unamortized accumulated other comprehensive loss on securities transferred to held-to-maturity status. See Notes to Consolidated Financial Statements. 5 EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (dollars in thousands except share and per share data) Accumulated Other Comprehensive Income (Loss) Common Additional Paid-in Capital Retained Earnings Shareholders' Equity Shares Amount Balance July 1, 2023 29,912,082 $ 296 $ 370,278 $ 1,040,779 $ ( 191,587 ) $ 1,219,766 Net Income — — — 27,383 — 27,383 Other comprehensive loss, net of tax — — — — ( 19,918 ) ( 19,918 ) Stock-based compensation expense — — 1,969 — — 1,969 Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 15,250 ) — — — — — Time-based stock awards granted 14,280 — — — — — Issuance of common stock related to employee stock purchase plan 6,870 — 145 — — 145 Cash dividends declared ($ 0.45 per share) — — — ( 13,463 ) — ( 13,463 ) Common stock repurchased — — 2 — — 2 Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ ( 211,505 ) $ 1,215,884 Balance July 1, 2022 32,081,241 $ 318 $ 440,418 $ 964,353 $ ( 152,369 ) $ 1,252,720 Net Income — — — 37,297 — 37,297 Other comprehensive loss, net of tax — — — — ( 58,270 ) ( 58,270 ) Stock-based compensation expense — — 2,274 — — 2,274 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes — — — — — — Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 2,893 ) — — — — — Time-based stock awards granted — — — — — — Issuance of common stock related to employee stock purchase plan 3,973 — 188 — — 188 Cash dividends declared ($ 0.45 per share) — — — ( 14,438 ) — ( 14,438 ) Balance September 30, 2022 32,082,321 $ 318 $ 442,880 $ 987,212 $ ( 210,639 ) $ 1,219,771 See Notes to Consolidated Financial Statements. 6 EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity - Continued (Unaudited) (dollars in thousands except share and per share data) Accumulated Other Comprehensive Income (Loss) Common Additional Paid-in Capital Retained Earnings Shareholders' Equity Shares Amount Balance January 1, 2023 31,346,903 $ 310 $ 412,303 $ 1,015,215 $ ( 199,507 ) $ 1,228,321 Net Income — — — 80,309 — 80,309 Other comprehensive income, net of tax — — — — ( 11,998 ) ( 11,998 ) Stock-based compensation expense — — 7,653 — — 7,653 Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 59,314 ) 1 ( 1 ) — — — Vesting of performance-based stock awards, net of shares withheld for payroll taxes 27,296 — — — — — Time-based stock awards granted 187,822 — — — — — Issuance of common stock related to employee stock purchase plan 15,275 — 459 — — 459 Cash dividends declared ($ 1.35 per share) — — — ( 40,825 ) — ( 40,825 ) Common stock repurchased ( 1,600,000 ) ( 15 ) ( 48,020 ) — — ( 48,035 ) Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ ( 211,505 ) $ 1,215,884 Balance January 1, 2022 31,950,092 $ 316 $ 434,640 $ 930,061 $ ( 14,242 ) $ 1,350,775 Net Income — — — 98,737 — 98,737 Other comprehensive loss, net of tax — — — — ( 196,397 ) ( 196,397 ) Stock-based compensation expense — — 7,587 — — 7,587 Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 3,289 — 97 — — 97 Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 68,931 ) 2 ( 2 ) — — — Vesting of performance-based stock awards, net of shares withheld for payroll taxes 21,026 — — — — — Time-based stock awards granted 166,471 — — — — — Issuance of common stock related to employee stock purchase plan 10,374 — 558 — — 558 Cash dividends declared ($ 1.30 per share) — — — ( 41,586 ) — ( 41,586 ) Balance September 30, 2022 32,082,321 $ 318 $ 442,880 $ 987,212 $ ( 210,639 ) $ 1,219,771 See Notes to Consolidated Financial Statements. 7 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2023 2022 Cash Flows From Operating Activities: Net Income $ 80,309 $ 98,737 Adjustments to reconcile Net Income to net cash provided by operating activities: Provision for credit losses 17,046 730 Provision for credit losses for unfunded commitments 327 1,316 Depreciation and amortization 2,649 2,483 Gain on sale of loans ( 395 ) ( 3,168 ) Loss (gain) on mortgage servicing rights 108 ( 872 ) Securities premium amortization, net 4,766 7,191 Origination of loans held for sale ( 29,690 ) ( 264,765 ) Proceeds from sale of loans held for sale 36,819 305,764 Net gain on sale of other real estate owned ( 134 ) ( 107 ) Net loss on sale of investment securities 14 172 Net increase in cash surrender value of BOLI ( 1,972 ) ( 1,889 ) Stock-based compensation expense 7,653 7,587 Increase in other assets ( 29,589 ) ( 19,055 ) Increase in other liabilities 51,058 5,503 Net Cash Provided by Operating Activities 138,969 139,627 Cash Flows From Investing Activities: Investment securities available-for-sale: Purchases — ( 414,935 ) Proceeds from maturities 92,647 182,767 Proceeds from sale/call 8,303 6,225 Investment securities held-to-maturity: Purchases — ( 290,740 ) Proceeds from maturities 60,312 82,163 Proceeds from call 2,906 19,944 Proceeds from (purchase of) sale of Federal Reserve stock 39,378 ( 8,158 ) Net increase in loans ( 287,673 ) ( 239,089 ) Redemption of BOLI 736 — Proceeds from sale of OREO 609 241 Net change in premises and equipment ( 298 ) ( 1,518 ) Net Cash Used in Investing Activities ( 83,080 ) ( 663,100 ) Cash Flows From Financing Activities: Decrease in deposits ( 336,876 ) ( 1,218,190 ) Decrease in customer repurchase agreements ( 9,411 ) ( 2,453 ) Proceeds from short-term borrowings 325,000 215,000 Proceeds from employee stock purchase plan 459 558 Proceeds from exercise of equity compensation plans — 97 Common stock repurchased ( 48,035 ) — Cash dividends paid ( 40,825 ) ( 41,586 ) Net Cash Used in Financing Activities ( 109,688 ) ( 1,046,574 ) Net Decrease in Cash and Cash Equivalents ( 53,799 ) ( 1,570,047 ) Cash and Cash Equivalents at Beginning of Period 311,854 1,714,222 Cash and Cash Equivalents at End of Period $ 258,055 $ 144,175 See Notes to Consolidated Financial Statements. 8 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows - Continued (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2023 2022 Supplemental Cash Flows Information: Interest paid $ 266,633 $ 49,273 Income taxes paid $ 16,940 $ 16,150 Non-Cash Investing Activities Transfers of investment securities from available-for-sale to held-to-maturity $ — $ 922,795 Transfers from loans to other real estate owned $ — $ 475 See Notes to Consolidated Financial Statements. 9 EAGLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the "Company"), with all significant intercompany transactions eliminated. EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Parent's principal subsidiary. The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry. The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited. The Consolidated Balance Sheet as of December 31, 2022 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Certain reclassifications have been made to 2022 amounts previously reported to conform to the 2023 presentation. Reclassifications had no effect on net income or shareholders' equity. These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Nature of Operations The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration ("FHA") loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination. The Bank offers its products and services through thirteen banking offices, four lending centers and various digital capabilities, including remote deposit services and mobile banking services. During the nine months ended September 30, 2023, the Company closed three branches following the leases' expiration. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company has completed residual origination and sales activities as of June 30, 2023. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements. Investment Securities The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Premiums and discounts on investment securities available-for-sale and held-to-maturity are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality. 10 Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security. Loans Loans held for investment are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan. Past due loans are placed on nonaccrual status when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, this conclusion is reached when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Allowance for Credit Losses - Loans The allowance for credit losses - loans ("ACL") is an estimate of the expected credit losses in the loans held for investment portfolio. Accounting Standards Codification ("ASC") 326, "Financial Instruments-Credit Losses" requires that an estimate of current expected credit losses ("CECL") be immediately recognized and reevaluated over the contractual life of the financial asset when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes, and a loan-level probability of default ("PD") / Loss Given Default ("LGD") cash flow method is applied using an exposure at default ("EAD") model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default. For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. 11 In addition to the quantitative model and individual evaluation conducted in connection with CECL, the Company applies qualitative and environmental factors into its methodology for the calculation of its ACL for its loan portfolio. The factors include: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. The Company's quantitative model may reflect assumptions by management that are not covered by the qualitative and environmental factors. The Company reevaluates the qualitative and environmental factors on a quarterly basis. While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. A summary of our primary portfolio segments is as follows: Commercial. The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses. Income producing commercial real estate. Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who generally have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates. Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities. Real estate mortgage – residential . Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property. Construction – commercial and residential. The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing. Construction – commercial and industrial ("C&I") (owner occupied) . The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings. Home equity . The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property. Other consumer. The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process. 12 We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual. Classified loans represent the sum of loans graded substandard and doubtful. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the allowance on collectively assessed and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Risk Committee, the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a borrower will result in financial difficulty. We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status. Collateral Dependent Financial Assets Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Loan Modifications to Borrowers in Financial Difficulty On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminated the recognition and measurement of troubled debt restructurings ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there are principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. 13 A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $ 1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company. Allowance for Credit Losses - Available-for-Sale Securities The Company utilizes ASC 326 to evaluate its available-for-sale ("AFS") and held-to-maturity ("HTM") debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment. The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. Allowance for Credit Losses - Held-to-Maturity Debt Securities The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and enhanced analysis is performed. This may consist of evaluating the security as if it were a below investment grade rated security or a discounted cash flow analysis may be performed and compared to the amortized cost basis. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheet. 14 The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands): Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Provision for credit losses - loans $ 5,643 $ 3,046 $ 15,802 $ 532 Provision for (reversal of) credit losses - HTM debt securities 1 ( 24 ) 1,244 800 Reversal of credit losses - AFS debt securities — — — ( 602 ) Total $ 5,644 $ 3,022 $ 17,046 $ 730 Goodwill Assessment Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. 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. In 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 as a result of 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 and determined that there was no impairment as the fair value exceeded the carrying amount of the Company. Management has evaluated and will continue to evaluate economic conditions in interim periods for triggering events. New Authoritative Accounting Guidance Accounting Standards Adopted in 2023 : ASU No. 2022-02, " Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures " ("ASU 2022-02") eliminates the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. Effective January 1, 2023, the Company adopted the guidance prescribed under ASU 2022-02. Refer to the "Loan Modifications" subsection above and Note 4 for additional disclosure. Note 2. Cash and Due from Banks For the nine months ended September 30, 2023 and 2022, the Bank maintained an average daily balance at the Federal Reserve Bank of $ 892.8 million and $ 1.4 billion, respectively, on which interest is paid. Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank. 15 Note 3. Investment Securities The amortized cost and estimated fair value of the Company's available-for-sale and held-to-maturity securities are summarized as follows: (dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value September 30, 2023 Investment securities available-for-sale: U.S. treasury bonds $ 49,868 $ — $ ( 2,818 ) $ — $ 47,050 U.S. agency securities 736,078 1 ( 79,802 ) — 656,277 Residential mortgage-backed securities 848,555 — ( 134,407 ) — 714,148 Commercial mortgage-backed securities 54,904 — ( 6,900 ) — 48,004 Municipal bonds 8,828 — ( 1,026 ) — 7,802 Corporate bonds 2,000 — ( 319 ) ( 17 ) 1,664 Total available-for-sale securities $ 1,700,233 $ 1 $ ( 225,272 ) $ ( 17 ) $ 1,474,945 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value September 30, 2023 Investment securities held-to-maturity: Residential mortgage-backed securities $ 685,648 $ — $ ( 109,590 ) $ 576,058 Commercial mortgage-backed securities 91,337 — ( 16,805 ) 74,532 Municipal bonds 125,224 2,828 ( 19,533 ) 108,519 Corporate bonds 132,286 — ( 18,685 ) 113,601 Total $ 1,034,495 $ 2,828 $ ( 164,613 ) $ 872,710 Allowance for credit losses ( 2,010 ) Total held-to-maturity securities, net of ACL $ 1,032,485 (dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value December 31, 2022 Investment securities available-for-sale: U.S. treasury bonds $ 49,793 $ — $ ( 3,466 ) $ — $ 46,327 U.S. agency securities 747,777 — ( 78,049 ) — 669,728 Residential mortgage-backed securities 937,557 18 ( 117,072 ) — 820,503 Commercial mortgage-backed securities 56,071 — ( 5,858 ) — 50,213 Municipal bonds 10,700 45 ( 658 ) — 10,087 Corporate bonds 2,000 — ( 175 ) ( 17 ) 1,808 Total available-for-sale securities $ 1,803,898 $ 63 $ ( 205,278 ) $ ( 17 ) $ 1,598,666 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value December 31, 2022 Investment securities held-to-maturity: Residential mortgage-backed securities $ 741,057 $ — $ ( 88,390 ) $ 652,667 Commercial mortgage-backed securities 92,557 — ( 11,993 ) 80,564 Municipal bonds 128,273 — ( 12,092 ) 116,181 Corporate bonds 132,253 — ( 12,958 ) 119,295 Total $ 1,094,140 $ — $ ( 125,433 ) $ 968,707 Allowance for credit losses ( 766 ) Total held-to-maturity securities, net of ACL $ 1,093,374 16 In addition, at September 30, 2023 and December 31, 2022 the Company held $ 25.7 million and $ 65.1 million, respectively, in equity securities in a combination of Federal Reserve Bank and FHLB stocks, which were required to be held for regulatory purposes and which were not marketable, and therefore are carried at cost. The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $ 1.1 billion of mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $ 237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized. At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through the provision for credit losses. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $ 66.2 million was included in other comprehensive loss at the time of transfer and, as of September 30, 2023, $ 53.5 million remains in accumulated other comprehensive loss, to be amortized through interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer. Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities. Accrued interest receivable on available-for-sale securities totaled $ 4.0 million and $ 4.3 million at September 30, 2023 and December 31, 2022, respectively, and accrued interest receivable on held-to-maturity securities totaled $ 3.6 million and $ 3.5 million at September 30, 2023 and December 31, 2022, respectively. The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets. The following tables summarizes available-for-sale and held-to-maturity securities in an unrealized loss position by length of time: Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses September 30, 2023 Investment securities available-for-sale: U.S. treasury bonds 2 $ — $ — $ 47,050 $ ( 2,818 ) $ 47,050 $ ( 2,818 ) U. S. agency securities 78 485,494 ( 59,495 ) 167,358 ( 20,307 ) 652,852 ( 79,802 ) Residential mortgage-backed securities 156 8 — 714,068 ( 134,407 ) 714,076 ( 134,407 ) Commercial mortgage-backed securities 13 — — 48,004 ( 6,900 ) 48,004 ( 6,900 ) Municipal bonds 1 — — 7,802 ( 1,026 ) 7,802 ( 1,026 ) Corporate bonds 1 — — 1,664 ( 319 ) 1,664 ( 319 ) Total 251 $ 485,502 $ ( 59,495 ) $ 985,946 $ ( 165,777 ) $ 1,471,448 $ ( 225,272 ) Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses September 30, 2023 Investment securities held-to-maturity: Residential mortgage-backed securities 143 $ — $ — $ 576,058 $ ( 109,590 ) $ 576,058 $ ( 109,590 ) Commercial mortgage-backed securities 16 — — 74,532 ( 16,805 ) 74,532 ( 16,805 ) Municipal bonds 41 5,866 ( 162 ) 97,879 ( 19,371 ) 103,745 ( 19,533 ) Corporate bonds 30 23,577 ( 3,434 ) 77,964 ( 15,251 ) 101,541 ( 18,685 ) Total 230 $ 29,443 $ ( 3,596 ) $ 826,433 $ ( 161,017 ) $ 855,876 $ ( 164,613 ) 17 Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses December 31, 2022 Investment securities available-for-sale: U.S. treasury bond 2 $ — $ — $ 46,327 $ ( 3,466 ) $ 46,327 $ ( 3,466 ) U. S. agency securities 85 490,699 ( 58,437 ) 179,029 ( 19,612 ) 669,728 ( 78,049 ) Residential mortgage-backed securities 157 3,994 — 808,697 ( 117,072 ) 812,691 ( 117,072 ) Commercial mortgage-backed securities 14 471 ( 2 ) 49,742 ( 5,856 ) 50,213 ( 5,858 ) Municipal bonds 1 — — 8,299 ( 658 ) 8,299 ( 658 ) Corporate bonds 1 — — 1,825 ( 175 ) 1,825 ( 175 ) Total 260 $ 495,164 $ ( 58,439 ) $ 1,093,919 $ ( 146,839 ) $ 1,589,083 $ ( 205,278 ) Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses December 31, 2022 Investment securities held-to-maturity: Residential mortgage-backed securities 143 $ — $ — $ 652,667 $ ( 88,390 ) $ 652,667 $ ( 88,390 ) Commercial mortgage-backed securities 16 — — 80,564 ( 11,993 ) 80,564 ( 11,993 ) Municipal bonds 43 3,110 ( 45 ) 113,071 ( 12,047 ) 116,181 ( 12,092 ) Corporate bonds 30 20,771 ( 3,183 ) 86,451 ( 9,775 ) 107,222 ( 12,958 ) Total 232 $ 23,881 $ ( 3,228 ) $ 932,753 $ ( 122,205 ) $ 956,634 $ ( 125,433 ) Unrealized losses at September 30, 2023 were generally attributable to changes in market interest rates and interest spread relationships subsequent to the dates the securities were originally purchased, and not due to credit quality concerns on the investment securities. The Company measures its AFS and HTM security portfolios for current expected credit losses as part of its allowance for credit losses analysis. During the nine months ended September 30, 2023, the Company recorded a provision for credit losses on its held-to-maturity portfolio of $ 1.2 million. No provision was recorded for its available-for-sale security portfolio during the nine months ended September 30, 2023. At September 30, 2023, the Company had a total allowance of $ 17 thousand and $ 2.0 million on its available-for-sale securities and held-to-maturity securities, respectively, each of which primarily comprise allowances for corporate bonds. The weighted average duration of debt securities, which comprise 100 % of total investment securities, is 4.59 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company currently has no plans to sell the investments, and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity. 18 The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities at September 30, 2023 and December 31, 2022 by contractual maturity are shown in the table below. Contractual maturities for mortgage-backed securities ("MBS") are excluded as they may differ significantly from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 2023 December 31, 2022 Amortized Estimated Amortized Estimated (dollars in thousands) Cost (1) Fair Value Cost Fair Value Investment securities available-for-sale U.S. Treasury bonds (after one year through five years) 49,868 47,050 49,793 46,327 U. S. agency securities maturing: One year or less 544,988 485,494 $ 549,137 $ 490,699 After one year through five years 135,014 122,355 111,742 100,297 After five years through ten years 43,971 39,077 73,886 68,180 After ten years 12,105 9,351 13,012 10,552 Residential mortgage-backed securities 848,555 714,148 937,557 820,503 Commercial mortgage-backed securities 54,904 48,004 56,071 50,213 Municipal bonds maturing: One year or less — — 300 300 After one year through five years — — 1,444 1,488 After five years through ten years 8,828 7,802 8,956 8,299 After ten years — — — — Corporate bonds maturing: One year or less — — — — After one year through five years 2,000 1,681 2,000 1,825 After five years through ten years — — — — Allowance for credit losses — ( 17 ) — ( 17 ) 1,700,233 1,474,945 1,803,898 1,598,666 Investment securities held-to-maturity Residential mortgage-backed securities 685,648 576,058 741,057 652,667 Commercial mortgage-backed securities 91,337 74,532 92,557 80,564 Municipal bonds maturing: One year or less 6,028 5,866 3,139 3,110 After one year through five years 35,000 31,813 35,579 33,743 After five years through ten years 72,011 60,765 77,262 67,945 After ten years 12,185 10,075 12,293 11,383 Corporate bonds maturing: One year or less 27,011 23,577 23,954 20,771 After one year through five years 88,443 76,666 84,953 77,997 After five years through ten years 16,832 13,358 23,346 20,527 Allowance for credit losses ( 2,010 ) — ( 766 ) — 1,032,485 872,710 1,093,374 968,707 $ 2,732,718 $ 2,347,655 $ 2,897,272 $ 2,567,373 (1) Amortized cost for investment securities held-to-maturity is presented net of the allowance for credit losses on the Consolidated Balance Sheet. For the three and nine months ended September 30, 2023, gross realized gains on sales and calls of investments securities were $ 5 thousand and $ 126 thousand, respectively, as compared to $ 4 thousand and $ 16 thousand for the three and nine months ended September 30, 2022. 19 For the nine months ended September 30, 2023, gross realized losses on sales of investments securities were $ 140 thousand as compared to $ 187 thousand for the three and nine months ended September 30, 2022, respectively. There were no realized losses incurred during the three months ended September 30, 2023 and 2022. Gross sales and call proceeds were $ 2.6 million and $ 11.2 million for the three and nine months ended September 30, 2023, respectively, and $ 6.2 million and $ 26.2 million for the three and nine months ended September 30, 2022, respectively. The book value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2023 and December 31, 2022 was $ 2.3 billion and $ 220.1 million, respectively, which were well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders' equity. Note 4. Loans and Allowance for Credit Losses The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank's loan portfolio consists of loans to businesses secured by real estate and other business assets. Loans, net of unamortized deferred fees and costs, at September 30, 2023 and December 31, 2022 are summarized by portfolio segment as follows: September 30, 2023 December 31, 2022 (dollars in thousands, except amounts in the footnote) Amount % Amount % Commercial $ 1,418,760 18 % $ 1,487,349 19 % PPP loans 588 — % 3,256 — % Income-producing - commercial real estate 4,147,301 52 % 3,919,941 51 % Owner-occupied - commercial real estate 1,182,959 15 % 1,110,325 15 % Real estate mortgage - residential 76,511 1 % 73,001 1 % Construction - commercial and residential 904,282 11 % 877,755 12 % Construction - C&I (owner-occupied) 129,616 2 % 110,479 1 % Home equity 53,917 1 % 51,782 1 % Other consumer 2,457 — % 1,744 — % Total loans 7,916,391 100 % 7,635,632 100 % Less: allowance for credit losses ( 83,332 ) ( 74,444 ) Net loans (1) $ 7,833,059 $ 7,561,188 (1) Excludes accrued interest receivable of $ 45.4 million and $ 43.5 million at September 30, 2023 and December 31, 2022, respectively, which were recorded in other assets on the Consolidated Balance Sheets. Unamortized net deferred fees and costs amounted to $ 27.4 million and $ 29.2 million at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, the Bank serviced $ 315.9 million and $ 361.5 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets. Real estate loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed-price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects. Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner occupied commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or their agent. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition. Commercial permanent loans are generally secured by improved real property that is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0 . As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels. Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years. The Company's loan portfolio includes acquisition, development and construction ("ADC") real estate loans including both investment and owner-occupied projects. ADC loans amounted to $ 1.5 billion at September 30, 2023. A portion of the ADC portfolio includes loan-funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 52.4 % of the outstanding ADC loan portfolio at September 30, 2023. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit, including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides a means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower's ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines that are monitored on an ongoing basis and track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which include monitoring of current and projected real estate market conditions. The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2023 and 2022. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories. (dollars in thousands) Commercial Income-Producing Commercial Real Estate Owner-Occupied -Commercial Real Estate Real Estate Mortgage Residential Construction - Commercial and Residential Construction - C&I (Owner-Occupied) Home Equity Other Consumer Total Three Months Ended September 30, 2023 Allowance for credit losses: Balance at beginning of period $ 15,374 $ 38,486 $ 12,805 $ 811 $ 8,018 1,914 $ 595 $ 26 $ 78,029 Loans charged-off ( 467 ) — — — — — — — ( 467 ) Recoveries of loans previously charged-off 103 — 23 — — — — 1 127 Net loans (charged-off) recovered ( 364 ) — 23 — — — — 1 ( 340 ) Provision for (reversal of) credit losses 1,327 2,207 1,424 53 615 ( 20 ) 39 ( 2 ) 5,643 Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332 Nine Months Ended September 30, 2023 Allowance for credit losses: Balance at beginning of period $ 15,655 $ 35,688 $ 12,702 $ 969 $ 7,195 1,606 $ 555 $ 74 $ 74,444 Loans charged-off ( 1,828 ) ( 5,306 ) — — ( 136 ) — — ( 50 ) ( 7,320 ) Recoveries of loans previously charged-off 335 — 31 — 34 — — 6 406 Net loans (charged-off) recovered ( 1,493 ) ( 5,306 ) 31 — ( 102 ) — — ( 44 ) ( 6,914 ) Provision for (reversal of) credit losses 2,175 10,311 1,519 ( 105 ) 1,540 288 79 ( 5 ) 15,802 Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332 Three Months Ended September 30, 2022 Allowance for credit losses: Balance at beginning of period $ 15,754 $ 34,120 $ 12,796 $ 790 $ 6,470 2,024 $ 647 $ 64 $ 72,665 Loans charged-off ( 53 ) — — — — — — ( 70 ) ( 123 ) Recoveries of loans previously charged-off 152 — 25 — — — — 2 179 Net loans (charged-off) recovered 99 — 25 — — — — ( 68 ) 56 Provision for (reversal of) credit losses 20 2,207 ( 240 ) 20 759 261 ( 23 ) 42 3,046 Ending balance $ 15,873 $ 36,327 $ 12,581 $ 810 $ 7,229 $ 2,285 $ 624 $ 38 $ 75,767 Nine Months Ended September 30, 2022 Allowance for credit losses: Balance at beginning of period $ 14,475 $ 38,287 $ 12,146 $ 449 $ 7,094 $ 2,005 $ 474 $ 35 $ 74,965 Loans charged-off ( 604 ) — ( 1,356 ) — — — — ( 74 ) ( 2,034 ) Recoveries of loans previously charged-off 648 — 25 — 1,627 — — 4 2,304 Net loans (charged-off) recovered 44 — ( 1,331 ) — 1,627 — — ( 70 ) 270 Provision for (reversal of) credit losses 1,354 ( 1,960 ) 1,766 361 ( 1,492 ) 280 150 73 532 Ending balance $ 15,873 $ 36,327 $ 12,581 $ 810 $ 7,229 $ 2,285 $ 624 $ 38 $ 75,767 The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Business/Other Business/Other (dollars in thousands) Assets Real Estate Assets Real Estate Commercial $ 2,330 $ 1,070 $ 1,563 $ 1,871 Income-producing - commercial real estate 1,753 23,236 2,000 4,328 Owner-occupied - commercial real estate — 19,882 — 19,187 Real estate mortgage - residential — 1,692 — 1,698 Construction - commercial and residential — 39,695 — — Home equity — 245 — — Other consumer — — 50 — Total $ 4,083 $ 85,820 $ 3,613 $ 27,084 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators inform an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment. The following are the definitions of the Company's credit quality indicators: Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention. Classified: Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. The Company's credit quality indicators are generally updated annually, however , credits rated "Special Mention" or below are reviewed more frequently. Based on the most recent analysis performed, the amortized cost basis of loans by risk category, class and year of origination are as follows: (dollars in thousands) Prior 2019 2020 2021 2022 2023 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total September 30, 2023 Commercial Pass $ 179,327 $ 50,533 $ 48,437 $ 217,772 $ 159,417 $ 82,375 $ 665,282 $ 5,209 $ 1,408,352 Special Mention — — 5,299 — 68 — 2,439 — 7,806 Substandard 1,172 90 — 542 149 — 380 269 2,602 Total 180,499 50,623 53,736 218,314 159,634 82,375 668,101 5,478 1,418,760 YTD gross charge-offs ( 885 ) — — — — — — ( 943 ) ( 1,828 ) PPP loans Pass — — — 588 — — — — 588 Income producing - commercial real estate Pass 1,320,917 385,392 371,421 516,336 731,489 317,755 196,981 1,848 3,842,139 Special Mention 91,756 4,175 6,739 — — — 47,706 — 150,376 Substandard 106,407 48,379 — — — — — — 154,786 Total 1,519,080 437,946 378,160 516,336 731,489 317,755 244,687 1,848 4,147,301 YTD gross charge-offs ( 5,306 ) — — — — — — — ( 5,306 ) Owner occupied - commercial real estate Pass 614,664 117,143 37,206 203,082 45,904 121,169 1,890 22,019 1,163,077 Substandard 19,882 — — — — — — — 19,882 Total 634,546 117,143 37,206 203,082 45,904 121,169 1,890 22,019 1,182,959 Real estate mortgage - residential Pass 27,025 8,057 2,198 16,007 14,798 6,734 — — 74,819 Substandard 1,692 — — — — — — — 1,692 Total 28,717 8,057 2,198 16,007 14,798 6,734 — — 76,511 Construction - commercial and residential Pass 39,878 4,087 41,069 268,943 338,874 58,341 112,439 956 864,587 Substandard 525 39,170 — — — — — — 39,695 Total 40,403 43,257 41,069 268,943 338,874 58,341 112,439 956 904,282 YTD gross charge-offs ( 136 ) — — — — — — — ( 136 ) Construction - C&I (owner occupied) Pass 18,658 4,294 56,784 638 33,229 9,607 6,406 — 129,616 Total 18,658 4,294 56,784 638 33,229 9,607 6,406 — 129,616 Home equity Pass 2,171 — 88 152 133 — 50,452 577 53,573 Substandard — 37 — — — — 62 245 344 Total 2,171 37 88 152 133 — 50,514 822 53,917 Other consumer Pass 2 — — — 68 1,858 529 — 2,457 Total 2 — — — 68 1,858 529 — 2,457 YTD gross charge-offs ( 50 ) — — — — — — — ( 50 ) Total recorded investment $ 2,424,076 $ 661,357 $ 569,241 $ 1,224,060 $ 1,324,129 $ 597,839 $ 1,084,566 $ 31,123 $ 7,916,391 Total YTD gross charge-offs $ ( 6,377 ) $ — $ — $ — $ — $ — $ — $ ( 943 ) $ ( 7,320 ) (dollars in thousands) Prior 2018 2019 2020 2021 2022 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total December 31, 2022 Commercial Pass $ 183,329 $ 47,393 $ 56,261 $ 64,163 $ 237,146 $ 144,390 $ 736,090 $ 8,570 $ 1,477,342 Special Mention — — — — — 82 5,475 — 5,557 Substandard 1,332 351 276 — — — 1,344 1,147 4,450 Total 184,661 47,744 56,537 64,163 237,146 144,472 742,909 9,717 1,487,349 YTD gross charge-offs ( 283 ) ( 101 ) ( 49 ) — — — ( 483 ) — ( 916 ) PPP loans Pass — — — 2,479 777 — — — 3,256 Income producing - commercial real estate Pass 1,016,529 439,221 480,474 334,165 542,143 744,328 192,089 358 3,749,307 Special Mention 44,195 5,206 4,209 6,735 — — 47,676 — 108,021 Substandard 60,613 2,000 — — — — — — 62,613 Total 1,121,337 446,427 484,683 340,900 542,143 744,328 239,765 358 3,919,941 YTD gross charge-offs ( 680 ) ( 645 ) ( 676 ) — — — — — ( 2,001 ) Owner occupied - commercial real estate Pass 461,029 191,646 111,497 40,562 206,595 41,765 24,240 13,238 1,090,572 Substandard 19,753 — — — — — — — 19,753 Total 480,782 191,646 111,497 40,562 206,595 41,765 24,240 13,238 1,110,325 Real estate mortgage - residential Pass 16,968 12,438 8,219 2,640 16,307 14,731 — — 71,303 Substandard 1,698 — — — — — — — 1,698 Total 18,666 12,438 8,219 2,640 16,307 14,731 — — 73,001 Construction - commercial and residential Pass 84,522 71,841 90,560 189,023 191,127 159,771 90,911 — 877,755 Total 84,522 71,841 90,560 189,023 191,127 159,771 90,911 — 877,755 Construction - C&I (owner occupied) Pass 14,816 8,160 11,810 33,854 653 34,679 6,507 — 110,479 Home equity Pass 1,747 — — 98 551 — 48,378 906 51,680 Substandard — — 41 — — — 61 — 102 Total 1,747 — 41 98 551 — 48,439 906 51,782 Other consumer Pass 4 — — — — 126 1,561 3 1,694 Substandard — — — — — — — 50 50 Total 4 — — — — 126 1,561 53 1,744 YTD gross charge-offs ( 3 ) — — — — — ( 75 ) — ( 78 ) Total recorded investment $ 1,906,531 $ 778,256 $ 763,347 $ 673,719 $ 1,195,299 $ 1,139,872 $ 1,154,332 $ 24,272 $ 7,635,632 Total YTD gross charge-offs $ ( 966 ) $ ( 746 ) $ ( 725 ) $ — $ — $ — $ ( 558 ) $ — $ ( 2,995 ) Nonaccrual and Past Due Loans As part of the Company's comprehensive loan review process, management evaluates loans that are past-due 30 days or more. Management makes a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The table presents, by class of loan, an aging analysis and the recorded investments in loans past due on an amortized cost basis as of September 30, 2023 and December 31, 2022: (dollars in thousands, except amount in the footnote) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans September 30, 2023 Commercial $ 55 $ — $ — $ 55 $ 1,416,184 $ 2,521 $ 1,418,760 PPP loans — — — — 588 — 588 Income producing - commercial real estate 25,769 — — 25,769 4,096,543 24,989 4,147,301 Owner occupied - commercial real estate 404 19,125 — 19,529 1,162,672 758 1,182,959 Real estate mortgage - residential — — — — 74,561 1,950 76,511 Construction - commercial and residential 976 — — 976 863,611 39,695 904,282 Construction - C&I (owner occupied) — — — — 129,616 — 129,616 Home equity 42 — — 42 53,630 245 53,917 Other consumer — — — — 2,457 — 2,457 Total $ 27,246 $ 19,125 $ — $ 46,371 $ 7,799,862 $ 70,158 $ 7,916,391 December 31, 2022 Commercial $ 697 $ 643 $ — $ 1,340 $ 1,483,521 $ 2,488 $ 1,487,349 PPP loans — — — — 3,256 — 3,256 Income producing - commercial real estate — — — — 3,917,941 2,000 3,919,941 Owner occupied - commercial real estate — 279 — 279 1,110,029 17 1,110,325 Real estate mortgage – residential — — — — 71,088 1,913 73,001 Construction - commercial and residential 531 — — 531 877,224 — 877,755 Construction - C&I (owner occupied) — — — — 110,479 — 110,479 Home equity — 52 — 52 51,730 — 51,782 Other consumer — 1 — 1 1,693 50 1,744 Total $ 1,228 $ 975 $ — $ 2,203 $ 7,626,961 $ 6,468 $ 7,635,632 The following presents the nonaccrual loans on an amortized cost basis as of September 30, 2023 and December 31, 2022: (dollars in thousands, except amounts in footnotes) Nonaccrual with No Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans September 30, 2023 Commercial $ 366 $ 2,155 $ 2,521 Income producing - commercial real estate 23,236 1,753 24,989 Owner occupied - commercial real estate 758 — 758 Real estate mortgage - residential — 1,950 1,950 Construction - commercial and residential 39,170 525 39,695 Home equity 245 — 245 Total (1) $ 63,775 $ 6,383 $ 70,158 December 31, 2022 Commercial $ 101 $ 2,387 $ 2,488 Income producing - commercial real estate — 2,000 2,000 Owner occupied - commercial real estate 17 — 17 Real estate mortgage - residential — 1,913 1,913 Other consumer — 50 50 Total (1) $ 118 $ 6,350 $ 6,468 (1) Gross coupon interest income of approximately $ 4.1 million and $ 410 thousand would have been recorded for the nine months ended September 30, 2023 and 2022, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while $ 1.1 million and $ 5 thousand of coupon interest income was actually recorded on such loans for the nine months ended September 30, 2023 and 2022, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company's policy for placing loans on nonaccrual status. Modifications with Borrowers Experiencing Financial Difficulty On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a TDR. Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows. The Company may offer various types of modifications when restructuring a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a loan restructuring often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a loan restructuring may also involve extending the interest-only payment period. Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for consumer and commercial loans that have been modified in a loan restructuring is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. The following table presents the amortized cost basis as of September 30, 2023 and the financial effect of loans modified to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023: September 30, 2023 (dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Total Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension (1) Weighted Average Interest Rate Reduction (2) Three months ended September 30, 2023 Commercial $ 29,898 $ — $ — $ 29,898 2.1 % 4 months — % Income producing - commercial real estate 7,190 55,649 113,833 176,672 4.3 % 10 months 1.89 % Owner occupied - commercial real estate — 19,125 — 19,125 1.6 % 3 months — % Total $ 37,088 $ 74,774 $ 113,833 $ 225,695 Nine months ended September 30, 2023 Commercial $ 36,969 $ — $ — $ 36,969 2.6 % 7 months — % Income producing - commercial real estate (3) 7,190 57,808 113,833 178,831 4.3 % 13 months 2.55 % Owner occupied - commercial real estate — 19,125 — 19,125 1.6 % 9 months — % Construction - commercial and residential 7,093 — — 7,093 0.8 % 6 months — % Total $ 51,252 $ 76,933 $ 113,833 $ 242,018 (1) For loans that received multiple modifications during the nine months ended September 30, 2023, weighted average term and principal payment extensions were calculated based on the aggregated impact of the extensions received during the period. (2) The weighted average is calculated based on the total amortized cost at September 30, 2023 of loans that received interest rate reduction modifications during the three and nine months ended September 30, 2023. (3) Includes one loan modified as a combination - principal payment delay and term extension during the first quarter of 2023 that was 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. The following table presents the performance of loans modified to borrowers experiencing financial difficulty during the nine months ended September 30, 2023: September 30, 2023 Payment Status (Amortized Cost Basis) (dollars in thousands) Current 30-89 Days Past Due Nonaccrual Commercial $ 36,969 $ — $ — Income producing - commercial real estate 130,461 25,769 22,601 Owner occupied - commercial real estate — 19,125 — Construction - commercial and residential 7,093 — — Total $ 174,523 $ 44,894 $ 22,601 The Company monitors loan payments on performing and nonperforming loans on an on-going basis to determine if a loan is considered to have a payment default. To determine the existence of a payment default, the Company analyzes the economic conditions that exist for each borrower and their ability to generate positive cash flow during a given loan's term. The following table presents the amortized cost basis of loans that had a payment default during the nine months ended September 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty: September 30, 2023 Amortized Cost Basis (dollars in thousands) Combination - Term Extension and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Income producing - commercial real estate $ — $ 46,211 Owner occupied - commercial real estate 19,125 — Total $ 19,125 $ 46,211 The Company individually evaluates nonaccrual loans when performing its CECL estimate to calculate the ACL. Additionally, the Company utilizes historical internal and third-party service provider sourced loss data in the determination of its PD/LGD rates applied in the calculation of its CECL estimate. Upon determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount. Note 5. Leases The Company accounts for leases in accordance with ASC Topic 842. A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee comprise real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases. With the adoption of ASC Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as a right-of-use ("ROU") asset and a corresponding lease liability. As of September 30, 2023 and December 31, 2022, the Company had $ 20.2 million and $ 24.5 million of operating lease ROU assets, respectively, and $ 24.4 million and $ 29.3 million of operating lease liabilities, respectively, on the Company's Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets. The leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90 % probability that the Company will exercise the option. If these criteria are not met, the options are not included in ROU assets and lease liabilities. As of September 30, 2023, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company's ability to incur additional financial obligations. During the nine months ended September 30, 2023, the Company did not enter into new leases or renew or extend any leases. The Company had three leases expire during that period. 20 The following table presents lease costs and other lease information. Three Months Ended Nine Months Ended (dollars in thousands) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Lease cost Operating lease cost (cost resulting from lease payments) $ 1,604 $ 1,757 $ 4,987 $ 5,418 Variable lease cost (cost excluded from lease payments) 245 270 754 781 Sublease income ( 30 ) ( 30 ) ( 89 ) ( 212 ) Net lease cost $ 1,819 $ 1,997 $ 5,652 $ 5,987 Operating lease - operating cash flows (fixed payments) $ 1,760 $ 1,809 $ 5,433 $ 5,551 (dollars in thousands) September 30, 2023 December 31, 2022 Operating lease right-of-use assets $ 20,151 $ 24,544 Operating lease liabilities $ 24,422 $ 29,267 Weighted average lease term - operating leases 5.04 yrs 5.50 yrs Weighted average discount rate - operating leases 2.79 % 2.91 % Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2023 were as follows: (dollars in thousands) Twelve months ended: September 30, 2024 $ 1,765 September 30, 2025 6,880 September 30, 2026 5,987 September 30, 2027 2,894 September 30, 2028 2,502 Thereafter 5,776 Total future minimum lease payments 25,804 Amounts representing interest ( 1,382 ) Present value of net future minimum lease payments $ 24,422 Note 6. Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments. Interest Rate Products Interest rate derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net market risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 21 The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Credit-Risk-Related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Mortgage Banking Derivatives The Company commenced the cessation of first lien residential mortgage origination for secondary sale in the first quarter of 2023. The Company completed the residual origination and sales activities in the second quarter of 2023. As of September 30, 2023, the Company had no outstanding mortgage banking derivatives. Historically, as part of its mortgage banking activities, the Bank entered into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determined the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. Certain additional risks arose from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank did not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank did not close the loans subject to interest rate risk lock commitments, it would still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this have been required, the Bank could have incurred significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair value of the mortgage banking derivatives was recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. 22 The table below identifies the balance sheet category and fair value of the Company's derivative instruments as of September 30, 2023 and December 31, 2022. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at September 30, 2023, it could have been required to settle its obligations under the agreement at the termination value. September 30, 2023 December 31, 2022 (dollars in thousands) Notional Amount Fair Value Balance Sheet Category Notional Amount Fair Value Balance Sheet Category Derivatives not designated as hedging instruments in an asset position Interest rate product $ 654,757 $ 41,787 Other assets $ 396,024 $ 31,039 Other assets Credit risk participation agreements 49,480 1 Other liabilities — — N/A Mortgage banking derivatives — — N/A 6,963 93 Other assets Total $ 704,237 $ 41,788 $ 402,987 $ 31,132 Derivatives not designated as hedging instruments in a liability position Interest rate product $ 654,757 $ 41,637 Other liabilities $ 396,024 $ 30,065 Other liabilities Credit risk participation agreements — — N/A 25,902 2 Other liabilities Total $ 654,757 $ 41,637 $ 421,926 $ 30,067 The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022: The Effect of Derivatives Not Designated as Hedging Instruments in the Consolidated Statements of Income Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Interest rate products Other income / (other expense) $ 3,027 $ 837 $ 3,735 $ 2,299 Mortgage banking derivatives Gain on sale of loans — ( 90 ) — ( 619 ) Total $ 3,027 $ 747 $ 3,735 $ 1,680 Note 7. Deposits The following table provides information regarding the Bank’s deposit composition at September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 Noninterest-bearing demand $ 2,072,665 $ 3,150,751 Interest-bearing transaction 932,779 1,138,235 Savings and money market 3,129,773 3,640,697 Time deposits 2,241,089 783,499 Total $ 8,376,306 $ 8,713,182 23 The remaining maturity of time deposits at September 30, 2023 and December 31, 2022 were as follows: (dollars in thousands) September 30, 2023 December 31, 2022 2023 $ 348,469 $ 463,393 2024 1,129,014 152,898 2025 575,976 157,320 2026 173,067 2,628 2027 4,995 4,130 2028 9,568 3,130 Thereafter — — Total $ 2,241,089 $ 783,499 As of September 30, 2023 and December 31, 2022, time deposit accounts in excess of $ 250 thousand were as follows: (dollars in thousands) September 30, 2023 December 31, 2022 Three months or less $ 202,819 $ 87,959 More than three months through six months 115,089 51,746 More than six months through twelve months 559,670 108,877 Over twelve months 791,238 269,200 Total $ 1,668,816 $ 517,782 At September 30, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $ 2.4 billion, or 29.1 % of total deposits. At December 31, 2022, total deposits included $ 2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 26.5 % of total deposits. 24 Note 8. Borrowings The following table summarizes the Company’s borrowings, which include repurchase agreements with the Company’s customers, short-term borrowings and long-term borrowings, at September 30, 2023 and December 31, 2022: (dollars in thousands) Borrowings - Principal Unamortized Deferred Issuance Costs Net Borrowings Outstanding Available Capacity (1)(2) Maturity Dates Interest Rates (3) September 30, 2023: Customer repurchase agreements $ 25,689 $ — $ 25,689 $ — N/A 3.43 % Short-term borrowings: FHLB secured borrowings — — — 1,736,759 N/A N/A FRB: BTFP secured borrowings 1,300,001 — 1,300,001 253,133 March 26, 2024 4.53 % Discount window secured borrowings — — — 606,178 N/A N/A Raymond James repurchase agreement — — — 17,162 N/A N/A Total 1,300,001 — 1,300,001 2,613,232 Long-term borrowings: Subordinated notes, 5.75 % 70,000 ( 113 ) 69,887 — September 1, 2024 5.75 % Total borrowings $ 1,395,690 $ ( 113 ) $ 1,395,577 $ 2,613,232 December 31, 2022: Customer repurchase agreements $ 35,100 $ — $ 35,100 $ — N/A 2.94 % Short-term borrowings: FHLB secured borrowings 975,001 — 975,001 145,104 December 1, 2023 4.57 % FRB discount window secured borrowings — — — 607,405 N/A N/A Total 975,001 — 975,001 752,509 Long-term borrowings: Subordinated notes, 5.75 % 70,000 ( 206 ) 69,794 — September 1, 2024 5.75 % Total borrowings $ 1,080,101 $ ( 206 ) $ 1,079,895 $ 752,509 (1) Available capacity on the Company's short-term borrowing arrangements with the FHLB, the FRB's BTFP program and the Raymond James repurchase line comprise pledged collateral that has not been borrowed against. At September 30, 2023, the Company had total additional undrawn borrowing capacity of approximately $ 2.3 billion, comprising unencumbered securities available to be pledged of approximately $ 269.9 million and undrawn financing on pledged assets of $ 2.0 billion, including $ 1.7 billion with the FHLB, $ 253.1 million with the BTFP and $ 17.2 million with Raymond James. (2) As part of the Company's agreement governing its participation in the BTFP program and the Raymond James repurchase agreement, the borrowing capacity is determined based on the principal balance of the pledged assets. (3) Represent the weighted average interest rate on customer repurchase agreements and the short-term borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate. The Company’s repurchase agreements operate on a rolling basis and do not contain contractual maturity dates. The contractual maturity dates on FHLB secured borrowings represent the maturity dates of current advances and are not evidence of a termination date on the line. There are no prepayment penalties nor unused commitment fees on any of the Company’s borrowing arrangements. 25 Bank Term Funding Program (“BTFP”) On March 12, 2023, the FRB, Department of Treasury and the FDIC issued a joint statement outlining actions they had taken to protect the U.S. economy by strengthening public confidence in the banking system as a result of and in response to recently announced bank closures. Among other actions, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of a new BTFP. The BTFP provides eligible depository institutions, including the Company's subsidiary bank, EagleBank, an additional source of liquidity. Borrowings are funded based on a percentage of the principal of eligible collateral posted, as defined within the terms of the program. Interest is payable at a fixed rate over the term of the borrowing and there are no prepayment penalties. The program is expected to continue until at least March 2024. Subordinated Notes On August 5, 2014, the Company completed the sale of $ 70.0 million of its 5.75 % subordinated notes, due September 1, 2024 (the "2024 Notes"). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $ 68.8 million which included $ 1.2 million in deferred financing costs, which are being amortized over the life of the 2024 Notes. Note 9. Net Income per Common Share The calculation of net income per common share for the three and nine months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars and shares in thousands, except per share data) 2023 2022 2023 2022 Basic: Net income $ 27,383 $ 37,297 $ 80,309 $ 98,737 Average common shares outstanding 29,910 32,084 30,487 32,066 Basic net income per common share $ 0.91 $ 1.16 $ 2.63 $ 3.08 Diluted: Net income $ 27,383 $ 37,297 $ 80,309 $ 98,737 Average common shares outstanding 29,910 32,084 30,487 32,066 Adjustment for common share equivalents 34 71 48 72 Average common shares outstanding-diluted 29,944 32,155 30,535 32,138 Diluted net income per common share $ 0.91 $ 1.16 $ 2.63 $ 3.07 Anti-dilutive shares 3 3 3 — 26 Note 10. Other Comprehensive (Loss) Income The following table presents the components of other comprehensive (loss) income for the three and nine months ended September 30, 2023 and 2022. (dollars in thousands) Before Tax Tax Effect Net of Tax Three Months Ended September 30, 2023 Net unrealized loss on securities available-for-sale $ ( 28,150 ) $ 6,836 $ ( 21,314 ) Less: Reclassification adjustment for net gain included in net income ( 5 ) 1 ( 4 ) Total unrealized loss on investment securities available-for-sale ( 28,155 ) 6,837 ( 21,318 ) Amortization of unrealized loss on securities transferred to held-to-maturity 1,824 ( 424 ) 1,400 Other comprehensive loss $ ( 26,331 ) $ 6,413 $ ( 19,918 ) Three Months Ended September 30, 2022 Net unrealized loss on securities available-for-sale $ ( 81,384 ) $ 21,355 $ ( 60,029 ) Less: Reclassification adjustment for net gain included in net income ( 4 ) 1 ( 3 ) Total unrealized loss on investment securities available-for-sale ( 81,388 ) 21,356 ( 60,032 ) Amortization of unrealized loss on securities transferred to held-to-maturity 2,382 ( 620 ) 1,762 Other comprehensive loss $ ( 79,006 ) $ 20,736 $ ( 58,270 ) Nine Months Ended September 30, 2023 Net unrealized loss on securities available-for-sale $ ( 20,070 ) $ 4,618 $ ( 15,452 ) Less: Reclassification adjustment for net loss included in net income 14 ( 4 ) 10 Total unrealized gain on investment securities available-for-sale ( 20,056 ) 4,614 ( 15,442 ) Amortization of unrealized loss on securities transferred to held-to-maturity 5,638 ( 2,194 ) 3,444 Other comprehensive loss $ ( 14,418 ) $ 2,420 $ ( 11,998 ) Nine Months Ended September 30, 2022 Net unrealized loss on securities available-for-sale $ ( 205,329 ) $ 53,876 $ ( 151,453 ) Less: Reclassification adjustment for net loss included in net income 172 ( 58 ) 114 Total unrealized loss on investment securities available-for-sale ( 205,157 ) 53,818 ( 151,339 ) Net unrealized loss on securities transferred to held-to-maturity ( 66,193 ) 17,098 ( 49,095 ) Amortization of unrealized loss on securities transferred to held-to-maturity 5,071 ( 1,318 ) 3,753 Total unrealized loss on investment securities held-to-maturity ( 61,122 ) 15,780 ( 45,342 ) Net unrealized gain on derivatives 284 — 284 Other comprehensive loss $ ( 265,995 ) $ 69,598 $ ( 196,397 ) 27 The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2023 and 2022. (dollars in thousands) Securities Available-For-Sale Securities Held-to-Maturity Derivatives Accumulated Other Comprehensive Income (Loss) Three Months Ended September 30, 2023 Balance at beginning of period $ ( 148,897 ) $ ( 42,690 ) $ — $ ( 191,587 ) Other comprehensive loss before reclassifications ( 21,314 ) — — ( 21,314 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 4 ) — — ( 4 ) Amortization of unrealized loss on securities transferred to held-to-maturity — 1,400 — 1,400 Net other comprehensive (loss) income during period ( 21,318 ) 1,400 — ( 19,918 ) Balance at end of period $ ( 170,215 ) $ ( 41,290 ) $ — $ ( 211,505 ) Three Months Ended September 30, 2022 Balance at beginning of period $ ( 105,265 ) $ ( 47,104 ) $ — $ ( 152,369 ) Other comprehensive loss before reclassifications ( 60,029 ) — — ( 60,029 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 3 ) — — ( 3 ) Amortization of unrealized loss on securities transferred to held-to-maturity — 1,762 — 1,762 Net other comprehensive (loss) income during period ( 60,032 ) 1,762 — ( 58,270 ) Balance at end of period $ ( 165,297 ) $ ( 45,342 ) $ — $ ( 210,639 ) Nine Months Ended September 30, 2023 Balance at beginning of period $ ( 154,773 ) $ ( 44,734 ) $ — $ ( 199,507 ) Other comprehensive income before reclassifications ( 15,452 ) — — ( 15,452 ) Amounts reclassified from accumulated other comprehensive income (loss) 10 — — 10 Amortization of unrealized loss on securities transferred to held-to-maturity — 3,444 — 3,444 Net other comprehensive (loss) income during period ( 15,442 ) 3,444 — ( 11,998 ) Balance at end of period $ ( 170,215 ) $ ( 41,290 ) $ — $ ( 211,505 ) Nine Months Ended September 30, 2022 Balance at beginning of period $ ( 13,958 ) $ — $ ( 284 ) $ ( 14,242 ) Other comprehensive loss before reclassifications ( 151,453 ) ( 49,095 ) 284 ( 200,264 ) Amounts reclassified from accumulated other comprehensive income (loss) 114 — — 114 Amortization of unrealized loss on securities transferred to held-to-maturity — 3,753 — 3,753 Net other comprehensive (loss) income during period ( 151,339 ) ( 45,342 ) 284 ( 196,397 ) Balance at end of period $ ( 165,297 ) $ ( 45,342 ) $ — $ ( 210,639 ) 28 The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022. Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Three Months Ended September 30, Affected Line Item in Consolidated Statements of Income (dollars in thousands) 2023 2022 Realized gain (loss) on sale of investment securities $ 5 $ 4 Net gain (loss) on sale of investment securities Income tax benefit (expense) ( 1 ) ( 1 ) Income tax expense Total reclassifications for the periods $ 4 $ 3 Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Nine Months Ended September 30, Affected Line Item in Consolidated Statements of Income (dollars in thousands) 2023 2022 Realized loss on sale of investment securities $ ( 14 ) $ ( 172 ) Net gain (loss) on sale of investment securities Income tax benefit (expense) 4 58 Income tax expense Total reclassifications for the periods $ ( 10 ) $ ( 114 ) Note 11. Fair Value Measurements The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. treasury and other U.S. Government and agency securities actively traded in over-the-counter markets. Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or inputs that can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. 29 Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Fair Value September 30, 2023 Assets: Investment securities available-for-sale: U.S treasury bonds $ — $ 47,050 $ — $ 47,050 U. S. agency securities — 656,277 — 656,277 Residential mortgage-backed securities — 714,148 — 714,148 Commercial mortgage-backed securities — 48,004 — 48,004 Municipal bonds — 7,802 — 7,802 Corporate bonds — 1,664 — 1,664 Interest rate product — 41,787 — 41,787 Credit risk participation agreements — 1 — 1 Total assets measured at fair value on a recurring basis $ — $ 1,516,733 $ — $ 1,516,733 Liabilities: Interest rate product $ — $ 41,637 $ — $ 41,637 Total liabilities measured at fair value on a recurring basis $ — $ 41,637 $ — $ 41,637 December 31, 2022 Assets: Investment securities available-for-sale: U.S. treasury bonds $ — $ 46,327 $ — $ 46,327 U. S. agency securities — 669,728 — 669,728 Residential mortgage-backed securities — 820,503 — 820,503 Commercial mortgage-backed securities — 50,213 — 50,213 Municipal bonds — 10,087 — 10,087 Corporate bonds — 1,808 — 1,808 Loans held for sale — 6,734 — 6,734 Interest rate product — 31,039 — 31,039 Mortgage banking derivatives — — 93 93 Total assets measured at fair value on a recurring basis $ — $ 1,636,439 $ 93 $ 1,636,532 Liabilities: Credit risk participation agreements $ — $ 2 $ — $ 2 Interest rate product — 30,065 — 30,065 Total liabilities measured at fair value on a recurring basis $ — $ 30,067 $ — $ 30,067 30 Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include certain U.S. treasury bonds, U.S. Government and agency securities that actively traded in over-the-counter markets. Level 2 securities includes certain U.S. treasury bonds, U.S. agency debt securities, mortgage-backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, for which the carrying amounts approximate the fair value. The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3): (dollars in thousands) Investment Securities Available-for-Sale Assets: Beginning balance at January 1, 2022 $ 10,000 Reclassified to investment securities held-to-maturity ( 10,000 ) Ending balance at December 31, 2022 $ — Loans held for sale : The Company previously carried loans held for sale at fair value. This election reduced certain timing differences in the Consolidated Statement of Income and better aligned with the management of the portfolio from a business perspective. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sale of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. Fair value is derived from secondary market quotations for similar instruments. As such, the Company classified loans subjected to fair value adjustments as Level 2 valuation. The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of December 31, 2022: (dollars in thousands) Fair Value Aggregate Unpaid Principal Balance Difference December 31, 2022 Loans held for sale $ 6,734 $ 6,775 $ ( 41 ) There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of December 31, 2022. While the Company had loans held for sale outstanding in 2023, the Company does not have any loans held for sale as of September 30, 2023. Credit risk participation agreements : The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2. Interest rate derivatives: The Company entered into an interest rate derivative agreement with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the derivatives strike rate. The fair value of the derivative is calculated by determining the total expected asset or liability exposure of the derivative. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the derivative falls within Level 2. Mortgage banking derivatives for loans settled on a mandatory basis: The Company commenced the cessation of first lien residential mortgage origination for secondary sale in the first quarter of 2023. The Company completed origination and sales activities as of the end of the second quarter of 2023. While the Company had mortgage banking derivatives in 2023 and 2022, the Company does not have any of these derivatives as of September 30, 2023. 31 Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company measures certain assets at fair value on a nonrecurring basis, and the following is a general description of the methods used to value such assets. At September 30, 2023, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. Other real estate owned : Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below: (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Fair Value September 30, 2023 Individually assessed loans: Commercial $ — $ — $ 2,583 $ 2,583 Income producing - commercial real estate — — 23,738 23,738 Owner occupied - commercial real estate — — 19,929 19,929 Real estate mortgage - residential — — 1,638 1,638 Construction - commercial and residential — — 39,896 39,896 Home equity — — 245 245 Other real estate owned — — 1,487 1,487 Total assets measured at fair value on a nonrecurring basis as of September 30, 2023 $ — $ — $ 89,516 $ 89,516 December 31, 2022 Individually assessed loans: Commercial $ — $ — $ 1,790 $ 1,790 Income producing - commercial real estate — — 3,131 3,131 Owner occupied - commercial real estate — — 19,187 19,187 Real estate mortgage - residential — — 1,404 1,404 Consumer — — 3 3 Other real estate owned — — 1,962 1,962 Total assets measured at fair value on a nonrecurring basis as of December 31, 2022 $ — $ — $ 27,477 $ 27,477 Fair Value of Financial Instruments The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists. 32 Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole. 33 The estimated fair value of the Company's financial instruments at September 30, 2023 and December 31, 2022 are as follows: Fair Value Measurements (dollars in thousands) Carrying Value Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) September 30, 2023 Assets Cash and due from banks $ 8,625 $ 8,625 $ 8,625 $ — $ — Federal funds sold 13,611 13,611 — 13,611 — Interest bearing deposits with other banks 235,819 235,819 — 235,819 — Investment securities available-for-sale 1,474,945 1,474,945 — 1,474,945 — Investment securities held-to-maturity 1,032,485 872,710 — 872,710 — Federal Reserve and Federal Home Loan Bank stock 25,689 N/A — — — Loans 7,916,391 7,635,283 — — 7,635,283 Bank owned life insurance 112,234 112,234 — 112,234 — Annuity investment 13,088 13,088 — 13,088 — Interest rate product 41,787 41,787 — 41,787 — Credit risk participation agreement 1 1 — 1 — Accrued interest receivable 53,361 53,361 53,361 — — Liabilities Noninterest bearing deposits $ 2,072,665 $ 2,072,665 $ — $ 2,072,665 $ — Interest bearing deposits 4,062,552 4,062,552 — 4,062,552 — Time deposits 2,241,089 2,225,503 — 2,225,503 — Customer repurchase agreements 25,689 25,689 — 25,689 — Borrowings 1,369,888 1,367,912 — 1,367,912 — Interest rate product 41,637 41,637 — 41,637 — Accrued interest payable 38,642 38,642 38,642 — — December 31, 2022 Assets Cash and due from banks $ 12,655 $ 12,655 $ 12,655 $ — $ — Federal funds sold 33,927 33,927 — 33,927 — Interest bearing deposits with other banks 265,272 265,272 — 265,272 — Investment securities available-for-sale 1,598,666 1,598,666 — 1,598,666 — Investment securities held-to-maturity 1,093,374 967,940 — 967,940 — Federal Reserve and Federal Home Loan Bank stock 65,067 N/A — — — Loans held for sale 6,734 6,734 — 6,734 — Loans 7,635,632 7,492,283 — — 7,492,283 Bank owned life insurance 110,998 110,998 — 110,998 — Annuity investment 13,869 13,869 — 13,869 — Mortgage banking derivatives 93 93 — — 93 Interest rate product 31,039 31,039 — 31,039 — Accrued interest receivable 51,390 51,390 51,390 — — Liabilities Noninterest bearing deposits $ 3,150,751 $ 3,150,751 $ — $ 3,150,751 $ — Interest bearing deposits 4,778,932 4,778,932 — 4,778,932 — Time deposits 783,499 777,757 — 777,757 — Customer repurchase agreements 35,100 35,100 — 35,100 — Borrowings 1,044,795 1,043,083 — 1,043,083 — Credit risk participation agreements 2 2 — 2 — Interest rate product 30,065 30,065 — 30,065 — Accrued interest payable 25,911 25,911 25,911 — — 34 Note 12 - Legal Contingencies There have been no material changes in the status of the legal, regulatory and governmental proceedings, investigations and inquiries previously disclosed in Part II, Item 8, "Note 21 - Commitments and Contingent Liabilities" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. From time to time, the Company and its subsidiaries are involved in various legal proceedings and regulatory and governmental investigations and inquiries incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed. Such matters may result in legal expenses that could adversely impact the financial condition and results of operations of the Company. The Company had no contingent liabilities outstanding in connection with pending legal matters at September 30, 2023 and December 31, 2022. As previously disclosed, the Company maintains director and officer insurance policies ("D&O Insurance Policies") that provide coverage for the legal defense costs. When claims are covered by D&O Insurance Policies, the Company records a corresponding receivable against the incurred legal defense cost expense subject to coverage under the D&O Insurance Policies and then eliminates the receivable and expense when the claim is paid. If the D&O Insurance Policies are exhausted, the Company will be responsible for paying the defense costs associated with any investigations and litigations for itself and on behalf of any current and former Officers and Directors entitled to indemnification from the Company. The D&O Insurance Policies for the period from December 2016 to December 2017 have been exhausted. The Company will therefore be responsible for paying future costs related to matters from that period, if any, including matters that are not currently pending. The Company cannot predict with any certainty the amount of defense costs that the Company may incur in the future in connection with any potential future investigations and legal proceedings, as they are dependent on various factors, many of which are outside of the Company's control. 35