EAGLE BANCORP INC 10-Q

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the "Company") and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Caution About Forward Looking Statements . This report contains forward looking statements. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and are typically identified with words such as “may,” “will,” “can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “assume,” “probable,” “possible,” “continue,” “should,” “could,” “would,” “strive,” “seeks,” “deem,” “projections,” “forecast,” “consider,” “indicative,” “uncertainty,” “likely,” “unlikely,” “likelihood,” “unknown,” “attributable,” “depends,” “intends,” “generally,” “feel,” “typically,” “judgment,” “subjective” and similar words or phrases. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. These forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. The Company's past results are not necessarily indicative of future performance, and nothing contained herein is meant to or should be considered and treated as earnings guidance of future quarters' performance projections. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking statement for any reason. GENERAL The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland. The Company provides general commercial and consumer banking services through EagleBank (the "Bank"), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of thirteen branch offices, including three in Northern Virginia, six in Suburban Maryland, and four in Washington, D.C. The Bank also operates four lending offices, with one in Northern Virginia, two in Suburban Maryland and one in Washington, D.C. During the first nine months of 2023, three branches were closed as they had expiring leases. The branches' clients will be served from our other branches, and through digital channels. The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank's market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, consumer loans, and cash management services. The Bank is also active in the origination of Small Business Administration ("SBA") loans. The Bank made the strategic decision to cease originating first lien residential mortgage loans for secondary sale in the first quarter of 2023, due to diminishing residential mortgage production volumes in the face of a higher interest rate environment and increasing costs associated with regulatory compliance and risk management. The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company completed origination and sales activities as of June 30, 2023. 36 The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily Federal Housing Administration ("FHA") loans through the Department of Housing and Urban Development's Multifamily Accelerated Program ("MAP"). The Company securitizes these loans through the Government National Mortgage Association ("Ginnie Mae") MBS I program and shortly thereafter sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned ("OREO") assets. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 except as indicated in "Accounting Standards Adopted in 2023" in Note 1 to the Consolidated Financial Statements in this report. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. 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. During the second quarter of 2023, Management determined that a triggering event had occurred as a result of a sustained decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget for the remainder of 2023 due primarily to the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent events in the banking sector. The Company performed a qualitative assessment and quantitative impairment test on its only reporting unit as of May 31, 2023. The Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2023. A combination of a risk-weighted income valuation methodology, comprising a discounted cash flow analysis, and a market valuation methodology, comprising the guideline public company method, was employed. 37 Significant judgment is necessary in the determination of the fair value of a reporting unit. The income valuation methodology requires an estimation of future cash flows, considering the after-tax results of operations, the extent and timing of credit losses, and appropriate discount and growth rates. Actual future cash flows may differ from forecasted results based on the assumptions used. In performing the discounted cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations. The long-term growth rate used in the calculation of fair value was derived from published projections of the inflation rate and GDP, along with Management estimates. The discount rate was calculated as the cost of equity capital using the modified capital asset pricing model, which includes variables including the risk-free interest rate, beta, equity risk premium, size premium, and company-specific risk premium. The market approach considers a combination of price to tangible book value and price to earnings, adjusted based on companies similar to the reporting unit and adjusted for selected multiples, along with a control premium based on a review of transactions in the banking industry in order to calculate the indicated value of the Company's equity on a control, marketable basis. The resulting calculation of fair value exceeded the carrying amount of the Company by approximately 17% as of May 31, 2023, which resulted in no impairment loss. Future events could cause the Company to conclude that the Company’s goodwill has become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management has evaluated and will continue to evaluate economic conditions in interim periods for triggering events. RESULTS OF OPERATIONS Earnings Summary Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022 Net income for the three months September 30, 2023 was $27.4 million as compared to $37.3 million for the same period in 2022, a $9.9 million decrease, or 26.6%. The decrease in net income of $9.9 million for the three months ended September 30, 2023 relative to the same period in 2022 was due to a decrease in net interest income of $13.2 million, an increase in provision for credit losses of $2.6 million, and an increase in noninterest expenses of $1.4 million, the total of which was partially offset by a reduction of income tax expense of $4.7 million, a decrease in the provision for unfunded commitments of $1.6 million, and an increase in noninterest income of $1.0 million. Net interest income decreased primarily due to an increase in interest rates impacting deposits and funding costs that exceeded the increase in total interest income, which in part was affected by the reversal of $1.6 million of interest income during the three months ended September 30, 2023 on a loan that entered nonperforming status. Noninterest expenses included an increase in FDIC insurance assessments of $2.1 million. Noninterest income increased primarily due to an increase in other income of $1.5 million. The increase in the provision was primarily driven by the fluctuations in the qualitative and economic factors of the credit model in the third quarter of 2023 compared to the third quarter of 2022. Additional details on other noninterest expenses are provided in the "Noninterest Expense" section below. Total revenue (i.e. net interest income plus noninterest income) was $77.1 million for the three months ended September 30, 2023 as compared to $89.2 million for the same period in 2022. The most significant portion of revenue is net interest income, which was $70.7 million for the three months ended September 30, 2023, compared to $83.9 million for the same period in 2022. Net interest income decreased primarily due to an increase in interest expense from increased interest rates on deposits and borrowings, which was partially offset by an increase in interest income on loans. The increase in interest income on loans included the impact of the reversal of interest income on the loan that entered nonperforming status during the three months ended September 30, 2023. The primary driver for the increase in noninterest income was an increase in swap fee income that was partially offset by a decrease from a gain to a loss on the sales of residential loans and fees associated with residential mortgage loans. 38 The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.43% for the three months ended September 30, 2023 and 3.02% for the same period in 2022. The $1.6 million reversal of interest income on a loan that entered nonperforming status during the three months ended September 30, 2023 reduced the net interest margin by 0.06%. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below. Total noninterest income for the three months ended September 30, 2023 increased to $6.3 million from $5.3 million for the same period in 2022, a 19.6% increase. Noninterest income increased primarily due to an increase in other income driven by an increase in swap fee income of $1.2 million, which was partially offset by a decrease from a gain to a loss on sales of residential loans. For further information on the components and drivers of these changes, see the "Noninterest Income" section below. Other income for the three months ended September 30, 2023 increased to $4.0 million from $2.5 million for the same period in 2022, a 61.0% increase. This increase was primarily attributable to an increase in swap fee income of $1.2 million. Loss on sale of loans for the three months ended September 30, 2023 was $5 thousand compared to an $821 thousand gain for the same period in 2022, a decrease to earnings of $826 thousand. The decline from a gain to a loss on sales of loans was due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced. Noninterest expense totaled $37.6 million for the three months ended September 30, 2023, as compared to $36.2 million for same period in 2022, a $1.4 million increase. The increase in noninterest expense was primarily due to an increase in FDIC insurance assessments of $2.1 million. Additional details on other noninterest expenses are provided in "Noninterest Expense" section below. Income tax expenses were $7.2 million for the three months ended September 30, 2023, a reduction of 39.1%, compared to the same period in 2022. The components and drivers of the change are discussed in the "Income Tax Expense" section below. The efficiency ratio was 48.83% for the three months ended September 30, 2023, as compared to 40.59% for the same period in 2022. The adverse change in the efficiency ratio was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. For the three months ended September 30, 2023, the Company reported an annualized return on average assets ("ROAA") of 0.91%, as compared to 1.29% for the same period in 2022. The annualized return on average common equity ("ROACE") for the three months ended September 30, 2023 was 8.80% as compared to 11.64% for the same period in 2022. The annualized return on average tangible common equity ("ROATCE") for the three months ended September 30, 2023 was 9.61% as compared to 12.67% for the same period in 2022. The adverse change in returns was primarily attributable to the reduction in net income. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022 Net income for the nine months ended September 30, 2023 was $80.3 million as compared to $98.7 million for the same period in 2022, a decrease of $18.4 million, or 18.7%. The decrease in net income of $18.4 million for the nine months ended September 30, 2023 relative to the same period in 2022 was due to a decrease in net interest income of $29.7 million and an increase in provision for credit losses of $16.3 million. These were offset by a decrease in the provision for unfunded commitments of $1.0 million, a decrease in noninterest expenses of $10.0 million, and a reduction of income tax expense of $16.3 million. 39 Net interest income decreased primarily due to a rapid increase in interest rates impacting deposits and funding costs. These increases in interest expense exceeded the increase to interest income driven by rate growth during the comparative period. The provision for credit losses increased to $17.0 million during the nine months ended September 30, 2023 from $730 thousand during the nine months ended September 30, 2022. Noninterest income increased primarily due to an increase in swap fee income which was partially offset by a decrease in gain on the sales of residential loans and fees associated with residential mortgage loans. During the nine months ended September 30, 2023, the Company closed residential mortgage locked commitments of $32.8 million, down from $286.2 million for the nine months ended September 30, 2022. Noninterest expenses decreased $10.0 million primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the Securities and Exchange Commission ("SEC") and Federal Reserve Bank ("FRB") associated with previously disclosed government investigations, totaling $22.9 million. This was offset by an increase in salaries and benefits of $7.3 million and legal and professional fees of $2.1 million and FDIC insurance assessments of $4.2 million. Additional details on the accrual for the agreements and other noninterest expenses are provided in "Noninterest Expense" section below. Total revenue (i.e. net interest income plus noninterest income) was $236.2 million for the nine months ended September 30, 2023 as compared to $265.6 million for the same period in 2022. The most significant portion of revenue is net interest income, which was $217.6 million for the nine months ended September 30, 2023, compared to $247.3 million for the same period in 2022. Net interest income decreased primarily due to increased interest expense due to higher rates on deposits and borrowings which was partially offset by an increase in interest income on loans. The primary driver for the increase in noninterest income was an increase in swap fees which was partially offset by a decrease in gain on the sales of residential mortgage loans and fees associated with residential mortgage loans. The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was 2.56% for the nine months ended September 30, 2023 and 2.86% for the same period in 2022. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below. Total noninterest income for the nine months ended September 30, 2023 increased to $18.6 million from $18.3 million for the same period in 2022, a 1.7% increase. Noninterest income increased primarily due to an increase in swap fees that was partially offset by a decline in gain on the sales of residential loans. For further information on the components and drivers of these changes see "Noninterest Income" section below. Other income for the nine months ended September 30, 2023 increased to $11.5 million from $9.5 million for the same period in 2022, a 21.7% increase. Noninterest income increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund, $1.5 million in swap fees, and BOLI income of $846 thousand, the total of which was partially offset by reductions in credit card income of $1.5 million, mortgage servicing fees of $887 thousand, and other loan fees of $808 thousand. Gain on sale of loans for the nine months ended September 30, 2023 was $395 thousand compared to $3.2 million for the same period in 2022, a decrease of 87.5%. The decline in gain on the sales of loans is due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced. Noninterest expense totaled $116.2 million for the nine months ended September 30, 2023, as compared to $126.2 million for same period in 2022, a 7.9% decrease. The decrease in noninterest expense was primarily in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million. This was partially offset by increases in salaries and benefits of $7.3 million, legal and professional fees of $2.1 million and $4.2 million in FDIC insurance assessments. Additional details on the accrual for the agreements and other noninterest expenses are provided in "Noninterest Expense" section below. Income tax expenses were $22.3 million for the nine months ended September 30, 2023, a reduction of 42.2%, compared to the same period in 2022. The components and drivers of the change are discussed in the "Income Tax Expense" section below. The efficiency ratio was 49.19% for the nine months ended September 30, 2023, as compared to 47.51% for the same period in 2022. The adverse change in the efficiency ratio was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings which was partially offset by the decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. 40 For the nine months ended September 30, 2023, the Company reported an annualized ROAA of 0.91%, as compared to 1.11% for the same period in 2022. The annualized ROACE for the nine months ended September 30, 2023 was 8.66% as compared to 10.17% for the same period in 2022. The annualized ROATCE for the nine months ended September 30, 2023 was 9.45% as compared to 11.06% for the same period in 2022. The decline in returns was primarily attributable to a reduction in net income. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities, and interest bearing deposits with other banks and other short term investments. The cost of funds includes interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. Net interest income was $70.7 million for the three months ended September 30, 2023, as compared to $83.9 million for the same period in 2022. Net interest income decreased for the three months ended September 30, 2023 primarily due to increases in average deposit rates (4.20% compared to 1.70%) and other short-term borrowings (4.68% compared to 2.65%), which were partially offset by higher average loan balances and yields (6.73% compared to 5.10%) as compared to September 30, 2022. The net interest margin decreased by 59 basis points from three months ended September 30, 2023, as compared to the three months ended September 30, 2022, (from 3.02% to 2.43%). The $1.6 million reversal of interest income during the three months ended September 30, 2023 reduced the net interest margin by 0.06%. The yield on earning assets increased by 153 basis points (from 4.01% to 5.54%) while cost of funds increased 230 basis points (from 1.09% to 3.39%), refer to footnote 3 in the Consolidated Average Balances, Interest Yields and Rates tables below for additional information. Average loans (excluding loans held for sale) were $7.8 billion for the three months ended September 30, 2023 compared to $7.3 billion for the same period in 2022. Additionally, average borrowings increased from $131.5 million in the three months ended September 30, 2022 to $1.6 billion in the three months ended September 30, 2023. Overall yields and rates moved higher during the three months ended September 30, 2023 as compared to the same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors. Net interest income was $217.6 million for the nine months ended September 30, 2023, as compared to $247.3 million for the same period in 2022. Net interest income decreased for the nine months ended September 30, 2023 primarily due to increases in average deposit rates (4.03% compared to 0.91%) and other short-term borrowings (4.78% compared to 1.01%), which were partially offset by higher average loan balances and yields (6.58% compared to 4.66%) as compared to September 30, 2022. The net interest margin decreased by 30 basis points from nine months ended September 30, 2022 as compared to the nine months ended September 30, 2023 (from 2.86% to 2.56%). The yield on earning assets increased by 197 basis points (from 3.42% to 5.39%) while cost of funds increased 247 basis points (from 0.61% to 3.08%). Average loans (excluding loans held for sale) were $7.8 billion for the nine months ended September 30, 2023 compared to $7.1 billion for the same period in 2022. Additionally, average borrowings increased from $201.0 million in the nine months ended September 30, 2022 to $1.7 billion in the nine months ended September 30, 2023. Overall yields and rates moved higher during the nine months ended September 30, 2023 as compared to same period in 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors. The tables below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three and nine months ended September 30, 2023 and 2022. Included in the tables are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. 41 Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) Three Months Ended September 30, 2023 2022 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate ASSETS Interest earning assets: Interest bearing deposits with other banks and other short-term investments $ 1,127,451 $ 15,067 5.30 % $ 771,063 $ 4,100 2.11 % Loans held for sale (1) — — — % 11,586 150 5.14 % Loans (1) (2) 7,795,144 132,273 6.73 % 7,282,589 93,594 5.10 % Investment securities available-for-sale (2) 1,554,348 8,126 2.07 % 1,782,859 7,587 1.69 % Investment securities held-to-maturity (2) 1,047,515 5,606 2.12 % 1,128,943 5,876 2.06 % Federal funds sold 7,728 77 3.95 % 53,630 220 1.63 % Total interest earning assets 11,532,186 161,149 5.54 % 11,030,670 111,527 4.01 % Total noninterest earning assets 489,683 475,581 Less: allowance for credit losses 78,964 75,141 Total noninterest earning assets 410,719 400,440 TOTAL ASSETS $ 11,942,905 $ 11,431,110 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Interest bearing transaction $ 1,421,522 $ 12,785 3.57 % $ 960,970 $ 1,891 0.78 % Savings and money market 3,113,755 32,855 4.19 % 4,504,216 21,711 1.91 % Time deposits 2,162,582 25,289 4.64 % 633,241 2,523 1.58 % Total interest bearing deposits 6,697,859 70,929 4.20 % 6,098,427 26,125 1.70 % Customer repurchase agreements 36,082 311 3.42 % 26,546 55 0.82 % Other short-term borrowings 1,540,221 18,152 4.68 % 61,703 412 2.65 % Long-term borrowings 69,876 1,038 5.89 % 69,752 1,038 5.90 % Total interest bearing liabilities 8,344,038 90,430 4.30 % 6,256,428 27,630 1.75 % Noninterest bearing liabilities: Noninterest bearing demand 2,248,782 3,809,070 Other liabilities 114,923 93,859 Total noninterest bearing liabilities 2,363,705 3,902,929 Shareholders' Equity 1,235,162 1,271,753 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,942,905 $ 11,431,110 Net interest income $ 70,719 $ 83,897 Net interest spread 1.24 % 2.26 % Net interest margin 2.43 % 3.02 % Cost of funds (3) 3.39 % 1.09 % (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $4.1 million and $3.4 million for the three months ended September 30, 2023 and 2022, respectively. 42 (2) Interest and fees on loans and investments exclude tax equivalent adjustments. (3) Beginning in the second quarter of 2023, the Company revised its cost of funds methodology to use a daily average calculation where interest expense on interest bearing liabilities is divided by average interest bearing liabilities and average noninterest bearing deposits. Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin. The cost of funds for the three months ended September 30, 2022 has been recalculated using the current methodology. 43 Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2023 2022 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate ASSETS Interest earning assets: Interest bearing deposits with other banks and other short-term investments $ 905,414 $ 34,070 5.03 % $ 1,449,800 $ 7,608 0.70 % Loans held for sale (1) 1,620 73 6.02 % 18,216 548 4.02 % Loans (1) (2) 7,766,212 382,043 6.58 % 7,147,844 249,168 4.66 % Investment securities available for sale (2) 1,613,257 24,463 2.03 % 2,119,822 25,888 1.63 % Investment securities held-to-maturity ( 2) 1,067,628 17,055 2.14 % 774,135 12,002 2.07 % Federal funds sold 9,392 202 2.88 % 37,907 269 0.95 % Total interest earning assets 11,363,523 457,906 5.39 % 11,547,724 295,483 3.42 % Total noninterest earning assets 492,069 466,661 Less: allowance for credit losses 77,342 74,390 Total noninterest earning assets 414,727 392,271 TOTAL ASSETS $ 11,778,250 $ 11,939,995 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest bearing liabilities: Interest bearing transaction $ 1,173,823 $ 29,533 3.36 % $ 858,152 $ 2,843 0.44 % Savings and money market 3,135,300 96,990 4.14 % 4,926,766 34,207 0.93 % Time deposits 1,642,805 52,782 4.30 % 670,708 6,972 1.39 % Total interest bearing deposits 5,951,928 179,305 4.03 % 6,455,626 44,022 0.91 % Customer repurchase agreements 38,473 946 3.29 % 25,765 90 0.47 % Other short-term borrowings 1,595,448 56,989 4.78 % 131,253 992 1.01 % Long-term borrowings 69,845 3,112 5.96 % 69,722 3,112 5.97 % Total interest bearing liabilities 7,655,694 240,352 4.20 % 6,682,366 48,216 0.96 % Noninterest bearing liabilities: Noninterest bearing demand 2,784,396 3,863,283 Other liabilities 97,586 96,176 Total noninterest bearing liabilities 2,881,982 3,959,459 Shareholders’ Equity 1,240,574 1,298,170 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 11,778,250 $ 11,939,995 Net interest income $ 217,554 $ 247,267 Net interest spread 1.19 % 2.46 % Net interest margin 2.56 % 2.86 % Cost of funds (3) 3.08 % 0.61 % (1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $12.0 million and $11.5 million for the nine months ended September 30, 2023 and 2022, respectively. (2) Interest and fees on loans and investments exclude tax equivalent adjustments. 44 (3) Beginning in the second quarter of 2023, the Company revised its cost of funds methodology to use a daily average calculation where interest expense on interest bearing liabilities is divided by average interest bearing liabilities and average noninterest bearing deposits. Previously, the Company calculated the cost of funds as the difference between yield on earning assets and net interest margin. The cost of funds for the nine months ended September 30, 2022 has been recalculated using the current methodology. Rate/Volume Analysis of Net Interest Income The rate/volume tables below presents the composition of the change in net interest income for the period indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates. Three Months Ended September 30, 2023 Compared With The Three Months Ended September 30, 2022 (dollars in thousands) Change Due to Volume Change Due to Rate Total Increase (Decrease) Interest earned on Loans $ 6,587 $ 32,092 $ 38,679 Loans held for sale (150) — (150) Investment securities available-for-sale (972) 1,511 539 Investment securities held-to-maturity (424) 154 (270) Interest bearing bank deposits 1,895 9,072 10,967 Federal funds sold (188) 45 (143) Total interest income 6,748 42,874 49,622 Interest paid on Interest bearing transaction 906 9,988 10,894 Savings and money market (6,702) 17,846 11,144 Time deposits 6,093 16,673 22,766 Customer repurchase agreements 20 236 256 Other borrowings 9,874 7,866 17,740 Total interest expense 10,191 52,609 62,800 Net interest income $ (3,443) $ (9,735) $ (13,178) 45 Nine Months Ended September 30, 2023 Compared With The Nine Months Ended September 30, 2022 (dollars in thousands) Change Due to Volume Change Due to Rate Total Increase (Decrease) Interest earned on Loans $ 21,556 $ 111,319 $ 132,875 Loans held for sale (499) 24 (475) Investment securities available-for-sale (6,186) 4,761 (1,425) Investment securities held-to-maturity 4,550 503 5,053 Interest bearing bank deposits (2,857) 29,319 26,462 Federal funds sold (202) 135 (67) Total interest income 16,362 146,061 162,423 Interest paid on Interest bearing transaction 1,046 25,644 26,690 Savings and money market (12,438) 75,221 62,783 Time deposits 10,105 35,705 45,810 Customer repurchase agreements 44 812 856 Other borrowings 11,071 44,926 55,997 Total interest expense 9,828 182,308 192,136 Net interest income $ 6,534 $ (36,247) $ (29,713) Provision for Credit Losses The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL on loans and the ACL on available-for-sale and held-to-maturity investment securities. The amount of the ACL on loans is based on management's assessment of current expected credit losses in the portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company. The provision for credit losses for unfunded commitments is presented separately on the consolidated statements of income. This provision considers the probability that unfunded commitments will fund among other factors. Management has developed a comprehensive analytical process to monitor the adequacy of the ACL. The ACL is estimated using a CECL model. Our methodology for determining our allowance was developed utilizing, among other factors, the guidance from federal banking regulatory agencies and relevant available information from internal and external sources and relating to past events, current conditions and reasonable and supportable forecasts. The process is being continually enhanced and refined based on periodic reviews. The maintenance of a high quality loan portfolio, with an adequate ACL, will continue to be a primary management objective for the Company. We develop our estimate of the ACL from several sources: (i) a quantitative model that determines expected credit losses using a probability of default ("PD") / Loss Given Default ("LGD") cash flow methodology, using internal and third-party provided peer historical loss data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics, i.e., call codes; (ii) individual evaluation of any loans that exhibit evidence of credit deterioration, excluded from the quantitative model; and (iii) the application of qualitative and environmental factors as determined by management. We utilize the following qualitative and environmental factors in our CECL methodology: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and we reevaluate all of its factors quarterly. 46 Refer to additional detail regarding these forecasts in the "Allowance for Credit Losses - Loans" section of Note 1 to the Consolidated Financial Statements. During the three months ended September 30, 2023, the Company recorded a provision for credit losses of $5.6 million on its loan portfolio and incurred $340 thousand in net charge-offs to its ACL. The provision for credit losses on loans for the same period in 2022 was $3.0 million and there were $56 thousand of net recoveries in its ACL. During the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $15.8 million on its loan portfolio and incurred $6.9 million in net charge-offs to its ACL. The provision for credit losses on loans for the same period in 2022 was $532 thousand and there were $270 thousand of net recoveries in its ACL. For the three and nine months ended September 30, 2023, the provisions for credit losses were primarily driven by adjustments to the qualitative components of the CECL model combined with smaller increases in the quantitative components. The increase in qualitative components was driven by increases in early-stage past due and perceived weakness in the commercial real estate market, in addition to the high inflationary environment and the related uncertainty and impacts on the broader economy, changes in the qualitative and economic ("Q&E") component of the model associated with commercial real estate office properties. The increase in the quantitative components was due to continued increases in total loans during the nine months ended September 30, 2023, particularly in longer-life categories that carry corresponding higher reserves as well as slowing prepayment speeds in certain loan categories due to higher interest rates. The increase in quantitative components was partially offset by modest improvements in the unemployment forecast. These adjustments were also offset by improvements in the quality of the assets associated with individually assessed loans that were deemed impaired. The provisions for credit losses during the three and nine months ended September 30, 2022 were primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, partially offset by improvements in asset quality. A provision for credit losses on the securities portfolio of $1 thousand was recorded during the three months ended September 30, 2023, as compared to a reversal of credit losses of $24 thousand during the three months ended September 30, 2022. During the nine months ended September 30, 2023, a provision for credit losses of $1.2 million was recorded, primarily on several corporate bonds in the held-to-maturity securities portfolio, while a net provision for credit losses of $198 thousand was recorded during the nine months ended September 30, 2022. At September 30, 2023, the ACL for loans represented 1.05% of loans outstanding, as compared to 0.97% at December 31, 2022. The ACL represented 119% of nonperforming loans at September 30, 2023, as compared to 1,151% at December 31, 2022. As part of its comprehensive loan review process, internal loan and credit committees carefully evaluate loans that are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The maintenance of a high quality loan portfolio, with an adequate allowance for credit losses, will continue to be a primary management objective for the Company. The Company's goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower's business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. 47 The following table sets forth activity in the allowance for credit losses for the periods indicated. Nine Months Ended September 30, (dollars in thousands) 2023 2022 Balance at beginning of period $ 74,444 $ 74,965 Charge-offs: Commercial (1,828) (604) Income producing - commercial real estate (5,306) — Owner occupied - commercial real estate — (1,356) Construction - commercial and residential (136) — Other consumer (50) (74) Total charge-offs (7,320) (2,034) Recoveries: Commercial 335 648 Owner occupied - commercial real estate 31 25 Construction - commercial and residential 34 1,627 Other consumer 6 4 Total recoveries 406 2,304 Net (charge-offs) recoveries (6,914) 270 Provision for credit losses - loans 15,802 532 Balance at end of period $ 83,332 $ 75,767 Annualized ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period 0.12 % — % The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. September 30, 2023 December 31, 2022 (dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans Commercial $ 16,337 20 % 18 % $ 15,655 21 % 19 % Income producing - commercial real estate 40,693 49 % 52 % 35,688 48 % 51 % Owner occupied - commercial real estate 14,252 17 % 15 % 12,702 17 % 15 % Real estate mortgage - residential 864 1 % 1 % 969 1 % 1 % Construction - commercial and residential 8,633 10 % 11 % 7,195 10 % 12 % Construction - C&I (owner-occupied) 1,894 2 % 2 % 1,606 2 % 1 % Home equity 634 1 % 1 % 555 1 % 1 % Other consumer 25 — % — % 74 — % — % Total allowance $ 83,332 100 % 100 % $ 74,444 100 % 100 % Nonperforming Assets As shown in the table below, the Company's level of nonperforming assets, which comprise the amortized cost of loans delinquent 90 days or more and nonaccrual loans, which include the nonperforming portion of loan restructurings, and the carrying value of OREO, totaled $71.6 million at September 30, 2023 representing 0.64% of total assets, as compared to $8.4 million of nonperforming assets, or 0.08% of total assets, at December 31, 2022. The increase is primarily due to the increase in nonperforming loans discussed below. 48 At September 30, 2023, the Company had no accruing loans 90 days or more past due. Management remains attentive to early signs of deterioration in borrowers' financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.05% of total loans at September 30, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date. On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. A loan that is considered a restructured loan may be subject to an individually evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company. Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. During the three months ended September 30, 2023, the Bank modified 13 loans with a total amortized cost of $225.7 million at September 30, 2023 (2.9% of the loan portfolio). These loans received extended loan terms of between approximately one to 36 months. Two loans received a weighted average interest rate reduction of approximately 1.89%. During the nine months ended September 30, 2023, the Bank modified 17 loans with a total amortized cost of $242.0 million at September 30, 2023 (3.1% of the loan portfolio). These loans received extended loan terms of between approximately one to 36 months. Five loans received a weighted average interest rate reduction of approximately 2.55%. As of September 30, 2023, three loans that were modified in the preceding twelve months, including two loans with a total amortized cost of $44.9 million that were 30 to 89 days past due and one loan with an amortized cost of $20.4 million that was on nonaccrual status, experienced a subsequent payment default during the nine months ended September 30, 2023. One loan with an amortized cost of $2.2 million at September 30, 2023, which was modified during the first quarter of 2023, moved to nonaccrual status and incurred a $2.1 million charge-off in the second quarter of 2023. In October 2023, the loan was sold. All other loans are performing under their modified terms. OREO properties are carried at the lower of cost or fair value less estimated costs to sell. It is the Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as: comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. OREO properties had a carrying value of $1.5 million and $2.0 million at September 30, 2023 and December 31, 2022, respectively. One OREO property was sold during the nine months ended September 30, 2023 and one OREO property was sold during the nine months ended September 30, 2022, generating proceeds of $609 thousand and $241 thousand, respectively. 49 Total nonperforming loans amounted to an amortized cost of $70.2 million at September 30, 2023 (0.89% of total loans) compared to $6.5 million at December 31, 2022 (0.08% of total loans). The increase was primarily from one income producing CRE office note in Northern Virginia, of which approximately $3.2 million was charged off during the second quarter of 2023, and one construction - commercial and residential note in Washington, D.C. The following table shows the amounts of nonperforming assets, including loans at amortized cost and OREO at the lower of cost or fair value less estimated costs to sell, at the dates indicated. (dollars in thousands) September 30, 2023 December 31, 2022 Nonaccrual Loans: Commercial $ 2,521 $ 2,488 Income producing - commercial real estate 24,989 2,000 Owner occupied - commercial real estate 758 17 Real estate mortgage - residential 1,950 1,913 Construction - commercial and residential 39,695 — Home equity 245 — Other consumer — 50 Total nonperforming loans 70,158 6,468 Other real estate owned 1,487 1,962 Total nonperforming assets $ 71,645 $ 8,430 Coverage ratio, allowance for credit losses to total nonperforming loans 119 % 1,151 % Ratio of nonperforming loans to total loans 0.89 % 0.08 % Ratio of nonperforming assets to total assets 0.64 % 0.08 % Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio. At September 30, 2023, there were $219.0 million of Substandard loans. Substandard loans are considered potential or actual problem loans due to known information about possible or actual credit problems which causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in the reclassification to the past due, nonaccrual or restructured loan categories, as appropriate. Based upon their status as potential or actual problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Noninterest Income Total noninterest income includes service charges on deposits, gain on sale of loans, gains and losses on sale of investment securities, FHA multi-family income, income from bank owned life insurance ("BOLI") and other income. Total noninterest income for the three months ended September 30, 2023 increased to $6.3 million from $5.3 million for the three months ended September 30, 2022, a 19.6% increase. Total noninterest income for the nine months ended September 30, 2023 increased to $18.6 million from $18.3 million for the nine months ended September 30, 2022, a 1.7% increase. Service charges on deposits for the three months ended September 30, 2023 increased to $1.6 million from $1.3 million for the three months ended September 30, 2022. Service charges on deposits for the nine months ended September 30, 2023 increased to $4.8 million from $4.0 million for the nine months ended September 30, 2022. Loss on the sales of loans for the three months ended September 30, 2023 was $5 thousand as compared to a gain of $821 thousand for the three months ended September 30, 2022, a 100.6% decrease. Gain on sale of loans for the nine months ended September 30, 2023 decreased to $395 thousand from $3.2 million for the nine months ended September 30, 2022, a $2.8 million, or 87.5% decrease. The reduction from a gain on the sales of loans to a loss for the comparative three months ended September 30, 2023 and 2022 and decline in the gain on the sales of loans for the comparative nine months ended September 30, 2023 and 2022 were due to lower volumes as a result of higher interest rates as well as ceasing the origination of residential mortgages as previously announced. 50 There were no residential mortgage loan locked commitments for the three months ended September 30, 2023 as compared to $57.5 million for the same period in 2022. Residential mortgage loan locked commitments were $32.8 million for the nine months ended September 30, 2023 as compared to $286.2 million for the same period in 2022, a 88.5% decrease. The residential mortgage loans were originated for sale to third-party investors subject to compliance with pre-established criteria. The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the first quarter of 2023. The Company completed origination and sales activities as of the end of the second quarter of 2023. Gain on the sale of investments for the three months ended September 30, 2023, was $5 thousand compared to a gain of $4 thousand for the three months ended September 30, 2022. Loss on the sale of investments for the nine months ended September 30, 2023, was $14 thousand compared to a loss of $172 thousand for the nine months ended September 30, 2022. The loss for the nine months ended September 30, 2023 was due to the sale of 12 securities for a loss of $27 thousand, which was partially offset by $13 thousand in gains on partial calls. Other income for the three months ended September 30, 2023 increased to $4.0 million from $2.5 million for the three months ended September 30, 2022, a 61.0% increase, primarily attributable to an increase in swap fee income of $1.2 million. Other income for the nine months ended September 30, 2023 increased to $11.5 million from $9.5 million for the nine months ended September 30, 2022, a 21.7% increase. Other interest income during the comparative nine months ended September 30, 2023 and 2022 increased primarily due to an increase in other fees driven by income of $2.8 million from an investment in an SBIC fund, $1.5 million in swap fee income, and BOLI income of $846 thousand, which was partially offset by reductions in credit card income of $1.5 million, mortgage servicing fees of $887 thousand, and other loan income of $808 thousand. Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. To the extent the mortgage loans underlying the Company's servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds, as well as incur additional administrative costs related to increases in collection efforts. The Company is a long-time originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. There was $0 and $45 thousand of income from this source for the three and nine months ended September 30, 2023, respectively, compared to $59 thousand and $249 thousand for the three and nine months ended September 30, 2022, respectively. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. Noninterest Expense Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance assessments, and other expenses. Total noninterest expense totaled $37.6 million for the three months ended September 30, 2023, as compared to $36.2 million for the three months ended September 30, 2022, a 3.9% increase. Total noninterest expense totaled $116.2 million for the nine months ended September 30, 2023, as compared to $126.2 million for the nine months ended September 30, 2022, a 7.9% decrease. Salaries and employee benefits were $21.5 million for both three months ended September 30, 2023 and September 30, 2022. Salaries and employee benefits were $67.7 million for the nine months ended September 30, 2023, as compared to $60.4 million for the nine months ended September 30, 2022, a 12.1% increase. The primary reason for the difference for the first nine months expense was the one-time accrual reduction in the first three months of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. At September 30, 2023, the Company's full time equivalent staff numbered 452 as compared to 495 at September 30, 2022. Premises and equipment for the three and nine months ended September 30, 2023 and 2022, were $3.1 million and $9.6 million compared to $3.3 million and $9.9 million, respectively, of which premises expenses were $1.8 million and $5.6 million compared to $2.0 million and $6.0 million, respectively. 51 Marketing and advertising expenses totaled $768 thousand for the three months ended September 30, 2023 and $1.2 million for the same period in 2022. For the nine months ended September 30, 2023, marketing and advertising expense was $2.3 million compared to $3.4 million for the nine month period ended September 30, 2022. The decrease for both the three and nine month periods were due to a reduction in advertising and promotions. Data processing expenses were $3.2 million and $9.6 million for the three and nine months ended September 30, 2023, respectively, compared to $3.4 million and $9.1 million for the same periods in 2022, respectively. Legal, accounting and professional fees were $2.2 million and $8.1 million for the three and nine months ended September 30, 2023, respectively, compared to $2.3 million and $6.0 million for the three and nine months ended September 30, 2022, respectively, a decrease of $170 thousand and an increase of $2.1 million for the comparative periods, respectively. Legal fees and expenditures were $446 thousand and $227 thousand for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and September 30, 2022 legal fees and expenditures were $2.9 million and $723 thousand, respectively. The decrease was primarily due to a $959 thousand reversal of legal fees receivable relating to the previously disclosed settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted. FDIC insurance assessments were $3.3 million for the three months ended September 30, 2023 compared to $1.3 million for the same period in 2022, a 159.7% increase. For the nine months ended September 30, 2023, FDIC insurance assessments were $7.4 million compared to $3.3 million for the nine months ended September 30, 2022. The major components of other expenses include franchise taxes, director compensation and insurance expense. Other expenses increased to $3.5 million from $3.1 million, or 11.9%, for the three months ended September 30, 2023, compared to the same three month period in 2022. For the nine month period ended September 30, 2023 other expenses decreased to $11.5 million from $34.1 million, or 66.4%, for the same period in 2022. The decrease in other expenses over the comparative nine months ended September 30, 2023 and 2022 was primarily due to the SEC and FRB penalties totaling $22.9 million. The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 48.83% for the third quarter of 2023, as compared to 40.59% for the third quarter of 2022. For the first nine months of 2023, the efficiency ratio was 49.19% as compared to 47.51% for the same period in 2022. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The adverse change in the efficiency ratio for the three and nine months ended September 30, 2023 as compared to the same three and nine month period in 2022 was primarily driven by the decrease in net interest income as a result of the increase in interest rates on deposits and borrowings which was partially offset by the decrease in noninterest expense in connection with the second quarter of 2022 accrual of settlement expenses in connection with the agreements with the SEC and FRB associated with previously disclosed government investigations, totaling $22.9 million of settlement expenses associated with previously disclosed government investigations in the second quarter of 2022. As a percentage of average assets, total noninterest expense (annualized) was 1.25% for the three months ended September 30, 2023 as compared to 1.27% for the same period in 2022. As a percentage of average assets, total noninterest expense (annualized) was 1.32% for the nine months ended September 30, 2023 as compared to 1.41% for the same period in 2022. The decrease for the nine month period ended September 30, 2023 was primarily due to the accrual of the $22.9 million of settlement expenses in the second quarter of 2022. The decrease for the nine month period ended September 30, 2023 was partially offset by the salary accrual reduction in the first quarter of 2022 of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman. Income Tax Expense The Company's ratio of income tax expense to pre-tax income ("effective tax rate") for the three months ended September 30, 2023 and 2022 was 20.9% and 24.2%, respectively. The total tax provision for the three months ended September 30, 2023 was $7.2 million, compared to $11.9 million for the three months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 was 21.7% as compared to 28.1% for the same period in 2022. The total tax provision for the nine months ended September 30, 2023 was $22.3 million, compared to $38.6 million for the nine months ended September 30, 2022. The decreases in the effective tax rate and tax provision over the comparative three months ended September 30, 2023 and 2022 were primarily due to decreases in pre-tax income period over period. The decrease in the effective tax rate and tax provisions over the comparative nine months ended September 30, 2023 and 2022 was primarily due to the SEC and FRB penalties totaling $22.9 million and decreases in pre-tax income period over period. The penalties associated with the previously disclosed investigations are not deductible for tax purposes. 52 The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022 which makes significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the “adjusted financial statement income” of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. Effective January 1, 2023, the Company became subject to the tax laws under the Inflation Reduction Act. The Company has not experienced and currently does not expect the tax-related provisions of the Inflation Reduction Act to have a material impact on our financial results. FINANCIAL CONDITION Summary Total assets were $11.2 billion at September 30, 2023 and December 31, 2022. Total assets remained consistent over the nine months ended September 30, 2023, as a result of an increase in loan balances which were partially offset by decreases in investment securities and other short-term investments. The largest component of assets, total loans (excluding loans held for sale), had an amortized cost basis of $7.9 billion at September 30, 2023, a 3.7% increase from the balance at December 31, 2022. The increase in loans over the nine months ended September 30, 2023, was driven primarily by growth from CRE and construction loans. There were no loans held for sale at September 30, 2023, compared to $6.7 million at December 31, 2022, as a result of the cessation in origination of residential mortgages as previously announced. Investment securities, at amortized cost net of the allowance for credit losses, totaled $2.7 billion at September 30, 2023 as compared to $2.9 billion at December 31, 2022, a decrease of $164.6 million, or 5.7%, primarily driven by the pay down of principal on mortgage-backed securities and sales and calls of securities. During the first quarter of 2022, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as available-for-sale ("AFS") to held-to-maturity ("HTM"), including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized. The securities transferred with unrealized losses of $66.2 million, and, as of September 30, 2023, $53.5 million remains in accumulated other comprehensive loss, and will be accreted ratably over the remaining lives of the securities through accumulated other comprehensive loss. The securities transferred were generally municipal bonds, corporate bonds, bonds that qualify for Community Reinvestment Act credit, and mortgage-backed securities with longer final maturity dates. At quarter-end, $1.0 billion, or 41.2% of the securities portfolio, was classified as securities HTM. The fair value of HTM securities was $159.8 million less than carrying value at September 30, 2023 compared to a difference of $125.4 million at December 31, 2022. In terms of funding, total deposits at September 30, 2023 were $8.4 billion down from $8.7 billion at December 31, 2022, a decline of 3.9%. Total borrowed funds (excluding customer repurchase agreements) were $1.4 billion and $1.0 billion at September 30, 2023 and December 31, 2022, respectively. The increase in borrowings was primarily to meet funding needs, including to fund loan growth, given the decrease in deposits. Total shareholders' equity was $1.2 billion as of September 30, 2023 , and December 31, 2022. The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements. Regulatory ratios based on risk-weighted assets experienced decreases of less than 2% from December 31, 2022 to September 30, 2023. The decreases were primarily due to an increase in average assets and also due to minor declines in Tier 1 and risk based capital. The total risk based capital ratio was 14.54% at September 30, 2023, as compared to 14.94% at December 31, 2022. The common equity tier 1 ("CET1") risk based capital ratio was 13.68% at September 30, 2023, as compared to 14.03% at December 31, 2022. The tier 1 risk based capital ratio was 13.68% at September 30, 2023, as compared to 14.03% at December 31, 2022. The tier 1 leverage ratio was 10.96% at September 30, 2023, as compared to 11.63% at December 31, 2022. The ratio of common equity to total assets was 10.89% at September 30, 2023, as compared to 11.02% at December 31, 2022 as common equity levels remained almost constant over the nine months ended September 30, 2023. Total assets remained consistent over the nine months ended September 30, 2023, as a result of an increase in loan balances which were partially offset by decreases in investment securities and other short-term investments. Book value per share was $40.64 at September 30, 2023, a 3.7% increase over $39.18 at December 31, 2022 primarily as a result of share repurchases of 1,600,000 of the Company's common stock during the nine months ended September 30, 2023 under the 2023 Repurchase Program. The repurchases, at prices below book and tangible book values, reduced the number of shares outstanding as of September 30, 2023. The Company has reached the maximum number of shares that may be purchased under the 2023 Repurchase Program. 53 In addition, the tangible common equity ratio was 10.04% at September 30, 2023, as compared to 10.18% at December 31, 2022. Tangible book value per share was $37.12 at September 30, 2023, a 3.5% increase from $35.86 at December 31, 2022. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. Loan Portfolio Loans, net of amortized deferred fees and costs, at September 30, 2023 and December 31, 2022 by major category are summarized below. September 30, 2023 December 31, 2022 (dollars in thousands, except amounts in the footnote) Amount % Amount % 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 is recorded in other assets. In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality. Loans outstanding were $7.9 billion at September 30, 2023, an increase of $280.8 million, or 3.7%, from the balance at December 31, 2022. The loan portfolio continued to grow in the nine months ended September 30, 2023, due primarily to our income producing CRE loan originations and fundings, along with increases in our owner occupied CRE loans, and to a lesser extent, construction - commercial and residential loans and construction C&I (owner occupied) loans. Amidst this growth, we have remained cognizant of the volatility in our industry, capital markets and interest rate markets. Market rates on our new loan originations have risen in connection with rate increases implemented by the Federal Reserve. We continue to see opportunities for growth in the commercial real estate market in our focused sectors; our processes for evaluating these opportunities are designed to ensure they are subject to reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. 54 The Company's overall loan portfolio is substantially concentrated with borrowers located in the Washington, D.C. metro area, including "Washington's Maryland Suburbs," which comprise Frederick, Prince George's and Montgomery counties and "Northern Virginia," which comprises Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties. At September 30, 2023, 30.8%, 26.8%, 24.6%, 6.0% and 11.8% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. At December 31, 2022, 33.2%, 25.8%, 23.7%, 5.8% and 11.5% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. While we remain cautious with regard to CRE market conditions, principally office, the strength of the Washington D.C. metro area in certain sectors, particularly multi-family commercial real estate and the housing market, continue to drive premiums for well-located properties. As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.1 billion and $5.8 billion, or 77.5% and 76.2% of total loans, outstanding at September 30, 2023 and December 31, 2022, respectively. Management meets regularly in order to monitor its existing CRE loan portfolio and to evaluate the pipeline for CRE loan investment. The Company has remained focused on monitoring sectors that have been impacted by the ramifications of the COVID-19 pandemic, particularly income producing CRE loans collateralized by office properties, which comprised approximately $950.1 million and $937.2 million, or 12.0% and 12.3% of total loans, at September 30, 2023 and December 31, 2022, respectively. Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $877.7 million and $851.9 million, or 11.1% and 11.2% of total loans, at September 30, 2023 and December 31, 2022, respectively. As a percentage of total income producing - CRE office loans, 34.0%, 33.9% and 24.5% were located in Northern Virginia, Washington's Maryland Suburbs and Washington, D.C. at September 30, 2023. At September 30, 2023, $181.9 million of principal of loans collateralized by office properties were criticized or classified. The following table sets forth the time to contractual maturity of the loan portfolio as of September 30, 2023: September 30, 2023 (dollars in thousands) Total One Year or Less Over One Year to Five Years Over Five Years to Fifteen Years Over Fifteen Years Commercial $ 1,418,760 $ 531,057 $ 711,836 $ 172,213 $ 3,654 PPP loans 588 — 588 — — Income producing - commercial real estate (1) 4,147,301 1,439,877 2,238,713 468,711 — Owner occupied - commercial real estate 1,182,959 94,290 492,412 377,578 218,679 Real estate mortgage - residential 76,511 11,997 52,395 510 11,609 Construction - commercial and residential 904,282 282,350 583,040 9,786 29,106 Construction - C&I (owner occupied) 129,616 1,011 33,734 35,782 59,089 Home equity 53,917 3,869 2,351 1,607 46,090 Other consumer 2,457 2,189 68 — 200 Total loans $ 7,916,391 $ 2,366,640 $ 4,115,137 $ 1,066,187 $ 368,427 Loans with: Predetermined fixed interest rate $ 2,997,636 $ 771,529 $ 1,573,630 $ 553,044 $ 99,433 Floating or adjustable interest rate 4,918,755 1,595,111 2,541,507 513,143 268,994 Total loans $ 7,916,391 $ 2,366,640 $ 4,115,137 $ 1,066,187 $ 368,427 (1) Income producing CRE office loans, which had total principal of $950.1 million at September 30, 2023 and are included within income producing - commercial real estate, had principal of $249.9 million, $652.6 million, $47.6 million aggregated with one year or less, over one year to five years, and over five years to fifteen years remaining until contractual maturity, respectively. Approximately $94.8 million and $393.3 million of income producing CRE office loans as of September 30, 2023 were due to mature within three months and 18 months, respectively. 55 Deposits and Other Borrowings The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts, and certificates of deposits. The deposit base includes transaction accounts, time and savings accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs, including during periods of high loan demand and seasonal variations in core deposits, the Bank regularly utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms. Additionally, the Bank has participated in the BTFP established by Federal Reserve Bank in March 2023. For the nine months ended September 30, 2023, total deposits decreased by $336.9 million as compared to December 31, 2022. The decline was primarily attributable to a $1.1 billion reduction in noninterest bearing deposits and a $510.9 million reduction in savings and money market accounts as a result of an increase of disintermediation driven primarily by an increase in interest rates, partially offset by a $1.5 billion increase in interest bearing time deposits. The growth in interest bearing deposits was driven by the increased utilization of brokered deposits, particularly brokered time deposits, during the nine months ended September 30, 2023. During the nine months ended September 30, 2023, brokered time deposits increased by approximately $1.2 billion, while other interest bearing brokered deposits decreased by approximately $1.1 billion. No single depositor represented more than 10% of total deposits as of September 30, 2023. The ten largest depositors not associated with brokered pass-through relationships represented approximately 17% of total deposits in the aggregate as of September 30, 2023. The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances. From time to time, when appropriate in order to fund strong loan demand or account for increased deposit outflow, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm and other national brokerage networks, including IntraFi. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (the "CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. The total of reciprocal deposits at September 30, 2023 was $1.5 billion (18.2% of total deposits) as compared to $782.2 million (9.0% of total deposits) at December 31, 2022. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs. The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit Program ("IND"). The Bank had $648.3 million and $1.1 billion of IND brokered deposits as of September 30, 2023 and December 31, 2022, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, or if aggregate funding available to banks change due to changes in the marketplace, we may experience an outflow of brokered deposits or difficulty in obtaining them in the future. In that event, we would be required to obtain alternate sources for funding, which may increase our cost of funds and negatively impact our net interest margin. At September 30, 2023 and December 31, 2022, total deposits included $2.4 billion and $2.3 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 29.1% and 26.5% of total deposits, respectively. At September 30, 2023 and December 31, 2022, total deposits included estimated totals of $2.5 billion and $4.4 billion of uninsured deposits, which represented 29.6% and 50.5% of total deposits, respectively. The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits. At September 30, 2023, the Company had $2.1 billion in noninterest bearing demand deposits, representing 24.7% of total deposits, compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36.2% of total deposits. The decrease was primarily attributable to outflows from noninterest bearing deposits and savings/money market accounts which was partially offset by the increase in time deposits. Average noninterest bearing deposits of total deposits for the nine months ended September 30, 2023 and 2022 were 31.9% and 38.4%, respectively. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets. 56 As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or "customer repurchase agreement," allowing qualifying businesses to earn interest on short-term excess funds that are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $25.7 million at September 30, 2023 compared to $35.1 million at December 31, 2022. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed mortgage-backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. At September 30, 2023 the Company had $2.2 billion in time deposits an increase of $1.5 billion from year end December 31, 2022. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning. Throughout the year, the Bank raised rates in most of its time deposit accounts in response to the increased disintermediation of deposits, and the current rate environment with continued rate increases. The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at September 30, 2023 and December 31, 2022. At September 30, 2023 and December 31, 2022, the Company had $0 and $975.0 million, respectively, of FHLB short-term advances borrowed. Additionally, at September 30, 2023, the Company had a $1.3 billion one year fixed rate advance, maturing on March 26, 2024 from the BTFP as part of the overall asset liability strategy and to support loan growth. Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities and a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios. Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities. Long-term borrowings outstanding at September 30, 2023 and December 31, 2022 included the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024. Liquidity Management Liquidity is a measure of the Company's and Bank's ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank's primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 59% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. As of September 30, 2023, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity. However, these securities are utilized as pledged assets that provide secondary liquidity through the form of additional available borrowings. Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings. The Company's primary sources of liquidity are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. 57 The following table summarizes the Company's secondary sources of liquidity in use and available at September 30, 2023: (dollars in thousands, except amount in the footnotes) Secondary Sources of Liquidity in Use Secondary Sources of Liquidity Available September 30, 2023: Unsecured brokered deposits (1) $ 873,410 $ 1,841,487 FHLB secured borrowings — 1,736,759 FRB: BTFP secured borrowings 1,300,001 253,133 Discount window secured borrowings — 606,178 Federal funds lines — 155,000 Customer repurchase agreements 25,689 — Raymond James repurchase agreement — 17,162 Unpledged assets: (2) Interest-bearing deposits with banks N/A 31,811 Investment securities N/A 269,882 Total $ 2,199,100 $ 4,911,412 (1) The available liquidity from the unsecured brokered deposits represents unsecured funds under one-way CDARS and ICS brokered deposits that would require then current market rates and be dependent on the availability of funds in those networks. (2) Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing. The funding mix has continued to change in the nine months ended September 30, 2023. Deposits at quarter-end were $8.4 billion and $8.7 billion at September 30, 2023 and December 31, 2022, respectively. The decline in deposits was primarily attributable to a decrease in noninterest bearing deposits and savings and money market accounts, offset by an increase in interest bearing deposits primarily due to the increased utilization of brokered deposits as discussed in "Deposits and Other Borrowings" above. Short-term borrowings at quarter-end were $1.3 billion and $975.0 million at September 30, 2023 and December 31, 2022, respectively. The increase in borrowings was due to the utilization of BTFP borrowings during the nine months ended September 30, 2023. The Bank can purchase up to $155 million in federal funds on an unsecured basis from its correspondents, against which there was no outstanding amount at September 30, 2023, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.8 billion, against which there was $873.4 million outstanding at September 30, 2023. The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $648.3 million of brokered deposits at September 30, 2023. At September 30, 2023, the Bank was also eligible to draw on advances from the FHLB up to $1.7 billion based on assets pledged as collateral to the FHLB, against which there was no outstanding amount at September 30, 2023. The Bank had FHLB borrowings of $975.0 million outstanding at December 31, 2022, which were repaid during the nine months ended September 30, 2023. The Bank posted additional collateral to the FHLB during the nine months ended September 30, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize this source of funding in the future. In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP. The BTFP provides eligible depository institutions, including the Bank, an additional source of liquidity. At September 30, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $1.6 billion on assets that have been pledged, of which $1.3 billion was outstanding. This alternative source of liquidity is being utilized for balance sheet optimization. The program permits advances to be requested until March 2024, unless extended by the Federal Reserve Bank. There can be no assurance, however, that the opportunity to further borrow from the BTFP will continue to be available beyond March 2024. Once the BTFP program terminates, we may be required to rely on other, potentially more expensive, sources of liquidity. 58 The Bank's aggregate borrowing capacity at September 30, 2023 was $2.3 billion which consists of $2.0 billion of additional aggregate capacity to borrow from the Federal Home Loan Bank of Atlanta ("FHLB") and BTFP on assets that have been pledged. The Bank also has unencumbered securities totaling approximately $269.9 million available for pledging to the FHLB or the BTFP for additional borrowing capacity. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank. This facility, which amounts to approximately $606.2 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates from alternative savings and investment sources. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive. There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or that some deposits would be lost if rates were to continue to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run, but the use of such sources may negatively impact our net interest margin and our earnings, as the use of such sources did in the first nine months of 2023, and there can be no assurance that they will be adequate to meet our liquidity needs. The market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment. Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships. The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank’s interest expense and net interest margin, as the transfer of some noninterest-bearing deposits to interest-bearing deposits did in the first nine months of 2023. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The ALCO has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations. We maintain a liquid investment portfolio outside of our held-to-maturity investments, including overnight liquidity. In the first nine months of 2023, average short term liquidity was $2.5 billion, which is above the Bank's average needs. Secondary sources of liquidity at September 30, 2023 were $4.9 billion, which include the FHLB, BTFP, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window. At September 30, 2023, the Company held total securities available to be pledged with a par balance of $269.9 million. Commitments and Contractual Obligations Loan commitments outstanding and lines and letters of credit at September 30, 2023 are as follows: (dollars in thousands) Unfunded loan commitments $ 2,250,259 Unfunded lines of credit 99,449 Letters of credit 93,254 Total $ 2,442,962 Unfunded loan commitments are agreements whereby the Bank has made a commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract and the borrower has accepted the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. 59 Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since lines of credit may expire without being drawn, the total unfunded line of credit amount does not necessarily represent future cash requirements. Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank's customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank's net income is largely dependent on net interest income. The Bank's ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and overseen by the Audit Committee and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide net interest income growth consistent with the Company's profit objectives. During the nine months ended September 30, 2023, the Company was able to produce a net interest margin of 2.56% as compared to 2.86% during the same period in 2022 and continues to manage its overall interest rate risk position. The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and risk in its portfolio of mortgage-backed securities. Further, the Company has been principally collecting cash flows from the investment portfolio to provide liquidity. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. At September 30, 2023, the amortized cost less allowance of the investment portfolio decreased by $164.6 million, or 5.7%, as compared to the balance at December 31, 2022. The percentage mix of municipal securities was 5% of total investments at September 30, 2023 and December 31, 2022. The portion of the portfolio invested in mortgage-backed securities was 61% at September 30, 2023 and 62% at December 31, 2022. The portion of the portfolio invested in U.S. agency investments was 28% at September 30, 2023 and 26% at December 31, 2022. Corporate bonds made up 5% of total investments at September 30, 2023 and December 31, 2022. U.S. treasury bonds were 2% of total investments at September 30, 2023 and December 31, 2022. The duration of the investment portfolio decreased to 4.6 years at September 30, 2023 from 4.8 years at December 31, 2022. At September 30, 2023, $80.3 million of corporate bonds were subordinated debt from other financial institutions. Corporate bonds generally, and subordinated debt in particular, pose credit risk such that if any of these issuers were to enter bankruptcy or insolvency proceedings, we could experience losses that may be material to operating results and our financial condition. The re-pricing duration of the loan portfolio was 11 and 13 months at September 30, 2023 and December 31, 2022, respectively, with fixed rate loans amounting to 38% of total loans at September 30, 2023 and December 31, 2022. Variable and adjustable rate loans comprised 62% of total loans at September 30, 2023 and December 31, 2022. Variable rate loans are generally indexed to either the one month LIBOR interest rate (prior to the June 30, 2023 LIBOR cessation date), SOFR, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. The few remaining loans that were still tied to LIBOR based rates on June 30, 2023 were transitioned to their appropriate fallback rate on July 3, 2023. The duration of the deposit portfolio decreased as rates rose, measuring 24 months at September 30, 2023 and 29 months at December 31, 2022. 60 The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $225.3 million and $205.3 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the net unrealized loss position represented 13.25% of the investment portfolio's book value. Management relies on the use of models in order to measure the expected future impact on interest income of various interest rate environments, as described above. Through its modeling, the Company makes certain estimates that may vary from actual results. There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy. Although the Company has experienced net interest margin compression during the nine months ended September 30, 2023, the Company's interest rate risk modeling shows net interest margin expansion in an increasing rate environment. The model's prediction is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations but with no changes in the mix of assets or liabilities or the spreads we are able to earn. The model also assumes a stable interest rate environment after the programmed rate change, allowing assets and liabilities to reprice at their schedule in a stable environment, which may be quite different than real world conditions. Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment; however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded, though this is not relevant for the current rate environment with most variable rate loans well above their floor rate. The weighted average rate of the Company's variable rate loans increased by approximately 92 basis points from December 31, 2022 to September 30, 2023 in connection with the increase in 100 basis points for the same period in Fed Funds rate hikes caused by actions taken by the Federal Reserve Bank. At September 30, 2023, the Company had a portfolio of $4.9 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.79%. At September 30, 2023, only $224.5 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date. Additionally, the Company’s cost of interest bearing deposits increased by 108 basis points across its interest-bearing deposits, which comprise 75.3% of its total deposits, at September 30, 2023. The Company employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, deposit decay rates, and the level of noninterest income and noninterest expense. The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100, 200, and 300 basis points, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next 12 months from September 30, 2023. In addition to analysis of simultaneous changes in interest rates along the yield curve, an analysis of changes based on interest rate "ramps" is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes. For the analysis presented below at September 30, 2023, the simulation assumes a high degree of correlation between the change in interest rates on offered interest bearing deposit products for each 100 basis point change in market interest rates in a rate shock scenario with a floor of 0 basis points. Those correlations range from 75% for interest bearing checking to 100% for savings and money market demand accounts. The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates. Thus, the overall measure of the correlation between deposit costs and market rate changes is modeled at 95%. At December 31, 2022, the Company assumed a 70 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates, with a floor of 10 basis points and 0 basis points on decreasing and increasing rate shock scenarios, respectively. The Company's analysis at September 30, 2023 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations. The repricing duration of the investment portfolio at September 30, 2023 is 4.6 years, the loan portfolio 0.9 years, the interest bearing deposit portfolio 1.0 years, and the borrowed funds portfolio 0.5 years. 61 The following table reflects the result of simulation analysis on the September 30, 2023 asset and liabilities balances: Change in interest rates (basis points) Percentage change in net interest income Percentage change in net income Percentage change in market value of portfolio equity + 400 2.1% 5.2% (8.0)% + 300 1.6% 3.9% (5.8)% + 200 1.1% 2.7% (3.6)% + 100 0.4% 1.0% (1.8)% — — — — - 100 0.9% 2.0% 1.8% - 200 3.2% 7.1% 2.1% - 300 5.6% 12.6% 0.6% The results of the simulation are within the relevant policy limits adopted by the Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at September 30, 2023 are not believed to be excessive. The impact of 0.9% in net interest income and 2% in net income given a 100 basis point decrease in market interest rates reflects in large measure the ability to quickly reprice deposits downward while recently booked loans would take time to re-price. In the nine months ended September 30, 2023, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. Although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in modeling. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. During the nine months ended September 30, 2023, average market interest rates increased across the yield curve as compared to the 2022 year end. Capital Resources and Adequacy The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company's current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. 62 The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has focused on commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At September 30, 2023, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 106% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Capital Policy, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. The FRB and the FDIC have adopted rules (the "Basel III Rules") implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and a minimum leverage ratio of 4.0%. At September 30, 2023, the Company and the Bank meet all these requirements. The Company’s capital position remained strong for the nine months ended September 30, 2023 as a result of good earnings, continued improvements in economic conditions and strong asset quality. As a result of the Company’s strong capital position and earnings, we were able to continue with our quarterly dividend. The Company announced a regular quarterly cash dividend on September 27, 2023 of $0.45 per share to shareholders of record on October 20, 2023 and it was paid on October 31, 2023. On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program which took effect starting January 2, 2023, after the expiration of the previous repurchase program on December 31, 2022. The Board of Directors authorized the repurchase of 1,600,000 shares of common stock, or approximately 5% of the Company's outstanding shares of common stock, under the 2023 Repurchase Program. In June 2023, the Company completed the repurchase of authorized shares of common stock under the 2023 Stock Repurchase Plan. The Company paid an average price of $29.77 per share (including commissions) to repurchase the shares in 2023. No shares were repurchased in the third quarter of 2023. 63 The capital amounts and ratios for the Company and Bank as of September 30, 2023 and December 31, 2022 are presented in the table below. Company Bank Minimum Required Basel III To Be Well-Capitalized Under Prompt Corrective Action Regulations (1) Actual Actual (dollars in thousands) Amount Ratio Amount Ratio September 30, 2023 CET1 capital (to risk weighted assets) $ 1,326,400 13.68 % $ 1,323,915 13.73 % 7.00 % 6.50 % Total capital (to risk weighted assets) 1,409,767 14.54 % 1,407,282 14.59 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) 1,326,400 13.68 % 1,323,915 13.73 % 8.50 % 8.00 % Tier 1 capital (to average assets) 1,326,400 10.96 % 1,323,915 10.99 % 4.00 % 5.00 % December 31, 2022 CET1 capital (to risk weighted assets) $ 1,329,971 14.03 % $ 1,341,347 14.23 % 7.00 % 6.50 % Total capital (to risk weighted assets) 1,415,854 14.94 % 1,412,904 14.99 % 10.50 % 10.00 % Tier 1 capital (to risk weighted assets) 1,329,971 14.03 % 1,341,347 14.23 % 8.50 % 8.00 % Tier 1 capital (to average assets) 1,329,971 11.63 % 1,341,347 11.78 % 4.00 % 5.00 % (1) Applies to the Bank only. Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At September 30, 2023 the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained the minimum required capital ratios listed in the table above. In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the option provided by the March 2020 interim final rule. 0Use of Non-GAAP Financial Measures The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP. Tangible common equity to tangible assets (the "tangible common equity ratio"), tangible book value per common share, the annualized return on average tangible common equity, and the efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders' equity by common shares outstanding. The Company calculates the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders' equity. The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios, and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. 64 The Company calculates the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The efficiency ratio measures a bank's overhead as a percentage of its revenue. The Company believes that reporting the non-GAAP efficiency ratio more closely measures its effectiveness of controlling operational activities. The following tables reconcile the GAAP financial measures to the associated non-GAAP financial measures: GAAP Reconciliation (dollars in thousands except per share data) September 30, 2023 December 31, 2022 Common shareholders' equity $ 1,215,884 $ 1,228,321 Less: Intangible assets (105,239) (104,233) Tangible common equity $ 1,110,645 $ 1,124,088 Book value per common share $ 40.64 $ 39.18 Less: Intangible book value per common share (3.52) (3.32) Tangible book value per common share $ 37.12 $ 35.86 Total assets $ 11,164,214 $ 11,150,854 Less: Intangible assets (105,239) (104,233) Tangible assets $ 11,058,975 $ 11,046,621 Tangible common equity ratio 10.04 % 10.18 % Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Average common shareholders' equity $ 1,235,162 $ 1,271,753 $ 1,240,574 $ 1,298,170 Less: Average intangible assets (104,639) (104,253) (104,366) (104,252) Average tangible common equity $ 1,130,523 $ 1,167,500 $ 1,136,208 $ 1,193,918 Net income available to common shareholders $ 27,383 $ 37,297 $ 80,309 $ 98,737 Average tangible common equity 1,130,523 1,167,500 1,136,208 1,193,918 Annualized return on average tangible common equity 9.61 % 12.67 % 9.45 % 11.06 % Net interest income $ 70,719 $ 83,897 $ 217,554 $ 247,267 Noninterest income 6,347 5,308 18,642 18,325 Operating revenue $ 77,066 $ 89,205 $ 236,196 $ 265,592 Noninterest expense $ 37,633 $ 36,206 $ 116,195 $ 126,180 Efficiency ratio 48.83 % 40.59 % 49.19 % 47.51 % Item 3. Quantitative and Qualitative Disclosures about Market Risk Please refer to Item 2 of this report, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk."