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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-01 · 533 added, 493 removed, 635 unchanged (62% of the section changed)

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This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report.

We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report as that disclosure is included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission ("SEC") on February 9, 2023.

You can reference the discussion and analysis of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2022 in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” within that report.

Caution About Forward Looking Statements .

This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

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.

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,” "outlook," “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.

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.

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The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward looking statements:

• Changes in the general economic, political, social and health conditions, including the macroeconomic and other challenges and uncertainties resulting from the effects of the COVID-19 pandemic;

• Changes in the general economic, political, social and health conditions, including the macroeconomic and other challenges and uncertainties resulting from the effects of pandemics and natural disasters;

• The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

• The willingness of customers to substitute competitors’ products and services for our products and services;

• Our management of liquidity risks in our operations, including, but not limited to, risks related to customer deposits, deposits in excess of the FDIC insurance coverage limits, access to capital markets and securities and market values;

• Our management of liquidity risks in our operations, including, but not limited to, risks related to customer deposits, deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance coverage limits, access to capital markets and securities and market values;

• The effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

• Our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of, and our ability to sell, properties which stand as collateral for loans we make;

• Our decision to cease originating residential mortgages (See Note 26 of the Consolidated Financial Statements for further details);

• Our decision to cease originating residential mortgages;

• The growth and profitability of noninterest or fee income being less than expected;

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• The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance and the application thereof by regulatory bodies;

• The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board, inflation, interest rate, market and monetary fluctuations;

• Results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses, to write-down assets or to hold more capital;

• The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB"), inflation, interest rate, market and monetary fluctuations;

• The effects or impact of any litigation, regulatory proceeding, including enforcement proceedings and any possibly resulting fines, judgments, expenses or restrictions on our business activities;

• Unanticipated regulatory or judicial proceedings;

• The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board ("PCAOB") or the FASB;

• Cybersecurity breaches, threats, and cyber-fraud that cause the Bank to sustain financial losses;

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We will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements.

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-four years of successful operations.

The Company is a one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating twenty-five years of successful operations.

The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve.

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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 sixteen branch offices (six in Suburban Maryland, five in Washington, D.C.

and five in Northern Virginia), a principal corporate office, five lending centers (two are co-located with branches and one co-located in the principal corporate office) and one operations center.

The Bank currently has a total of thirteen branch offices (six in Suburban Maryland, four in Washington, D.C.

and three in Northern Virginia), a principal corporate office, four lending centers (two are co-located with branches and one co-located in the principal corporate office) and one operations center.

Refer to the Business Section above, which describes in detail the various banking services offered.

Although the global economy has largely adapted operations to a world with COVID-19, certain adverse residual consequences of the pandemic continue to impact the macroeconomic environment and they may continue to persist.

The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications and/or disruptions, has contributed greatly to rising inflationary pressures.

General economic, political, social and health conditions affect financial markets, and therefore, our business.

As the economy has experienced higher levels of inflation, interest rates have increased due to current monetary policies.

Fiscal and monetary policies have a direct and indirect impact on the level and volatility of interest rates, liquidity of financial markets, the availability and cost of capital, and market conditions of financing.

In 2022, the Federal Reserve Open Market Committee ("FOMC"), began a series of rate increases thereby discontinuing the generally accommodative monetary policy it had pursued when the COVID-19 pandemic began in early 2020.

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Actual real U.S.

GDP growth for 2022 was 2.1%, in contrast to 5.7% growth in 2021 as the economy re-opened, and was adversely impacted by the effects of the COVID-19 pandemic.

Employment climbed throughout 2022 as the U.S.

unemployment rate ended the year at 3.4%, down from 3.9% at the end of 2021.

GDP growth for 2023 was 3.3%, in contrast to 2.1% growth in 2022 as the economy grew despite continuing to experience the effects of inflationary pressures and rising interest rates that also existed in 2022.

The employment climbed throughout 2023 as the U.S.

unemployment rate ended the year at 3.7%, up from 3.4% at the end of 2022.

Longer-term U.S.

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The yield curve in 2023 was inverted as rates increased sharply on the short end of the curve and remained anchored on the longer end versus a more normal shape in 2022.

As the ten year U.S.

Treasury rate continued to increase in 2022, the volume of residential mortgage lending continued to decrease in 2022.

Overall, real estate values in most of the Company's markets decreased moderately in 2022 as the FOMC increased interest rates in 2022 to stave off inflationary pressures.

Political gridlock continued in Washington, D.C.

over concerns of public debt and deficits, as well as tax policy and spending levels.

The Company’s primary market, the Washington, D.C.

metropolitan area, has continued to perform well relative to other parts of the country notwithstanding the adverse effects of the COVID-19 pandemic, due to a stable public sector along with increased government spending.

We believe the Company’s primary market, the Washington, D.C.

metropolitan area, continues to exhibit a certain degree of resilience relative to other parts of the country despite the volatility in the current economic environment.

The Washington, D.C.

metropolitan area maintains a diverse economy which includes a stable public sector, a large healthcare component, substantial business services and a highly educated work force.

The private sector, in particular, the Leisure and Hospitality sector has seen some recovery in recent years following the adverse effects of the pandemic.

The multi-family commercial real estate leasing sector, notwithstanding increased supply of units in the Bank’s market area, has held up relatively well, particularly for well-located close-in projects.

Overall, commercial real estate values have generally held up well, but we continue to be cautious of the cap rates at which some assets are trading, and therefore, we are being careful with valuations.

In spite of recent challenges, the Washington, D.C.

metropolitan area maintains a diverse economy including a large healthcare component, substantial business services and a highly educated work force.

The Company has the financial resources to meet, and has remained committed to meeting, the credit needs of its community.

The decline in the Company's loan balances in 2021 was a result of PPP loans paying off, competition refinancing at lower rates with longer amortization periods, and excess liquidity at competing banks as well as many companies and construction project sponsors.

Loan balances increased in 2022 as rising rates led to deposit disintermediation reducing our liquidity levels and earning assets.

However, rates on interest earning assets increased which ultimately had a net positive impact on the net interest margin and resulted in a higher net interest income in 2022 despite the decrease in liquidity and earning assets.

The Company’s capital position remained strong in 2022 as a result of good earnings, improved economic conditions and strong asset quality.

While commercial real estate office properties continue to experience challenges, the Company has remained focused on monitoring this sector and working with borrowers in order to mitigate credit losses within our loan portfolio.

Overall, we believe commercial real estate values have generally decreased moderately, but we continue to be cautious of the cap rates at which some assets are trading, and therefore, we are being careful with valuations.

At December 31, 2023, the Company had total assets of approximately $11.7 billion, total loans of $8.0 billion, total deposits of $8.8 billion and thirteen branches in the Washington, D.C.

metropolitan area.

The loan portfolio continued to grow in the year ended December 31, 2023, due primarily to our income producing commercial real estate ("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.

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.

The Company has the financial resources to meet, and remains committed to meeting, the credit needs of its community.

Loan balances increased in 2022 and 2023 as rising rates led to deposit disintermediation reducing our liquidity levels and earning assets.

The yield on earning assets continued to increase in 2023.

During the year ended December 31, 2023, the yield on earning assets increased by 171 basis points (from 3.74% to 5.45%) while cost of funds increased 229 basis points (from 0.88% to 3.17%) which resulted in a decrease of 40 basis points in the net interest margin.

The Company’s capital position remained strong in 2023 as a result of continued earnings, improved economic conditions and strong asset quality.

As a result of the Company’s strong capital position and earnings, we were able to continue our quarterly dividend in 2023.

Additionally, the Company was active in share repurchase activity as we repurchased 1,600,000 shares at an average price of $29.74 per share during 2023.

On December 13, 2022, the Company's Board of Directors authorized a new share repurchase program to take effect starting January 2, 2023, after the expiration of the previous repurchase program on December 31, 2022.

The Board of Directors authorized the repurchase of 1,600,000 shares of common stock, or approximately 5% of the Company's outstanding shares of common stock, under the 2023 Repurchase Program, which will expire on December 31, 2023, subject to earlier termination of the program by the Board of Directors.

The Company believes its strategy of remaining growth-oriented, retaining talented staff and maintaining focus on seeking quality lending and deposit relationships has proven successful.

Additionally, the Company believes such focus and strategy of relationship building has fostered future growth opportunities, as the Company’s reputation in the marketplace remains strong.

At December 31, 2022, the Company had total assets of approximately $11.2 billion, total loans of $7.6 billion, total deposits of $8.7 billion and sixteen branches in the Washington, D.C.

metropolitan area.

Additionally, the Company believes this strategy of relationship building has fostered future growth opportunities, as the Company’s reputation in the marketplace remains strong.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Allowance for Credit Losses and Provision for Unfunded Commitments

A consequence of lending activities is that we may incur credit losses, so we record an ACL with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.

The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.

As a result of our January 1, 2020 adoption of FASB's Accounting Standard Codification ("ASC") 326, Measurement of Credit Losses on Financial Instruments , and its related amendments, our methodology for estimating these credit losses changed significantly from years prior to 2020.

The standard replaced the “incurred loss” approach with a “current expected credit loss” approach known as CECL, which requires an estimate of the credit losses expected over the life of an exposure (or

pool of exposures).

A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses.

The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions

such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.

On January 1, 2020, when the Company adopted FASB's Accounting Standard Codification ("ASC") 326, Measurement of Credit Losses on Financial Instruments , and its related amendments, our methodology for estimating these credit losses changed significantly from years prior to 2020.

CECL removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

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For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as a loss driver over our reasonable and supportable period of 18 months, and reverts back to a historical loss rate over the following twelve months on a straight-line basis.

While the COVID-19 pandemic negatively impacted unemployment projections for 2021, which informed our CECL economic forecast and increased our loss reserve for that year, there were positive signs in 2022 as the unemployment rate and economic forecast continued to improve and suggested that the effects of the COVID-19 pandemic on credit would not be as significant as previously considered in 2021.

Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

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Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

For example, the effects of the COVID-19 pandemic and related hybrid or fully remote working environment had negatively impacted the performance outlook in the central business district office commercial real estate segment of our loan portfolio, which informed our CECL economic forecast and continued to adversely impact our loss reserve as of December 31, 2022.

For example, the effects of the COVID-19 pandemic and related hybrid or fully remote working environment has negatively impacted the performance outlook in the central business district office commercial real estate segment of our loan portfolio, which informed our CECL economic forecast and continued to adversely impact our loss reserve as of December 31, 2023.

See Notes 1, 3 and 4 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis and the risk factors related to our business and economic conditions in Item 1A for more information on the provision for credit losses.

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.

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 stress in the banking sector in the first and second quarters of 2023.

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.

In accordance with its regular schedule for impairment testing, the Company performed a second qualitative assessment and quantitative impairment test on its only reporting unit as of December 31, 2023.

The resulting calculations indicated that the fair value exceeded the carrying amount of the Company's only reporting unit by approximately 17% and 21% as of May 31, 2023 and December 31, 2023, respectively, which resulted in a determination of no impairment loss on the Company's only reporting unit.

The method employed was 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.

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.

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, however, it would not impact our regulatory capital ratios, tangible common equity ratio, nor our liquidity position.

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

SELECTED FINANCIAL DATA

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Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2022.

Use of Non-GAAP Financial Measures

The information set forth below contains certain financial information determined by methods other than in accordance with GAAP.

These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “efficiency ratio” and “return on average common equity.” Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are used as a measure of our performance by investors.

These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies.

Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures.

A reconciliation table is set forth below following the selected historical consolidated financial data.

Years Ended December 31,

Balance Sheets - Period End

(dollars in thousands)

December 31, 2023 December 31, 2022

Consolidated Balance Sheets:

Securities - available for sale $ 1,506,388 $ 1,598,666

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Allowance for credit losses (85,940) (74,444)

Intangible assets, net 104,233 104,255 104,307

Goodwill and intangible assets, net

104,925 104,233

Total assets 11,664,538 11,150,854

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1,169,358 1,124,088

Statements of Income

Years Ended December 31,

(dollars in thousands)

2023 2022 2021

Consolidated Statements of Income:

Interest income $ 625,327 $ 424,613 $ 364,496

Interest expense 334,781 91,746 39,982

Provision (reversal) for credit losses 266 (20,821) 45,571

Provision for (reversal of) credit losses

31,536 266 (20,821)

Noninterest income 21,536 23,654 40,385

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Dividend payout ratio 54.00 % 39.58 % 25.29 %

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

Asset Quality:

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Allowance for credit losses to nonperforming loans 131.16 % 1,150.96 %

Years Ended December 31,

(dollars in thousands) 2023 2022 2021

Asset Quality Activity:

Net charge-offs $ 18,850 $ 624 $ 13,339

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(4) Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

The following table details our Non-GAAP to GAAP reconciliation for the years 2020 through 2022.

Non-GAAP Reconciliation Years Ended December 31,

(dollars in thousands except per share data) 2022

Use of Non-GAAP Financial Measures

The information set forth below contains certain financial information determined by methods other than in accordance with GAAP.

These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “efficiency ratio” and “return on average tangible common equity.” The Company considers these non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.

Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are used as a measure of our performance by investors.

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 ("ROATCE"), 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.

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.

Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures.

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

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

Common shareholders’ equity $ 1,274,283 $ 1,228,321

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Tangible common equity ratio 10.12 % 10.18 %

Years Ended December 31,

(dollars in thousands)

2023 2022 2021

Average common shareholders’ equity $ 1,240,118 $ 1,281,921 $ 1,304,902

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Return on average tangible common equity 8.85 % 11.97 % 14.72 %

Total noninterest expense $ 165,098 $ 149,165 $ 144,162

Noninterest expense

$ 153,293 $ 165,098 $ 149,165

Net interest income $ 290,546 $ 332,867 $ 324,514

Total noninterest income 23,654 40,385 45,696

Total of net interest and noninterest income $ 356,521 $ 364,899 $ 367,258

Noninterest income

21,536 23,654 40,385

Operating revenue

$ 312,082 $ 356,521 $ 364,899

Efficiency ratio 49.12 % 46.31 % 40.88 %

RESULTS OF OPERATIONS

Twelve Months Ended December 31, 2022 Compared with Twelve Months Ended December 31, 2021

Year Ended December 31, 2023 Compared with Year Ended December 31, 2022

Net income for the years ended December 31, 2023 and 2022 was $100.5 million and $140.9 million, respectively.

Net income per basic and diluted common share for 2022 was $4.40 and $4.39, respectively, compared to $5.53 and $5.52 per basic and diluted common share, respectively for 2021, a 20% decrease.

Net income decreased in 2022 relative to 2021 primarily due to the provision reversals in the allowance for credit losses in 2021 that did not recur in 2022, increases in interest expense, lower noninterest income and higher noninterest expense which was partially offset by an increase in interest income.

The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which increased to $332.9 million for 2022 compared to $324.5 million for 2021.

The increase was due to an increase in the yield on average earning assets from 3.16% to 3.74%, or 58 basis points, which was partially offset by an increase in cost of funds of 46 basis points in net interest margin due to increased rates on interest bearing deposits and other borrowings.

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 2.93% for 2022 and 2.81% for 2021, an increase of 12 basis points.

Net income per basic and diluted common share for the year ended December 31, 2023 was $3.31 and $3.31, respectively, compared to $4.40 and $4.39 per basic and diluted common share, respectively, for the year ended December 31, 2022, a 25% decrease.

Net income decreased in 2023 relative to 2022 primarily due to a decrease in net interest income of $42.3 million and an increase in provision for credit losses of $31.3 million.

These were offset by a decrease in the provision for unfunded commitments of $1.7 million, a decrease in noninterest expenses of $11.8 million, and a reduction of income tax expense of $21.8 million.

The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which decreased to $290.5 million for 2023 compared to $332.9 million for 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 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 2.53% for 2023 and 2.93% for 2022, a decrease of 40 basis points.

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

The provision for credit losses in 2022 was $266 thousand as compared to a reversal of $20.8 million in 2021.

The provision for credit losses in 2023 was $31.5 million as compared to $266 thousand in 2022.

For information on the components and drivers of these changes see "Provision for Credit Losses" section below.

Total noninterest income in 2023 was $21.5 million, as compared to $23.7 million in 2022, a 9% decrease.

Noninterest expenses in 2022 totaled $165.1 million, as compared to $149.2 million in 2021, an 11% increase.

The primary drivers for the decrease in noninterest income was a reduction in gain on the sales of residential mortgage loans and fees associated with residential mortgage loans in connection with the cessation of that business during the year ended December 31, 2023.

Noninterest expenses in 2023 totaled $153.3 million, as compared to $165.1 million in 2022, a 7% decrease.

The decrease in noninterest expense was primarily attributable to 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 $2.0 million, legal and professional fees of $2.2 million and $6.9 million in FDIC insurance assessments.

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

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 49.12% for 2023 as compared to 46.31% for 2022.

The adverse change in the efficiency ratio was driven by the $22.9 million settlement expenses, which increased noninterest expense and was partially offset by the $5.0 million accrual reduction related to share-based compensation awards and deferred compensation associated with our former CEO and Chairman, which reduced noninterest expense.

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.

At December 31, 2022, total loan balances (including PPP loans) were 8% higher than they were at December 31, 2021, and average loans were 1% lower in 2022 as compared to 2021.

PPP loans represented just $3.3 million of total loans at the end of 2022, as compared to $51.1 million at the end of 2021.

Excluding PPP loans, adjusted loan balances, increased 9% in 2022, driven by originations and advances which outpaced payoffs and paydowns.

The decline in PPP loans was the result of the forgiveness process.

Total deposits at December 31, 2022 declined by $1.3 billion as compared to December 31, 2021.

The decline consists of $127.2 million in noninterest bearing deposits and $1.1 billion in interest bearing deposits.

This was primarily driven by a significant increase in short term interest rates and the related deposit disintermediation.

At December 31, 2023, total loan balances were 4% higher than they were at December 31, 2022, and average loans were 8% higher in 2023 as compared to 2022, driven by originations and advances which outpaced payoffs and paydowns.

Total deposits at December 31, 2023 increased by $94.9 million as compared to December 31, 2022.

The increase consists of $966.5 million in interest bearing deposits which was partially offset by a decrease of $871.7 million in noninterest bearing deposits.

This was primarily driven by a significant increase in short term interest rates and the related deposit disintermediation and migration to interest-bearing deposit accounts.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 68% and 63% of average earning assets for 2023 and 2022, respectively.

For 2022, as compared to 2021, average loans, excluding loans held for sale, decreased $54.7 million, or 1%, driven by slightly higher payoffs and paydowns, which just outpaced originations and advances as well as PPP loan forgiveness.

For 2023, as compared to 2022, average loans, excluding loans held for sale, increased by $609.7 million, or 8%, driven by originations and advances that outpaced payoffs and paydowns.

Average investment securities for 2023 were 23% of average earning assets compared to 25% for 2022.

1 unchanged sentence

The decrease was driven by the decline in deposits due to a significant increase in short term interest rates.

The ratio of common equity to total assets decreased to 11.02% at December 31, 2022 from 11.40% at December 31, 2021, due to the significant impact of higher rates on the unrealized loss position of the investment portfolio and resulting impact to accumulated other comprehensive income.

The impact resulted in a reduction of common equity of $185.5 million related to investment securities in addition to the $55.8 million of cash dividends declared and $33.1 million in share repurchase activity during 2022.

The ratio of common equity to total assets decreased to 10.92% at December 31, 2023 from 11.02% at December 31, 2022, due primarily to an increase in total assets, in connection with increases in loans and interest-bearing deposits with banks and other short-term investments, and partially offset by an increase in common equity due to a reduction in accumulated other comprehensive losses.

For 2023, the return on average assets (“ROAA”) was 0.84%, as compared to 1.20% for 2022.

Total shareholders’ equity was $1.23 billion at December 31, 2022 as compared to $1.35 billion at December 31, 2021, a decrease of 9%.

Total shareholders’ equity was $1.27 billion at December 31, 2023 as compared to $1.23 billion at December 31, 2022, an increase of 4%.

The return on average common equity (“ROACE”) for 2023 was 8.11% as compared to 10.99% for 2022.

The return on average tangible common equity (“ROATCE”) for 2022, a non-GAAP financial measure, was 11.97% as compared to 14.73% for 2021.

The ROATCE for 2023, a non-GAAP financial measure, was 8.85% as compared to 11.97% for 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 decreases in these returns was primarily due to lower noninterest income, higher noninterest expense, the SEC and FRB settlements and, to a lesser extent, the non recurrence of provision reversals in the allowance for credit losses and net interest income on a lower asset base.

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, loans held for sale, investment securities and interest bearing deposits with other banks.

The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings, which consist of federal funds purchased, advances from the FHLB and subordinated notes.

Noninterest bearing

deposits and capital are other components representing funding sources.

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 represents interest expense on deposits, customer repurchase agreements and other borrowings, which consist primarily of federal funds purchased, advances from the Federal Home Loan Bank of Atlanta ("FHLB") and Bank Term Funding Program ("BTFP") and subordinated notes.

Noninterest bearing deposits and capital are other components representing funding sources.

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.

The Bank's earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities.

Net interest income represented 93% and 89% of the Company’s revenue for the years ended December 31, 2022 and December 31, 2021, respectively.

Net interest income represented 93% of the Company’s revenue for both years ended December 31, 2023 and December 31, 2022.

Net interest income in 2023 was $290.5 million compared to $332.9 million in 2022.

The 3% increase resulted from an increase in rates on earning assets, which was partially offset by increased rates on lower average balances of interest bearing deposits, as compared to 2021.

Net interest margin increased by 12 basis points to 2.93% in 2022 from 2.81% in 2021.

The increase reflects the impact of an increase in yields which more than offset the increase in the cost of funds and decrease in average earning assets.

The yield on earning assets increased by 58 basis points from 3.16% in 2021 to 3.74% in 2022 while cost of funds increased 46 basis points from 0.35% in 2021 to 0.81% in 2022.

The 13% decrease for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to increases in average deposit rates (4.02% compared to 1.33%, respectively) and other borrowings (4.78% compared to 3.35%, respectively), which were partially offset by higher average loan balances and yields (6.63% compared to 4.97%, respectively).

Net interest margin decreased by 40 basis points to 2.53% in 2023 from 2.93% in 2022.

The decrease reflects the increase in the cost of funds on deposits, primarily in connection with an increase in rates, and borrowings, in connection with both an increase in volume and rates, offset by an increase in the yield on loans.

The cost of funds on interest-bearing liabilities increased 229 basis points from 0.88% in 2022 to 3.17% in 2023, while the yield on interest-earning assets increased by 171 basis points from 3.74% in 2022 to 5.45% in 2023.

Average borrowings increased from $242.5 million in the year ended December 31, 2022 to $1.6 billion in the year ended December 31, 2023.

Average interest-bearing deposits increased from $6.2 billion in the year ended December 31, 2022 to $6.4 billion in the year ended December 31, 2023.

Average loans (excluding loans held for sale) were $7.8 billion for the year ended December 31, 2023, compared to $7.2 billion for the same period in 2022.

Average investment securities were $2.6 billion for the year ended December 31, 2023, compared to $2.9 billion for the same period in 2022.

Average interest-bearing deposits with other banks and other short term investments were $1.0 billion for 2023 compared to $1.2 billion for 2022.

As a result of FRB actions related to Fed Funds interest rate increases, overall yields and rates increased in 2023 as compared to 2022, as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.

Loans, the largest component of interest income on earnings assets, had a yield of 4.97% in 2022, compared to 4.62% in 2021, an increase of 35 basis points (includes PPP loans).

Although deposits declined in 2022 due to disintermediation, the deposit mix continued to be favorable at year end, with average noninterest deposits being 38% of average total deposits, up from 34% in 2021.

In 2022, average loans, the primary source of the Bank’s revenue, decreased by 1% between 2021 and 2022.

During the years ended December 31, 2023 and 2022, the Company incurred interest expense on brokered deposits, excluding the Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep ("ICS") two-way accounts, of $111.9 million and $44.3 million, respectively.

Loans, the largest component of interest income on earning assets, had a yield of 6.63% in 2023, compared to 4.97% in 2022, an increase of 166 basis points.

The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the years ended December 31, 2023, 2022 and 2021.

15 unchanged sentences

Loans (1) (2)

7,815,832 518,007 6.63 % 7,206,158 358,317 4.97 % 7,260,886 335,471 4.62 %

Investment securities available-for-sale (2)

1,584,239 32,074 2.02 % 2,003,475 33,641 1.68 % 1,653,522 23,205 1.40 %

Investment securities held-to-maturity 1,057,445 22,586 2.14 % 857,584 17,840 2.08 % — — — %

12 unchanged sentences

Customer repurchase agreements and federal funds purchased 36,663 1,218 3.32 % 30,745 356 1.16 % 24,884 51 0.20 %

Other short-term borrowings 172,717 3,980 2.30 % 300,003 2,008 0.67 % 280,126 1,870 0.66 %

Long-term borrowings 69,737 4,149 5.95 % 164,970 10,151 6.15 % 259,975 12,696 4.80 %

1,591,021 76,019 4.78 % 242,454 8,129 3.35 % 464,973 12,159 2.61 %

Total interest bearing liabilities 8,037,866 334,781 4.17 % 6,520,010 91,746 1.41 % 7,055,772 39,982 0.57 %

9 unchanged sentences

Cost of funds (3)

3.17 % 0.88 % 0.38 %

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

Net loan fees and late charges included in interest income on loans totaled $15.3 million, $30.6 million and $22.3 million for the years ended December 31, 2022, 2021 and 2020, res pectively.

Net loan fees and late charges included in interest income on loans totaled $16.7 million, $15.3 million and $30.6 million, for the years ended December 31, 2023, 2022 and 2021, respectively.

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

(3) 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 year ended December 31, 2022 and 2021 have been recalculated using the current methodology.

The rate/volume table below presents the composition of the change in net interest income for the periods 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.

As the table shows, the increase in net interest income in 2022 as compared to 2021 was due to an increase in volume of earning assets and a decrease in the volume of borrowings, which were partially offset by a change in mix along with the impact of higher deposit rates.

The increase in net interest income in 2021 as compared to 2020 was due to a decrease in the volume of earning assets, which was more than offset by lower deposit rates.

2022 compared with 2021

2021 compared with 2020

As the table shows, the decrease in net interest income in 2023 as compared to 2022 was due to an increase in rate on interest bearing liabilities, which was partially offset by an increase in rate on interest bearing assets.

Year Ended December 31, 2023 Compared with Year Ended December 31, 2022

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

(dollars in thousands) Change

19 unchanged sentences

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 AFS investment securities and HTM investment securities.

The amount of the ACL on loans is based on many factors that reflect management’s assessment of the risk in the loan portfolio.

Those factors include historical losses based on internal and peer data (as Company loss data is insufficient), economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio and internal loan processes of the Company and Bank.

The ACL under CECL (adopted January 1, 2020) utilizes an economic forecast that is updated quarterly with the significant measure being the expected regional unemployment rate, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.

The provision for credit losses was $266 thousand in 2022, as compared to a reversal of $20.8 million in 2021.

The provisions were primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, offset by improvements in asset quality.

The reversal in 2021 was driven by the improved macroeconomic outlook, improvement of credits in the loan portfolio and a reduction in total loans.

The provision for unfunded commitments is presented separately on the Statement of Income.

This provision considers the probability that unfunded commitments will fund.

The provision was $1.5 million in 2022, as compared to a reversal of $1.1 million in 2021.

Management has developed a comprehensive analytical process to monitor the adequacy of the ACL.

The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

The process is being continually enhanced and refined based on periodic review and challenge.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality or term, as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors.

Refer to additional detail regarding these forecasts in the “Cash Flow Method" section of Note 1 to the Consolidated Financial Statements.

The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date.

The provision for credit losses represents the amount of expense charged to current earnings to record the ACL on loans and the ACL on AFS investment securities and HTM 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.

Please refer to the discussion under “Critical Accounting Policies and Estimates” above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense.

Also, refer to the table in the "Allowance for Credit Losses" section which reflects activity in the ACL.

The ACL for loans at year-end 2022 decreased by $521 thousand as compared to year-end 2021, reflecting a provision for credit losses of $103 thousand and $624 thousand in net charge-offs.

The $266 thousand charge to the provision for credit losses includes $163 thousand for securities and $103 thousand for loans.

Net charge-offs of $624 thousand during 2022 represented 0.01% of average loans, excluding loans held for sale, a decline from net charge-offs of $13.3 million during 2021, which represented 0.18% of average loans, excluding loans held for sale.

Net charge-offs during 2022 were attributable primarily to commercial loans net charge-offs of $848 thousand and consumer net charge-offs of $73 thousand, which was partially offset by commercial real estate recoveries of $297 thousand (net of charge-offs).

At December 31, 2022, the ACL represented 0.97% of loans outstanding, as compared to 1.06% at December 31, 2021.

The ACL represented 1151% of nonperforming loans at December 31, 2022, as compared to 257% at December 31, 2021.

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, the Credit Administration department 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 ACL, will continue to be a primary management objective for the Company.

The total provision for credit losses was $31.5 million during the year ended December 31, 2023, as compared to $266 thousand during the year ended December 31, 2022.

The provision included $30.3 million and $103 thousand on the loan portfolio during the years ended December 31, 2023 and 2022, respectively.

The provision for loan credit losses for the year ended December 31, 2023 was driven by adjustments to the qualitative components of the CECL model combined with smaller increases in the quantitative components.

The changes in qualitative components were due to perceived weakness in the

commercial real estate market, in addition to the high inflationary environment offset by a reduction in the quantitative reserves based on a decline in individually evaluated loans.

The changes in quantitative components were related to changes in the nature and volume of the portfolio, changes in delinquencies and loss experience.

In 2022, the provisions were primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and the related uncertainty and impacts on the broader economy, offset by improvements in asset quality.

During the year ended December 31, 2023, a provision for credit losses on securities of $1.2 million was recorded, primarily on its corporate bonds classified as held-to-maturity, while a net provision for credit losses of $163 thousand was recorded during the year ended December 31, 2022.

The provision for unfunded commitments is presented separately on the Statement of Income.

This provision considers the probability that unfunded commitments will fund.

There was a reversal of $267 thousand in 2023, as compared to a provision of $1.5 million in 2022.

Noninterest Income

Noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.

Total noninterest income for the year ended December 31, 2022 was $23.7 million as compared to $40.4 million for the year ended December 31, 2021.

The 41% decrease was substantially due to lower gains on sale of residential mortgage loans of $10.3 million and lower net gains on sales of securities of $3.1 million.

The Bank recently announced that it plans to cease originating residential mortgages for sale in the first quarter of 2023 (See Note 26 of the Consolidated Financial Statements for further details).

At December 31, 2022, locked commitments for residential mortgage loans were $323.7 million, as compared to $994.5 million at December 31, 2021, a 67.45% decrease.

The rise in interest rates for residential mortgages in 2022 had a substantial negative impact on the volume of mortgage originations and in turn the sale of residential mortgages declined.

For the year ended December 31, 2022, service charges on deposits increased by $837 thousand to $5.4 million from $4.6 million for the same period in 2021, an increase of 18%.

While total deposits decreased in 2022, deposit fees increased significantly since those fees are no longer waived due to the pandemic, as they had been in 2021.

Gain on sale of loans consists of gains on the sale of residential mortgage and SBA loans.

For the year ended December 31, 2022, gain on sale of loans was $3.7 million, compared to $14.0 million in 2021, a decrease of 74%.

The decrease was driven by higher residential mortgage rates in 2022, which reduced mortgage origination volume.

The Company has historically originated residential mortgage loans and utilized both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans with servicing released.

Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale.

The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under GAAP for possible repurchases.

There were no repurchases due to fraud by the borrower during the year ended December 31, 2022.

The reserve is included in other liabilities on the Consolidated Balance Sheets.

The Bank does not originate “sub-prime” loans and has no exposure to this market segment.

Residential mortgage Years Ended December 31,

The following table summarizes the comparative noninterest income for the years ended December 31, 2023 and 2022:

Years Ended December 31,

(dollars in thousands)

2021 % Change

Gain on sale $ 3,211 $ 13,585 (76.4) %

Closed loans 295,567 1,140,408 (74.1) %

Locked loans 323,735 994,452 (67.4) %

Reserve 25 125 (80.0) %

The decision whether to sell residential mortgage loans on a mandatory or best efforts lock basis is a function of multiple factors, including, but not limited to, overall market volumes of mortgage loan originations, forecasted “pull-through” rates of origination, loan underwriting and closing operational considerations, pricing differentials between the two methods and availability and pricing of various interest rate hedging strategies associated with the mortgage origination pipeline.

The Company continually monitors these factors to maximize profitability and minimize operational and interest rate risks.

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $491 thousand for the year ended December 31, 2022, compared to $460 thousand for the same period in 2021.

Activity in SBA loan sales to secondary markets can vary widely from year to year.

Loss on the sale of investment securities was $169 thousand for the year ended December 31, 2022, compared to a gain of $3.0 million for the year ended December 31, 2021.

2023 2022 Dollar Change

Percent Change

Service charges on deposits $ 6,455 $ 5,399 $ 1,056 20 %

Gain on sale of loans 418 3,702 (3,284) (89) %

Net loss on sale of investment securities

(11) (169) 158 (93) %

Increase in the cash surrender value of bank-owned life insurance 2,659 2,547 112 4 %

Other income 12,015 12,175 (160) (1) %

$ 21,536 $ 23,654 $ (2,118) (9) %

Total noninterest income for the year ended December 31, 2023 was $21.5 million as compared to $23.7 million for the year ended December 31, 2022.

The 9% decrease was primarily due to a reduction on gains on sale of residential mortgage loans of $3.3 million.

The Company ceased originations of first lien residential mortgages for secondary sale in the first quarter of 2023, and completed residual origination and sales activities in the second quarter of 2023.

This decrease was partially offset by an increase on service charges on deposits of $1.1 million to $6.5 million for the year ended December 31, 2023 from $5.4 million for the same period in 2022.

Other income totaled $12.0 million for the year ended December 31, 2023 as compared to $12.2 million for 2022, a decrease of 1%.

The FHA business unit generated income on the sale of FHA multifamily-backed Ginnie Mae securities of $790 thousand for 2022 compared to $4.2 million for 2021.

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.

At December 31, 2022, the Company did not have any funds advanced outstanding under FHA mortgage loan servicing agreements.

The decrease in other income was primarily attributable to the reductions in Mastercard income of $1.8 million, servicing fees of $1.0 million, and other loan income of $548 thousand.

This activity was partially offset by increases of $2.5 million of income from an investment in an SBIC fund, income on swap fees of $617 thousand, and gain on the sale of Federal Housing Administration ("FHA") multifamily-backed Government National Mortgage Association ("Ginnie Mae") securities of $479 thousand.

Noninterest Expense

Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional fees, FDIC insurance premiums and other expenses.

Total noninterest expense totaled $165.1 million for 2022, as compared to $149.2 million for 2021, an 11% increase.

The following table summarizes the comparative noninterest expense for the years ended December 31, 2023 and 2022:

Years Ended December 31,

(dollars in thousands)

2023 2022 Dollar Change

Percent Change

Salaries and employee benefits $ 86,096 $ 84,053 $ 2,043 2 %

Premises and equipment expenses 12,606 13,218 (612) (5) %

Marketing and advertising 3,359 4,721 (1,362) (29) %

Data processing 13,083 12,171 912 7 %

Legal, accounting and professional fees 10,787 8,583 2,204 26 %

FDIC insurance 11,853 4,969 6,884 139 %

SEC/FRB penalties — 22,977 (22,977) (100) %

Other expenses 15,509 14,406 1,103 8 %

$ 153,293 $ 165,098 $ (11,805) (7) %

Total noninterest expense totaled $153.3 million for 2023, as compared to $165.1 million for 2022, a 7% decrease.

For 2023, the efficiency ratio (ratio of noninterest expenses to total revenue) was 49.12% as compared to 46.31% for 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 increase in 2022 as compared to 2021 was primarily associated with the $22.9 million of settlement expenses in the second quarter of 2022, which were partially offset by the salary accrual reduction of $5.0 million related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022.

Salaries and employee benefits were $84.1 million for 2022, as compared to $88.4 million for 2021, a decrease of 5%.

The primary reason for the decrease in 2022 was the reduction of the $5.0 million accrual related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022.

The accrual was originally recorded in the first quarter of 2019.

Additionally, at December 31, 2022, the Company’s full time equivalent staff numbered 496, as compared to 507 at December 31, 2021.

The decrease in 2023 as compared to 2022 was primarily associated with the $22.9 million of settlement expenses during the year ended December 31, 2022, which were partially offset by increases in FDIC insurance expenses of $6.9 million, legal, accounting and professional fees of $2.2 million and salaries and employee benefits of $2.0 million over the comparative year.

Salaries and employee benefits were $86.1 million for 2023, as compared to $84.1 million for 2022, an increase of 2%.

The primary reason for the increase in 2023 from 2022 was the reversal of a $5.0 million accrual related to stock-based compensation awards and deferred compensation for our former CEO and Chairman in the first quarter of 2022.

At December 31, 2023 and 2022, the Company’s full time equivalent staff numbered 452 and 496, respectively.

Premises and equipment expenses were $12.6 million for 2023 as compared to $13.2 million for 2022, a decrease of 5%.

The decrease was due to the reduction in rent expense from the closure of one location and was partially offset by normal lease increases and acceleration of leasehold amortization.

Marketing and advertising expenses were $4.7 million for 2022 as compared to $4.2 million for 2021, an increase of 13%.

Marketing and advertising expenses increased due to additional advertising, promotions and sponsorships.

Data processing expenses were $12.2 million for 2022 as compared to $11.7 million for 2021, an increase of 4%.

Legal, accounting and professional fees and expenses were $8.6 million for 2022 as compared to $11.5 million for 2021, a 25% decrease.

Legal expenses were greater in 2021 primarily due to the previously disclosed governmental investigations and related subpoenas and document requests, as well as our defense of the previously disclosed class action lawsuit.

The amount of legal fees and expenditures reported for 2022 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies, but does not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

Refer to Note 21 – Commitments and Contingent Liabilities to the Consolidated Financial Statements for additional information on the Company’s recent proceedings.

FDIC insurance expense was $5.0 million for 2022 as compared to $5.9 million for 2021, a decrease of 16%.

The decreases in 2022 compared to 2021 were due to a change in the institution's size, which improved metrics used in the calculation of fees.

The decrease was due to the reduction in rent expense from the closure of three locations in 2023, and one additional location in the fourth quarter of 2022.

The reduction was partially offset by normal lease increases and acceleration of leasehold amortization.

Legal, accounting and professional fees and expenses were $10.8 million for 2023 as compared to $8.6 million for 2022, a 26% increase.

The increase was primarily attributable to an increase in legal expenses, which, for the years ended December 31, 2023 and 2022, were $3.7 million and $1.0 million, respectively.

FDIC insurance expense was $11.9 million for 2023 as compared to $5.0 million for 2022, an increase of 139%.

The increases in 2023 compared to 2022 were due to increases in FDIC deposit insurance assessments.

In 2022, the Company incurred a penalty of $22.9 million in connection with the settlements with the SEC and FRB.

3 unchanged sentences

Other expenses were $15.5 million for 2023 as compared to $14.4 million for 2022, an increase of 8%.

The increase in 2022, as compared to 2021, was primarily due to director compensation and insurance expenses.

Income Tax Expense

Income tax expense was $48.8 million for 2022 as compared to $61.0 million for 2021, resulting in an effective tax rate of 25.70% and 25.66%, respectively.

The overall reduction in tax expense for 2022 versus 2021 was primarily attributable to lower pre-tax earnings, a lower state effective tax rate and to higher levels of tax-exempt income earned during 2022.

The reductions in tax expense were partially offset by the non-deductible SEC and FRB settlements in 2022.

The effective tax rate was essentially flat for 2022 compared to 2021 because the benefits from the lower effective state tax rate and the higher tax-exempt income were offset by the impact of the non-deductible expenses.

The impact of the change in mix of the components noted above can be seen in the reconciliation of statutory federal income tax rate table in Note 14 to the Consolidated Financial Statements.

The Inflation Reduction Act of 2022 ("Inflation Reduction Act") was signed into law by president Biden on August 16, 2022.

The Inflation Reduction Act makes significant changes to the U.S.

tax law, including the introduction of a corporate alternative minimum tax of 15% of the “adjusted financial statement income” of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023.

The Company currently does not expect the tax-related provision of the Inflation Reduction Act to have a material impact on our financial results.

Twelve Months Ended December 31, 2021 Compared with Twelve Months Ended December 31, 2020

Net income for the years ended December 31, 2021 and 2020 were $176.7 million and $132.2 million, respectively.

Net income per basic and diluted common share for 2021 was $5.53 and $5.52, respectively, compared to $4.09 per basic and diluted common share for 2020, a 35% increase.

Net income increased in 2021 relative to 2020 primarily due to reversals from the allowance for credit losses and, to a lesser extent, net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense.

The most significant portion of revenue (i.e., net interest income plus noninterest income) is net interest income, which increased to $324.5 million in 2021 compared to $321.6 million for 2020.

The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points in net interest margin.

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 2.81% for 2021 and 3.19% for 2020, a decline of 38 basis points.

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

The provision for credit losses in 2021 was a reversal of $20.8 million as compared to a provision of $45.6 million in 2020.

The reversal of the provision was primarily driven by the improved economic environment, adjustments to the quantitative components of the CECL model and improvements in asset quality.

F or information on the components and drivers of these changes see "Provision for Credit Losses" section below.

Total noninterest income in 2021 was $40.4 million, as compared to $45.7 million in 2020, a 12% decrease.

Noninterest expenses in 2021 totaled $149.2 million, as compared to $144.2 million in 2020, a 3% increase.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 40.88% for 2021 as compared to 39.25% for 2020.

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

Income tax expense in 2021 was $61.0 million, as compared to $43.9 million in 2020, a 39% increase.

At December 31, 2021, total loan balances (including PPP loans) were 9% lower than they were at December 31, 2020, and average loans were 8% lower in 2021 as compared to 2020.

PPP loans represented $51.1 million of total loans at the end of 2021, as compared to $454.8 million at the end of 2020.

Excluding PPP loans, loans decreased 4% in 2021, driven by higher payoffs and paydowns, which outpaced originations and advances.

The decline in PPP loans was the result of the forgiveness process and, in the second quarter of 2021, the Company's sale of a portion of the PPP loan portfolio.

Deposit growth was strong throughout 2021, and resulted in well above historical average overnight liquidity for the Company.

Deposit funding during 2021 was primarily from noninterest bearing and money market accounts.

In large part due to those inflows, total deposits at December 31, 2021 were 9% higher than deposits at December 31, 2020, while average deposits were 17% higher for 2021 compared with 2020.

This increase in deposits allowed the Company to sustain strong primary and secondary sources of liquidity and increase the size of the investment securities portfolio.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 63% and 76% of average earning assets for 2021 and 2020, respectively.

For 2021, as compared to 2020, average loans, excluding loans held for sale, decreased $607.6 million, or 8%, driven by higher payoffs and paydowns, which outpaced originations and advances, and PPP loan forgiveness and sale.

Average investment securities for 2021 were 14% of average earning assets compared to 9% for 2020.

The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 23% and 12% of average earning assets for 2021 and 2020, respectively, as much higher levels of on-balance sheet liquidity existed throughout 2021.

These increases were driven by the decline in loans coupled with the inflow of deposits.

The ratio of common equity to total assets increased to 11.40% at December 31, 2021 from 11.16% at December 31, 2020, due to common equity growing faster rate than total assets, even with common equity reductions due to $682 thousand in share repurchase activity and $44.7 million of cash dividends declared.

For 2021, the return on average assets (“ROAA”) was 1.49%, as compared to 1.28% for 2020.

Total shareholders’ equity was $1.35 billion at December 31, 2021 and $1.24 billion and 2020, an increase of 9%.

The return on average common equity (“ROACE”) for 2021 was 13.54% as compared to 10.98% for 2020.

The return on average tangible common equity (“ROATCE”) for 2021 was 14.73% as compared to 12.03% for 2020.

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

The increase in these returns was primarily due to reversals from the allowance for credit losses and to a lesser extent net interest income on a higher asset base, partially off set by lower noninterest income and higher noninterest expense.

Net Interest Income and Net Interest Margin

Net interest income in 2021 was $324.5 million compared to $321.6 million in 2020.

For 2021, net interest income increased 1% over the same period for 2020.

The increase resulted from an increase in average earning assets of 14%, which offset a decline of 38 basis points in net interest margin.

The net interest margin was 2.81% for 2021, as compared to 3.19% for 2020, a decline of 38 basis points.

This decline was led by a lower rate environment and the decline in loans, which generally have higher yields than securities.

Additionally, the increase in deposits, led to an increase in low yielding assets such as securities or interest bearing deposits at other banks, which contributed to net income and liquidity, but lowered net interest margin.

In 2021, average loans decreased $607.6 million or 8% and average deposits increased by $1.4 billion or 17%.

Loans, the largest component of interest income on earnings assets, had a yield of 4.62% in 2021, compared to 4.66% in 2020, a decline of 4 basis points (includes PPP loans).

The decline in yield was minimized due to disciplined loan pricing practices and the sale or forgiveness of PPP loans, which accelerated net deferred fees and cost into interest income.

Additionally, the deposit mix remained favorable, with average noninterest deposits being 34% of average total deposits, up from 31% in 2020.

In 2021, total net loans, the primary source of the Bank’s revenue, declined, although total assets increased over the same period.

Further, loan pricing pressures in the highly competitive market for high-quality commercial loans, and the costs and implementation risks associated with pursuing loan growth, put pressure on loan portfolio yields and consequently the Bank’s net interest margin and net income.

Provision for Credit Losses

The provision for credit losses was a reversal of $20.8 million in 2021, as compared to a provision of $45.6 million in 2020.

The reversal in 2021 was largely due to the improvement of the economy as the COVID-19 vaccines and treatments became widely available and the improvement in credit quality, whereas the provision in 2020 was due to a reserve build associated with the onset of the COVID-19 pandemic.

The provision for unfunded commitments is presented separately on the Statement of Income.

This provision considers the probability that unfunded commitments will fund.

The provision was a reversal of $1.1 million in 2021, as compared to a provision of $1.4 million in 2020.

For 2021, the ACL decreased by $34.6 million, reflecting a reversal of $20.8 million to provision for credit losses and $13.3 million in net charge-offs.

Net charge-offs of $13.3 million during 2021 represented 0.18% of average loans, excluding loans held for sale, as compared to $20.1 million or 0.26% of average loans, excluding loans held for sale, in 2020.

Net charge-offs during 2021 were attributable primarily to commercial real estate ($5.1 million) and commercial loans ($8.3 million).

At December 31, 2021 the ACL represented 1.06% of loans outstanding, as compared to 1.41% at December 31, 2020.

The ACL represented 257% of nonperforming loans at December 31, 2021, as compared to 180% at December 31, 2020.

Noninterest Income

Noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.

Total noninterest income for the year ended December 31, 2021 was $40.4 million as compared to $45.7 million for the year ended December 31, 2020.

The 12% decrease was due substantially to $8.0 million lower gains on sa le of residential mortgage loans which was partially offset by $1.1 million higher gains on sales of securities and $1.6 million higher fees associated with the origination, securitization, sale and servicing of FHA loans.

The Bank recently announced that it plans to cease originating residential mortgages for sale in the first quarter of 2023 (See Note 26 of the Consolidated Financial Statements for further details).

For the year ended December 31, 2021, service charges on deposit accounts slightly increased $146 thousand to $4.6 million from $4.4 million for the same period in 2020, an increase of 3%.

While deposits increased significantly in 2021, deposit fees continue to be waived due to the pandemic.

Gain on sale of loans consists of gains on the sale of residential mortgage and SBA loans.

For the year ended December 31, 2021, gain on sale of loans was $14.0 million, compared to $22.1 million for the year ended December 31, 2020, a decrease of 36%.

The decrease was driven by higher residential mortgage rates in the latter part of the year, which reduced mortgage origination volume.

Residential mortgage Years Ended December 31,

(dollars in thousands) 2021 2020 % Change

Gain on sale $ 13,585 $ 22,368 (39.3) %

Closed loans 1,140,408 1,260,615 (9.5) %

Locked loans 994,452 1,860,813 (46.6) %

Reserve 125 205 (39.2) %

The Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium.

Income from this source was $460 thousand for the year ended December 31, 2021 compared to $269 thousand for the same period in 2020.

Activity in SBA loan sales to secondary markets can vary widely from year to year.

Gain on the sale of investments were $3.0 million for the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020.

Other income totaled $16.8 million for the year ended December 31, 2021 as compared to $15.3 million for 2020, an increase of 9%.

The FHA business unit generated income on the sale of FHA multifamily-backed GNMA securities of $5.0 million for 2021 compared to $3.4 million for 2020.

Noninterest Expense

Total noninterest expenses totaled $149.2 million for 2021, as compared to $144.2 million for 2020, a 3% increase.

For 2021, the efficiency ratio (ratio of noninterest expenses to total revenue) was 40.88% as compared to 39.25% for 2020.

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

Salaries and employee benefits were $88.4 million for 2021, as compared to $74.4 million for 2020, an increase of 19%.

The increase was a result of higher incentive bonus accruals based on Company performance and increased share based compensation.

At December 31, 2021, the Company’s full time equivalent staff numbered 507, as compared to 519 at December 31, 2020.

Premises and equipment expenses were $14.9 million for 2021 as compared to $15.7 million for 2020, a decrease of 5%.

The reduction in rent expense from the closure of several locations and was partially offset by normal lease increases and acceleration of leasehold amortization;

and the third quarter of 2020 included a $1.7 million adjustment which increased rent expense in accordance with ASC 842 on leases.

Marketing and advertising expenses were $4.2 million for 2021 as compared to $4.3 million for 2020, a decrease of 3%.

Marketing and advertising expenses remained low in 2021 as events and conferences remained on hold as a result of COVID-19.

Data processing expenses were $11.7 million for 2021 as compared to $10.7 million for 2020, an increase of 9%, primarily due to increased customer activity and annual increases in license fee renewals.

Legal, accounting and professional fees and expenses were $11.5 million for 2021 as compared to $16.4 million for 2020, a 30% decrease.

The decrease was primarily associated with reduced legal fees as the Company incurred significant legal expenses in 2020 due to ongoing governmental investigations and subpoenas and document requests.

Refer to Note 21 – Commitments and Contingent Liabilities to the Consolidated Financial Statements for additional information on the Company’s recent proceedings.

FDIC insurance expense was $5.9 million for 2021 as compared to $7.9 million for 2020, a decrease of 26%.

The decrease was primarily due to adoption of the large bank assessment methodology.

Other expenses were $12.6 million for 2021 as compared to $14.7 million for 2020, a decrease of 14%.

The decrease was associated with reductions in OREO expense, franchise tax, other loan expenses, telephone and travel expense.

The major components of cost in this category include broker fees, franchise tax, insurance expenses, and director compensation.

Cost control remains a significant operating objective of the Company.

Income Tax Expense

Income tax expense was $61.0 million for 2021 as compared to $43.9 million for 2020, resulting in an effective tax rate of 25.7% and 24.9%, respectively.

The increase in rates was due to an increase in state income taxes and nondeductible stock-based compensation awarded to execu tiv e officers.

The increase in 2023, as compared to 2022, was primarily due to increases in expenses incurred in connection with OREO properties.

BALANCE SHEET ANALYSIS

Total assets at December 31, 2022 were $11.2 billion as compared to $11.8 billion at December 31, 2021, a 6% decrease.

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

The largest component of assets, total loans (excluding loans held for sale), were $7.6 billion at December 31, 2022, as compared to $7.1 billion at December 31, 2021 an 8% increase.

The increase in loans in 2022, was driven by growth from CRE loans.

Additionally, the Bank reduced its PPP loans from $51.1 million at December 31, 2021 to $3.3 million at December 31, 2022 through the forgiveness process.

Loans held for sale were $6.7 million at December 31, 2022, compared to $47.2 million at December 31, 2021, an 86% decrease due to a decline in production.

The investment securities portfolio totaled $2.7 billion at December 31, 2022 as compared to $2.6 billion at December 31, 2021, a $68.6 million increase.

For the year ended December 31, 2022, total deposits were $8.7 billion as compared to $10.0 billion at December 31, 2021, a decrease of 13%, due primarily to deposit disintermediation as a result of the higher interest rate environment.

Total shareholders’ equity at December 31, 2022 was $1.23 billion as compared to $1.35 billion at December 31, 2021, a 9% decrease.

The decrease in shareholders’ equity in 2022 was from unrealized losses on the AFS investments included in other comprehensive income (loss), cash dividends and common stock repurchased, offset by net income.

Total assets at December 31, 2023 were $11.7 billion as compared to $11.2 billion at December 31, 2022, a 5% increase.

The increase in total assets in 2023 was primarily due to increases in total interest-bearing deposits with banks and other short-term investments, and an increase in total loans.

The largest component of assets, total loans (excluding loans held for sale), were approximately $8.0 billion at December 31, 2023, as compared to $7.6 billion at December 31, 2022 a 4% increase.

The increase in loans in 2023, was driven by growth from CRE and construction loans.

There were no loans held for sale at December 31, 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, were $2.7 billion at December 31, 2023 as compared to $2.9 billion at December 31, 2022, a $213.2 million decrease, or 7%, primarily driven by the pay down of principal on mortgage-backed securities ("MBS") and sales and calls of securities.

In terms of funding, total deposits at December 31, 2023 were $8.8 billion as compared to $8.7 billion at December 31, 2022, an increase of 1%.

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

The increase in borrowings was primarily to meet funding needs, including to fund loan growth.

Total shareholders’ equity at December 31, 2023 was $1.3 billion as compared to $1.2 billion at December 31, 2022, a 4% increase.

The increase in shareholders’ equity in 2023 was primarily from a reduction of accumulated other comprehensive loss and net income partially offset by cash dividends.

The Company's capital ratios remain substantially in excess of regulatory minimum and buffer requirements.

Regulatory ratios based on risk-weighted assets declined in 2022 as non-risk weighted cash was moved into risk-weighted securities and loans.

Regulatory ratios based on risk-weighted assets slightly declined in 2023 due to an increase in risk-weighted assets, which was partially offset by an increase in risk-based capital.

The total risk based capital ratio was 14.79% at December 31, 2023, as compared to 14.94% at December 31, 2022.

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The ratio of common equity to total assets was 10.92% at December 31, 2023 as compared to 11.02% at December 31, 2022.

The CET1 risk based capital ratio was 14.03% at December 31, 2022, as compared to 14.63% at December 31, 2021.

The common equity tier one capital ("CET1") risk based capital ratio was 13.90% at December 31, 2023, as compared to 14.03% at December 31, 2022.

The tier 1 leverage ratio was 10.73% at December 31, 2023, as compared to 11.63% at December 31, 2022.

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The AFS classification requires that investment securities be recorded at fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of shareholders’ equity (accumulated other comprehensive income), net of deferred income taxes, while securities classified as HTM are recorded and presented at their amortized cost.

At December 31, 2022, the Company had a net unrealized loss in AFS securities of $205.2 million with a deferred tax asset of

$50.4 million, as compared to December 31, 2021 where there was a net unrealized loss in AFS securities of $18.6 million with a deferred tax asset of $5.0 million.

The AFS portfolio is comprised of U.S.

At December 31, 2023, the Company had a net unrealized loss in AFS securities of $161.9 million with a deferred tax asset of $39.8 million, as compared to a net unrealized loss in AFS securities of $205.2 million with a deferred tax asset of $50.4 million at December 31, 2022.

The AFS portfolio comprises U.S.

treasury bonds (3.2% of AFS securities), U.S.

agency securities (41.9% of AFS securities) with an average duration of 3.8 years, seasoned mortgage-backed securities that are 100% agency issued (51.3% of AFS securities for residential mortgage-backed and 3.1% for commercial mortgage-backed) which have an average expected life of 4.6 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (0.6% of AFS securities) which have an average duration of 6.6 years and corporate bonds (0.1% of AFS securities) which have an average duration of 0 years.

Investment securities which are debt instruments are 95 percent of the portfolio and are generally rated AAA or AA or have the implicit guarantee of the U.S.

agency securities (44.6% of AFS securities) with an average duration of 3.1 years, seasoned MBS that are 100% agency issued (48.3% of AFS securities for residential mortgage-backed and 3.3% for commercial mortgage-backed), which have an average duration of 3.4 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (0.6% of AFS securities), which have an average duration of 6.8 years, and corporate bonds (0.1% of AFS securities), which have an average duration of 6.1 years.

The HTM portfolio comprises seasoned MBS that are 100% agency issued (65.8% of HTM securities for residential mortgage-backed and 8.9% for commercial mortgage-backed), which have an average duration of 4.7 years with contractual

maturities of the underlying mortgages of up to thirty years, municipal bonds (12.3% of HTM securities), which have an average duration of 6.1 years, and corporate bonds (13.0% of HTM securities), which have an average duration of 5.3 years.

At December 31, 2023, the AFS investment portfolio was $1.5 billion as compared to $1.6 billion at December 31, 2022, a decrease of 6%.

At December 31, 2023, the HTM investment portfolio was $1.0 billion as compared to $1.1 billion at December 31, 2022, a decrease of 7%.

The investment portfolio is managed to achieve goals related to liquidity, income, interest rate risk management and to provide collateral for customer repurchase agreements and other borrowing relationships.

The decrease in AFS in 2022 was primarily due to securities being transferred into HTM.

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 AFS to 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 transferred securities had unrealized losses of $66.2 million, and, as of December 31, 2023, $51.7 million remains in accumulated other comprehensive loss and will be amortized 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 December 31, 2022, $1.1 billion, or 40.6% of the securities portfolio, was classified as securities HTM.

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

The following table provides information regarding the composition of the investment securities portfolio at the dates indicated.

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At December 31, 2023, the investment portfolio balances at fair value decreased and amortized cost increased as compared to December 31, 2022, and the composition of portfolio changed, as follows:

Years Ended December 31,

Available-for-sale 2022

(dollars in thousands) Fair Value Percent of Total Fair Value Percent of Total

Investment securities available-for-sale:

treasury bonds $ 47,901 3 % $ 46,327 3 %

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$ 1,506,388 100 % $ 1,598,666 100 %

Years Ended December 31,

Held-to-maturity 2022

(dollars in thousands) Amortized Cost Percent of Total Amortized Cost Percent of Total

Investment securities held-to-maturity:

Residential mortgage-backed securities $ 670,043 66 % $ 741,057 68 %

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Allowance for credit losses

(1,956) (766)

Total held-to-maturity securities, net of ACL $ 1,015,737 $ 1,093,374

At December 31, 2023, there were no issuers, other than the U.S.

Government and its agencies, whose securities owned by the Company had a book or fair value exceeding 10% of the Company’s shareholders’ equity.

Government, U.S.

agencies and U.S.

Government-sponsored enterprises, whose securities owned by the Company had a book or fair value exceeding 10% of the Company’s shareholders’ equity.

The following tables provides information, on an amortized cost basis, for AFS and HTM portfolios regarding the expected maturity and weighted-average yield of the investment portfolio at December 31, 2023.

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Yields on tax exempt securities have not been calculated on a tax equivalent basis.

Available-for-sale One Year or Less After One Year

One Year or Less After One Year

Through Five Years After Five Years

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Cost Weighted

Available-for-sale:

treasury bonds $ 24,952 0.97 % $ 24,942 0.69 % $ — — % $ — — $ 49,894 0.83 %

agency securities

569,749 1.45 % 105,230 1.34 % 42,244 2.90 % 11,867 1.25 % 729,090 1.51 %

Residential mortgage-backed securities 5 4.55 % 5,362 1.79 % 175,811 1.44 % 642,814 1.91 % 823,992 1.81 %

2 unchanged sentences

Corporate bonds — — % 2,000 5.50 % — — % — — 2,000 5.50 %

Total available-for-sale securities $ 553,906 1.53 % $ 196,960 1.09 % $ 289,656 1.91 % $ 763,376 1.90 % $ 1,803,898 1.68 %

Held-to-maturity One Year or Less After One Year

$ 594,706 1.43 % $ 166,818 1.48 % $ 241,901 1.79 % $ 664,891 1.93 % $ 1,668,316 1.69 %

One Year or Less After One Year

Through Five Years After Five Years

10 unchanged sentences

Cost Weighted

Held-to-maturity:

Residential mortgage-backed securities $ — — % $ 1,168 2.72 % $ 21,489 2.32 % $ 647,386 2.65 % $ 670,043 2.64 %

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Interest bearing deposits with banks and other short-term investments represent liquid funds held at the Federal Reserve to meet general liquidity needs of the Company, such as future loan demand and future increases in investment securities, among others.

Interest bearing deposits with banks and other short-term investments were $265.3 million at December 31, 2022, as compared to $1.68 billion at December 31, 2021, a decrease of $1.4 billion, or 84%.

Interest bearing deposits with banks and other short-term investments were $709.9 million at December 31, 2023, as compared to $265.3 million at December 31, 2022, an increase of $444.6 million, or 168%.

In 2023, as rising rates led to deposit disintermediation reducing our liquidity levels, and loan balances increased, the Company reduced these short-term investments to rebalance the earning assets mix.

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Loan Portfolio

In its lending activities, the Company seeks to develop and expand relationships with clients whose business 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.

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.

We believe 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 increased over the past year as loans outstanding were $7.97 billion at December 31, 2023, as compared to $7.64 billion at December 31, 2022, an increase of $333.1 million or 4.4% .

Loan production in 2022 was predominantly in the commercial, income producing - commercial real estate and owner occupied – commercial real estate loan categories.

That said, the Company continues to be active as a construction lender and we expect to continue to see construction commitments funded up over time.

Despite an increased level of in-market competition for business, we have experienced net loan growth for 2022 over 2021;

the Bank continued to experience organic gross loan production, having originated more than $2.3 billion in new CRE loan commitments and more than $1.3 billion in CRE Construction commitment during 2022.

This production was offset by the continued successful completion of projects and subsequent paydowns.

Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up relatively well, particularly for well-located close-in projects.

The loan portfolio continued to grow in 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 subject them to reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service.

Following origination, we continue to monitor our borrowers' business plans and identify primary and alternative sources for loan repayment and, if necessary, obtain collateral to mitigate credit loss in the event of default.

"Owner occupied-commercial real estate" and "construction–C&I (owner occupied)" loans represent 17% of the loan portfolio.

The Bank has a large portion of its loan portfolio related to real estate, with 80% consisting of commercial real estate and real estate construction loans.

When "owner occupied commercial real estate" and "construction–C&I (owner occupied)" are excluded, the percentage of total loans represented by commercial real estate decreases to 63%.

Other than "owner occupied commercial real estate" and "construction–C&I (owner occupied)", the percentage of remaining total loans represented by commercial real estate is 63%.

Real estate also serves as collateral for loans made for other purposes, resulting in 82% of loans being secured or partially secured by real estate.

The following table shows the trends in the composition of the loan portfolio over the past three years.

Years Ended December 31,

(dollars in thousands) Amount % Amount % Amount %

The following table shows the trends in the composition of the loan portfolio over the past two years.

(dollars in thousands) Amount % Amount %

Commercial $ 1,473,766 18 % $ 1,487,349 19 %

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allowance for credit losses

Net loans $ 7,561,188 $ 6,990,633 $ 7,650,633

(85,940) (74,444)

$ 7,882,755 $ 7,561,188

As noted above, a significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C.

metropolitan area and secured by real estate or other collateral in that market.

metropolitan area and is secured by real estate or other collateral in that market.

Although these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the Washington, D.C.

metropolitan real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position.

Management believes that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices and ongoing portfolio monitoring and market analysis.

While our basic market area is the Washington, D.C.

metropolitan area, the Bank has made loans outside that market area where the applicant is an existing customer and the nature and quality of such loans was consistent with the Bank’s lending policies.

The Company's concentration in the Washington, D.C.

metro area, includes "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 December 31, 2023, 31.5%, 26.4%, 25.1%, 5.5%, 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.

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 77.0% and 76.2% of total loans, outstanding at December 31, 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 $949.0 million and $937.2 million, or 11.9% and 12.3% of total loans, at December 31, 2023 and December 31, 2022, respectively.

Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $879.0 million and $851.9 million, or 11.0% and 11.2% of total loans, at December 31, 2023 and December 31, 2022, respectively.

As a percentage of total income producing - CRE office loans, 35.4%, 32.7%, and 24.4% were located in Washington's Maryland Suburbs, Northern Virginia and Washington, D.C.

at December 31, 2023.

The following table summarizes the Company's income producing - commercial real estate loans, at principal, by collateral location and type:

(dollars in thousands)

Hotel & Motel

Single / 1-4 Family & Res.

December 31, 2023:

Washington D.C.

$ 138,943 $ 4,987 $ 271,689 $ 353,805 $ 231,963 $ 82,436 $ 80,264 $ 184,790 $ 1,348,877

Washington Suburbs 85,704 78,765 47,629 235,594 336,290 95,716 2,812 182,287 1,064,797

Other 83,566 34,013 11,534 2,410 4,376 67,806 2,563 29,030 235,298

Northern Virginia 66,982 19,436 11,527 76,839 310,773 79,979 14,957 504,507 1,085,000

Other — 3,268 25,828 55,555 65,557 101,018 6,585 9,403 267,214

Other 23,769 — 5,382 40,708 50 1,949 4,092 28,671 104,621

Total $ 398,964 $ 140,469 $ 373,589 $ 764,911 $ 949,009 $ 428,904 $ 111,273 $ 938,688 $ 4,105,807

At December 31, 2023 and 2022, $240.7 million and $4.3 million, respectively, of principal of loans collateralized by office properties were criticized or classified.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending.

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The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years.

December 31, 2022, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 347.9% of consolidated risk based capital;

however, growth in that segment over the past 36 months at 1.2% did not exceed the 50% threshold laid out in the regulatory guidance.

As of December 31, 2023, non-owner occupied commercial real estate loans (including construction, land and land development loans) represented 350.4% of consolidated risk based capital.

Although growth in that segment over the past 36 months at 7% did not exceed the 50% threshold laid out in the regulatory guidance, we expect the heightened supervisory expectations to continue to apply to us given the federal banking regulators' general focus on commercial real estate exposures at banks.

Construction, land and land development loans represented 111% of consolidated 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.

Management has extensive experience in commercial real estate lending and has implemented and continues to maintain risk management procedures and underwriting criteria with respect to its commercial real estate portfolio designed to address the risks inherent in that asset class.

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, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns.

The Company has an extensive Capital Policy and Capital Plan, 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.

At December 31, 2022, the Company had no concentrations of loans in any one industry exceeding 10% of its total loan portfolio.

Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to raise additional capital, increasing our funding costs or diluting our shareholders, or take other action to retain capital, adversely affecting shareholder returns.

The Company seeks to manage the risks relating to commercial real estate and its capital adequacy through the development and implementation of its Capital Policy and Capital Plan, the preparation of pro-forma projections including stress testing and the development of internal minimum targets for regulatory capital ratios that are subject to approval by the the Board of Directors (the "Board") and in excess of well capitalized ratio requirements.

At December 31, 2023, the Company had no concentrations of loans with any one borrower in any one industry exceeding 10% of its total loan portfolio.

An industry for this purpose is defined as a group of businesses that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

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The following table sets forth the time to contractual maturity of the loan portfolio as of December 31, 2023.

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

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

Over Fifteen Years

Commercial $ 1,473,766 $ 431,362 $ 868,535 $ 170,283 $ 3,586

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Income producing - commercial real estate (1)

4,094,614 1,581,533 2,128,038 385,043 —

Owner occupied - commercial real estate 1,172,239 193,757 409,730 351,184 217,568

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Other consumer 401 212 46 — 143

Total loans $ 7,635,632 $ 2,580,522 $ 3,594,938 $ 1,182,442 $ 277,730

$ 7,968,695 $ 2,442,118 $ 4,202,708 $ 955,052 $ 368,817

Predetermined fixed interest rate

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Other consumer 54 5 46 — 3

$ 2,942,269 $ 648,171 $ 1,496,326 $ 696,590 $ 101,182

Total $ 3,047,949 $ 912,263 $ 1,579,092 $ 458,132 $ 98,462

Floating or adjustable interest rate

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Other consumer 347 207 — — 140

$ 4,693,363 $ 1,932,351 $ 2,098,612 $ 485,852 $ 176,548

Total loans $ 7,635,632 $ 2,580,522 $ 3,594,938 $ 1,182,442 $ 277,730

Total $ 4,920,746 $ 1,529,855 $ 2,623,616 $ 496,920 $ 270,355

(1) Income producing CRE office loans, which had total principal of $949.0 million at December 31, 2023 and are included within income producing - commercial real estate, had principal of $325.3 million, $587.8 million, $35.7 million and $150 thousand aggregated with one year or less, over one year to five years, over five years to fifteen years, and over fifteen

years remaining until contractual maturity, respectively.

Approximately $107.0 million and $393.7 million of income producing CRE office loans as of December 31, 2023 were due to mature within three months and 18 months, respectively.

Loans are shown in the period based on final contractual maturity.

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Allowance for Credit Losses

The amount of the ACL is based on many factors which reflect management’s assessment of the risk in the loan portfolio.

The ACL is an estimate based on many factors which reflect management’s assessment of the risk in the loan portfolio.

Those factors include economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio and internal loan processes of the Company and Bank.

The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL.

Management has developed a comprehensive analytical process to monitor the adequacy of the ACL.

This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies.

The ACL for loans at December 31, 2023, or $85.9 million, reflected a $11.5 million increase from December 31, 2022, or $74.4 million, reflecting a provision for credit losses of $30.3 million and $18.9 million in net charge-offs during the year ended December 31, 2023.

Net charge-offs of $18.9 million during 2023 represented 0.24% of average loans, excluding loans held for sale, an increase from net charge-offs of $624 thousand during 2022, which represented 0.01% of average loans, excluding loans held for sale.

Net charge-offs included $17.1 million of charge-offs on four loans, three of which were income producing - commercial real estate loans and one of which was a construction - commercial residential loan.

The ACL represented 1.08% of total loans at December 31, 2023 as compared to 0.97% at December 31, 2022.

At December 31, 2023, the allowance represented 131% of nonperforming loans as compared to 1,151% at December 31, 2022.

As the loan portfolio balances increased, the ACL decreased driven by the improved macroeconomic outlook and improvement of the quality of the loan portfolio.

In 2022, the decrease in the ratio of the allowance for loan losses to total loans was also driven by net charge offs of $624 thousand, which had a greater impact on the ratio than the increase in loans.

The decreases were offset by the increase in the provision of $103 thousand due to the increase in loan balances.

In 2021, the decrease in the ratio of the allowance for loan losses to total loans was due to the provision reversal of $20.8 million and net charge offs of $13.3 million, which had a greater impact on the ratio than the decline in loans.

The increase in the coverage ratio is due to the improvement in asset quality, which also contributed to the decision to reverse provisions to the ACL.

A full discussion of the accounting for ACL is contained in Note 1 to the Consolidated Financial Statements and activity in the ACL is contained in Note 4 to the Consolidated Financial Statements.

Also, please refer to the discussion under the caption “Critical Accounting Policies and Estimates” within Management’s Discussion and Analysis of Financial Condition and Results of Operation for further discussion of the methodology which management employs to maintain an adequate ACL, as well as the discussion under the caption “Provision for Credit Losses.”

As part of its comprehensive loan review process, the Bank’s Board of Directors, Directors’ Loan Committee and Credit Review Committee carefully evaluate loans which are past due 30 days or more.

The Committees make a thorough assessment of the conditions and circumstances surrounding delinquent and potential problem loans.

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.

The Credit Administration department specifically analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk which may require additional reserves.

As part of its comprehensive loan review process, the Bank’s Risk Committee evaluates loans which are past due 30 days or more.

The Committee makes an assessment of the conditions and circumstances surrounding delinquent and potential problem loans.

The Bank’s loan policy requires that loans be placed on nonaccrual if they are 90 days past due or if their collection is deemed to be doubtful, unless they are well secured and in the process of collection.

The Credit Administration department analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to c assess potential increased levels of risk which may require additional reserves.

At December 31, 2023 and 2022, the Company had $65.5 million and $6.5 million, respectively, of loans classified as nonperforming.

At each of December 31, 2022 and 2021, the Company also had $88.6 million of additional loans rated substandard or worse.

Please refer to Note 1 to the Consolidated Financial Statements under the caption “Loans” for a discussion of the Company’s policy regarding impairment of loans.

Please refer to Note 1 to the Consolidated Financial Statements under the caption “Loans” for a discussion of the Company’s policy regarding individual evaluation of loans to record a provision for expected credit losses.

Please refer to the “Nonperforming Assets” section for a discussion of problem and potential problem assets.

The Company has taken a conservative posture with respect to risk rating its loan portfolio.

Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management.

The Company believes it has taken a conservative posture with respect to risk rating its loan portfolio.

As of December 31, 2023 and 2022, loans rated special mention were $207.1 million and $113.6 million, respectively, and loans rated substandard were $335.8 million and $88.7 million, respectively.

The increases in special mention and substandard loans were primarily attributable to a continued focus on the evaluation of the Company's income producing - commercial real estate and owner occupied - commercial real estate loans.

Based upon their status as potential problem loans, loans risk rated special mention or substandard receive heightened scrutiny and ongoing intensive risk management.

Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio.

See the “Allowance for Credit Losses” section for a description of the allowance methodology.

As the loan portfolio and ACL review processes continue to evolve, and with the adoption of CECL, there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance maintained.

Management did conduct sensitivity analysis on the CECL model.

This was tested by shocking the unemployment forecast up by 2% across the forecast period.

This stress test resulted in an increased expected loss and resulting increase to ACL of $11.2 million versus the current balance.

Historically, the Bank has enjoyed a high quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates.

In 2022, the Company experienced an improvement in the reduced level of net charge-offs as a percentage of average loans (0.01%) as compared to 2021 (0.18%) and to 2020 (0.26%).

The maintenance of a high quality portfolio will continue to be a high priority for both management and the Board of Directors.

Bank management, being aware of the loan growth experienced by the Bank, is intent on maintaining strong portfolio management and a strong risk rating process.

As the loan portfolio and ACL review processes continue to evolve there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance maintained.

Management did conduct sensitivity analysis on the CECL model, which, in part, was conducted by shocking the unemployment forecast up by 2% across the forecast period.

Management, being aware of the loan growth experienced by the Bank and the risks facing commercial real estate, is intent on maintaining strong portfolio management and a strong risk rating process.

The Bank provides analysis of credit requests and the management of problem credits.

The Bank has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system and has adopted enhanced monitoring of the loan portfolio (in particular the construction loan portfolio) and the adequacy of the ACL, including stress test analyses.

Additionally, fair value assessments of loans acquired is made as part of analytical procedures.

The loan portfolio analysis process is ongoing and proactive in order to maintain a portfolio of quality credits and to quickly identify any weaknesses before they become more severe.

The following table sets forth activity in the allowance for credit losses for the past three years.

The Bank has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system and has adopted enhanced monitoring of the loan portfolio and the adequacy of the ACL, in particular on its commercial real estate and construction loans (including those collateralized by office properties).

These analyses include stress testing Additionally, fair value assessments of loans acquired are included in our analytical procedures.

The loan portfolio analysis process is ongoing and proactive to support the Company's objective of maintaining a portfolio of quality credits and quickly identifying weaknesses before they become more severe.

The following table sets forth activity in the allowance for credit losses:

Years Ended December 31,

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Balance at beginning of year $ 74,444 $ 74,965 $ 109,579

Impact of adopting CECL — — 10,614

Commercial (2,020) (1,561) (8,788)

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Owner occupied - commercial real estate — (1,355) (5,445)

Real estate mortgage - residential — — 815

Construction - commercial and residential (5,636) — (206)

Home equity — — 92

Other consumer (50) (79) (1)

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Commercial 576 713 486

Income producing - commercial real estate — — —

Owner occupied - commercial real estate 55 25 97

Real estate mortgage - residential — — —

Construction - commercial and residential 36 1,627 499

Home equity — — —

Other consumer 6 6 18

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Net charge-offs (18,850) (624) (13,340)

(Reversal) Provision for Credit Losses- Loans 103 (21,274) 45,404

Provision for credit losses - loans

30,346 103 (21,274)

Balance at end of year $ 85,940 $ 74,444 $ 74,965

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The following table presents the allocation of the ACL by loan category and the percentage of allowance in each category.

The allocation of the allowance at December 31, 2022 includes specific reserves of $5.2 million against individually assessed loans of $30.7 million, as compared to specific reserves of $7.0 million against individually assessed of $39.1 million at December 31, 2021.

The allocation of the allowance at December 31, 2023 includes allowance for credit losses of $641 thousand against individually assessed loans of $66.1 million, as compared to allowance for credit losses of $5.2 million against individually assessed loans of $30.7 million at December 31, 2022.

The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the usage of the allowance for any specific loan or category.

Years Ended December 31,

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

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Construction - commercial and residential 10,198 12 % 12 % 7,195 10 % 12 %

Construction - C&I (owner occupied) 1,992 2 % 2 % 1,606 2 % 1 %

Home equity 657 1 % 1 % 555 1 % 1 %

Other consumer 25 — % — % 74 — % — %

Total allowance $ 74,444 100 % 100 % $ 74,965 100 % 100 %

Total $ 85,940 100 % 100 % $ 74,444 100 % 100 %

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, nonaccrual loans, which includes the nonperforming portion of troubled debt restructurings ("TDR"), and other real estate owned ("OREO") totaled $8.4 million at December 31, 2022, representing 0.08% of total assets, as compared to $30.8 million at December 31, 2021, representing 0.26% of total assets.

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of the amortized cost of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of loan restructurings, and the carrying value of other real estate owned ("OREO") totaled $66.6 million at December 31, 2023, representing 0.57% of total assets, as compared to $8.4 million at December 31, 2022, representing 0.08% of total assets.

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

The Company had no accruing loans 90 days or more past due at December 31, 2023 or December 31, 2022.

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 ACL at 0.97% of total loans at December 31, 2022, is adequate to absorb expected credit losses.

Total nonperforming loans amounted to $6.5 million at December 31, 2022, representing 0.08% of total loans, compared to $29.2 million at December 31, 2021, representing 0.41% of total loans.

The majority of nonperforming loans are believed to be adequately secured by real estate.

Management prioritizes remaining attentive to early signs of deterioration in borrowers’ financial conditions and to taking action to mitigate risk.

The Company places loans on nonaccrual status if it deems collection to be doubtful.

The Company believes it is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis that its ACL at 1.08% of total loans at December 31, 2023, is adequate to absorb expected credit losses within the loan portfolio at that date.

Total nonperforming loans amounted to an amortized cost of $65.5 million at December 31, 2023, representing 0.82% of total loans, compared to $6.5 million at December 31, 2022, representing 0.08% of total loans.

The increase was primarily attributable to the movement to nonaccrual of two income producing CRE loans with a total amortized cost of $38.6 million that are collateralized by office properties in Northern Virginia and received charge-offs of $9.3 million during the year ended December 31, 2023;

and one owner occupied CRE loan with an amortized cost balance of $19.1 million that is collateralized by an assisted living facility in Maryland.

The CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation.

This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment.

In particular, the Company individually evaluates loans on nonaccrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment.

In particular, the Company individually evaluates loans on nonaccrual and those identified as loan restructurings to borrowers experiencing financial difficulties, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment.

Reserves on individually assessed loans are determined by one of two methods:

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Nonperforming assets include loans that the Company considers to be individually assessed.

Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a TDR that has not shown a period of performance as required under applicable accounting standards.

Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a loan restructuring to a borrower experiencing financial difficulties that has not shown a period of performance as required under applicable accounting standards.

Loans that do not share risk characteristics are evaluated on an individual basis.

For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

For collateral dependent financial

assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral.

When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell.

The ACL may be zero if the fair value of the

collateral at the measurement date exceeds the amortized cost basis of the financial asset.

The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider.

Concessions could include interest rate reductions, principal or interest forgiveness, forbearance and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

Such modifications are not considered to be TDRs as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty.

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 year ended December 31, 2023, the Bank modified loans with a total amortized cost of $237.2 million at December 31, 2023 (3.0% 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 2.56%.

As of December 31, 2023, four loans that were modified in the preceding twelve months, including one loan with an amortized cost of $4.4 million that was 30 to 89 days past due and three loans with a total amortized cost of $57.7 million that were on nonaccrual status, experienced a subsequent payment default as of December 31, 2023.

All other loans are performing under their modified terms.

Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant, and therefore, such modifications are not considered to be loan restructurings to a borrower experiencing financial difficulty, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty.

(1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan;

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or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing.

The most common change in terms provided by the Company is an extension of an interest only term.

The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms and the exercise of prudent business judgment.

The Company had 5 TDRs at December 31, 2022, totaling approximately $24.4 million, as compared to 7 TDRs totaling approximately $16.5 million at December 31, 2021.

Refer to Note 4 – Loan Modifications for more detail on TDRs.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.

If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further 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 2022 and 2021, there was one loan modified in a TDR.

Included in nonperforming assets at December 31, 2023 is OREO of $1.1 million, consisting of 2 foreclosed properties.

Included in nonperforming assets at December 31, 2021 was OREO of $1.6 million, consisting of three foreclosed properties.

OREO properties are carried at fair value less estimated costs to sell.

Included in nonperforming assets at December 31, 2022 was OREO of $2.0 million, consisting of 4 foreclosed properties.

OREO properties are carried at the lower of cost or at fair value less estimated costs to sell.

It is the Company's policy to generally 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.

There was one OREO sale in 2022 and one in 2021.

The following table shows the amounts and relevant ratios of nonperforming assets at the dates indicated:

(dollars in thousands) 2022

There were two OREO sales in 2023 and one in 2022, generating proceeds of $987 thousand and $241 thousand, respectively.

The following table shows the amounts and relevant ratios 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) December 31, 2023 December 31, 2022

Nonaccrual Loans:

Commercial $ 2,049 $ 2,488

PPP — 1,365 —

Income producing - commercial real estate 40,926 2,000

2 unchanged sentences

Construction - commercial and residential 525 —

Construction - C&I (owner occupied) — — —

Home equity 242 —

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Total nonperforming loans (1)

6,468 29,208 60,943

Other real estate owned 1,108 1,962

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Ratio of nonperforming assets to total assets 0.57 % 0.08 %

(1) At December 31, 2022, nonaccrual loans reported in the table above do not include any loans that were migrated from TDR and as of December 31, 2021 there was one loan totaling $101 thousand which migrated from performing troubled debt restructuring.

(2) Gross interest income of $558 thousand, $1.7 million and $3.7 million would have been recorded for 2022, 2021 and 2020, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $17 thousand, $101 thousand and $679 thousand at December 31, 2022, 2021 and 2020, respectively.

(1) Gross interest income of $4.2 million, and $558 thousand would have been recorded for 2023, and 2022, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $1.5 million, and $17 thousand at December 31, 2023 and 2022, respectively.

See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

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 December 31, 2023, there were $335.8 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.

Other Earning Assets

Due to the higher interest rate environment in 2022, residential mortgage loans held for sale declined to $6.7 million at December 31, 2022 from $47.2 million at December 31, 2021.

The Company ceased originations of first lien residential mortgage loans for secondary sale during the three months ended March 31, 2023, and completed residual origination and sales activities as of June 30, 2023.

There were no residential mortgage loans held for sale at December 31, 2023, as compared to $6.7 million at December 31, 2022.

The Company’s general practice was to originate and sell such loans only on a “servicing released” basis in order to enhance noninterest income.

The Bank plans to cease originating residential mortgages for sale in the first quarter of 2023 (See Note 26 of the Consolidated Financial Statements for further details).

See the “Business” section for a additional details on the Bank’s residential mortgage lending and sales activities.

Bank owned life insurance at December 31, 2023 amounted to $112.9 million, as compared to $111.0 million at December 31, 2022.

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Intangible Assets

The Company recognizes a servicing asset for the computed value of servicing fees on the sales of multifamily FHA loans, the guaranteed portion of SBA loans and other loans sold with retained servicing which is in excess of the normal servicing fees.

The Company recognizes a servicing asset for the computed value of servicing fees on the sales of multifamily FHA loans, the guaranteed portion of Small Business Administration ("SBA") loans and other loans sold with retained servicing

which is in excess of the normal servicing fees.

Assumptions related to loan term and amortization are made to arrive at the initial recorded value, which is included in intangible assets, net, on the Consolidated Balance Sheet.

For 2022, excess servicing fees of $67 thousand were recorded and $89 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

For 2023, no excess servicing fees were recorded and $28 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

At December 31, 2023, the balance of excess servicing fees was $37 thousand.

For 2021, excess servicing fees of $130 thousand were recorded and $182 thousand was amortized as a

reduction of actual service fees collected, which is a component of other income.

For 2022, excess servicing fees of $67 thousand were recorded and $89 thousand was amortized as a reduction of actual service fees collected, which is a component of other income.

At December 31, 2022, the balance of excess servicing fees was $65 thousand.

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In 2014, the Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $102 million.

Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions.

Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions.

These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparable factors.

Impairment analyses were performed as of December 31, 2022 and 2021 as part of our regularly scheduled annual impairment testing and found no impairment existed.

Refer to Note 7 to the Consolidated Financial Statements for information on the initial and current carrying values as well as additions and amortization.

During the second quarter of 2023, Management determined that the goodwill needed to be tested for impairment.

The determination was due to a triggering event which 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.

In accordance with its regular schedule for impairment testing, the Company performed a second qualitative assessment and quantitative impairment test that rolled forward its second quarter of 2023 testing on its only reporting unit as of December 31, 2023.

The method employed for the impairment testing was 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.

Significant judgment is necessary in the determination of the fair value of a reporting unit.

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

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.

Management continues to monitor economic conditions, as future events could result in new determinations of triggering events which would require additional impairment tests of the Company's only reporting unit.

Future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss.

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

Refer to Note 7 to the Consolidated Financial Statements for information on the initial and current carrying values as well as additions and amortization.

Deposits and Other Borrowings

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts and savings accounts.

Additionally, the Bank obtains certificates of deposits from the Washington, D.C.

metropolitan area.

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, Negotiable Order of Withdrawal ("NOW") accounts, savings accounts, and certificates of deposits.

The deposit base includes transaction accounts, time and savings accounts and 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 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.

For the year ended December 31, 2022, deposits were $8.7 billion as compared to $10.0 billion at December 31, 2021, a decrease of 13%.

Noninterest bearing deposits decreased $127.2 million or 4% to $3.2 billion at December 31, 2022 as compared to $3.3 billion at December 31, 2021, while interest bearing deposits decreased by $1.1 billion, or 17%.

Within interest bearing deposits, money market and savings accounts collectively amounted to $3.6 billion at December 31, 2022, or 42% of total deposits, as compared to $5.2 billion, or 52% of total deposits, at December 31, 2021, a decrease of $1.6 billion, or 30%.

Average total deposits for the year ended December 31, 2022 were $10.1 billion, as compared to $9.9 billion for the same period in 2021, a 2% increase.

Time deposits were $783.5 million at December 31, 2022, which was 9% of deposits.

To meet funding needs 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.

The Federal Reserve announced in January 2024 that the BTFP will stop originating new loans on March 11, 2024, as scheduled.

The Federal Reserve also modified the terms of the program so that the interest rate for new loans will be no lower than the interest rate on reserve balances in effect on the day the loan is made.

In January 2024, prior to these announcements by the Federal Reserve, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program, each at an interest rate of 4.76% and a maturity date in January 2025.

For the year ended December 31, 2023, deposits were $8.8 billion as compared to $8.7 billion at December 31, 2022, an increase of 1%.

The increase was primarily attributable to a $1.4 billion increase in interest bearing time deposits, offset by a $871.7 million reduction in noninterest bearing deposits and a $326.7 million reduction in savings and money market accounts as a result of an increase of disintermediation driven primarily by an increase in interest rates.

The growth in interest bearing deposits was driven by the increased utilization of brokered deposits, particularly brokered time deposits, during the year ended December 31, 2023.

During the year ended December 31, 2023, brokered time deposits increased by approximately $998.0 million, while other interest bearing brokered deposits decreased by approximately $977.6 million.

Noninterest bearing deposits decreased $871.7 million or 28% to $2.3 billion at December 31, 2023 as compared to $3.2 billion at December 31, 2022, while interest bearing deposits decreased by $140.8 million, or 12%.

Within interest bearing deposits, money market and savings accounts collectively amounted to $3.3 billion at December 31, 2023, or 38% of total deposits, as compared to $3.6 billion, or 42% of total deposits, at December 31, 2022, a decrease of $326.7 million, or 9%.

No single depositor represented more than 10% of total deposits as of December 31, 2023.

The ten largest depositors not associated with brokered pass-through relationships represented approximately 22% of total deposits in the aggregate as of December 31, 2023.

The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances.

Average total deposits for the year ended December 31, 2023 were $8.9 billion, as compared to $10.1 billion for the same period in 2022, a 12% decrease.

Time deposits were $2.2 billion at December 31, 2023, which was 25% of deposits.

This was an increase from $783.5 million at December 31, 2022, which was 9% of deposits.

The increase in time deposits was driven by an increase in interest rates.

Time deposits $250,000 or more

(dollars in thousands) 2022

The increase in time deposits was driven by an increased utilization of brokered time deposits.

The following table summarizes time deposits in excess of $250 thousand by maturity:

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

Three months or less $ 119,880 $ 87,959

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Time deposits of $250 thousand or more can be more volatile and more expensive than time deposits of less than $250 thousand.

However, because the Bank focuses on relationship banking, and

its marketplace demographics are favorable, its historical experience has been that large time deposits have not been more volatile or significantly more expensive than smaller denomination certificates.

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 CDARS and the ICS products, which provides for reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance.

The total of reciprocal deposits at December 31, 2022 was $782.2 million (9% of total deposits) as compared to $701.5 million (7% of total deposits) at December 31, 2021.

However, because the Bank focuses on relationship banking, and its marketplace demographics are favorable, its historical experience has been that large time deposits have not been more volatile or significantly more expensive than smaller denomination certificates.

Additionally, the Bank participates in the CDARS and the ICS products, 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 December 31, 2023 was $1.7 billion (19% of total

deposits) as compared to $782.2 million (9% 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.

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The Bank had $786.5 million and $1.1 billion of IND brokered deposits as of December 31, 2023 and 2022, respectively.

However, to the extent that the condition or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits or a difficulty with obtaining them in the future.

However, to the extent that the condition or reputation of the Company or Bank deteriorates, or 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 with 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 December 31, 2022 and 2021, total deposits included $2.3 billion and $2.6 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 26.5% and 26.5% of total deposits, respectively.

At December 31, 2022, the Company had $3.2 billion in noninterest bearing demand deposits, representing 36% of total deposits.

This compared to $3.3 billion of noninterest bearing demand deposits at December 31, 2021, or 33% of total deposits.

We have used brokered deposits and intend to continue to use brokered deposits as one of our funding sources to support future growth.

At December 31, 2023 and 2022, total deposits included $2.5 billion and $2.5 billion of brokered deposits (excluding the CDARS and ICS two-way accounts), which represented 28.8% and 28.8% of total deposits, respectively.

Brokered deposits comprised time deposits of $1.5 billion and $465.5 million, savings and money market accounts of $961.5 million and $1.3 billion, and interest-bearing transaction accounts of $108.2 million and $590.1 million at December 31, 2023 and 2022, respectively.

At December 31, 2023 and December 31, 2022, total deposits included estimated totals of $2.8 billion and $4.4 billion of uninsured deposits, which represented 31% and 51% of total deposits, respectively.

The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits.

At December 31, 2023, the Company had $2.3 billion in noninterest bearing demand deposits, representing 26% of total deposits compared to $3.2 billion of noninterest bearing demand deposits at December 31, 2022, or 36% of total deposits.

The decrease was primarily attributable to outflows from noninterest bearing deposits, money market and savings accounts which was partially offset by the increase in time deposits.

Average noninterest bearing deposits over total deposits for years ended December 31, 2023 and 2022 were 28% and 38%, 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.

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agency securities and/or U.S.

agency backed mortgage-backed securities.

agency backed MBS.

These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows.

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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 December 31, 2023 the Company had $2.2 billion in time deposits, an increase of $1.4 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 following tables summarize the Company's borrowings at December 31, 2023 and 2022 and activities on borrowings for the years ended December 31, 2023 and 2022:

(dollars in thousands) Borrowings - Principal Unamortized Deferred Issuance Costs Net Borrowings Outstanding Interest Rates (1)

December 31, 2023:

Customer repurchase agreements $ 30,587 $ — $ 30,587 3.42 %

FRB BTFP secured borrowings 1,300,000 — 1,300,000 4.53 %

Subordinated notes, 5.75%

70,000 (82) 69,918 5.75 %

Total $ 1,400,587 $ (82) $ 1,400,505

December 31, 2022:

Customer repurchase agreements $ 35,100 $ — $ 35,100 2.94 %

FHLB secured borrowings 975,001 — 975,001 4.57 %

Subordinated notes, 5.75% 70,000 (206) 69,794 5.75 %

Total $ 1,080,101 $ (206) $ 1,079,895

Years Ended December 31,

(dollars in thousands) Average Daily Balance (2)

Maximum Month-End Balance (2)

Average Daily Balance (2)

Maximum Month-End Balance (2)

Customer repurchase agreements and federal funds purchased $ 36,663 $ 54,851 $ 30,745 $ 47,946

FHLB secured borrowings $ 549,522 $ 1,770,156 $ 172,408 $ 975,001

FRB BTFP secured borrowings $ 971,507 $ 1,300,001 $ — $ —

Subordinated notes, 5.75%

$ 70,000 $ 70,000 $ 70,000 $ 70,000

(1) Represent the weighted average interest rate on customer repurchase agreements, borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate.

(2) The average daily balance and maximum month-end balance are calculated on the principal balance on the borrowings.

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

At December 31, 2022, the Company had $975.0 million of FHLB advances borrowed as part of the overall asset liability strategy.

The Company had $300.0 million FHLB advances outstanding as of December 31, 2021.

At December 31, 2023 and 2022, the Company had no outstanding balances and $975.0 million, respectively, of FHLB advances borrowed as part of the overall asset liability strategy.

Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at December 31, 2022 and 2021 consisted of the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

Additionally, at December 31, 2023, the Company had a $1.3 billion one year fixed rate advance from the BTFP as part of the overall asset liability strategy and to support loan growth.

In January 2024, the Company borrowed an additional $500.0 million of BTFP financing and refinanced approximately $500.0 million at 4.76%, which mature in January 2025.

The remaining approximately $800.0 million matures in March 2024.

Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities.

The subordinated notes outstanding at December 31, 2023 and 2022 consisted of the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

The Company is considering various options to finance the upcoming maturity of the subordinated debt, and the Company may seek to issue new subordinated notes or other debt securities to replace those that are maturing, or fund the maturity through other means.

Given prevailing interest rates, any new debt securities to refinance the subordinated notes are expected to have a higher interest rate than the subordinated notes.

For additional information on the Company’s subordinated notes, please refer to Note 12 to the Consolidated Financial Statements, as well as the “Capital Resources and Adequacy” section below.

Additionally, there were no long-term borrowings that consist of FHLB advances (maturities over one year) at December 31, 2022 and December 31, 2021.

CONTRACTUAL OBLIGATIONS

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16,292 6,340 518 735 23,885

2,000 — — — 2,000

Total $ 9,465,453 $ 784,652 $ 35,134 $ 8,966 $ 10,294,205

(1) Excludes accrued interest payable at December 31, 2023.

(2) Borrowed funds include customer repurchase agreements and other short-term and long-term borrowings.

(2) Borrowed funds include customer repurchase agreements and other borrowings.

(3) The Bank has outstanding obligations under its current core data processing contract that expire in June 2029 and one other vendor arrangement that relates to network infrastructure and data center services that expires in December 2024.

(4) The Bank has the option of terminating the George Mason agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030).

(4) The Bank has the option of terminating the George Mason University ("George Mason") agreement at the end of contract years 10 and 15 (that is, effective June 30, 2025 or June 30, 2030).

Should the Bank elect to exercise its right to terminate the George Mason contract, contractual obligations would decrease $ 3.5 million and $ 3.6 million for the first option period (years 11 - 15 ) and the second option period ( 16 - 20 ), respectively.

(5) Low Income Housing Tax Credits (“LIHTC”) expected payments for unfunded affordable housing commitments.

(6) As disclosed in the 8-K dated January 25, 2021, pursuant to the executed stipulation of settlement of the demand litigation, the Company has agreed to invest an additional $2 million incremental spend above 2020 levels by the end of 2023 to enhance its corporate governance and risk and compliance controls and infrastructure.

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.

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Total $ 2,167,094 $ 2,550,813

Included in the unfunded loan commitments are interest rate lock commitments on residential mortgage loans which are short-term in nature.

These interest rate lock commitments were $7.0 million as of December 31, 2022 and $53.3 million as of December 31, 2021.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet

See Note 19 to the Consolidated Financial Statements for a summary list of loan commitments at December 31, 2023 and 2022.

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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 available-for-sale investment securities, income from operations and new core deposits into the Bank.

The majority of the Bank’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.

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 60% 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 December 31, 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.

These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.

The following table summarizes the Company's secondary sources of liquidity in use and available at December 31, 2023:

(dollars in thousands)

Secondary Sources of Liquidity in Use

Secondary Sources of Liquidity Available

Unsecured brokered deposits (1)

$ 977,915 $ 1,950,803

FHLB secured borrowings

BTFP secured borrowings

1,300,000 598,870

Discount window secured borrowings

Federal funds lines

Customer repurchase agreements

Raymond James repurchase agreement

Unpledged assets:

Interest-bearing deposits with banks

Investment securities

$ 2,308,502 $ 4,924,489

(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 throughout the year ended December 31, 2023.

Deposits at year end were $8.8 billion and $8.7 billion at December 31, 2023 and 2022, respectively.

The growth in interest bearing deposits was driven by the increased utilization of brokered deposits, particularly brokered time deposits, during the year ended December 31, 2023, as discussed in "Deposits and Other Borrowings" above.

Borrowings were $1.4 billion and $1.0 billion at December 31, 2023 and December 31, 2022, respectively.

The increase in borrowings was due to the utilization of BTFP borrowings during the year ended December 31, 2023.

Additionally, the Bank can purchase up to $155.0 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2023 and can borrow unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.7 billion, against which there was $94 million outstanding at December 31, 2023.

The Bank also has a commitment at December 31, 2022 from IntraFi to place up to $1.8 billion of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of $1.1 billion at December 31, 2022.

At December 31, 2022, the Bank was also eligible to make advances from the FHLB up to $1.1 billion based on collateral at the FHLB, of which there were $975.0 million outstanding as of December 31, 2022.

The Bank has posted additional collateral to the FHLB in the first quarter of 2023 to increase its eligibility for advances up to $1.5 billion to meet its ongoing liquidity needs and expects to continue to utilize and expand this source of funding in the future.

At December 31, 2023, the Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $786.5 million of brokered deposits.

At December 31, 2023, the Bank was also eligible to make advances from the FHLB up to $1.3 billion based on assets pledged as collateral to the FHLB, against which there was no outstanding amount as of December 31, 2023.

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

The Bank posted additional collateral to the FHLB during the year ended December 31, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue utilizing 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 December 31, 2023, the Bank had eligible collateral and borrowing capacity with the BTFP of $1.9 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 Federal Reserve announced in January 2024 that the BTFP will stop originating new loans on March 11, 2024, as scheduled.

The Federal Reserve also modified the terms of the program so that the interest rate for new loans will be no lower than the interest rate on reserve balances in effect on the day the loan is made .

In January 2024, prior to these announcements by the Federal Reserve, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program at an interest rate of 4.76% and a maturity in January 2025.

The remaining $800.0 million matures in March 2024.

Once the BTFP program terminates and in light of the changes to the BTFP's terms, we may be required to rely on other, potentially more expensive, sources of liquidity.

The Bank's aggregate borrowing capacity at December 31, 2023 was $2.2 billion, which consists of $1.9 billion of additional aggregate capacity to borrow from the FHLB and BTFP on assets that have been pledged.

The Bank also has unencumbered securities totaling approximately $292.3 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.

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Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer.

The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks.

The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive.

There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates.

Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run, but the use of such sources may negatively impact our net interest margin and our earnings and there can be no assurance that they will be adequate to meet our liquidity needs.

However, the market for customer and brokered deposits is highly

competitive and the risk of disintermediation is high, particularly in a high interest rate environment.

Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships, and are less likely to disintermediate.

The mix of sources used in the year ended December 31, 2023 negatively impacted our net interest margin and earnings, as expected in an economic environment with rising interest rates.

There can be no assurance that the mix of sources of funds available to us at any particular time in the future will be adequate to meet our future liquidity needs.

However, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a high interest rate environment.

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 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 Asset Liability Committee ("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.

During the year ended December 31, 2023, average short term liquidity was $2.6 billion, which is above the Bank's average needs.

Secondary sources of liquidity at December 31, 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 December 31, 2023, the Company held total securities available to be pledged with a par balance of $292.3 million.

At December 31, 2023, under the Bank’s liquidity formula, it had $5.9 billion of primary and secondary liquidity sources.

Management believes the amount is deemed adequate to meet current and projected funding needs.

Management believes the amount is adequate to meet current and projected funding needs.

CAPITAL RESOURCES AND ADEQUACY

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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 a concentration in commercial real estate loans, and the Company continues to pursue lending opportunities in its commercial real estate portfolio.

The Company, like many community banks, has in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years.

Although growth in that segment over the past 36 months at 7% did not exceed the 50% threshold laid out in the regulatory guidance, we expect the heightened supervisory expectations to continue to apply to us given the federal banking regulators’ general focus on commercial real estate exposures at banks.

At December 31, 2023, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

Construction, land and land development loans represent 111% 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.

The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal policy limits for regulatory capital ratios that are in excess of well capitalized ratios (as defined in the section “Regulation” above).

Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns.

The Company seeks to manage the risks relating to commercial real estate and its capital adequacy through the development and implementation of its Capital Policy and Capital Plan, the preparation of pro-forma projections including stress testing and the development of internal minimum targets for regulatory capital ratios that are subject to approval by the Board and in excess of well capitalized ratios (as defined in the section “Regulation” above).

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.

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Tier 1 capital consists of common and qualifying preferred shareholders’ equity less goodwill and other intangibles.

Total risk-based capital consists of Tier 1 capital, plus qualifying subordinated debt and the qualifying portion of the ACL, and for the Company to a limited extent, excess amounts of restricted core capital elements.

Total risk-based capital consists of Tier 1 capital, plus qualifying subordinated debt and the qualifying portion of the ACL.

Risk-based capital ratios are calculated with reference to risk-weighted assets, which are prescribed by regulation.

of Tier 1 capital to average assets for the prior quarter is often referred to as the leverage ratio.

The measure of Tier 1 capital to average assets for the prior quarter is often referred to as the leverage ratio.

The CET1 ratio is the Tier 1 capital ratio but excluding preferred stock.

The FRB and the other federal banking agencies have adopted the Basel III Rules to implement the Basel III capital guidelines for U.S.

The capital rules require a CET1 ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%;

The FRB and the FDIC have adopted the Basel III Rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S.

Under the Basel III Rules, the Company and Bank are required to maintain a CET1 ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%;

a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, or 8.5% with the fully phased in capital conservation buffer;

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See the “Regulation” section for additional information regarding regulatory capital requirements.

The Company’s capital position remained strong for the year ended December 31, 2023 as a result of continued 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 December 19, 2023 of $0.45 per share to shareholders of record on January 11, 2024 and it was paid on January 31, 2024.

The Company’s capital ratios were all well in excess of guidelines established by the Federal Reserve Board and the Bank’s capital ratios were in excess of those required to be classified as a “well capitalized” institution under the prompt corrective action provisions of the Federal Deposit Insurance Act.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis