EAGLE BANCORP INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company. The Company’s primary subsidiary is the Bank, and the Company’s other direct and indirect active subsidiaries are Bethesda Leasing, LLC, Eagle Insurance Services, LLC and Landroval Municipal Finance, Inc. 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. 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,” "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. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. 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 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 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; • The growth and profitability of noninterest or fee income being less than expected; • Changes in the level of our nonperforming assets and charge-offs; • Changes in consumer spending and savings habits; • The impact of climate change or government action and societal responses to climate change; • Difficulty recruiting or retaining successful bankers, executive officers or other key personnel; • Changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; 40 Table of Contents • 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 Board of Governors of the Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB"), 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, to hold more capital or to incur costs to remediate supervisory findings; • 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 Financial Accounting Standards Board ("FASB"); • Cybersecurity breaches, threats, and cyber-fraud that cause the Bank to sustain financial losses; • Technological and social media changes; • Our management of risks inherent in the use of statistical and quantitative data and modeling; • The strength of the United States economy, in general, and the strength of the local economies in which we conduct operations; • Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; and • The factors discussed under the caption “Risk Factors” in this report. If one or more of the factors affecting our forward looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward looking information and statements contained in this report. You should not place undue reliance on our forward looking information and statements. We will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements. GENERAL 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. The Company was organized in October 1997 and to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of thirteen branch offices (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. 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. In late 2022, the Federal Reserve begun tapering purchases of securities and is no longer expanding its balance sheet as aggressively. Actual real U.S. 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. 41 Table of Contents Longer-term U.S. interest rates increased in 2023, with the ten year U.S. Treasury rate averaging 3.96% in 2023 as compared to 2.95% in 2022. 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. 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. 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. 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 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 The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies, including those identified below for the year ended December 31, 2023, inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. 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 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 42 Table of Contents 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. 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). 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.” The Provision for Unfunded Commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws. Management has significant discretion in making the judgments inherent in the determination of the provisions for credit loss, ACL and the RUC. Our determination of these amounts requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors and the reliance on our reasonable and supportable forecasts. The ACL represents the expected credit losses arising from the Company's loan and available-for-sale ("AFS") securities portfolios. The ACL is determined as follows: The Company uses a loan-level probability of default ("PD")/ loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage - residential, construction – commercial and residential, construction – C&I (owner occupied), home equity and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default and loss given default. The modeling of expected prepayment speeds is based on historical internal data. The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will react to forecasted levels of the loss drivers. 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. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. 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 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 Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various 43 Table of Contents 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. 44 Table of Contents SELECTED FINANCIAL DATA The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2023. The information contained in this section should be read together with the December 31, 2023 audited Consolidated Financial Statements and the accompanying Notes included in Item 8 Financial Statements And Supplementary Data of this Form 10-K. This section of this Form 10-K generally discusses 2023 items and year-to-year comparisons between 2023 and 2022. 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. (dollars in thousands) December 31, 2023 December 31, 2022 Consolidated Balance Sheets: Securities - available for sale $ 1,506,388 $ 1,598,666 Securities - held to maturity 1,015,737 1,093,374 Loans held for sale — 6,734 Loans 7,968,695 7,635,632 Allowance for credit losses (85,940) (74,444) Goodwill and intangible assets, net 104,925 104,233 Total assets 11,664,538 11,150,854 Deposits 8,808,039 8,713,182 Borrowings 1,369,918 1,044,795 Total liabilities 10,390,255 9,922,533 Total shareholders’ equity 1,274,283 1,228,321 Tangible common equity (1) 1,169,358 1,124,088 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 for (reversal of) credit losses 31,536 266 (20,821) Noninterest income 21,536 23,654 40,385 Noninterest expense 153,293 165,098 149,165 Income before taxes 127,520 189,680 237,674 Income tax expense 26,986 48,750 60,983 Net income 100,534 140,930 176,691 Cash dividends declared 54,293 55,776 44,691 Total revenue (2) 312,082 356,521 364,899 45 Table of Contents Years Ended December 31, (dollars in thousands except per share data) 2023 2022 2021 Per Common Share Data: Net income, basic $ 3.31 $ 4.40 $ 5.53 Net income, diluted 3.31 4.39 5.52 Dividends declared 1.80 1.75 1.40 Book value 42.58 39.18 42.28 Tangible book value (3) 39.08 35.86 38.97 Common shares outstanding 29,925,612 31,346,903 31,950,092 Weighted average common shares outstanding, basic 30,345,504 32,004,251 31,935,824 Weighted average common shares outstanding, diluted 30,393,100 32,078,070 32,003,090 Ratios: Net interest margin 2.53 % 2.93 % 2.81 % Efficiency ratio (4) 49.12 % 46.31 % 40.88 % Return on average assets 0.84 % 1.20 % 1.49 % Return on average common equity 8.11 % 10.99 % 13.54 % Return on average tangible common equity (1) 8.85 % 11.97 % 14.73 % CET1 capital (to risk weighted assets) 13.90 % 14.03 % 14.63 % Total capital (to risk weighted assets) 14.79 % 14.94 % 15.74 % Tier 1 capital (to risk weighted assets) 13.90 % 14.03 % 14.63 % Tier 1 capital (to average assets) 10.73 % 11.63 % 10.19 % Tangible common equity ratio 10.12 % 10.18 % 10.60 % Dividend payout ratio 54.00 % 39.58 % 25.29 % (dollars in thousands) December 31, 2023 December 31, 2022 Asset Quality: Nonperforming assets and loans 90+ past due $ 66,632 $ 8,430 Nonperforming assets and loans 90+ past due to total assets 0.57 % 0.08 % Nonperforming loans to total loans 0.82 % 0.08 % Allowance for credit losses to loans 1.08 % 0.97 % 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 Net charge-offs to average loans 0.24 % 0.01 % 0.18 % (1) Tangible common equity and return on average tangible common equity are non-GAAP financial measures. Tangible common equity is defined as total common shareholders’ equity reduced by goodwill and other intangible assets. (2) Total revenue calculated as net interest income plus noninterest income. (3) Tangible book value per common share, a non-GAAP financial measure, is defined as tangible common shareholders’ equity divided by total common shares outstanding. (4) Computed by dividing noninterest expense by the sum of net interest income and noninterest income. 46 Table of Contents 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. 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. The following tables reconcile the GAAP financial measures to the associated non-GAAP financial measures: 47 Table of Contents (dollars in thousands except per share data) December 31, 2023 December 31, 2022 Common shareholders’ equity $ 1,274,283 $ 1,228,321 Less: Intangible assets (104,925) (104,233) Tangible common equity $ 1,169,358 $ 1,124,088 Book value per common share $ 42.58 $ 39.18 Less: Intangible book value per common share (3.50) (3.32) Tangible book value per common share $ 39.08 $ 35.86 Total assets $ 11,664,538 $ 11,150,854 Less: Intangible assets (104,925) (104,233) Tangible assets $ 11,559,613 $ 11,046,621 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 Less: Average intangible assets (104,534) (104,248) (104,265) Average tangible common equity $ 1,135,584 $ 1,177,673 $ 1,200,637 Net Income $ 100,534 $ 140,930 $ 176,691 Average tangible common equity $ 1,135,584 $ 1,177,673 $ 1,200,637 Return on average tangible common equity 8.85 % 11.97 % 14.72 % Noninterest expense $ 153,293 $ 165,098 $ 149,165 Net interest income $ 290,546 $ 332,867 $ 324,514 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 Year Ended December 31, 2023 Compared with Year Ended December 31, 2022 Overview 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 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. 48 Table of Contents 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 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. 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 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, 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 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. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 9% and 11% of average earning assets for 2023 and 2022, respectively, as lower levels of on-balance sheet liquidity existed throughout 2023. 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 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 $1.27 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 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. 49 Table of Contents Net Interest Income and Net Interest Margin Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities and interest bearing deposits with other banks and other short term investments. The cost of funds 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. 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 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. 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. Included in the table are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets. 50 Table of Contents Eagle Bancorp, Inc. Consolidated Average Balances, Interest Yields And Rates (Unaudited) (dollars in thousands) Years Ended December 31, 2023 2022 2021 Average Balance Interest Average Yield / Rate Average Balance Interest Average Yield / Rate Average Balance Interest Average Yield / Rate Assets Interest earning assets: Interest bearing deposits with other banks and other short-term investments $ 1,015,199 $ 52,300 5.15 % $ 1,235,768 $ 13,304 1.08 % $ 2,499,377 $ 3,511 0.14 % Loans held for sale 1,212 73 6.02 % 15,356 650 4.23 % 71,043 2,278 3.21 % 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 % — — — % Federal funds sold 9,120 287 3.15 % 48,402 861 1.78 % 31,667 31 0.10 % Total interest earning assets 11,483,047 625,327 5.45 % 11,366,743 424,613 3.74 % 11,516,495 364,496 3.16 % Noninterest earning assets 501,722 475,563 416,492 Less: allowance for credit losses 79,218 74,726 96,252 Total noninterest earning assets 422,504 400,837 320,240 Total Assets $ 11,905,551 $ 11,767,580 $ 11,836,735 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing transaction $ 1,459,795 $ 46,140 3.16 % $ 893,137 $ 6,721 0.75 % $ 814,999 $ 1,609 0.20 % Savings and money market 3,176,203 132,374 4.17 % 4,683,850 65,777 1.40 % 4,947,198 15,000 0.30 % Time deposits 1,774,184 79,030 4.45 % 669,824 10,763 1.61 % 803,718 11,163 1.39 % Total interest bearing deposits 6,410,182 257,544 4.02 % 6,246,811 83,261 1.33 % 6,565,915 27,772 0.42 % Customer repurchase agreements and federal funds purchased 36,663 1,218 3.32 % 30,745 356 1.16 % 24,884 51 0.20 % Borrowings 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 % Noninterest bearing liabilities: Noninterest bearing demand 2,508,687 3,871,773 3,374,662 Other liabilities 118,880 93,876 101,399 Total noninterest bearing liabilities 2,627,567 3,965,649 3,476,061 Shareholders’ equity 1,240,118 1,281,921 1,304,902 Total Liabilities and Shareholders’ Equity $ 11,905,551 $ 11,767,580 $ 11,836,735 Net interest income $ 290,546 $ 332,867 $ 324,514 Net interest spread 1.28 % 2.33 % 2.59 % Net interest margin 2.53 % 2.93 % 2.81 % Cost of funds (3) 3.17 % 0.88 % 0.38 % 51 Table of Contents (1) Loans placed on nonaccrual status are included in average balances. 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 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 Due to Volume Change Due to Rate Total Increase (Decrease) Change Due to Volume Change Due to Rate Total Increase (Decrease) Interest earned on: Loans $ 30,315 $ 129,375 $ 159,690 $ (2,529) $ 25,375 $ 22,846 Loans held for sale (599) 22 (577) (1,786) 158 (1,628) Investment securities available-for sale (7,040) 5,473 (1,567) 4,911 5,525 10,436 Investment securities held-to-maturity 4,158 588 4,746 12,035 5,805 17,840 Interest bearing bank deposits (2,375) 41,371 38,996 (1,775) 11,568 9,793 Federal funds sold (699) 125 (574) 16 814 830 Total interest income 23,760 176,954 200,714 10,872 49,245 60,117 Interest paid on: Interest bearing transaction 4,264 35,155 39,419 154 4,958 5,112 Savings and money market (21,172) 87,769 66,597 (798) 51,575 50,777 Time deposits 17,745 50,522 68,267 (1,860) 1,460 (400) Customer repurchase agreements 69 793 862 12 293 305 Other borrowings 45,216 22,674 67,890 (6,712) 2,682 (4,030) Total interest expense 46,122 196,913 243,035 (9,204) 60,968 51,764 Net interest income $ (22,362) $ (19,959) $ (42,321) $ 20,076 $ (11,723) $ 8,353 Provision for Credit Losses 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 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 52 Table of Contents 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. The following table summarizes the comparative noninterest income for the years ended December 31, 2023 and 2022: Years Ended December 31, (dollars in thousands) 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) % Total $ 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 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. The following table summarizes the comparative noninterest expense for the years ended December 31, 2023 and 2022: 53 Table of Contents 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 % Total $ 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 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 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. The amount of penalty fees was reported as noninterest expense for 2022. No such penalty fees were incurred in 2023. The major components of other expenses include broker fees, franchise tax, insurance expenses and director compensation. Other expenses were $15.5 million for 2023 as compared to $14.4 million for 2022, an increase of 8%. The increase in 2023, as compared to 2022, was primarily due to increases in expenses incurred in connection with OREO properties. 54 Table of Contents BALANCE SHEET ANALYSIS Overview 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 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. In addition, the tangible common equity ratio was 10.12% at December 31, 2023, compared to 10.18% at December 31, 2022. 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 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. Investment Securities and Short-Term Investments The tables below and Note 3 to the Consolidated Financial Statements provide additional information regarding the Company’s investment securities categorized as “available-for-sale” or AFS and as "held-to-maturity" or HTM. The Company classifies its investment securities as either AFS or HTM. 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, 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 (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 55 Table of Contents 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. 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 MBS with longer final maturity dates. The following table provides information regarding the composition of the investment securities portfolio at the dates indicated. AFS securities are reported at estimated fair value and HTM securities are reported at amortized cost. 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: December 31, 2023 2022 (dollars in thousands) Fair Value Percent of Total Fair Value Percent of Total Investment securities available-for-sale: U.S. treasury bonds $ 47,901 3 % $ 46,327 3 % U.S. agency securities 671,397 45 % 669,728 42 % Residential mortgage-backed securities 727,353 48 % 820,503 51 % Commercial mortgage-backed securities 49,564 3 % 50,213 3 % Municipal bonds 8,490 1 % 10,087 1 % Corporate bonds 1,683 — % 1,808 — % Total $ 1,506,388 100 % $ 1,598,666 100 % December 31, 2023 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 % Commercial mortgage-backed securities 90,227 9 % 92,557 8 % Municipal bonds 125,114 12 % 128,273 12 % Corporate bonds 132,309 13 % 132,253 12 % Total 1,017,693 100 % 1,094,140 100 % 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, 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. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax exempt securities have not been calculated on a tax equivalent basis. 56 Table of Contents One Year or Less After One Year Through Five Years After Five Years Through Ten Years After Ten Years Total (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Available-for-sale: U.S. treasury bonds $ 24,952 0.97 % $ 24,942 0.69 % $ — — % $ — — $ 49,894 0.83 % U.S. 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 % Commercial mortgage-backed securities — — % 29,284 2.30 % 15,063 2.27 % 10,210 3.81 % 54,557 2.57 % Municipal bonds — — % — — % 8,783 2.67 % — — % 8,783 2.67 % Corporate bonds — — % 2,000 5.50 % — — % — — 2,000 5.50 % Total $ 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 Through Ten Years After Ten Years Total (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Held-to-maturity: Residential mortgage-backed securities $ — — % $ 1,168 2.72 % $ 21,489 2.32 % $ 647,386 2.65 % $ 670,043 2.64 % Commercial mortgage-backed securities — — % 1,728 2.63 % 35,737 2.63 % 52,762 2.54 % 90,227 2.58 % Municipal bonds 11,832 2.69 % 29,150 3.24 % 71,981 3.16 % 12,151 3.85 % 125,114 3.20 % Corporate bonds 28,041 3.64 % 92,695 4.01 % 11,573 4.46 % — — % 132,309 3.97 % Total $ 39,873 3.36 % $ 124,741 3.80 % $ 140,780 3.00 % $ 712,299 2.66 % 1,017,693 2.88 % Allowance for credit losses (1,956) Total held-to-maturity securities, net of ACL $ 1,015,737 Federal funds sold were $3.7 million at December 31, 2023, as compared to $33.9 million at December 31, 2022. These funds represent excess daily liquidity which is invested on an unsecured basis with well capitalized banks, in amounts generally limited both in the aggregate and to any one bank. 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 $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. The Bank did not hold any time deposits at December 31, 2023 or December 31, 2022. Loan Portfolio 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% . 57 Table of Contents 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. 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 two years. December 31, 2023 2022 (dollars in thousands) Amount % Amount % Commercial $ 1,473,766 18 % $ 1,487,349 19 % PPP loans 528 — % 3,256 — % Income producing - commercial real estate 4,094,614 51 % 3,919,941 51 % Owner occupied - commercial real estate 1,172,239 15 % 1,110,325 15 % Real estate mortgage - residential 73,396 1 % 73,001 1 % Construction - commercial and residential 969,766 12 % 877,755 12 % Construction - C&I (owner occupied) 132,021 2 % 110,479 1 % Home equity 51,964 1 % 51,782 1 % Other consumer 401 — % 1,744 — % Total loans 7,968,695 100 % 7,635,632 100 % Less: allowance for credit losses (85,940) (74,444) Loans, net $ 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 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. 58 Table of Contents 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 Industrial Mixed Use Multifamily Office Retail Single / 1-4 Family & Res. Condo Other Total 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 Maryland: 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 Virginia: 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. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. 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 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 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. 59 Table of Contents Certain directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of the Company’s lending business; were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties; and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features. Refer to Note 4 to the Consolidated Financial Statements for further detail regarding related party loans. 60 Table of Contents Loan Maturity The following table sets forth the time to contractual maturity of the loan portfolio as of December 31, 2023. Due In (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 PPP loans 528 — 528 — — 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 Real estate mortgage - residential 73,396 17,021 44,354 501 11,520 Construction - commercial and residential 969,766 215,207 711,288 12,182 31,089 Construction - C&I (owner occupied) 132,021 769 37,988 34,319 58,945 Home equity 51,964 2,257 2,201 1,540 45,966 Other consumer 401 212 46 — 143 Total $ 7,968,695 $ 2,442,118 $ 4,202,708 $ 955,052 $ 368,817 Loans with: Predetermined fixed interest rate Commercial $ 403,955 $ 47,290 $ 246,822 $ 109,843 $ — PPP loans 528 — 528 — — Income producing - commercial real estate 1,849,347 662,143 1,014,799 172,405 — Owner occupied - commercial real estate 615,019 172,237 216,481 163,735 62,566 Real estate mortgage - residential 67,877 13,186 44,354 153 10,184 Construction - commercial and residential 67,891 16,597 51,294 — — Construction - C&I (owner occupied) 42,699 769 4,588 11,633 25,709 Home equity 579 36 180 363 — Other consumer 54 5 46 — 3 Total $ 3,047,949 $ 912,263 $ 1,579,092 $ 458,132 $ 98,462 Floating or adjustable interest rate Commercial $ 1,069,811 $ 384,072 $ 621,713 $ 60,440 $ 3,586 Income producing - commercial real estate 2,245,267 919,390 1,113,239 212,638 — Owner occupied - commercial real estate 557,220 21,520 193,249 187,449 155,002 Real estate mortgage - residential 5,519 3,835 — 348 1,336 Construction - commercial and residential 901,875 198,610 659,994 12,182 31,089 Construction - C&I (owner occupied) 89,322 — 33,400 22,686 33,236 Home equity 51,385 2,221 2,021 1,177 45,966 Other consumer 347 207 — — 140 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 61 Table of Contents 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. Demand loans, having no contractual maturity, and overdrafts are reported as due in one year or less. Allowance for Credit Losses 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 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. 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” for a discussion of the Companys calculation of the provision for credit losses during the years ended December 31, 2023 and 2022. 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. 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 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. 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. 62 Table of Contents 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 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, (dollars in thousands) 2023 2022 2021 Balance at beginning of year $ 74,444 $ 74,965 $ 109,579 Charge-offs: Commercial (2,020) (1,561) (8,788) Income producing - commercial real estate (11,817) — — Owner occupied - commercial real estate — (1,355) (5,445) Construction - commercial and residential (5,636) — (206) Other consumer (50) (79) (1) Total charge-offs (19,523) (2,995) (14,440) Recoveries: Commercial 576 713 486 Owner occupied - commercial real estate 55 25 97 Construction - commercial and residential 36 1,627 499 Other consumer 6 6 18 Total recoveries 673 2,371 1,100 Net charge-offs (18,850) (624) (13,340) Provision for credit losses - loans 30,346 103 (21,274) Balance at end of year $ 85,940 $ 74,444 $ 74,965 Ratio of allowance for credit losses to total loans outstanding at year end 1.08 % 0.97 % 1.06 % Ratio of net charge-offs during the year to average loans outstanding during the year 0.24 % 0.01 % 0.18 % 63 Table of Contents 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, 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. December 31, 2023 2022 (dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans Commercial $ 17,824 21 % 18 % $ 15,655 21 % 19 % Income producing - commercial real estate 40,050 47 % 51 % 35,688 48 % 51 % Owner occupied - commercial real estate 14,333 16 % 15 % 12,702 17 % 15 % Real estate mortgage - residential 861 1 % 1 % 969 1 % 1 % 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 $ 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 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 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 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: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default. 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 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 64 Table of Contents 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. Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis. 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. For example: (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; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; 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. 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, 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 were two OREO sales in 2023 and one in 2022, generating proceeds of $987 thousand and $241 thousand, respectively. 65 Table of Contents 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 Income producing - commercial real estate 40,926 2,000 Owner occupied - commercial real estate 19,836 17 Real estate mortgage - residential 1,946 1,913 Construction - commercial and residential 525 — Home equity 242 — Other consumer — 50 Accrual loans-past due 90 days — — Total nonperforming loans (1) 65,524 6,468 Other real estate owned 1,108 1,962 Total nonperforming assets $ 66,632 $ 8,430 Coverage ratio, allowance for credit losses to total nonperforming loans 131 % 1,151 % Ratio of nonperforming loans to total loans 0.82 % 0.08 % Ratio of nonperforming assets to total assets 0.57 % 0.08 % (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 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. Bank owned life insurance at December 31, 2023 amounted to $112.9 million, as compared to $111.0 million at December 31, 2022. Refer to Note 18 to Consolidated Financial Statements for further detail. 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 Small Business Administration ("SBA") loans and other loans sold with retained servicing 66 Table of Contents 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 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 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. In 2008, the Company recorded an unidentified intangible asset (goodwill) incident to the acquisition of Fidelity of $2.2 million. In 2014, the Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $102 million. 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 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 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. 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 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. 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. Deposits and Other Borrowings 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 67 Table of Contents 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 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 More than three months through six months 318,353 51,746 More than three months through twelve months 368,103 108,877 Over twelve months 726,758 269,200 Total $ 1,533,094 $ 517,782 Maturities of time deposits with balances of $250 thousand or more represented 17% and 6% of total deposits as of December 31, 2023 and 2022, respectively. See Note 10 to the Consolidated Financial Statements for additional information regarding the maturities of time deposits and the Average Balances Table in the “Net Interest Income and Net Interest Margin” section for the average rates paid on interest-bearing deposits. 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 Network, LLC ("IntraFi"). 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 68 Table of Contents 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. The Bank also is able to obtain one way CDARS deposits and participates in IntraFi’s Insured Network Deposit, (“IND”). 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, 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. 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. As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds, which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $30.6 million at December 31, 2023 compared to $35.1 million at December 31, 2022. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed MBS. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts. At 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: 69 Table of Contents (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, 2023 2022 (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, 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. 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. 70 Table of Contents CONTRACTUAL OBLIGATIONS The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments except for its loan commitments, as shown in Note 20 to the Consolidated Financial Statements. The following table shows details on these fixed and determinable obligations as of December 31, 2023, in the time period indicated. (dollars in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total Deposits without a stated maturity (1) $ 6,590,572 $ — $ — $ — $ 6,590,572 Time deposits (1) 1,445,395 756,763 15,309 — 2,217,467 Borrowed funds (2) 1,400,505 — — — 1,400,505 Operating lease obligations 6,564 8,593 4,525 3,556 23,238 Outside data processing (3) 5,450 11,568 13,382 — 30,400 George Mason sponsorship (4) 675 1,388 1,400 4,675 8,138 LIHTC investments (5) 16,292 6,340 518 735 23,885 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 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 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. 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. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company’s loans outstanding. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments outstanding and lines and letters of credit at December 31, 2023 and 2022 were as follows: (dollars in thousands) 2023 2022 Unfunded loan commitments $ 1,981,334 $ 2,335,735 Unfunded lines of credit 98,614 107,919 Letters of credit 87,146 100,196 Interest rate lock commitments — 6,963 Total $ 2,167,094 $ 2,550,813 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 71 Table of Contents instruments. See Note 19 to the Consolidated Financial Statements for a summary list of loan commitments at December 31, 2023 and 2022. Loan commitments represent agreements to lend to a customer as long as there is no violation of any condition established in the contract and which have been accepted in writing by the borrower. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Collateral obtained varies and may include certificates of deposit, accounts receivable, inventory, property and equipment, residential and commercial real estate. Standby letters of credit are conditional commitments issued by the Company which guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. At December 31, 2023, approximately 71% of the dollar amount of standby letters of credit was collateralized. In connection with deposit guarantees, the Bank collateralizes certain public funds using qualified investment securities. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, capital expenditures or capital resources, that is material to investors. LIQUIDITY MANAGEMENT Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 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 — 1,271,846 FRB: BTFP secured borrowings 1,300,000 598,870 Discount window secured borrowings — 601,504 Federal funds lines — 155,000 Customer repurchase agreements 30,587 — Raymond James repurchase agreement — 17,993 Unpledged assets: (2) Interest-bearing deposits with banks N/A 36,215 Investment securities N/A 292,258 Total $ 2,308,502 $ 4,924,489 72 Table of Contents (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 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, 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. 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. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately $601.5 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only. There can be no assurance, however, that these alternative sources of liquidity will continue to be available or will be sufficient to meet our ongoing liquidity needs. The loss of deposits, through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive. 73 Table of Contents 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. 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 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 adequate to meet current and projected funding needs. CAPITAL RESOURCES AND ADEQUACY The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The federal banking regulators have issued guidance for those institutions, which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has 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. 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). 74 Table of Contents The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. At December 31, 2023, the capital position of the Company and its wholly owned subsidiary, the Bank, continue to exceed regulatory requirements and well-capitalized guidelines. The primary indicators relied on by bank regulators in measuring the capital position are four ratios as follows: Tier 1 risk-based capital ratio, Total risk-based capital ratio, the Leverage ratio and the CET1 ratio. 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. Risk-based capital ratios are calculated with reference to risk-weighted assets, which are prescribed by regulation. 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 FDIC have adopted the Basel III Rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain 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; a minimum total capital to risk-weighted assets ratio of 10.5% with the fully phased-in capital conservation buffer; and a minimum leverage ratio of 4.0%. The Basel III Rules also increased risk weights for certain assets and off-balance-sheet exposures. 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. The Company’s and Bank’s capital ratios at December 31, 2023 and December 31, 2022 are shown in Note 21 to the Consolidated Financial Statements. The ability of the Company to continue to grow is dependent on its earnings and those of the Bank, the ability to obtain additional funds for contribution to the Bank’s capital, through additional borrowings, through the sale of additional common stock or preferred stock or through the issuance of additional qualifying capital instruments, such as subordinated debt. The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank’s concentrations in commercial real estate loans. See further detail at the “Regulation” and “Risk Factors” sections. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and Notes thereto have been prepared in accordance with GAAP in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services. 75 Table of Contents NEW AUTHORITATIVE ACCOUNTING GUIDANCE Refer to Note 1 to the Consolidated Financial Statements for New Authoritative Accounting Guidance and their expected impact on the Company’s Financial Statements. 76 Table of Contents