What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-03 · 492 added, 238 removed, 666 unchanged (52% of the section changed)

23 unchanged sentences

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

In April 2024, one branch was closed as it had an expiring lease.

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

The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank's market area.

45 unchanged sentences

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 CRE segment of our loan portfolio, which informed our CECL economic forecast and continued to adversely impact our loss reserve as of March 31, 2024.

Refer to the "Provision for Credit Losses" and "Allowance for Credit Losses" of Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the provision for credit losses and ACL for the loan portfolio.

10 unchanged sentences

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

As part of its annual testing for goodwill impairment, the Company concluded that no impairment existed at December 31, 2023.

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

As of the time of this report's filing, the Company did not identify any triggering events for interim testing.

However, future events, including the continuation of the Company's recent common stock trading below the book value per share, 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, however, it would not impact our regulatory capital ratios, tangible common equity ratio, nor its liquidity position.

During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters.

During the past twelve months ended June 30, 2024, changes in macroeconomic conditions, market volatility due to rising interest rates resulted in fluctuations of the Company's stock price with a sustained decrease.

As a result of the triggering event, 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 2024.

The resulting calculations indicated that the fair value did not exceed the carrying amount of the Company's only reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired.

The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill.

The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014.

The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.

The method employed to determine the fair value of the reporting unit was a combination of a risk-weighted income and market valuation methodologies, comprised of the discounted cash flow method, the guideline public company method and the guideline transaction 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.

RESULTS OF OPERATIONS

Earnings Summary

Three Months Ended March 31, 2024 vs.

Three Months Ended March 31, 2023

Net loss for the three months ended March 31, 2024 was $338 thousand, as compared to net income of $24.2 million for the same period in 2023, a decrease of $24.6 million, or 101.4%.

The decrease of $24.6 million to net loss for the three months ended March 31, 2024 from net income for the same period in 2023 was due primarily to an increase in provision for credit losses of $29.0 million, partially offset by a reduction of income tax expenses of $3.9 million.

Three Months Ended June 30, 2024 vs.

Three Months Ended June 30, 2023

Net loss for the three months June 30, 2024 was $83.8 million as compared to net income of $28.7 million for the same period in 2023, a $112.5 million decrease.

Operating net income (non-GAAP), adjusted to exclude the impact of the goodwill impairment charge, for the three months June 30, 2024 was $20.4 million, a $8.3 million decrease.

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 net income of $112.5 million for the three months ended June 30, 2024 relative to the same period in 2023 was primarily due to the recognition of goodwill impairment of $104.2 million .

Other factors contributing to the decline in net income were an increase in provision for credit losses of $3.7 million and a decrease in noninterest income of $3.3 million, partially offset by a reduction of income tax expense of $3.8 million.

The increase in the provision was due to an updated scoring of qualitative factors and an increase in the provision attributable to the reserve on the performing CRE office portfolio.

The increase in operating noninterest expense (non-GAAP) was due to higher FDIC insurance fees, and the decrease in noninterest income was attributable to several one time items in the same period in 2023.

The reduction in income tax expense was due to lower pre-tax income period over period.

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

Total revenue (i.e.

net interest income plus noninterest income) was $76.7 million for the three months ended June 30, 2024 as compared to $80.4 million for the same period in 2023.

The most significant portion of revenue is net interest income, which was $71.4 million for the three months ended June 30, 2024, compared to $71.8 million for the same period in 2023.

The primary driver for lower total revenue was lower noninterest income, which decreased $3.3 million from the same period last year.

When the impact of the provision and goodwill impairment are excluded, pre-provision net revenue ("PPNR"), a non-GAAP measure, was $34.4 million for the three months ended June 30, 2024, as compared to $42.4 million for the same period in 2023.

The $8.1 million decrease was primarily due to lower noninterest income and higher noninterest expenses, primarily FDIC insurance.

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

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 2.40% for the three months ended June 30, 2024 and 2.49% for the same period in 2023.

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

Total noninterest income for the three months ended June 30, 2024 decreased to $5.3 million from $8.6 million for the same period in 2023, a 38.0% decrease.

Noninterest income decreased primarily due to lower other income.

Other income for the three months ended June 30, 2024 decreased to $2.9 million from $6.2 million for the same period in 2023, a 52.9% decrease primarily based on the prior year period including several one time items.

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

Noninterest expense totaled $146.5 million for the three months ended June 30, 2024, as compared to $38.0 million for same period in 2023, a $108.5 million increase.

The increase in noninterest expense was primarily due to the recognition of goodwill impairment of $104.2 million.

Excluding the goodwill impairment charge, operating noninterest expense (non-GAAP) was $42.3 million.

The $4.3 million increase in operating noninterest expense (non-GAAP) was primarily due to higher FDIC insurance fees.

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

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

Income tax expenses were $4.4 million for the three months ended June 30, 2024, a reduction of 45.9%, compared to the same period in 2023.

The components and drivers of the change are discussed in the "Income Tax Expense" section below.

The efficiency ratio was 191.0% for the three months ended June 30, 2024, as compared to 47.2% for the same period in 2023.

The adverse change in the efficiency ratio was primarily driven by the recognition of goodwill impairment of $104.2 million.

Excluding the goodwill impairment charge, operating efficiency ratio (non-GAAP) was 55.2%.

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

For the three months ended June 30, 2024 and 2023, the Company had average assets of $12.4 billion and $12.0 billion, respectively, the increase in which was primarily attributable to an increase in average interest-bearing deposits with other banks and other short-term investments over the comparative period.

For the three months ended June 30, 2024 and 2023, the Company had average common equity of $1.3 billion and $1.2 billion, respectively.

For the three months ended June 30, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively.

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

For the three months ended June 30, 2024, the Company reported an annualized return on average assets ("ROAA") of (2.7)%, as compared to 0.96% for the same period in 2023.

The annualized return on average common equity ("ROACE") for the three months ended June 30, 2024 was (26.7)% as compared to 9.2% for the same period in 2023.

The annualized return on average tangible common equity ("ROATCE") for the three months ended June 30, 2024 was (29.0)% as compared to 10.1% for the same period in 2023.

The adverse change in returns was primarily attributable to the recognition of goodwill impairment.

Excluding the goodwill impairment charge, operating annualized ROAA (non-GAAP) was 0.7%, operating annualized return on common equity (non-GAAP) was 6.5%, and operating annualized return on tangible common equity (non-GAAP) was 7.0%.

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

RESULTS OF OPERATIONS

Earnings Summary

Six Months Ended June 30, 2024 vs.

Six Months Ended June 30, 2023

Net loss for the six months ended June 30, 2024 was $84.1 million, as compared to net income of $52.9 million for the same period in 2023, a decrease of $137.0 million, or 259.0%.

The decrease of $137.0 million to net loss for the six months ended June 30, 2024 from net income for the same period in 2023 was primarily attributable to the recognition of goodwill impairment of $104.2 million and an increase in provision for credit losses of $32.7 million, partially offset by a reduction of income tax expenses of $7.6 million.

For more information on the drivers and the components of these changes, see the "Provision for Credit Losses" and "Income Tax Expenses" sections below.

When the impact of the provision is excluded, pre-provision net revenue ("PPNR"), a non-GAAP measure, was $38.3 million for the three months ended March 31, 2024, as compared to $38.1 million for the same period in 2023.

When the impact of the provision and goodwill impairment are excluded, operating pre-provision net revenue ("PPNR"), a non-GAAP measure, was $72.7 million for the six months ended June 30, 2024, as compared to $80.6 million for the same period in 2023.

The $7.9 million decrease was primarily due to lower noninterest income and higher noninterest expenses, primarily FDIC insurance.

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

Total revenue (i.e.

net interest income plus noninterest income) was $78.3 million for the three months ended March 31, 2024, as compared to $78.7 million for the same period in 2023.

net interest income plus noninterest income) was $155.0 million for the six months ended June 30, 2024, as compared to $159.1 million for the same period in 2023.

The net interest margin, which measures the difference between interest income and interest expense (i.e.

net interest income) as a percentage of earning assets, was 2.43% for the three months ended March 31, 2024 and 2.77% for the same period in 2023.

net interest income) as a percentage of earning assets, was 2.42% for the six months ended June 30, 2024 and 2.63% for the same period in 2023.

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

Noninterest income was $3.6 million for the three months ended March 31, 2024, as compared to $3.7 million for the same period in 2023.

Noninterest expense was $40.0 million for the three months ended March 31, 2024, as compared to $40.6 million for the same period in 2023.

The drivers of the change are detailed in the "Noninterest Income" and "Noninterest Expense" sections below.

The efficiency ratio remained steady at 51.09% for the three months ended March 31, 2024 as compared to 51.55% for the same period in 2023.

Total noninterest income for the six months ended June 30, 2024 decreased to $8.9 million from $12.3 million for the same period in 2023, a 27.4% decrease.

Noninterest income decreased primarily due to lower other income.

Other income for the six months ended June 30, 2024 decreased to $4.1 million from $7.5 million for the same period in 2023, a 45.0% decrease primarily due to several one time items in the prior year.

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

The efficiency ratio was 120.34% for the six months ended June 30, 2024 as compared to 49.37% for the same period in 2023.

Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 53.12%.

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

For the three months ended March 31, 2024 and 2023, the Company had average assets of $12.8 billion and $11.4 billion, respectively, the increase of which was primarily attributable to an increase in average interest-bearing deposits with other banks and other short-term investments over the comparative period.

For the three months ended March 31, 2024 and 2023, the Company had average common equity of $1.3 billion and $1.2 billion, respectively.

For the three months ended March 31, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively.

For the six months ended June 30, 2024 and 2023, the Company had average assets of $12.6 billion and $11.7 billion, respectively, the increase in which was primarily attributable to an increase in average interest-bearing deposits with other banks and other short-term investments over the comparative period.

For the six months ended June 30, 2024 and 2023, the Company had average common equity of $1.3 billion and $1.2 billion, respectively.

For the six months ended June 30, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively.

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

For the three months ended March 31, 2024, the Company reported an annualized return on average assets ("ROAA") of (0.01)%, as compared to 0.86% for the same period in 2023.

The annualized return on average common equity ("ROACE") for the three months ended March 31, 2024 was (0.11)% as compared to 7.92% for the same period in 2023.

The annualized return on average tangible common equity ("ROATCE"), a non-GAAP measure, for the three months ended March 31, 2024 was (0.11)% as compared to 8.65% for the same period in 2023.

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

For the six months ended June 30, 2024, the Company reported an annualized ROAA of (1.35)%, as compared to 0.91% for the same period in 2023.

The annualized ROACE for the six months ended June 30, 2024 was (13.25)% as compared to 8.58% for the same period in 2023.

The annualized ROATCE, a non-GAAP measure, for the six months ended June 30, 2024 was (14.4)% as compared to 9.37% for the same period in 2023.

The adverse change in returns was primarily attributable to the recognition of goodwill impairment of $104.2 million in 2024.

Excluding the goodwill impairment charge, operating annualized ROAA (non-GAAP) in 2024 was 0.32%, operating annualized return on common equity (non-GAAP) was 3.15%, and operating annualized return on tangible common equity (non-GAAP) was 3.43%.

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

5 unchanged sentences

Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

Net interest income was $74.7 million for the three months ended March 31, 2024, as compared to $75.0 million for the same period in 2023.

The decrease was primarily due to the $35.7 million increase in interest expense outpacing the $35.4 million increase in interest income.

The increase in interest expense was primarily attributable to increased volume of time deposits, other borrowings, and interest bearing transactions, and to a lesser extent was attributable to increases in average deposits and rates (4.29% for the three months ended March 31, 2024, compared to 3.63% for the same period in 2023).

The increase in interest income was primarily attributable to increased volume and rates on loans (6.95% for the three months ended March 31, 2024, compared to 6.35% for the same period in 2023) and interest bearing bank deposits and other short-term investments (5.43% for the three months ended March 31, 2024, compared to 4.45% for the same period in 2023)

The net interest margin decreased by 34 basis points from the three months ended March 31, 2023 as compared to the three months ended March 31, 2024 (from 2.77% to 2.43%).

Net interest income was $71.4 million for the three months ended June 30, 2024, as compared to $71.8 million for the same period in 2023.

Net interest income decreased for the three months ended June 30, 2024 primarily due to increases in average deposit rates (4.31% compared to 4.00%), increases in interest bearing deposits ($7.2 billion vs $6.0 billion), increases in other borrowing rates (5.07% compared to 4.85%).

This was partially offset by higher average loan balances ($8.0 billion compared to $7.8 billion) and yields (6.91% compared to 6.64%) as compared to June 30, 2023.

The net interest margin decreased by 9 basis points in the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, (from 2.49% to 2.40%).

The yield on earning assets increased by 27 basis points (from 5.44% to 5.71%) while cost of funds increased 41 basis points (from 3.20% to 3.61%).

Average loans (excluding loans held for sale) increased to $8.0 billion for the three months ended March 31, 2024 compared to $7.7 billion for the same period in 2023.

Average interest bearing deposits increased to $7.4 billion for the three months ended March 31, 2024 from $5.5 billion for the three months ended March 31, 2023, while average noninterest bearing demand deposits decreased to $2.1 billion for the three months ended March 31, 2024 from $3.3 billion for the three months ended March 31, 2023.

Additionally, average borrowings increased from $1.3 billion in the three months ended March 31, 2023 to $1.8 billion in the three months ended March 31, 2024.

Overall yields and rates increased during the three months ended March 31, 2024 as compared to the same period in 2023 as variable rate loans adjusted upwards and an increased number of loans moved off their rate floors.

The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the three months ended March 31, 2024 and 2023.

Average loans were $8.0 billion for the three months ended June 30, 2024 compared to $7.8 billion for the same period in 2023.

Additionally, average borrowings decreased from $2.1 billion in the three months ended June 30, 2023 to $1.7 billion in the three months ended June 30, 2024.

Overall yields on interest earning assets moved higher during the three months ended June 30, 2024 as compared to the same period in 2023, as variable rate loans adjusted upwards.

Additionally, rates on interest bearing liabilities moved higher during the three months ended June 30, 2024 as compared to the same period in 2023, as funding costs increased.

Net interest income was $146.1 million for the six months ended June 30, 2024, as compared to $146.8 million for the same period in 2023.

Net interest income decreased for the six months ended June 30, 2024 primarily due to increases in average deposit rates (4.30% compared to 3.89%), increases in interest bearing deposits ($7.3 billion vs $5.6 billion), increases in other borrowing rates (4.90% compared to 4.87%).

This was partially offset by higher average loan balances ($8.0 billion compared to $7.8 billion) and yields (6.93% compared to 6.50%) as compared to June 30, 2023.

The net interest margin decreased by 21 basis points in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 (from 2.63% to 2.42%).

The yield on earning assets increased by 40 basis points (from 5.31% to 5.71%) while cost of funds increased 68 basis points (from 2.92% to 3.60%).

Overall yields on interest earning assets moved higher during the six months ended June 30, 2024 as compared to the same period in 2023, as variable rate loans adjusted upwards.

Additionally, rates on interest bearing liabilities moved higher during the six months ended June 30, 2024 as compared to the same period in 2023, as funding costs increased.

Average loans increased to $8.0 billion for the six months ended June 30, 2024 compared to $7.8 billion for the same period in 2023.

Average interest bearing deposits increased to $7.3 billion for the six months ended June 30, 2024 from $5.6 billion for the six months ended June 30, 2023, while average noninterest bearing demand deposits decreased to $2.1 billion for the six months ended June 30, 2024 from $3.0 billion for the six months ended June 30, 2023.

Additionally, average borrowings remained steady at $1.7 billion for the six months ended June 30, 2024 and 2023.

The tables below present the average balances and rates of the major categories of the Company's assets and liabilities for the three and six months ended June 30, 2024 and 2023.

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

6 unchanged sentences

(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest Average

24 unchanged sentences

Customer repurchase agreements 38,599 330 3.44 % 41,105 333 3.25 %

Borrowings 1,682,684 21,202 5.07 % 2,061,402 24,944 4.85 %

Total interest bearing liabilities 8,894,772 98,378 4.45 % 8,058,585 84,699 4.22 %

Noninterest bearing liabilities:

Noninterest bearing demand 2,051,777 2,558,860

Other liabilities 151,324 97,019

Total noninterest bearing liabilities 2,203,101 2,655,879

Shareholders' Equity 1,263,627 1,245,647

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,361,500 $ 11,960,111

Net interest income $ 71,353 $ 71,811

Net interest spread 1.26 % 1.22 %

Net interest margin 2.40 % 2.49 %

Cost of funds

3.61 % 3.20 %

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

Net loan fees and late charges included in interest income on loans totaled $4.8 million and $4.2 million for the three months ended June 30, 2024 and 2023, respectively.

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

Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields And Rates (Unaudited)

(dollars in thousands)

Six Months Ended June 30,

Balance Interest Average

Yield/Rate Average

Balance Interest Average

Interest earning assets:

Interest bearing deposits with other banks and other short-term investments $ 1,648,389 $ 44,430 5.42 % $ 791,691 $ 19,003 4.84 %

Loans held for sale (1)

4,023 100 5.00 % 2,444 73 5.97 %

Loans (1) (2)

7,996,074 275,510 6.93 % 7,751,506 249,770 6.50 %

Investment securities available for sale (2)

1,497,680 14,295 1.92 % 1,643,200 16,337 2.00 %

Investment securities held-to-maturity ( 2)

1,003,253 10,790 2.16 % 1,077,851 11,449 2.14 %

Federal funds sold 10,054 208 4.16 % 10,238 125 2.46 %

Total interest earning assets 12,159,473 345,333 5.71 % 11,276,930 296,757 5.31 %

Total noninterest earning assets 509,855 494,146

allowance for credit losses (96,343) (76,518)

Total noninterest earning assets 413,512 417,628

TOTAL ASSETS $ 12,572,985 $ 11,694,558

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest bearing liabilities:

Interest bearing transaction $ 1,735,144 $ 32,930 3.82 % $ 1,096,436 $ 16,748 3.08 %

Savings and money market 3,372,195 69,381 4.14 % 3,146,251 64,135 4.11 %

Time deposits 2,201,506 53,918 4.93 % 1,378,609 27,493 4.02 %

Total interest bearing deposits 7,308,845 156,229 4.30 % 5,621,296 108,376 3.89 %

Customer repurchase agreements 37,341 645 3.47 % 39,689 635 3.23 %

1,739,773 42,408 4.90 % 1,693,349 40,911 4.87 %

Total interest bearing liabilities 9,085,959 199,282 4.41 % 7,354,334 149,922 4.11 %

11 unchanged sentences

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

Net loan fees and late charges included in interest income on loans totaled $5.1 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively.

Net loan fees and late charges included in interest income on loans totaled $9.1 million and $7.9 million for the six months ended June 30, 2024 and 2023, respectively.

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

(3) Beginning in the second quarter of 2023, the Company revised its cost of funds methodology to use a daily average calculation where interest expense on interest bearing liabilities is divided by average interest bearing liabilities and average noninterest bearing deposits.

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

The cost of funds for the three months ended March 31, 2023 has been recalculated using the current methodology.

Rate/Volume Analysis of Net Interest Income

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

Three Months Ended March 31, 2024 Compared With The Three Months Ended March 31, 2023

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

Three Months Ended June 30, 2024 Compared With The Three Months Ended June 30, 2023

(dollars in thousands) Change Due to Volume

17 unchanged sentences

Net interest income $ 57 $ (515) $ (458)

Six Months Ended June 30, 2024 Compared With The Six Months Ended June 30, 2023

(dollars in thousands) Change Due to Volume

Change Due to Rate

Total Increase (Decrease)

Interest earned on

Loans $ 7,881 $ 17,859 $ 25,740

Loans held for sale 47 (20) 27

Investment securities available-for-sale (1,447) (595) (2,042)

Investment securities held-to-maturity (792) 133 (659)

Interest bearing bank deposits 20,563 4,864 25,427

Federal funds sold (2) 85 83

Total interest income 26,250 22,326 48,576

Interest paid on

Interest bearing transaction 9,756 6,426 16,182

Savings and money market 4,606 640 5,246

Time deposits 16,411 10,014 26,425

Customer repurchase agreements (38) 48 10

Other borrowings 1,112 385 1,497

Total interest expense 31,847 17,513 49,360

Net interest income $ (5,597) $ 4,813 $ (784)

Provision for Credit Losses

6 unchanged sentences

Also, refer to the table in the "Allowance for Credit Losses" section in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflects activity in the ACL.

During the three months ended March 31, 2024, the Company recorded a provision for credit losses of $35.2 million on its loan portfolio.

The provision for credit losses was primarily attributable to an updated valuation for a CRE office property collateralizing a lending relationship with two loans outstanding, the total of which was partially charged off in the first quarter 2024.

Additionally, the provision was attributable to an increase in the ACL factor associated with CRE office loans.

The provision for credit losses on loans for the three months ended March 31, 2023 was $4.9 million.

The provision was primarily driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and uncertainty in the macroeconomic outlook and the related changes in economic growth and the broader economy, changes in the qualitative and economic component of the model associated with CRE office properties, as well as the increases in total loans.

During the three months ended March 31, 2024 and 2023, the provision for credit losses for the held-to-maturity securities portfolio was $1 thousand and $1.2 million, respectively, which, in 2023, were recorded primarily on several corporate bonds.

During the three months ended March 31, 2023, the provision for credit losses for the available-for-sale securities portfolio was $14 thousand.

There was no provision for credit losses on the available-for-sale securities portfolio for the three months ended March 31, 2024.

During the three months ended June 30, 2024, the Company recorded a provision for credit losses of $8.9 million on its loan portfolio and incurred $2.3 million in net charge-offs to its ACL.

The provision for credit losses on loans for the same period in 2023 was $5.3 million and there were $5.6 million of net charge-offs in its ACL.

During the six months ended June 30, 2024, the Company recorded a provision for credit losses of $44.1 million and net charge-offs of $23.7 million on its loan portfolio.

The provision for credit losses on loans for the same period in 2023 was $10.2 million and there were $6.6 million of net charge-offs in its ACL

The change in provision for credit losses during the six months ended June 30, 2024, was primarily attributable to an updated valuation for a CRE office property collateralizing a lending relationship with two loans outstanding, the total of which was partially charged off in the first quarter 2024.

Additionally, the increase in the provision was driven by adjustments to the qualitative components of the CECL model owing to the high inflationary environment and uncertainty in the macroeconomic outlook and the related changes in economic growth and the broader economy, changes in the qualitative and economic component of the model associated with CRE office properties, as well as the increases in total loans.

The provision for credit losses for the held-to-maturity securities portfolio was recorded primarily on several corporate bonds.

During the three months ended June 30, 2024 and 2023, the provision for credit losses for the held-to-maturity securities portfolio was of $55 thousand and $2 thousand, respectively.

During the six months ended June 30, 2024 and 2023, the provision for credit losses for the held-to-maturity securities portfolio was $56 thousand and $1.2 million, respectively.

There was no provision for credit losses on the available-for-sale securities portfolio for the three and six months ended June 30, 2024.

During the three and six months ended June 30, 2023, provisions of $0 and $14 thousand, respectively.

The provision for unfunded commitments is presented separately on the Consolidated Statements of Operations.

This provision considers the probability that unfunded commitments will fund.

During the three months ended March 31, 2024 and 2023, provisions of $456 thousand and $848 thousand, respectively, were incurred for unfunded commitments.

During the three months ended June 30, 2024 and 2023, provisions of $608 thousand and $318 thousand, respectively, were incurred for unfunded commitments.

During the six months ended June 30, 2024 and 2023, provisions of $1.1 million and $1.2 million, respectively, were incurred for unfunded commitments.

Noninterest Income

Noninterest income includes service charges on deposits, gain on sale of loans, gains and losses 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 three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table summarizes the comparative noninterest income for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

(dollars in thousands) 2024 2023 Dollar Change

Percent Change

Service charges on deposits $ 1,653 $ 1,626 $ 27 2 %

Gain on sale of loans 37 95 (58) (61) %

Net gain (loss) on sale of investment securities 3 2 1 50 %

Increase in the cash surrender value of bank-owned life insurance 709 648 61 9 %

Other income 2,930 6,224 (3,294) (53) %

Total $ 5,332 $ 8,595 $ (3,263) (38) %

Six Months Ended June 30,

(dollars in thousands)

7 unchanged sentences

$ 8,921 $ 12,295 $ (3,374) (27) %

Total noninterest income for the three months ended March 31, 2024 decreased to $3.6 million from $3.7 million for the three months ended March 31, 2023, a 3% decrease.

The decrease was primarily attributable to a decrease in gains on sale of residential mortgage loans, partially offset by an increase in service charges on deposits.

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.

Total noninterest income for the three and six months ended June 30, 2024 decreased to $5.3 million and $8.9 million from $8.6 million and $12.3 million for the three and six months ended June 30, 2023.

The decrease was primarily based on the prior year period nonrecurring items including income from SBIC fund and swap fees.

Noninterest Expense

Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, Federal Deposit Insurance Corporation ("FDIC") insurance assessments, and other expenses.

The following table summarizes the comparative noninterest expense for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table summarizes the comparative noninterest expense for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

(dollars in thousands) 2024 2023 Dollar Change

Percent Change

Salaries and employee benefits $ 21,770 $ 21,957 $ (187) (1) %

Premises and equipment expenses 2,894 3,227 (333) (10) %

Marketing and advertising 1,662 884 778 88 %

Data processing 3,495 3,354 141 4 %

Legal, accounting and professional fees 2,705 2,649 56 2 %

FDIC insurance 5,917 2,581 3,336 129 %

Goodwill impairment 104,168 — 104,168 — %

Other expenses 3,880 3,326 554 17 %

Total $ 146,491 $ 37,978 $ 108,513 286 %

Six Months Ended June 30,

(dollars in thousands)

7 unchanged sentences

FDIC insurance 12,329 4,067 8,262 203 %

Goodwill impairment 104,168 — 104,168 — %

Other expenses 6,021 7,944 (1,923) (24) %

$ 186,488 $ 78,562 $ 107,926 137 %

Total noninterest expense totaled $40.0 million for the three months ended March 31, 2024, as compared to $40.6 million for the three months ended March 31, 2023, a 1% decrease.

The decrease was primarily attributable to a $2.5 million reduction in other expenses, a $2.4 million reduction in salaries and employee benefits, and a $747 thousand reduction in legal, accounting and professional fees.

This total of these reductions to expense was partially offset by a $4.9 million increase in FDIC insurance.

The decrease in salaries and employee benefits over the comparative three months ended March 31, 2024 and 2023 was primarily due to a reduction in payroll taxes and employee benefits.

At March 31, 2024, the Company's full time equivalent staff numbered 451, as compared to 486 at March 31, 2023.

The decrease in legal, accounting and professional fees over the comparative three months ended March 31, 2024 and 2023 was primarily due to a $959 thousand reversal of legal fees receivable in the first quarter of 2023 relating to the previously disclosed settled litigations and investigations as Directors & Officers insurance for the 2016-2017 years was fully depleted.

Total noninterest expense was $146.5 million for the three months ended June 30, 2024, as compared to $38.0 million for the three months ended June 30, 2023, a 285.7% increase.

Total noninterest expense was $186.5 million for the six months ended June 30, 2024, as compared to $78.6 million for the six months ended June 30, 2023, a 137.4% increase.

The increase for three and six months ended June 30, 2024 was primarily due to the goodwill impairment charge of $104.2 million to reduce fully the carrying value of the Company's goodwill.

Refer to the "Critical Accounting Policies" section for additional details.

Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) was $42.3 million and $82.3 million for the three months and six months ended June 30, 2024.

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

Salaries and employee benefits were $21.8 million and $22.0 million, respectively, for the three months ended June 30, 2024 and June 30, 2023.

Salaries and employee benefits were $43.5 million and $46.1 million, respectively, for the six months ended June 30, 2024 and June 30, 2023.

The decrease in salaries and employee benefits over the comparative six months ended June 30, 2024 and 2023 was primarily due to reduced headcount and reduced incentive accruals and related taxes.

FDIC insurance expense was $5.9 million for the three months ended June 30, 2024 compared to $2.6 million, for the same period in 2023, a 129% increase.

FDIC insurance expense was $12.3 million for the six months ended June 30, 2024 compared to $4.1 million, for the same period in 2023, a 203% increase.

The increase in FDIC insurance expense over the comparative three and six months ended June 30, 2024 and 2023 was primarily due to increases in FDIC deposit insurance assessments.

Marketing expenses were $1.7 million and $0.9 million, respectively, for the three months ended June 30, 2024 and June 30, 2023, an 88% increase.

Marketing expenses were $2.5 million and $1.5 million, respectively, for the six months ended June 30, 2024 and June 30, 2023, a 66% increase.

The increase in marketing expenses over the comparative three and six months ended June 30, 2024 and 2023 was primarily due to higher marketing expenses related to our digital banking channel.

Legal, accounting and professional fees were $2.7 million and $5.2 million for the three and six months ended June 30, 2024, respectively, compared to $2.6 million and $5.9 million for the three and six months ended June 30, 2023, respectively, an increase of $56 thousand and a decrease of $0.7 million for the comparative periods, respectively.

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

The decrease in other expenses over the comparative three months ended March 31, 2024 and 2023 was primarily due to a reduction in director fees of $1.3 million and a $857 thousand recovery of real estate taxes.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 51.09% for the three months ended March 31, 2024, as compared to 51.55% for the same period in 2023.

Other expenses increased to $3.9 million from $3.3 million, or 16.7%, for the three months ended June 30, 2024, compared to the same three month period in 2023.

The increase in other expenses over the comparative three months was primarily due to two nonrecurring expenses ($325 thousand legal settlement and a $200 thousand non-loan charge-off).

For the six month period ended June 30, 2024 other expenses decreased to $6.0 million from $7.9 million, or 24.2%, for the same period in 2023.

The decrease in other expenses over the comparative six months ended June 30, 2024 and 2023 was primarily due to a reduction in director fees.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 191.03% and 120.34% for the three months and six months ended June 30, 2024, respectively as compared to 47.23% and 49.37% for the same periods in 2023.

The adverse change in the efficiency ratio was primarily driven by the recognition of goodwill impairment of $104.2 million.

Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 55.19% and 53.12% for the three and six months ended June 30, 2024, respectively.

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

The improvement in the efficiency ratio for the three months ended March 31, 2024 as compared to the same three month period in 2023 was primarily driven by the decrease in noninterest expenses outpacing the decreases in net interest income and noninterest income.

As a percentage of average assets, total noninterest expense (annualized) was 1.26% for the three months ended March 31, 2024, as compared to 1.44% for the same period in 2023.

The decrease for the three month period ended March 31, 2024 was primarily due to an increase in average interest earning assets.

As a percentage of average assets, total noninterest expense (annualized) was 4.77% for the three months ended June 30, 2024 as compared to 1.27% for the same period in 2023.

As a percentage of average assets, total noninterest expense (annualized) was 2.98% for the six months ended June 30, 2024, as compared to 1.35% for the same period in 2023.

Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) (annualized) as a percentage of average assets was 1.38% and 1.32% for the three and six months ended June 30, 2024.

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

Income Tax Expense

The Company's tax provision for the three months ended March 31, 2024 was $3.0 million, compared to $6.9 million for the three months ended March 31, 2023.

The decrease in the tax provision over the comparative three months ended March 31, 2024 and 2023 was primarily due to decreases in pre-tax income period over period.

For the three and six months ended June 30, 2024 the tax provision was $4.4 million and $7.4 million, respectively, compared to $8.2 million and $15.1 million for the three and six months ended June 30, 2023.

The decrease in the tax provision over the comparative three and six months ended June 30, 2024 and 2023 was primarily due to decreases in pre-tax income period over period.

The change in the effective tax rate over the comparative three and six months ended June 30, 2024 and 2023 was primarily driven by the impairment of the goodwill which is not deductible for tax purposes.

The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022 and made significant changes to the U.S.

3 unchanged sentences

FINANCIAL CONDITION

Total assets were $11.6 billion and $11.7 billion at March 31, 2024 and December 31, 2023, respectively.

Assets remained at similar levels from December 31, 2023 to March 31, 2024 with minor changes in the asset mix.

The decrease in total assets of $51.9 million (or 0.4%) from December 31, 2023 to March 31, 2024 was primarily due to decreases in investment securities and interest-bearing deposits with other banks and other short-term investments, the total of which was partially offset by an increase in loans.

The largest component of assets, total loans, had an amortized cost basis of $8.0 billion at March 31, 2024, a 0.2% increase from the balance at December 31, 2023.

The increase in loans over the three months ended March 31, 2024, was driven primarily by increased fundings of ongoing construction projects for commercial and residential properties, partially offset by decreases in income producing - CRE, owner occupied - CRE and commercial loans.

Investment securities, at amortized cost net of the ACL, totaled $2.6 billion at March 31, 2024 as compared to $2.7 billion at December 31, 2023, a decrease of $69.7 million, or 2.6%, that was primarily driven by the pay down of principal on mortgage-backed securities ("MBS") and calls of securities.

At March 31, 2024 and December 31, 2023, investment securities available-for-sale had an amortized cost of $1.6 billion and $1.7 billion, respectively, and a fair value of $1.4 billion and $1.5 billion, respectively.

Additionally, March 31, 2024 and December 31, 2023, investment securities held-to-maturity had an amortized cost, less an ACL of $2.0 million, of $1.0 billion and an estimated fair value of $878.2 million and $901.6 million, respectively.

In terms of funding, total deposits at March 31, 2024 were $8.5 billion, down from $8.8 billion at December 31, 2023, a decline of 3.5%.

Total borrowings (excluding customer repurchase agreements) were $1.7 billion and $1.4 billion at March 31, 2024 and December 31, 2023, respectively.

The decrease in deposits was primarily attributable to first quarter seasonality, while the increase in borrowings, attributable to net fundings on the Company's secured borrowings, was primarily to meet funding needs, including to fund loan growth, given the decrease in deposits.

Total shareholders' equity remained consistent at $1.3 billion as of March 31, 2024 , and December 31, 2023.

During the three months ended March 31, 2024, there was a slight decrease of 1.2%, which was primarily the result of cash dividends and the decrease in earnings.

Total assets were $11.3 billion and $11.7 billion at June 30, 2024 and December 31, 2023, respectively.

The decrease in total assets of $362.5 million, or 3.1%, from December 31, 2023 to June 30, 2024 was primarily due to decreases in investment securities and interest-bearing deposits with other banks, and the impairment charge of goodwill related to a 2014 acquisition.

The largest component of assets, total loans, had an amortized cost basis of $8.0 billion at June 30, 2024, a 0.4% increase from the balance at December 31, 2023.

The change in loans was a combination of increases in CRE, both owner occupied and income producing, partially offset by a reduction in commercial loans.

Investment securities, at amortized cost net of the ACL, totaled $2.6 billion at June 30, 2024 as compared to $2.7 billion at December 31, 2023, a decrease of $116.7 million, or 4.3%, that was primarily driven by the pay down of principal on mortgage-backed securities ("MBS") and calls of securities.

At June 30, 2024 and December 31, 2023, investment securities available-for-sale had an amortized cost of $1.6 billion and $1.7 billion, respectively, and a fair value of $1.4 billion and $1.5 billion, respectively.

Additionally, June 30, 2024 and December 31, 2023, investment securities held-to-maturity had an amortized cost (net of ACL of $2.0 million) of $1.0 billion and an estimated fair value of $856.3 million and $901.6 million, respectively.

In terms of funding, total deposits at June 30, 2024 were $8.3 billion, down from $8.8 billion at December 31, 2023, a decline of 6.1%.

Total borrowings (excluding customer repurchase agreements) were $1.7 billion and $1.4 billion at June 30, 2024 and December 31, 2023, respectively.

The decrease in deposits was primarily attributable to a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered funding.

Total shareholders' equity declined to $1.2 billion as of June 30, 2024 from $1.3 billion as of December 31, 2023.

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

Regulatory ratios based on risk-weighted assets experienced minor fluctuations of less than 1% from December 31, 2023 to March 31, 2024.

The total risk based capital ratio was 14.87% at March 31, 2024, as compared to 14.79% at December 31, 2023.

The common equity tier 1 capital ("CET1") risk based capital ratio was 13.80% at March 31, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 risk based capital ratio was 13.80% at March 31, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 leverage ratio was 10.26% at March 31, 2024, as compared to 10.73% at December 31, 2023.

The ratio of common equity to total assets was 10.85% at March 31, 2024, as compared to 10.92% at December 31, 2023 as common equity levels remained consistent over the three months ended March 31, 2024.

Book value per share was $41.72 at March 31, 2024, a 2.0% decrease over $42.58 at December 31, 2023.

In addition, the tangible common equity ratio was 10.03% at March 31, 2024, as compared to 10.12% at December 31, 2023.

Tangible book value per share was $38.26 at March 31, 2024, a 2.1% decrease from $39.08 at December 31, 2023.

Regulatory ratios based on risk-weighted assets experienced minor fluctuations of less than 1% from December 31, 2023 to June 30, 2024.

The total risk based capital ratio was 15.07% at June 30, 2024, as compared to 14.79% at December 31, 2023.

The common equity tier 1 capital ("CET1") risk based capital ratio was 13.92% at June 30, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 risk based capital ratio was 13.92% at June 30, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 leverage ratio was 10.58% at June 30, 2024, as compared to 10.73% at December 31, 2023.

The ratio of common equity to total assets was 10.35% at June 30, 2024, as compared to 10.92% at December 31, 2023 as common equity levels declined 8.2% over the six months ended June 30, 2024.

Book value per share was $38.75 at June 30, 2024, a 9.0% decrease over $42.58 at December 31, 2023.

These declines were primarily due to the goodwill impairment charge of $104.2 million.

In addition, the tangible common equity ratio was 10.35% at June 30, 2024, as compared to 10.12% at December 31, 2023.

Tangible book value per share was $38.74 at June 30, 2024, a 0.9% decrease from $39.08 at December 31, 2023.

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

5 unchanged sentences

Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.

Loans outstanding were $8.0 billion at March 31, 2024, an increase of $14.0 million, or 0.2%, from the balance at December 31, 2023.

The loan portfolio has continued to grow in the three months ended March 31, 2024, driven by increased fundings of ongoing construction projects for commercial and residential properties, partially offset by a reduction in CRE loans.

Loans outstanding were $8.0 billion at June 30, 2024, an increase of $33.0 million, or 0.4%, from the balance at December 31, 2023.

The loan portfolio has continued to grow in the six months ended June 30, 2024, driven by increased fundings of income producing CRE and ongoing construction projects for commercial and residential properties, partially offset by a reduction in commercial loans.

Market rates in 2024 for our new loan originations remained consistent with the market rates at the end of 2023, reflecting that the Federal Reserve has not raised short-term interest rates in 2024.

2 unchanged sentences

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.

Loans, net of amortized deferred fees and costs, at March 31, 2024 and December 31, 2023 by major category are summarized below.

March 31, 2024 December 31, 2023

Loans, net of amortized deferred fees and costs, at June 30, 2024 and December 31, 2023 by major category are summarized below.

June 30, 2024 December 31, 2023

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

12 unchanged sentences

$ 7,895,438 $ 7,882,755

(1) Excludes accrued interest receivable of $46.3 million and $45.3 million at March 31, 2024 and December 31, 2023, respectively, which is recorded in other assets.

(1) Excludes accrued interest receivable of $46.8 million and $45.3 million at June 30, 2024 and December 31, 2023, respectively, which is recorded in other assets.

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.

7 unchanged sentences

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 March 31, 2024, 31.8%, 26.9%, 24.2%, 5.4% and 11.7% 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 June 30, 2024, 31.1%, 27.6%, 24.5%, 5.4% and 11.4% 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, 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.

1 unchanged sentence

metro area in certain sectors, particularly multi-family CRE 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 $6.2 billion and $6.1 billion, or 77.1% and 77.0% of total loans, of amortized cost outstanding at March 31, 2024 and December 31, 2023, respectively.

As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.4 billion and $6.1 billion, or 80.5% and 77.0% of total loans, of amortized cost outstanding at June 30, 2024 and December 31, 2023, respectively.

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

The Company has remained focused on monitoring sectors that have had a lasting impact from the ramifications of the COVID-19 pandemic, particularly income producing CRE loans collateralized by office properties, which comprised approximately $898.7 million and $949.0 million, or 11.2% and 11.9% of total loans, at March 31, 2024 and December 31, 2023, respectively.

Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $829.5 million and $879.0 million, or 10.4% and 11.0% of total loans, at March 31, 2024 and December 31, 2023, respectively.

As a percentage of total income producing - CRE office loans, 37.4%, 31.4% and 23.5% were located in Washington's Maryland Suburbs, Northern Virginia, and Washington, D.C.

at March 31, 2024.

The following table summarizes the Company's income producing - commercial real estate loans, at principal, at March 31, 2024:

(dollars in thousands)

Washington D.C.

Washington Suburbs

Northern Virginia

Percent of Total

The Company has remained focused on monitoring sectors that have had a lasting impact from the ramifications of the COVID-19 pandemic, particularly income producing CRE loans collateralized by office properties, which comprised approximately $887.4 million and $949.0 million, or 11.1% and 11.9% of total loans, at June 30, 2024 and December 31, 2023, respectively.

Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $818.2 million and $879.0 million, or 10.2% and 11.0% of total loans, at June 30, 2024 and December 31, 2023, respectively.

As a percentage of total income producing - CRE office loans, 37.9%, 30.6% and 23.9% were located in Washington's Maryland Suburbs, Northern Virginia, and Washington, D.C., respectively, at June 30, 2024.

The following table summarizes the Company's income producing - commercial real estate loans, at principal, at June 30, 2024.

Additionally, we present the three most recent quarters' data for percent of principal by loan size and geographical concentration a comparative analysis :

At June 30, 2024

Maryland Virginia

(dollars in thousands) Washington D.C.

Washington Suburbs Other Northern Virginia Other Other Total Percent of Total

Collateral Type:

Hotel & motel $ 137,750 $ 80,579 $ 83,175 $ 60,223 $ — $ 21,936 $ 383,663 9 %

$ 138,330 $ 85,641 $ 83,327 $ 66,982 $ — $ 22,129 $ 396,409 10 %

5,854 78,924 40,898 19,713 3,815 — 149,204 4 %

265,432 45,969 372 54,511 25,793 5,380 397,457 10 %

384,408 214,415 320 72,131 84,636 47,877 803,787 20 %

211,181 336,043 4,349 282,297 64,823 47 898,740 22 %

82,279 97,738 62,018 77,094 99,788 1,938 420,855 10 %

Industrial 5,825 81,281 40,733 19,578 12,071 983 160,471 4 %

Mixed use 265,272 47,185 371 54,609 25,758 5,377 398,572 9 %

Multifamily 389,042 250,929 318 120,246 84,850 47,838 893,223 21 %

Office 211,660 336,115 4,536 271,685 63,369 — 887,365 21 %

Retail 81,300 99,537 61,613 79,103 99,615 1,927 423,095 10 %

Single / 1-4 Family & Res.

73,737 2,775 2,543 14,496 6,554 4,080 104,185 2 %

155,520 188,186 39,918 459,291 9,355 27,255 879,525 22 %

$ 1,316,741 $ 1,049,691 $ 233,745 $ 1,046,515 $ 294,764 $ 108,706 $ 4,050,162 100 %

Condo 73,238 2,648 2,498 14,302 6,524 4,068 103,278 3 %

Other 185,312 188,563 40,295 522,269 8,166 33,011 977,616 23 %

Total $ 1,349,399 $ 1,086,837 $ 233,539 $ 1,142,015 $ 300,353 $ 115,140 $ 4,227,283 100 %

Percent of total 31 % 26 % 6 % 27 % 7 % 3 % 100 %

Percent of Principal by Loan Size:

Less than $1 million 2 % 1 % 4 % 3 % 2 % 2 %

$1 million to $5 million

10 % 10 % 19 % 7 % 8 % 15 %

$5 million to $10 million 7 % 8 % 28 % 5 % 12 % 39 %

$10 million to $25 million 18 % 17 % 30 % 31 % 28 % 12 %

$25 million to $50 million 51 % 26 % 19 % 37 % 26 % 32 %

Greater than $50 million 12 % 38 % — % 17 % 24 % — %

Total 100 % 100 % 100 % 100 % 100 % 100 %

At March 30, 2024

Percent of Principal by Loan Size

1 unchanged sentence

$1 million to $5 million

9 % 10 % 15 % 7 % 8 % 16 %

$5 million to $10 million 8 % 7 % 32 % 6 % 10 % 35 %

2 unchanged sentences

Greater than $50 million 13 % 39 % — % 19 % 24 % — %

Total 100 % 100 % 100 % 100 % 100 % 100 %

At December 31, 2023

Percent of Principal by Loan Size

Less than $1 million 2 % 2 % 3 % 2 % 2 % 3 %

$1 million to $5 million

10 % 9 % 18 % 8 % 9 % 18 %

At March 31, 2024, $248.9 million of principal of loans collateralized by office properties were criticized or classified.

At March 31, 2024, the Company had no concentrations of loans with any one borrower in any one industry exceeding 10% of its total loan portfolio.

$5 million to $10 million 8 % 6 % 30 % 6 % 11 % 29 %

$10 million to $25 million 17 % 22 % 30 % 37 % 21 % 15 %

$25 million to $50 million 51 % 22 % 19 % 29 % 30 % 35 %

Greater than $50 million 12 % 39 % — % 18 % 27 % — %

Total 100 % 100 % 100 % 100 % 100 % 100 %

At June 30, 2024, $247.5 million of principal of loans collateralized by office properties were criticized or classified.

At June 30, 2024, 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.

The following table sets forth the time to the final contractual maturity of the loan portfolio as of March 31, 2024:

March 31, 2024

The following table sets forth the time to the final contractual maturity of the loan portfolio as of June 30, 2024:

June 30, 2024

(dollars in thousands) Total One Year or Less (1)

15 unchanged sentences

(1) Demand loans, having no contractual maturity, and overdrafts are reported as due in one year or less.

(2) Income producing CRE office loans, which had total principal of $898.7 million at March 31, 2024 and are included within income producing - commercial real estate, had principal of $323.8 million, $559.8 million, and $15.1 million aggregated with one year or less, over one year to five years, and over five years to fifteen years remaining until contractual maturity, respectively.

Approximately $107.8 million and $368.8 million of income producing CRE office loans as of March 31, 2024 were due to mature within three months and 18 months, respectively.

(2) Income producing CRE office loans, which had total principal of $887.4 million at June 30, 2024 and are included within income producing - commercial real estate, had principal of $297.9 million, $574.1 million, $15.2 million, and $0.2 million aggregated with one year or less, over one year to five years, over five years to fifteen years, and over fifteen years remaining until contractual maturity, respectively.

Approximately $126.4 million and $361.1 million of income producing CRE office loans as of June 30, 2024 were due to mature within three months and 18 months, respectively.

Allowance for Credit Losses

2 unchanged sentences

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 "Provision for Credit Losses" for a discussion of the Company's calculation of the provision for credit losses during the three months ended March 31, 2024 and 2023.

The ACL for loans at March 31, 2024, or $99.7 million, reflected a $13.7 million increase from December 31, 2023, or $85.9 million, reflecting a provision for credit losses of $35.2 million and $21.4 million in net charge-offs during the three months ended March 31, 2024.

Net charge-offs, on an annualized basis, represented 1.07% of average loans for the three months ended March 31, 2024, an increase from net charge-offs of $975 thousand during the three months ended March 31, 2023, which represented 0.05% of average loans, excluding loans held for sale, on an annualized basis.

Net charge-offs during the three months ended March 31, 2024 included $20.6 million of charge offs on one CRE office lending relationship.

At March 31, 2024, the ACL for loans represented 1.25% of total loans outstanding, as compared to 1.08% at December 31, 2023.

The ACL represented 109% of nonperforming loans at March 31, 2024, as compared to 131% at December 31, 2023.

Also, please refer to the discussion under the caption "Provision for Credit Losses" for a discussion of the Company's calculation of the provision for credit losses during the six months ended June 30, 2024 and 2023.

The ACL for loans at June 30, 2024 at $106.3 million, reflected a $20.4 million increase from December 31, 2023 when it was $85.9 million, reflecting a provision for credit losses of $44.1 million and $23.7 million in net charge-offs during the six months ended June 30, 2024.

Net charge-offs, on an annualized basis, represented 0.59% of average loans for the six months ended June 30, 2024, an increase from net charge-offs of $6.6 million during the six months ended June 30, 2023, which represented 0.17% of average loans, excluding loans held for sale, on an annualized basis.

Net charge-offs during the six months ended June 30, 2024 included $20.1 million of charge offs on one CRE office lending relationship.

At June 30, 2024, the ACL for loans represented 1.33% of total loans outstanding, as compared to 1.08% at December 31, 2023.

The ACL represented 114% of nonperforming loans at June 30, 2024, as compared to 131% at December 31, 2023.

Refer to the "Provision for Credit Losses" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the provision for credit losses.

4 unchanged sentences

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

As of March 31, 2024 and December 31, 2023, loans rated special mention had an amortized cost of $265.3 million and $207.1 million, respectively, and loans rated substandard had an amortized cost of $361.8 million and $335.8 million, respectively.

As of June 30, 2024 and December 31, 2023, loans rated special mention had an amortized cost of $307.9 million and $207.1 million, respectively, and loans rated substandard had an amortized cost of $403.3 million and $335.8 million, respectively.

The increases in special mention loans were primarily attributable to additions in CRE loans, particularly in income producing - commercial real estate and commercial construction loans, and commercial loans.

At March 31, 2024, 97.5% and $73.9% of special mention and substandard loans, respectively, were current.

The increases in substandard loans were primarily attributable to additions in CRE loans, particularly in owner occupied - commercial real estate loan and commercial construction loans.

At June 30, 2024, 100% and 74% of special mention and substandard loans, respectively, were current.

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

6 unchanged sentences

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.

At March 31, 2024 and December 31, 2023, the Company's performing office coverage ratio, which calculates the ACL attributable to loans collateralized by performing office properties as a percentage of total loans, was 3.67% and 1.91%, respectively.

At June 30, 2024 and December 31, 2023, the Company's performing office coverage ratio, which calculates the ACL attributable to loans collateralized by performing office properties as a percentage of total loans, was 4.05% and 1.91%, respectively.

The following table sets forth activity in the ACL for the periods indicated.

Three Months Ended March 31,

Six Months Ended June 30,

(dollars in thousands) 2024 2023

6 unchanged sentences

Commercial 166 232

Income producing - commercial real estate 185 —

Owner occupied - commercial real estate 47 8

Construction - commercial and residential — 34

Other consumer — 5

5 unchanged sentences

The following table reflects the allocation of the ACL at the dates indicated.

The allocation of the allowance at March 31, 2024 includes ACL of $387 thousand against individually assessed loans of $92.1 million, as compared to ACL of $641 thousand against individually assessed loans of $66.1 million at December 31, 2023.

The allocation of the allowance at June 30, 2024 includes ACL of $2.3 million against individually assessed loans of $98.1 million, as compared to ACL of $641 thousand against individually assessed loans of $66.1 million at December 31, 2023.

The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

9 unchanged sentences

Nonperforming Assets

The Company's level of nonperforming assets, which comprise the amortized cost of loans delinquent 90 days or more and nonaccrual loans, which includes the nonperforming portion of loan modifications, and the carrying value of OREO, totaled $92.3 million at March 31, 2024 representing 0.79% of total assets, as compared to $66.6 million of nonperforming assets, or 0.57% of total assets, at December 31, 2023.

The Company's level of nonperforming assets, which comprise the amortized cost of loans delinquent 90 days or more and nonaccrual loans, which includes the nonperforming portion of loan modifications, and the carrying value of OREO, totaled $98.9 million at June 30, 2024 representing 0.88% of total assets, as compared to $66.6 million of nonperforming assets, or 0.57% of total assets, at December 31, 2023.

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 March 31, 2024 or December 31, 2023.

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

The Company had no accruing loans 90 days or more past due at June 30, 2024 or December 31, 2023.

Management prioritizes remaining attention to early signs of deterioration in borrowers’ financial conditions and to taking action designed 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 1.25% of total loans at March 31, 2024, is adequate to absorb expected credit losses within the loan portfolio at that date.

Total nonperforming loans had an amortized cost of $91.5 million at March 31, 2024, representing 1.15% of total loans, compared to $65.5 million at December 31, 2023, representing 0.82% of total loans.

The increase was primarily from the addition of two income-producing commercial real estate loans to non-accruing status following a partial charge-off on the combined balances.

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 1.33% of total loans at June 30, 2024, is adequate to absorb expected credit losses within the loan portfolio at that date.

Total nonperforming loans had an amortized cost of $98.2 million at June 30, 2024, representing 1.23% of total loans, compared to $65.5 million at December 31, 2023, representing 0.82% of total loans.

The increase was primarily from the addition of two income-producing commercial real estate loans to non-accruing status following a partial charge-off on the combined balances in the six months ended June 30, 2024.

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.

16 unchanged sentences

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.

A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $500 thousand or greater;

otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.

Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company.

2 unchanged sentences

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

During the three months ended March 31, 2024, the Bank modified 11 loans with a total amortized cost of $85.0 million at March 31, 2024 (1.1% of the loan portfolio).

During the six months ended June 30, 2024 , the Bank modified 26 loans with a total amortized cost of $178.8 million at June 30, 2024 (2.2% of the loan portfolio).

These loans received extended loan terms of between approximately one to 12 months.

5 unchanged sentences

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 was OREO of $773 thousand, comprising four foreclosed properties, at March 31, 2024 and $1.1 million, comprising two foreclosed properties, at December 31, 2023.

Included in nonperforming assets was OREO of $773 thousand, comprising four foreclosed properties, at June 30, 2024 and $1.1 million, comprising two foreclosed properties, at December 31, 2023.

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

2 unchanged sentences

comparable sales, a scenario in which the Company is considering legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value.

Two OREO properties were sold during the three months ended March 31, 2024, generating proceeds of $656 thousand.

There were no sales of OREO property during the three months ended March 31, 2023.

Two OREO properties were sold during the six months ended June 30, 2024 and one OREO property was sold during the three and six months ended June 30, 2023, generating proceeds of $656 thousand and $609 thousand, respectively.

There were no sales of OREO property during the three months ended June 30, 2024.

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

(dollars in thousands) March 31, 2024 December 31, 2023

(dollars in thousands) June 30, 2024 December 31, 2023

Nonaccrual Loans:

1 unchanged sentence

Income producing - commercial real estate (1)

72,157 40,926

Owner occupied - commercial real estate 19,795 19,836

2 unchanged sentences

Home equity 265 242

Other consumer — —

Total nonperforming loans 98,153 65,524

4 unchanged sentences

Ratio of nonperforming assets to total assets 0.88 % 0.57 %

(1) Includes loans held for sale of $5 million that were on nonaccrual status at June 30, 2024.

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 March 31, 2024, there were $361.8 million of Substandard loans.

At June 30, 2024, there were $403.3 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.

8 unchanged sentences

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.

The following table summarizes the Company's deposits at March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023

The following table summarizes the Company's deposits at June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

Balance Percentage

8 unchanged sentences

$ 8,267,348 100 % $ 8,808,039 100 %

For the three months ended March 31, 2024, total deposits decreased by $306.6 million as compared to December 31, 2023.

For the six months ended June 30, 2024, total deposits decreased by $540.7 million as compared to December 31, 2023.

The decrease was primarily attributable to a $585.1 million decrease in noninterest bearing demand deposits and a reduction in savings and money market accounts of $148.7 million, which was partially offset by a $126.5 million increase in interest bearing transaction deposits.

No single depositor represented more than 10% of total deposits as of March 31, 2024.

The ten largest depositors not associated with brokered pass-through relationships represented approximately 19% of total deposits in the aggregate as of March 31, 2024.

These deposit changes were the result of a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings.

No single depositor represented more than 10% of total deposits as of June 30, 2024.

The ten largest depositors not associated with brokered pass-through relationships represented approximately 16% of total deposits in the aggregate as of June 30, 2024.

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

1 unchanged sentence

Additionally, the Bank participates in the Certificates of Deposit Account Registry Service ("CDARS") and the Insured Cash Sweep product ("ICS"), which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance.

The total of reciprocal deposits at March 31, 2024 was $1.7 billion (19.9% of total deposits) as compared to $1.6 billion (17.7% of total deposits) at December 31, 2023.

The total of reciprocal deposits at June 30, 2024 was $1.5 billion (17.6% of total deposits) as compared to $1.6 billion (17.7% of total deposits) at December 31, 2023.

These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs.

The Bank also is able to obtain one-way CDARS deposits and participates in IntraFi's Insured Network Deposit Program ("IND").

The Bank had $823.6 million and $786.5 million of IND brokered deposits as of March 31, 2024 and December 31, 2023, respectively.

The Bank had $714.2 million and $786.5 million of IND brokered deposits as of June 30, 2024 and December 31, 2023, respectively.

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

1 unchanged sentence

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

At March 31, 2024, total brokered deposits were $4.2 billion, or 49.1% of total deposits, of which $1.7 billion were attributable to the CDARS and ICS two-way accounts.

Total brokered deposits comprised $1.7 billion, $1.6 billion, and $853.0 million of time deposits, savings and money market accounts and interest-bearing transaction accounts, respectively, at March 31, 2024.

At June 30, 2024, total brokered deposits were $3.9 billion, or 46.9% of total deposits, of which $1.5 billion were attributable to the CDARS and ICS two-way accounts.

Total brokered deposits comprised $1.5 billion, $1.5 billion, and $865.0 million of time deposits, savings and money market accounts and interest-bearing transaction accounts, respectively, at June 30, 2024.

At December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $2.5 billion, or 28.8% of total deposits, and comprised $1.5 billion, $961.5 million, and $108.2 million of time deposits, savings and money market accounts, and interest-bearing transaction accounts, respectively.

At March 31, 2024 and December 31, 2023, total deposits included estimated totals of $2.3 billion and $2.8 billion of uninsured deposits, which represented 27.6% and 31.4% of total deposits, respectively.

At June 30, 2024 and December 31, 2023, total deposits included estimated totals of $2.3 billion and $2.8 billion of uninsured deposits, which represented 27.5% and 31.4% 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.

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 $37.1 million at March 31, 2024 compared to $30.6 million at December 31, 2023.

The balances in these accounts were $39.2 million at June 30, 2024 compared to $30.6 million at December 31, 2023.

Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S.

4 unchanged sentences

This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at March 31, 2024 and December 31, 2023.

At March 31, 2024, the Company had $600.0 million in FHLB secured borrowings outstanding compared to none at December 31, 2023.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at June 30, 2024 and December 31, 2023.

At June 30, 2024, the Company had $590.0 million in FHLB secured borrowings outstanding compared to none at December 31, 2023.

Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities and a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios.

Additionally, at March 31, 2024 and December 31, 2023, the Company had $1.0 billion and $1.3 billion of outstanding borrowings under the BTFP.

Additionally, at June 30, 2024 and December 31, 2023, the Company had $1.0 billion and $1.3 billion of outstanding borrowings under the BTFP.

Outstanding BTFP advances are secured by collateral consisting of specifically pledged qualifying investment securities.

Outstanding short-term advances and borrowings are part of the overall asset liability strategy to support loan growth.

The subordinated notes outstanding at March 31, 2024 and December 31, 2023 comprised the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024.

The subordinated notes outstanding at June 30, 2024 and December 31, 2023 comprised 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.

2 unchanged sentences

Loan commitments outstanding and lines and letters of credit were as follows:

(dollars in thousands) March 31, 2024

(dollars in thousands) June 30, 2024

December 31, 2023

25 unchanged sentences

Approximately 59% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand.

As of March 31, 2024, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity.

As of June 30, 2024, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity.

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

1 unchanged sentence

The Company's primary sources of liquidity are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.

The following table summarizes the Company's secondary sources of liquidity in use and available at March 31, 2024:

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

March 31, 2024:

The following table summarizes the Company's secondary sources of liquidity in use and available at June 30, 2024:

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

June 30, 2024:

Unsecured brokered deposits (1)

12 unchanged sentences

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

The funding mix has continued to change throughout the three months ended March 31, 2024.

Deposits at quarter-end were $8.5 billion and $8.8 billion at March 31, 2024 and December 31, 2023, respectively.

The funding mix has continued to change throughout the six months ended June 30, 2024.

Deposits were $8.3 billion and $8.8 billion at June 30, 2024 and December 31, 2023, respectively.

The decrease in deposits was primarily attributable to a $585.1 million decrease in noninterest bearing demand deposits and a reduction in savings and money market accounts of $148.7 million, partially offset by a $126.5 million increase in interest bearing transaction deposits.

Borrowings at quarter-end were $1.7 billion and $1.4 billion at March 31, 2024 and December 31, 2023, respectively.

These funding mix changes were the result of a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings.

Borrowings at quarter-end were $1.7 billion and $1.4 billion at June 30, 2024 and December 31, 2023, respectively.

The increase in borrowings was attributable to net fundings on the Company's secured borrowings.

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 March 31, 2024 and December 31, 2023.

The Bank can borrow unsecured funds under one-way CDARS and ICS brokered deposits up to $2.0 billion, against which there was $998.2 million outstanding at March 31, 2024.

The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $823.6 million of brokered deposits at March 31, 2024.

At March 31, 2024, the Bank was eligible to draw on advances from the FHLB up to $1.9 billion based on assets pledged as collateral to the FHLB, against which the Bank borrowed $600.0 million as of March 31, 2024.

The Bank can purchase up to $145.0 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at June 30, 2024 and December 31, 2023.

The Bank can borrow unsecured funds under one-way CDARS and ICS brokered deposits up to $1.9 billion, against which there was $886.3 million outstanding at June 30, 2024.

The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $714.2 million of brokered deposits at June 30, 2024.

At June 30, 2024, the Bank was eligible to draw on advances from the FHLB up to $1.9 billion based on assets pledged as collateral to the FHLB, against which the Bank borrowed $590.0 million as of June 30, 2024.

The Bank had no FHLB borrowings outstanding at December 31, 2023.

The Bank posted additional collateral to the FHLB during the three months ended March 31, 2024 and during the year ended December 31, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize this source of funding in the future.

The Bank posted additional collateral to the FHLB during the six months ended June 30, 2024 and during the year ended December 31, 2023 to increase its eligibility for advances to meet its ongoing liquidity needs and expects to continue to utilize this source of funding in the future.

In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP.

3 unchanged sentences

The Federal Reserve discontinued the origination of new loans on March 11, 2024, as scheduled.

At March 31, 2024, the Bank had $1.0 billion of BTFP borrowings outstanding.

At June 30, 2024, the Bank had $1.0 billion of BTFP borrowings outstanding.

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

The Bank has a back-up borrowing facility through the Discount Window at the Federal Reserve.

This facility, which can be used to borrow up to $568.6 million, is collateralized with specific assets identified to the Federal Reserve.

This facility, which can be used to borrow up to $1.9 billion, is collateralized with specific assets identified to the Federal Reserve.

During the second quarter, additional collateral in the form of acceptable loans was pledged to the Discount Window increasing available contingent capacity.

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.

In total, the Bank's aggregate borrowing capacity at March 31, 2024 was $2.2 billion, which consists of $1.3 billion and $568.6 million of additional aggregate capacity to borrow from the FHLB and the Federal Reserve's Discount Window, respectively, on assets that have been pledged;

In total, the Bank's aggregate borrowing capacity at June 30, 2024 was $3.4 billion, which consists of $1.3 billion and $1.9 billion of additional aggregate capacity to borrow from the FHLB and the Federal Reserve's Discount Window, respectively, on assets that have been pledged;

along with $17.9 million of aggregate capacity to borrow on a pledge security through a repurchase agreement with Raymond James.

5 unchanged sentences

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 first quarter of 2024 negatively impacted our net interest margin and earnings, as is expected in an economic environment with continued elevated rates.

The mix of sources used in the second quarter of 2024 negatively impacted our net interest margin and earnings, as is expected in an economic environment with continued elevated 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.

6 unchanged sentences

The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations.

During the three months ended March 31, 2024, average short term liquidity, comprising interest bearing deposits with other banks and other short-term investments and investment securities available-for-sale, was $3.4 billion, which is above the Bank's average needs.

Secondary sources of liquidity available at March 31, 2024 were $4.3 billion, which include the FHLB, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window.

At March 31, 2024, the Company held total securities available to be pledged with an estimated fair value of $297.5 million.

At March 31, 2024, under the Bank’s liquidity formula, it had $5.3 billion of primary and secondary liquidity sources.

During the first six months ended June 30, 2024, average short term liquidity, comprising interest bearing deposits with other banks and other short-term investments and investment securities available-for-sale, was $3.1 billion, which is above the Bank's average needs.

Secondary sources of liquidity available at June 30, 2024 were $5.5 billion, which include the FHLB, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window.

At June 30, 2024, the Company held total securities available to be pledged with an estimated fair value of $151.2 million.

At June 30, 2024, under the Bank’s liquidity formula, it had $6.6 billion of primary and secondary liquidity sources.

Management believes the amount is adequate to meet current and projected funding needs.

9 unchanged sentences

Although growth in that segment over the past 36 months at 21% 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 March 31, 2024, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators.

At June 30, 2024, 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 121% of total risk based capital.

1 unchanged sentence

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.

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.

3 unchanged sentences

Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

At March 31, 2024, the capital position of the Company and its wholly owned subsidiary, the Bank, continue to exceed regulatory requirements and well-capitalized guidelines.

At June 30, 2024, 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:

14 unchanged sentences

The Basel III Rules also increased risk weights for certain assets and off-balance-sheet exposures.

At March 31, 2024, the Company and the Bank meet all these requirements.

The Company announced a regular quarterly cash dividend on March 28, 2024 of $0.45 per share to shareholders of record on April 18, 2024 and it was paid on April 30, 2024.

At June 30, 2024, the Company and the Bank meet all these requirements.

The Company announced a regular quarterly cash dividend on June 28, 2024 of $0.45 per share to shareholders of record on July 20, 2024 and it was paid on July 31, 2024.

The ability of the Company to continue to grow is dependent on its results of operations 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.

The capital amounts and ratios for the Company and Bank as of March 31, 2024 and December 31, 2023 are presented in the table below.

The capital amounts and ratios for the Company and Bank as of June 30, 2024 and December 31, 2023 are presented in the table below.

Company Bank Minimum Required Basel III To Be Well-Capitalized Under Prompt Corrective Action Regulations (1)

1 unchanged sentence

(dollars in thousands) Amount Ratio Amount Ratio

March 31, 2024

June 30, 2024

CET1 capital (to risk weighted assets) $ 1,332,436 13.92 % $ 1,327,510 13.95 % 7.00 % 6.50 %

18 unchanged sentences

Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows to provide net interest income growth consistent with the Company's profit objectives.

During the three months ended March 31, 2024, the Company was able to produce a net interest margin of 2.43% as compared to 2.77% during the same period in 2023 and continues to manage its overall interest rate risk position.

During the six months ended June 30, 2024, the Company was able to produce a net interest margin of 2.42% as compared to 2.63% during the same period in 2023 and continues to manage its overall interest rate risk position.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits.

The loan portfolio increased during the first quarter of 2024.

The re-pricing duration of the loan portfolio was 13 and 12 months at March 31, 2024 and December 31, 2023, respectively, with fixed rate loans amounting to 39% of total loans at March 31, 2024 and 38% at December 31, 2023.

Variable and adjustable rate loans comprised 61% of total loans at March 31, 2024 and 62% at December 31, 2023.

The loan portfolio increased during the first six months of 2024.

The re-pricing duration of the loan portfolio was 11 and 12 months at June 30, 2024 and December 31, 2023, respectively, with fixed rate loans amounting to 39% of total loans at June 30, 2024 and 38% at December 31, 2023.

Variable and adjustable rate loans comprised 61% of total loans at June 30, 2024 and 62% at December 31, 2023.

Variable rate loans are generally indexed to the Secured Overnight Funding Rate ("SOFR") or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S.

2 unchanged sentences

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

At March 31, 2024, the amortized cost less allowance of the investment portfolio decreased by $69.6 million, or 2.6%, as compared to the balance at December 31, 2023.

Based on amortized cost, the percentage mix of municipal securities was 5% of total investments at March 31, 2024 and December 31, 2023.

The portion of the portfolio invested in MBS was 61% at March 31, 2024 and December 31, 2023.

At June 30, 2024, the amortized cost less allowance of the investment portfolio decreased by $116.6 million, or 4.3%, as compared to the balance at December 31, 2023.

Based on amortized cost, the percentage mix of municipal securities was 5% of total investments at June 30, 2024 and December 31, 2023.

The portion of the portfolio invested in MBS was 61% at June 30, 2024 and December 31, 2023.

The portion of the portfolio invested in U.S.

agency investments was 27% at March 31, 2024 and December 31, 2023.

Corporate bonds made up 5% of total investments at March 31, 2024 and December 31, 2023.

treasury bonds were 2% of total investments at March 31, 2024 and December 31, 2023.

The duration of the investment portfolio decreased to 4.3 years at March 31, 2024 from 4.4 years at December 31, 2023.

At March 31, 2024, $80.3 million of corporate bonds were subordinated debt from other financial institutions.

agency investments was 27% at June 30, 2024 and December 31, 2023.

Corporate bonds made up 5% of total investments at June 30, 2024 and December 31, 2023.

treasury bonds were 2% of total investments at June 30, 2024 and December 31, 2023.

The duration of the investment portfolio decreased to 4.2 years at June 30, 2024 from 4.4 years at December 31, 2023.

At June 30, 2024, $80.3 million of corporate bonds were subordinated debt from other financial institutions.

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

3 unchanged sentences

Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.

These derivatives are not designated as hedges, are not speculative and have an asset position with a notional value of $49.5 million as of March 31, 2024.

These derivatives are not designated as hedges, are not speculative and have an asset position with a notional value of $49.5 million as of June 30, 2024.

The changes in fair value for these contracts are recognized directly in earnings.

The duration of the deposit portfolio decreased as rates rose, measuring 24 months at March 31, 2024 and 28 months at December 31, 2023.

The Company experienced a total deposit decrease of $306.6 million for the three months ended March 31, 2024 as compared to a total loan increase of $14.0 million for the same period.

The funding mix has continued to change in the three months ended March 31, 2024.

The duration of the total deposit portfolio decreased as rates rose, measuring 25 months at June 30, 2024 and 28 months at December 31, 2023.

The Company experienced a total deposit decrease of $540.7 million for the six months ended June 30, 2024 as compared to a total loan increase of $33.0 million for the same period.

The funding mix has continued to change in the six months ended June 30, 2024.

The decrease in deposits was primarily attributable to a $585.1 million decrease in noninterest bearing demand deposits and a reduction in savings and money market accounts of $148.7 million, partially offset by a $193.2 million increase in interest bearing transaction deposits.

These funding mix changes were the result of an increased disintermediation driven primarily by an increase in interest rates.

During the three months ended March 31, 2024, the Company’s cost of interest bearing deposits increased by 18 basis points across its interest-bearing deposits, which comprise 78.4% of its total deposits at March 31, 2024.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $168.6 million and $162.0 million at March 31, 2024 and December 31, 2023, respectively.

At March 31, 2024, the net unrealized loss position represented 10.45% of the investment portfolio's book value.

During the six months ended June 30, 2024, the Company’s cost of interest bearing deposits increased by 22 basis points across its interest-bearing deposits, which comprise 79.5% of its total deposits at June 30, 2024.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $163.8 million and $162.0 million at June 30, 2024 and December 31, 2023, respectively.

At June 30, 2024, the net unrealized loss position represented 10.34% of the investment portfolio's book value.

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

3 unchanged sentences

While yields on interest-earning assets have increased, including the impact of the reset of variable and adjustable rate loans, as scheduled, our cost of funds on interest-bearing liabilities has also increased in connection with increased utilization of interest-bearing deposits and borrowings and increasing rates on those financing sources.

As a result, the net interest margin has remained steady, as compared to the two previous quarters.

Our rate risk modeling showed net interest margin expansion in an increasing rate environment;

As a result, the net interest margin has declined slightly, as compared to the two previous quarters.

Our rate risk modeling showed very modest net interest margin expansion in an increasing rate environment;

however, the model's prediction is the result of increases in both interest income on variable and adjustable rate loans and interest expense on its deposit liabilities, based on our funding needs, market conditions and certain contractual obligations but with no changes in the mix of assets or liabilities or the spreads we are able to earn.

2 unchanged sentences

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

At March 31, 2024, the Company had a portfolio of $4.9 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.82%, which was consistent with the rate at December 31, 2023.

At March 31, 2024, only $210.6 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date.

At June 30, 2024, the Company had a portfolio of $4.9 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.83%, which was a 1 bps increase from December 31, 2023.

At June 30, 2024, only $187.8 million of loans held by the Company were earning interest at their floor rate, and the majority of those are expected to reset at rates higher than their floor at their next rate reset date.

The Company employs an earnings simulation model (immediate parallel shifts along the yield curve) on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios.

2 unchanged sentences

The data is then subjected to a "shock test" which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100, 200, and 300 basis points, along the entire yield curve, but not below zero.

The results are analyzed as to the impact on net interest income, earnings and the market equity over the next twelve and twenty-four month periods from March 31, 2024.

The results are analyzed as to the impact on net interest income, earnings and the market equity over the next twelve and twenty-four month periods from June 30, 2024.

In addition to analysis of simultaneous changes in interest rates along the yield curve, an analysis of changes based on interest rate "ramps" is also performed.

Such analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

For the analysis presented below, at March 31, 2024, the simulation assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points and assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

For the analysis presented below, at June 30, 2024, the simulation assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points and assumes a 100 basis point change in interest rates on interest bearing deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

The Bank does have deposits with contractual terms which means these deposits will change 100 basis points for every 100 basis points change in market rates.

3 unchanged sentences

If this were to occur, the effects of a rising or declining interest rate environment may not be in accordance with management’s expectations.

As quantified in the table below, the Company's analysis at March 31, 2024 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points.

As quantified in the table below, the Company's analysis at June 30, 2024 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked down 100, 200, and 300 basis points and up 100, 200, 300, and 400 basis points.

This moderate impact is due substantially to the significant level of variable rate and repriceable assets and liabilities and related shorter relative durations.

At March 31, 2024, the repricing duration of the (a) investment portfolio was 4.3 years, (b) loan portfolio was 1.1 years, (c) interest bearing deposit portfolio was 1.1 years, and (d) the borrowed funds portfolio was 0.5 years.

The following table reflects the result of simulation analysis on the March 31, 2024 asset and liabilities balances:

At June 30, 2024, the repricing duration of the (a) investment portfolio was 4.2 years, (b) loan portfolio was 0.9 years, (c) interest bearing deposit portfolio was 1.2 years, and (d) the borrowed funds portfolio was 0.3 years.

The following table reflects the result of simulation analysis on the June 30, 2024 asset and liabilities balances:

Change in interest

13 unchanged sentences

For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change, and -30% for a 400 basis point change.

The impact of 0.1% in net interest income and 0.2% in net income given a 100 basis point decrease in market interest rates at March 31, 2024 compares to (1.3)% in net interest income and (2.6)% in net income for the same period in 2023, and reflects in large measure the beta factor discussion above.

The analysis at the end of the first quarter of 2024 compared to the first quarter of 2023, showed that in an environment of increasing rates the continued increase in income is dependent on rate increases, which are passed through to borrowers basis point for basis point, as opposed to the prior year where our model suggested rising rates would not be fully passed on to depositors.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at March 31, 2024 are not believed to be excessive.

The improvement in net interest income and net income of 1% and 2.4%, respectively, given a 100 basis point decrease in market interest rates at June 30, 2024 compares to declines of 2.7% and 5.3%, respectively, for the same period in 2023, and reflects in large measure the beta factor discussion above.

The analysis at the end of the first six months of 2024 compared to the first six months of 2023, showed that in an environment of increasing rates the continued increase in income is dependent on rate increases, which are passed through to borrowers basis point for basis point, as opposed to the prior year where our model suggested rising rates would not be fully passed on to depositors.

The changes in net interest income, net income and the economic value of equity in higher interest rate shock scenarios at June 30, 2024 are not believed to be excessive.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table.

22 unchanged sentences

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," "tangible common equity ratio," "average tangible common equity," "annualized return on average tangible common equity," "efficiency ratio," "operating efficiency ratio," "operating net income," "operating annualized return on average tangible common equity," "operating noninterest expense," "operating revenue," "operating pre-provision net revenue," "operating net income," and "operating earnings per share (diluted)." 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.

2 unchanged sentences

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 calculates operating ROATCE by dividing operating 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.

Operating noninterest expense is a non-GAAP financial measure derived from GAAP based amounts.

The Company calculates operating noninterest expense by subtracting from noninterest expense the one-time goodwill impairment of $104.2 million.

During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the Company's sustained decrease in the Company’s stock price.

Management performed an interim quantitative impairment test, resulting in the impairment charge on its only reporting unit as of May 31, 2024 and determined that goodwill had become fully impaired, which resulted in an impairment charge of $104.2 million to reduce fully the carrying value of the Company's goodwill.

The Company considers the adjusted metric information that is important to shareholders because the impairment charge was a one-time event that occurred during the second quarter of 2024.

The operating noninterest expense allows investors to better compare the Company's performance against historical periods.

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

The efficiency ratio measures a bank's overhead as a percentage of its revenue.

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

The Company calculates pre-provision net revenue by subtracting noninterest expenses from the sum of net interest income and noninterest income.

PPNR to average assets is calculated by dividing the annualized PPNR by average assets.

The operating efficiency ratio is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million, and then by dividing the operating noninterest expense by the sum of net interest income and noninterest income.

The efficiency ratio and the operating efficiency ratio measures a bank's overhead as a percentage of its revenue.

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

The Company calculates pre-provision net revenue by subtracting noninterest expense from the sum of net interest income and noninterest income.

The operating pre-provision net revenue is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million, and then by subtracting the operating noninterest expense from the sum of net interest income and noninterest income.

The Company considers this information important to shareholders because it illustrates revenue excluding the impact of provisions and reversals to the ACL on loans.

2 unchanged sentences

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

(dollars in thousands except per share data) March 31, 2024 December 31, 2023

(dollars in thousands except per share data) June 30, 2024 December 31, 2023

Common shareholders' equity $ 1,169,459 $ 1,274,283

8 unchanged sentences

Tangible common equity ratio 10.35 % 10.12 %

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands) 2024

2023 2024 2023

Average common shareholders' equity $ 1,263,627 $ 1,245,647 $ 1,276,641 $ 1,243,325

1 unchanged sentence

Average tangible common equity $ 1,163,800 $ 1,141,423 $ 1,174,369 $ 1,139,098

Net income available to common shareholders $ (338) $ 24,234

Net (loss) income available to common shareholders

$ (83,802) $ 28,692 $ (84,140) $ 52,926

Average tangible common equity 1,163,800 1,141,423 1,174,369 1,139,098

Annualized return on average tangible common equity (28.96) % 10.08 % (14.41) % 9.37 %

Net (loss) income

$ (83,802) $ 28,692 $ (84,140) $ 52,926

Add back of goodwill impairment

104,168 — 104,168 —

Operating net income (Non-GAAP)

$ 20,366 $ 28,692 $ 20,028 $ 52,926

Operating annualized return on average tangible common equity (Non-GAAP) 7.04 % 10.08 % 3.43 % 9.37 %

Three Months Ended June 30,

Six Months Ended June 30,

2023 2024 2023

Net interest income $ 71,353 $ 71,811 $ 146,051 $ 146,835

2 unchanged sentences

Noninterest expense 146,491 37,978 186,488 78,562

Exclude goodwill impairment

(104,168) — (104,168) —

Operating noninterest expense (Non-GAAP)

42,323 37,978 82,320 78,562

Efficiency ratio 191.03 % 47.23 % 120.34 % 49.37 %

Net interest income

Operating efficiency ratio (Non-GAAP)

55.19 % 47.23 % 53.12 % 49.37 %

Net interest income $ 71,353 $ 71,811 $ 146,051 $ 146,835

Noninterest income 5,332 8,595 8,921 12,295

Operating revenue 76,685 80,406 154,972 159,130

Noninterest expense 146,491 37,978 186,488 78,562

(39,997) (40,584)

Pre-provision net revenue (69,806) 42,428 (31,516) 80,568

Add back of goodwill impairment

104,168 — 104,168 —

Operating pre-provision net revenue (Non-GAAP)

$ 34,362 $ 42,428 $ 72,652 $ 80,568

Operating net (loss) income and operating (loss) earnings per share (diluted) are non-GAAP financial measures derived from GAAP based amounts.

The Company calculates operating net (loss) income by excluding from net (loss) income the one-time goodwill impairment of $104.2 million.

During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters.

Management performed an interim quantitative impairment test as of May 31, 2024, and determined that goodwill had become fully impaired, resulting in the impairment charge on its only reporting unit, of $104.2 million to reduce fully the carrying value of the Company's goodwill.

The Company calculates operating (loss) earnings per share (diluted) by dividing net (loss) income excluding the one-time goodwill impairment of $104.2 million by the weighted average shares outstanding (diluted) for the three and six months ended June 30, 2024.

The Company considers this information important to shareholders because operating net (loss) income and operating (loss) earnings per share (diluted) provides investors insight into how Company earnings changed exclusive of the impairment charge to allow investors to better compare the Company's performance against historical periods.

The table below provides a reconciliation of operating net (loss) income and operating (loss) earnings per share (diluted) to the nearest GAAP measure.

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands) 2024

2023 2024 2023

Net (loss) income

$ (83,802) $ 28,692 $ (84,140) $ 52,926

Add back of goodwill impairment

104,168 — 104,168 —

Operating net income (Non-GAAP)

$ 20,366 $ 28,692 $ 20,028 $ 52,926

(Loss) earnings per share (diluted) (1)

$ (2.78) $ 0.94 $ (2.79) $ 1.72

Add back of goodwill impairment per share (diluted)

3.45 — 3.46 —

Operating earnings per share (diluted) (Non-GAAP)

$ 0.67 $ 0.94 $ 0.67 $ 1.72

(1) For periods ended with a net loss, anti-dilutive financial instruments have been excluded from the calculation of earnings per share (diluted).

Operating earnings per share (diluted) calculations include the impact of outstanding equity-based awards for all periods.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis