What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 317 added, 361 removed, 797 unchanged (46% of the section changed)

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

For example, the effects of the COVID-19 pandemic and related hybrid or fully remote working environment 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 June 30, 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.

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

During the 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.

During the second quarter 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 due to changes in macroeconomic conditions and market volatility in the financial markets and the banking industry due to the impact from rising interest rates which 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 goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill as of May 31, 2024.

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

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Earnings Summary

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.

Three Months Ended September 30, 2024 vs.

Three Months Ended September 30, 2023

Net income for the three months ended September 30, 2024 was $21.8 million as compared to net income of $27.4 million for the same period in 2023, a $5.6 million decrease.

This decrease was primarily due to an increase in provision for credit losses of $4.5 million and an increase in noninterest expense of $6.0 million, partially offset by a reduction of income tax expense of $2.3 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 increase in noninterest expense was due to higher FDIC insurance fees.

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.

net interest income plus noninterest income) was $78.8 million for the three months ended September 30, 2024 as compared to $77.1 million for the same period in 2023.

The most significant portion of revenue is net interest income, which was $71.8 million for the three months ended September 30, 2024, compared to $70.7 million for the same period in 2023, and was the primary driver for higher total revenue period over period.

Refer to the "Net Interest Income and Net Interest Margin" section below for additional details.

When the impact of the provision is excluded, pre-provision net revenue ("PPNR"), a non-GAAP measure, was $35.2 million for the three months ended September 30, 2024, as compared to $39.4 million for the same period in 2023.

The $4.2 million decrease was primarily due to an increase in noninterest expenses driven by higher FDIC insurance fees, partially offset by higher net interest income as discussed in the "Net Interest Income and Net Interest Margin" below.

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.

net interest income) as a percentage of earning assets, was 2.37% for the three months ended September 30, 2024 and 2.43% 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.

Total noninterest income for the three months ended September 30, 2024 increased to $7.0 million from $6.3 million for the same period in 2023, a 9.5% increase.

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.

Noninterest expense totaled $43.6 million for the three months ended September 30, 2024, as compared to $37.6 million for same period in 2023, a $6.0 million increase.

The increase in noninterest expense 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.

The efficiency ratio was 55.4% for the three months ended September 30, 2024, as compared to 48.8% for the same period in 2023.

The adverse change in the efficiency ratio was primarily driven by an increase in noninterest expenses due to higher FDIC insurance fees.

For the three months ended September 30, 2024 and 2023, the Company had average assets of $12.4 billion and $11.9 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 September 30, 2024 and 2023, the Company had average common equity of $1.2 billion and $1.2 billion, respectively.

For the three months ended September 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%.

For the three months ended September 30, 2024, the Company reported an annualized return on average assets ("ROAA") of 0.7%, as compared to 0.9% for the same period in 2023.

The annualized return on average common equity ("ROACE") for the three months ended September 30, 2024 was 7.2% as compared to 8.8% for the same period in 2023.

The annualized return on average tangible common equity ("ROATCE") for the three months ended September 30, 2024 was 7.2% as compared to 9.6% for the same period in 2023.

The adverse change in returns was primarily attributable to the reduction in net income.

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

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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.

Nine Months Ended September 30, 2024 vs.

Nine Months Ended September 30, 2023

Net loss for the nine months ended September 30, 2024 was $62.3 million, as compared to net income of $80.3 million for the same period in 2023, a decrease of $142.6 million.

This decrease was primarily attributable to the recognition of goodwill impairment of $104.2 million in the second quarter of 2024 and an increase in provision for credit losses of $37.2 million, partially offset by a reduction of income tax expenses of $10.0 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 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.

When the impact of the provision and goodwill impairment are excluded, operating pre-provision net revenue ("PPNR"), a non-GAAP measure, was $107.8 million for the nine months ended September 30, 2024, as compared to $120.0 million for the same period in 2023.

The $12.2 million decrease was primarily due to an increase in noninterest expenses driven by higher FDIC insurance fees.

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 $155.0 million for the six months ended June 30, 2024, as compared to $159.1 million for the same period in 2023.

net interest income plus noninterest income) was $233.8 million for the nine months ended September 30, 2024, as compared to $236.2 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 2.42% for the six months ended June 30, 2024 and 2.63% for the same period in 2023.

net interest income) as a percentage of earning assets, was 2.40% for the nine months ended September 30, 2024 and 2.56% 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 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.

Total noninterest income for the nine months ended September 30, 2024 decreased to $15.9 million from $18.6 million for the same period in 2023, a 14.9% decrease.

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.

The efficiency ratio, inclusive of the goodwill impairment charge, was 98.43% for the nine months ended September 30, 2024 as compared to 49.19% for the same period in 2023.

Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 53.87%.

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 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.

For the nine months ended September 30, 2024 and 2023, the Company had average assets of $12.5 billion and $11.8 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 nine months ended September 30, 2024 and 2023, the Company had average common equity of $1.3 billion and $1.2 billion, respectively.

For the nine months ended September 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 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.

For the nine months ended September 30, 2024, the Company reported an annualized ROAA, inclusive of the goodwill impairment charge, of (0.67)%, as compared to 0.91% for the same period in 2023.

The annualized ROACE for the nine months ended September 30, 2024 was (6.65)% as compared to 8.66% for the same period in 2023.

The annualized ROATCE, a non-GAAP measure, for the nine months ended September 30, 2024 was (7.0)% as compared to 9.45% 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.

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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 $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%).

Net interest income was $71.8 million for the three months ended September 30, 2024, as compared to $70.7 million for the same period in 2023.

Net interest income increased for the three months ended September 30, 2024 primarily due to an increase in average loan balances ($8.0 billion compared to $7.8 billion) and yields increased from 6.73% to 6.93%.

Additionally, average balances for interest bearing deposits with other banks increased from $1.1 billion to $1.6 billion.

These increases were offset by higher average balances in total interest bearing deposits from $6.7 billion to $7.4 billion.

The net interest margin decreased by 6 basis points in the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, (from 2.43% to 2.37%).

The yield on earning assets increased by 19 basis points (from 5.54% to 5.73%) while cost of funds increased 30 basis points (from 3.39% to 3.69%).

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%).

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

Additionally, average short-term borrowings were unchanged at $1.6 billion for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Overall yields on interest earning assets moved higher during the three months ended September 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 September 30, 2024 as compared to the same period in 2023, as funding costs increased.

Net interest income was $217.9 million for the nine months ended September 30, 2024, as compared to $217.6 million for the same period in 2023.

Net interest income increased for the nine months ended September 30, 2024 primarily due to higher average loan balances ($8.0 billion compared to $7.8 billion) and yields (6.93% compared to 6.58%) as compared to September 30, 2023.

This was partially offset by increases in average deposit rates (4.32% compared to 4.03%), increases in interest bearing deposits ($7.3 billion vs $6.0 billion) and increases in other borrowing rates (4.94% compared to 4.83%) for the nine months ended September 30, 2024 as compared to the same period in 2023.

The net interest margin decreased by 16 basis points in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 (from 2.56% to 2.40%).

The yield on earning assets increased by 33 basis points (from 5.39% to 5.72%) while cost of funds increased 55 basis points (from 3.08% to 3.63%).

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.

Overall yields on interest earning assets moved higher during the nine months ended September 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 nine months ended September 30, 2024 as compared to the same period in 2023, as funding costs increased due to a combination of interest rates and mix of funding sources utilized.

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

Average interest bearing deposits increased to $7.3 billion for the nine months ended September 30, 2024 from $6.0 billion for the nine months ended September 30, 2023, while average noninterest bearing demand deposits decreased to $2.0 billion for the nine months ended September 30, 2024 from $2.8 billion for the nine months ended September 30, 2023.

Additionally, average short-term borrowings remained unchanged at $1.7 billion for the nine months ended September 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 nine months ended September 30, 2024 and 2023.

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

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(dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Balance Interest Average

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Customer repurchase agreements 38,045 332 3.47 % 36,082 311 3.42 %

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

Other short-term borrowings 1,615,867 20,448 5.03 % 1,610,097 19,190 4.73 %

Long-term borrowings 824 — — % — — — %

Total interest bearing liabilities 9,083,484 101,970 4.47 % 8,344,038 90,430 4.30 %

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Cost of funds 3.69 % 3.39 %

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.

Net loan fees and late charges included in interest income on loans totaled $3.9 million and $4.1 million for the three months ended September 30, 2024 and 2023, respectively.

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

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(dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest Average

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Customer repurchase agreements 37,578 977 3.47 % 38,473 946 3.29 %

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

Other short-term borrowings 1,698,170 62,856 4.94 % 1,665,293 60,101 4.83 %

Long-term borrowings 277 — — % — — — %

Total interest bearing liabilities 9,085,130 301,252 4.43 % 7,655,694 240,352 4.20 %

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Cost of funds 3.63 % 3.08 %

3.60 % 2.92 %

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

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.

Net loan fees and late charges included in interest income on loans totaled $12.9 million and $12.0 million for the nine months ended September 30, 2024 and 2023, respectively.

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

Rate/Volume Analysis of Net Interest Income

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

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

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

Three Months Ended September 30, 2024 compared with the Three Months Ended September 30, 2023

(dollars in thousands) Change Due to Volume

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Net interest income $ 1,344 $ (220) $ 1,124

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

Nine Months Ended September 30, 2024 compared with the Nine Months Ended September 30, 2023

(dollars in thousands) Change Due to Volume

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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 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.

During the three months ended September 30, 2024, the Company recorded a provision for credit losses of $10.9 million on its loan portfolio and incurred $5.3 million in net charge-offs to its ACL.

The provision for credit losses on loans for the same period in 2023 was $5.6 million and there were $340 thousand of net charge-offs in its ACL.

During the nine months ended September 30, 2024, the Company recorded a provision for credit losses of $54.9 million and net charge-offs of $29.0 million on its loan portfolio.

The provision for credit losses on loans for the same period in 2023 was $15.8 million and there were $6.9 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 change in provision for credit losses during the three and nine months ended September 30, 2024, was primarily attributable to the following factors:

1) changes in the qualitative component of the model relating to CRE office properties;

2) enhancements to the quantitative model during Q1 to include additional economic factors;

and, 3) specific reserves on individually evaluated non-performing loans.

Additionally, the change in provision for credit losses during the nine months ended September 30, 2024, was also impacted by the partial charge off of a CRE office relationship after an updated valuation was received in the first quarter 2024.

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.

During the three months ended September 30, 2024 and 2023, there was a reversal of provision for credit losses of $775 thousand and a provision expense of $1 thousand, respectively, for the held-to-maturity securities portfolios.

During the nine months ended September 30, 2024 and 2023, there was a reversal of provision for credit losses of $719 thousand and a provision expense of $1.2 million, respectively, for the held-to-maturity securities portfolios.

There was no provision for credit losses on the available-for-sale securities portfolio for the three and nine months ended September 30, 2024 and 2023.

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 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.

During the three months ended September 30, 2024 and 2023, a reversal of provision of $1.6 million and $839 thousand, respectively, were recorded for unfunded commitments.

During the nine months ended September 30, 2024 and 2023, a provision reversal of $529 thousand and provision expense of $327 thousand, respectively, were recorded 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 and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

(dollars in thousands) 2024 2023 Dollar Change

Percent Change

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

Three Months Ended September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

Service charges on deposits $ 1,747 $ 1,631 $ 116 7 %

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

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

Gain (loss) on sale of loans 20 (5) 25 (500) %

Net gain on sale of investment securities

3 5 (2) (40) %

Increase in the cash surrender value of bank-owned life insurance 731 669 62 9 %

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Total $ 6,951 $ 6,347 $ 604 10 %

Six Months Ended June 30,

(dollars in thousands)

2024 2023 Dollar Change

Percent Change

Nine Months Ended September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

Service charges on deposits $ 5,099 $ 4,767 $ 332 7 %

Gain on sale of loans

57 395 (338) (86) %

Net gain (loss) on sale of investment securities 10 (14) 24 (171) %

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Other income 8,563 11,522 (2,959) (26) %

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

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.

Total $ 15,872 $ 18,642 $ (2,770) (15) %

Total noninterest income for the three months ended September 30, 2024 increased to $7.0 million from $6.3 million for the three months ended September 30, 2023.

The increase was primarily driven by gains on the sale of mortgage servicing rights and higher swap fee income.

Total noninterest income for the nine months ended September 30, 2024 decreased to $15.9 million from $18.6 million for the nine months ended September 30, 2023.

The decrease was primarily based on the prior year period nonrecurring items including income from Small Business Investment Companies ("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 and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

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

Three Months Ended September 30,

(dollars in thousands) 2024 2023 Dollar Change

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FDIC insurance 7,399 3,342 4,057 121 %

Goodwill impairment 104,168 — 104,168 — %

Other expenses 3,290 3,523 (233) (7) %

Total $ 43,614 $ 37,633 $ 5,981 16 %

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

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$ 230,102 $ 116,195 $ 113,907 98 %

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.

Total noninterest expense was $43.6 million for the three months ended September 30, 2024, as compared to $37.6 million for the three months ended September 30, 2023, a 15.9% increase.

The increase for the three months ended September 30, 2024 was primarily due to increases in FDIC deposit insurance assessments.

Total noninterest expense was $230.1 million for the nine months ended September 30, 2024, as compared to $116.2 million for the nine months ended September 30, 2023, a 98.0% increase.

The increase for the nine months ended September 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.

Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) was $125.9 million for the nine months ended September 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.

Salaries and employee benefits were $21.7 million and $21.5 million, respectively, for the three months ended September 30, 2024 and September 30, 2023.

Salaries and employee benefits were $65.2 million and $67.7 million, respectively, for the nine months ended September 30, 2024 and September 30, 2023.

The decrease in salaries and employee benefits over the comparative nine months ended September 30, 2024 and 2023 was primarily due to reduced incentive accruals, payroll taxes and healthcare costs.

FDIC insurance expense was $7.4 million for the three months ended September 30, 2024 compared to $3.3 million, for the same period in 2023, a 121% increase.

FDIC insurance expense was $19.7 million for the nine months ended September 30, 2024 compared to $7.4 million, for the same period in 2023, a 166% increase.

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

Marketing expenses were $1.6 million and $0.8 million, respectively, for the three months ended September 30, 2024 and September 30, 2023, an 107% increase.

Marketing expenses were $4.1 million and $2.3 million, respectively, for the nine months ended September 30, 2024 and September 30, 2023, an 80% increase.

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

Legal, accounting and professional fees were $3.4 million and $8.6 million for the three and nine months ended September 30, 2024, respectively, compared to $2.2 million and $8.1 million for the three and nine months ended September 30, 2023, respectively, an increase of $1.2 million and an increase of $0.5 million for the comparative periods, respectively.

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

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.

Other expenses decreased to $3.3 million from $3.5 million, or 6.6%, for the three months ended September 30, 2024, compared to the same three month period in 2023.

For the nine month period ended September 30, 2024 other expenses decreased to $9.3 million from $11.5 million, or 19.1%, for the same period in 2023.

The decrease in other expenses over the comparative nine months ended September 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 55.35% and 98.43% for the three months and nine months ended September 30, 2024, respectively as compared to 48.83% and 49.19% for the same periods in 2023.

The adverse change in the efficiency ratio for the nine months ended September 30, 2024 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 53.87% for the nine months ended September 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.

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.

As a percentage of average assets, total noninterest expense (annualized) was 1.40% for the three months ended September 30, 2024 as compared to 1.25% for the same period in 2023.

As a percentage of average assets, total noninterest expense (annualized) was 2.46% for the nine months ended September 30, 2024, as compared to 1.32% 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 1.35% for the nine months ended September 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

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.

For the three and nine months ended September 30, 2024 the tax provision was $4.9 million and $12.3 million, respectively, compared to $7.2 million and $22.3 million for the three and nine months ended September 30, 2023.

The decrease in the tax provision over the comparative three and nine months ended September 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 nine months ended September 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.

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FINANCIAL CONDITION

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.

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

The decrease in total assets of $0.4 billion, or 3.3%, from December 31, 2023 to September 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 with an amortized cost basis of $8.0 billion at September 30, 2024, remained relatively flat compared to the balance at December 31, 2023.

Refer to the "Loan Portfolio" section below for further discussion on loans.

Investment securities, at amortized cost net of the ACL, totaled $2.5 billion at September 30, 2024 as compared to $2.7 billion at December 31, 2023, a decrease of $172.1 million, or 6.4%, that was primarily driven by the pay down of principal on mortgage-backed securities ("MBS") and calls of securities.

At September 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, September 30, 2024 and December 31, 2023, investment securities held-to-maturity had an amortized cost of $961.9 million (net of ACL of $1.2 million) and $1.0 billion (net of ACL of $2.0 million), respectively, and an estimated fair value of $868.4 million and $901.6 million, respectively.

In terms of funding, total deposits at September 30, 2024 were $8.5 billion, down from $8.8 billion at December 31, 2023, a decline of 3.0%.

Total borrowings (excluding customer repurchase agreements) were $1.3 billion and $1.4 billion at September 30, 2024 and December 31, 2023, respectively.

The components and drivers of the change are discussed in the "Deposits and Other Borrowings" section below.

Total shareholders' equity declined to $1.2 billion as of September 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 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.

Regulatory ratios based on risk-weighted assets experienced minor fluctuations of less than 5% from December 31, 2023 to September 30, 2024.

The total risk based capital ratio was 15.51% at September 30, 2024, as compared to 14.79% at December 31, 2023.

The common equity tier 1 capital ("CET1") risk based capital ratio was 14.30% at September 30, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 risk based capital ratio was 14.30% at September 30, 2024, as compared to 13.90% at December 31, 2023.

The tier 1 leverage ratio was 10.77% at September 30, 2024, as compared to 10.73% at December 31, 2023.

The ratio of common equity to total assets was 10.86% at September 30, 2024, as compared to 10.92% at December 31, 2023 as common equity levels declined 3.8% over the nine months ended September 30, 2024.

Book value per share was $40.61 at September 30, 2024, a 4.6% 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.

In addition, the tangible common equity ratio was 10.86% at September 30, 2024, as compared to 10.12% at December 31, 2023.

Tangible book value per share was $40.61 at September 30, 2024, a 3.9% increase 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 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.

Loans outstanding were $8.0 billion at September 30, 2024, an increase of $1.6 million, from the balance at December 31, 2023.

The loan portfolio is relatively flat in the nine months ended September 30, 2024, driven by increased fundings of ongoing construction projects for commercial and residential properties, offset by a reduction in commercial loans.

Market rates year to date in 2024 for our new loan originations on average have been consistent with the market rates at the end of 2023, reflecting that the Federal Reserve did not increase or decrease short-term interest rates until mid-September 2024.

We continue to see opportunities for growth in the commercial real estate market in our focused sectors;

1 unchanged sentence

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 June 30, 2024 and December 31, 2023 by major category are summarized below.

June 30, 2024 December 31, 2023

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

September 30, 2024 December 31, 2023

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

12 unchanged sentences

$ 7,858,402 $ 7,882,755

(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.

(1) Excludes accrued interest receivable of $43.4 million and $45.3 million at September 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.

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

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

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

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

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

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

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

Although all of these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the real estate market could continue to have an adverse impact on this portfolio of loans and the Company’s income and financial position.

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

metro area includes "Washington's Maryland Suburbs," which comprise Frederick, Prince George's and Montgomery counties and "Northern Virginia," which comprises Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties.

At 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 September 30, 2024, 30.9%, 27.4%, 24.5%, 5.4% and 11.8% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively.

At December 31, 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 $6.4 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.

As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.5 billion and $6.1 billion, or 81.7% and 77.0% of total loans, of amortized cost outstanding at September 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 $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

Income producing CRE loans collateralized by office properties comprised approximately $864.0 million and $949.0 million, or 10.8% and 11.9% of total loans, at September 30, 2024 and December 31, 2023, respectively.

Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $796.5 million and $879.0 million, or 10.0% and 11.0% of total loans, at September 30, 2024 and December 31, 2023, respectively.

As a percentage of total amortized cost of income producing - CRE office loans, 38.1%, 29.0%, 15.0%, 10.1% were located in Washington's Maryland Suburbs, Northern Virginia, the central business district of Washington D.C.

and Washington, D.C (outside the central business district), respectively, at September 30, 2024.

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

At September 30, 2024

Maryland Virginia

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$1 million to $5 million 10 % 9 % 18 % 7 % 10 % 16 %

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

$5 million to $10 million 7 % 8 % 29 % 4 % 10 % 43 %

3 unchanged sentences

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

At March 30, 2024

Percent of Principal by Loan Size

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

$1 million to $5 million

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

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

$10 million to $25 million 16 % 19 % 31 % 34 % 29 % 13 %

$25 million to $50 million 52 % 23 % 19 % 32 % 27 % 33 %

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 %

$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.

At September 30, 2024, $332.7 million of principal of loans collateralized by office properties were criticized or classified.

At September 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 June 30, 2024:

June 30, 2024

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

September 30, 2024

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

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(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 $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.

(2) Income producing CRE office loans, which had total principal of $865.5 million at September 30, 2024 and are included within income producing - commercial real estate, had principal of $278.5 million, $579.7 million, $6.7 million, and $0.6 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 $208.5 million and $328.9 million of income producing CRE office loans as of September 30, 2024 were due to mature within three months and 18 months, respectively.

Allowance for Credit Losses

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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 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.

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 nine months ended September 30, 2024 and 2023.

The ACL for loans at September 30, 2024 at $111.9 million, reflected a $25.9 million increase from December 31, 2023 when it was $85.9 million, reflecting a provision for credit losses of $54.9 million and $29.0 million in net charge-offs during the nine months ended September 30, 2024.

Net charge-offs, on an annualized basis, represented 0.48% of average loans for the nine months ended September 30, 2024, an increase from net charge-offs of $6.9 million during the nine months ended September 30, 2023, which represented 0.12% of average loans on an annualized basis.

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

At September 30, 2024, the ACL for loans represented 1.40% of total loans outstanding, as compared to 1.08% at December 31, 2023.

The ACL represented 83% of nonperforming loans at September 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.

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

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.

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.

As of September 30, 2024 and December 31, 2023, loans rated special mention had an amortized cost of $365.0 million and $207.1 million, respectively, and loans rated substandard had an amortized cost of $391.3 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 loans.

The increases in substandard loans were primarily attributable to additions in CRE loans, particularly in commercial construction loans.

At September 30, 2024, 100% and 59% 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.

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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 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.

At September 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 4.55% and 1.91%, respectively.

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

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands) 2024 2023

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Income producing - commercial real estate (21,329) (5,306)

Owner occupied - commercial real estate (3,800) —

Construction - commercial and residential (129) (136)

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

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 at September 30, 2024 includes ACL of $5.4 million against individually assessed loans of $134.4 million, as compared to ACL of $0.6 million 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.

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

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

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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 $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 June 30, 2024 or 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 $137.1 million at September 30, 2024 representing 1.22% of total assets, as compared to $66.6 million of nonperforming assets, or 0.57% of total assets, at December 31, 2023.

The Company had no accruing loans which were 90 days or more past due at September 30, 2024.

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 1.33% 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 Company believes it is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its ACL, at 1.40% of total loans at September 30, 2024, is adequate to absorb expected credit losses within the loan portfolio at that date.

Total nonperforming loans had an amortized cost of $134.4 million at September 30, 2024, representing 1.69% 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 and one owner-occupied commercial real estate loan to non-accruing status following a partial charge-off on the combined balances in the nine months ended September 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.

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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 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.

Loans modified in the preceding twelve months totaled $251.6 million, of which approximately $3.4 million are loans 30-89 days past due and $66.4 million are on non-accrual status.

During the nine months ended September 30, 2024, the Bank modified 33 loans with a total amortized cost of $278.7 million at September 30, 2024 (3.5% of the loan portfolio).

These loans received extended loan terms of between approximately 1 to 36 months.

Loans modified in the preceding twelve months totaled $304.7 million, of which approximately $15.7 million are loans 30-89 days past due and $57.6 million are on nonaccrual status.

All other loans are performing under their modified terms.

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

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.

Included in nonperforming assets was OREO of $2.7 million, comprising four foreclosed properties, at September 30, 2024 and $1.1 million, comprising three foreclosed properties, at December 31, 2023.

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

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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 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.

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

There were no sales of OREO properties during the three months ended September 30, 2024 and 2023.

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) June 30, 2024 December 31, 2023

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

Nonaccrual Loans:

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Income producing - commercial real estate 94,282 40,926

72,157 40,926

Owner occupied - commercial real estate 37,730 19,836

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Ratio of nonperforming assets to total assets 1.22 % 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 June 30, 2024, there were $403.3 million of Substandard loans.

At September 30, 2024, there were $391.3 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.

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To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank regularly utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms.

Additionally, the Bank has participated in the BTFP established by the Federal Reserve in March 2023.

Additionally, the Bank participated in the BTFP established by the Federal Reserve in March 2023.

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

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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 June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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

September 30, 2024 December 31, 2023

Balance Percentage

8 unchanged sentences

$ 8,540,850 100 % $ 8,808,039 100 %

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.

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.

For the nine months ended September 30, 2024, total deposits decreased by $267.2 million as compared to December 31, 2023.

The decrease was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits.

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

The ten largest depositors not associated with brokered pass-through relationships represented approximately 17% of total deposits in the aggregate as of September 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.

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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 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.

The total of reciprocal deposits at September 30, 2024 was $1.4 billion (16% of total deposits) as compared to $1.7 billion (19% 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 $714.2 million and $786.5 million of IND brokered deposits as of June 30, 2024 and December 31, 2023, respectively.

The Bank had $763.9 million and $786.5 million of IND brokered deposits as of September 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 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 September 30, 2024, total brokered deposits were $3.6 billion, or 42.5% of total deposits, of which $1.4 billion were attributable to the CDARS and ICS two-way accounts.

Total brokered deposits were comprised of $1.3 billion, $0.9 billion, and $1.4 billion of time deposits, savings and money market accounts and interest-bearing transaction accounts, respectively, at September 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 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.

At September 30, 2024 and December 31, 2023, total deposits included estimated totals of $2.2 billion and $2.8 billion of uninsured deposits, which represented 25.5% 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 $39.2 million at June 30, 2024 compared to $30.6 million at December 31, 2023.

The balances in these accounts were $32.0 million at September 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.

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

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.

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

At September 30, 2024, the Company had $240.0 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 June 30, 2024 and December 31, 2023, the Company had $1.0 billion and $1.3 billion of outstanding borrowings under the BTFP.

Additionally, at September 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 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.

Given prevailing interest rates, any new debt securities to refinance the subordinated notes are expected to have a higher interest rate than the subordinated notes.

The subordinated notes outstanding at December 31, 2023 comprised the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, which matured and were repaid in September 2024.

On September 30, 2024, the Company closed a private placement of its 10.00% senior unsecured debt totaling $77.7 million maturing on September 30, 2029 (the "2029 Senior Notes").

At September 30, 2024, the carrying value of these 2029 Senior Notes was $75.8 million.

which reflected $1.9 million in deferred financing costs that are being amortized over the life of the 2029 Senior Notes.

In connection with the issuance of the 2029 Senior Notes, the Company also entered into a registration rights agreement dated September 30, 2024 with the purchasers of the 2029 Senior Notes (the “Registration Rights Agreement”).

Pursuant to the Registration Rights Agreement, the Company is planning to file an exchange offer registration statement with the SEC to exchange the Senior Notes for substantially identical notes registered under the Securities Act.

Commitments and Contractual Obligations

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

(dollars in thousands) June 30, 2024

December 31, 2023

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

Unfunded loan commitments $ 1,564,617 $ 1,981,334

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Approximately 60% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand.

As of 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.

As of September 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 can be utilized as pledged assets that provide secondary liquidity through the form of additional available borrowings.

Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings.

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

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

The following table summarizes the Company's secondary sources of liquidity in use and available at September 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:

September 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 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.

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 $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 funding mix has continued to change throughout the nine months ended September 30, 2024.

Deposits were $8.5 billion and $8.8 billion at September 30, 2024 and December 31, 2023, respectively.

The decrease in deposits was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits.

Borrowings at quarter-end were $1.3 billion and $1.4 billion at September 30, 2024 and December 31, 2023, respectively.

The net decrease in borrowings was attributable to a decrease in net fundings on the Company's secured borrowings and subordinated notes that matured and were repaid in September 2024, partially offset by issuance of the 2029 Senior Notes.

Refer to the "Deposits and Other Borrowings" section above for further discussion.

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 September 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 $926.4 million outstanding at September 30, 2024.

The Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $763.9 million of brokered deposits at September 30, 2024.

At September 30, 2024, the Bank was eligible to draw on advances from the FHLB up to $1.4 billion based on assets pledged as collateral to the FHLB, against which the Bank borrowed $240.0 million as of September 30, 2024.

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

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.

The Bank posted additional collateral to the FHLB during the nine months ended September 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 June 30, 2024, the Bank had $1.0 billion of BTFP borrowings outstanding.

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

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

1 unchanged sentence

This facility, which can be used to borrow up to $1.8 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.

During the third 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 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;

In total, the Bank's aggregate borrowing capacity at September 30, 2024 was $3.9 billion, which consists of $1.2 billion and $1.8 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 $18.6 million of aggregate capacity to borrow on a pledge security through a repurchase agreement with Raymond James.

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

The continuing elevated cost of funding negatively impacted our net interest margin.

Late in the third quarter of 2024, the Federal Reserve decreased interest rates by 50 basis points, having minimal impact on net interest margin in the quarter.

There can be no assurance that the mix of sources of funds available to us at any particular time in the future will be adequate to meet our future liquidity needs.

However, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment.

Furthermore, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a rising or high interest rate environment.

Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships.

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

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.

During the first nine months ended September 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 September 30, 2024 were $6.1 billion, which include the FHLB, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window.

At September 30, 2024, the Company held total securities available to be pledged with an estimated fair value of $892.9 million.

At September 30, 2024, under the Bank’s liquidity formula, it had $6.5 billion of primary and secondary liquidity sources.

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

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Although growth in that segment over the past 36 months at 28% 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 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.

At September 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 124% of total risk based capital.

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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.

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

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.

At September 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:

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

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.

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

The Company announced a regular quarterly cash dividend on September 30, 2024 of $0.165 per share to shareholders of record on October 21, 2024 and it was paid on October 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 June 30, 2024 and December 31, 2023 are presented in the table below.

The capital amounts and ratios for the Company and Bank as of September 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)

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(dollars in thousands) Amount Ratio Amount Ratio

June 30, 2024

September 30, 2024

CET1 capital (to risk weighted assets) $ 1,351,807 14.30 % $ 1,351,231 14.38 % 7.00 % 6.50 %

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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 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.

During the nine months ended September 30, 2024, the Company was able to produce a net interest margin of 2.40% as compared to 2.56% 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 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.

The loan portfolio remained relatively flat in the first nine months of 2024.

The re-pricing duration of the loan portfolio was 12 months at September 30, 2024 and December 31, 2023, with fixed rate loans amounting to 40% of total loans at September 30, 2024 and 38% at December 31, 2023.

Variable and adjustable rate loans comprised 60% of total loans at September 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.

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

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.

At September 30, 2024, the amortized cost less allowance of the investment portfolio decreased by $172.1 million, or 6.4%, 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 September 30, 2024 and December 31, 2023.

The portion of the portfolio invested in MBS was 60% at September 30, 2024 and December 31, 2023.

The portion of the portfolio invested in U.S.

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.

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

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

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

The duration of the investment portfolio decreased to 4 years at September 30, 2024 from 4.4 years at December 31, 2023.

At September 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.

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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 June 30, 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 September 30, 2024.

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

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.

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.

The duration of the total deposit portfolio decreased, measuring 22 months at September 30, 2024 and 28 months at December 31, 2023.

The Company experienced a total deposit decrease of $267.2 million for the nine months ended September 30, 2024 as compared to a total loan increase of $1.6 million for the same period.

The funding mix has continued to change in the nine months ended September 30, 2024.

The decrease in deposits was primarily attributable to a $669.3 million decrease in noninterest bearing demand deposits, partially offset by a $493.4 million increase in time deposits.

During the nine months ended September 30, 2024, the Company’s cost of interest bearing deposits increased by 13 basis points across its interest-bearing deposits, which comprise 81.2% of its total deposits at September 30, 2024.

The net unrealized loss before income tax on the investment securities available-for-sale portfolio was $117.0 million and $162.0 million at September 30, 2024 and December 31, 2023, respectively.

At September 30, 2024, the net unrealized loss position represented 7.55% 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.

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There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, given competitive pressures, customer preferences and the inability to forecast future interest rates and movements with complete accuracy.

Market rates have stabilized as the last short-term interest rate increase from the Federal Reserve was instituted in July 2023.

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.

Market rates have been stable in the first nine months of 2024 since (i) the last short-term interest rate increase from the Federal Reserve was instituted in July 2023, and (ii) during the nine months ended September 2024, the Federal Reserve instituted only one adjustment to interest rates at the end of September 2024, as a decrease of 50 basis points, amid changes in the economic outlook indicating that inflation is moderating and the labor market is weakening.

The decrease in interest rates was the first decrease since early 2020 which was a period of economic upheaval due to the Covid pandemic.

While yields on interest-earning assets remain at increased levels, 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 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.

The model also assumes a stable interest rate environment after the programmed rate change, allowing assets and liabilities to reprice at their schedule in a stable environment, which may be quite different than real world conditions.

Our rate risk modeling showed very modest net interest margin expansion in an interest rate environment at increased interest rate levels while showing modest net interest margin compression in a declining interest rate environment.

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

The opposite is true in a falling interest rate environment as decreases in both interest income on variable and adjustable rate loans and interest expense on deposit liabilities drive modest margin compression.

The model also assumes a stable interest rate environment after the programmed changes in the yields, which assumes repricing of assets and liabilities as scheduled in a stable interest rate environment, which may be quite different than real world conditions.

Interest rate floors on certain of the Company's variable and adjustable rate loans may provide asset yield protection in a low-interest rate environment;

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

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.

however, they are also expected to delay the impact of increases to market rates on interest income until such floors have been exceeded.

In the first nine months of 2024, interest rate floors have not been relevant in the current interest rate environment since most variable rate loans are well above their floor rate.

Nevertheless, the most recent interest rate cut of 50 basis points instituted by the Federal Reserve at the end of September 2024, is a sign of changes in the economic outlook which may result in additional adjustments to interest rates as the economic outlook continues to evolve.

At September 30, 2024, the Company had a portfolio of $4.8 billion of variable and adjustable rate loans that were subject to interest rate floors with a weighted average rate of 7.48%, which was a 34 bps increase from December 31, 2023.

At September 30, 2024, $187.8 million, or 2.36%, of loans held by the Company were earning interest at their floor rate.

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.

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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 June 30, 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 September 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 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.

For the analysis presented below, at September 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.

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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 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.

As quantified in the table below, the Company's analysis at September 30, 2024 shows a moderate effect on net interest income (over the next 12 months) as well as the 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 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:

At September 30, 2024, the repricing duration of the (a) investment portfolio was 4.0 years, (b) loan portfolio was 1.0 year, (c) interest bearing deposit portfolio was 1.3 years, and (d) the borrowed funds portfolio was 0.3 years.

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

Change in interest

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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 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.

The impact on net interest income and net income of (1.4)% and (3.3)%, respectively, given a 100 basis point decrease in market interest rates at September 30, 2024 compares to increases of 0.9% and 2.0%, 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 nine months of 2024 compared to the first nine 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 September 30, 2024 are not believed to be excessive.

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

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The projected impact on net interest income in the table above also assumes a "through-the-cycle" non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes realized in scenarios of smaller and/or non-parallel interest rate movements.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by current and future changes in interest rates.

Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates.

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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.

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," "operating annualized return on average tangible common equity," "efficiency ratio," "operating efficiency ratio," "operating noninterest expense," "operating revenue," "pre-provision net 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.

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The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios, and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.

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

The operating efficiency ratio is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, 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.

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.

The Company calculates operating noninterest expense by subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable.

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.

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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 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 operating pre-provision net revenue is calculated by first subtracting from noninterest expense the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, 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.

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

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

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

Common shareholders' equity $ 1,225,424 $ 1,274,283

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Tangible common equity ratio 10.86 % 10.12 %

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands) 2024

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Average tangible common equity $ 1,201,453 $ 1,130,523 $ 1,183,463 $ 1,136,208

Net (loss) income available to common shareholders

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

Net income (loss) available to common shareholders $ 21,815 $ 27,383 $ (62,325) $ 80,309

Average tangible common equity 1,201,453 1,130,523 1,183,463 1,136,208

Annualized return on average tangible common equity 7.22 % 9.61 % (7.03) % 9.45 %

Net (loss) income

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

Net income (loss) $ 21,815 $ 27,383 $ (62,325) $ 80,309

Add back of goodwill impairment — — 104,168 —

104,168 — 104,168 —

Operating net income (Non-GAAP) $ 21,815 $ 27,383 $ 41,843 $ 80,309

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

Operating annualized return on average tangible common equity (Non-GAAP) 7.22 % 9.61 % 4.72 % 9.45 %

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2023 2024 2023

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Exclude goodwill impairment — — (104,168) —

(104,168) — (104,168) —

Operating noninterest expense (Non-GAAP) 43,614 37,633 125,934 116,195

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

Efficiency ratio 55.35 % 48.83 % 98.43 % 49.19 %

Operating efficiency ratio (Non-GAAP) 55.35 % 48.83 % 53.87 % 49.19 %

55.19 % 47.23 % 53.12 % 49.37 %

Net interest income $ 71,843 $ 70,719 $ 217,894 $ 217,554

4 unchanged sentences

Add back of goodwill impairment — — 104,168 —

104,168 — 104,168 —

Operating pre-provision net revenue (Non-GAAP) $ 35,180 $ 39,433 $ 107,832 $ 120,001

$ 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.

The Company calculates operating net (loss) income by excluding from net (loss) income the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable.

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 calculates operating (loss) earnings per share (diluted) by dividing net (loss) income, excluding the one-time goodwill impairment of $104.2 million recorded in the second quarter of 2024, as applicable, by the weighted average shares outstanding (diluted) for the three and nine months ended September 30, 2024, as applicable.

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,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands) 2024

1 unchanged sentence

Net (loss) income $ 21,815 $ 27,383 $ (62,325) $ 80,309

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

Add back of goodwill impairment — — 104,168 —

104,168 — 104,168 —

Operating net income (Non-GAAP) $ 21,815 $ 27,383 $ 41,843 $ 80,309

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

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

1 unchanged sentence

Add back of goodwill impairment per share (diluted) — — 3.46 —

3.45 — 3.46 —

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

5 unchanged sentences

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