EAGLE BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS EAGLE BANCORP, INC. Consolidated Balance Sheets (Unaudited) (dollars in thousands, except share and per share data) September 30, 2024 December 31, 2023 Assets Cash and due from banks $ 16,383 $ 9,047 Federal funds sold 9,610 3,740 Interest-bearing deposits with banks and other short-term investments 584,491 709,897 Investment securities available-for-sale (amortized cost of $ 1,550,038 and $ 1,668,316 , respectively, and allowance for credit losses of $ 17 and $ 17 , respectively). 1,433,006 1,506,388 Investment securities held-to-maturity, net of allowance for credit losses of $ 1,237 and $ 1,956 , respectively (fair value of $ 868,425 and $ 901,582 , respectively) 961,925 1,015,737 Federal Reserve and Federal Home Loan Bank stock 37,728 25,748 Loans held for investment, at amortized cost 7,970,269 7,968,695 Less: allowance for credit losses ( 111,867 ) ( 85,940 ) Loans held for investment, net of allowance 7,858,402 7,882,755 Premises and equipment, net 8,291 10,189 Right-of-use assets - operating leases 15,167 19,129 Deferred income taxes 74,381 86,620 Bank-owned life insurance 115,064 112,921 Goodwill and other intangible assets, net 21 104,925 Other real estate owned 2,743 1,108 Other assets 167,840 176,334 Total Assets $ 11,285,052 $ 11,664,538 Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing demand $ 1,609,823 $ 2,279,081 Interest-bearing transaction 903,300 997,448 Savings and money market 3,316,819 3,314,043 Time 2,710,908 2,217,467 Total deposits 8,540,850 8,808,039 Customer repurchase agreements 32,040 30,587 Other short-term borrowings 1,240,000 1,369,918 Long-term borrowings 75,812 — Operating lease liabilities 18,755 23,238 Reserve for unfunded commitments 5,060 5,590 Other liabilities 147,111 152,883 Total Liabilities 10,059,628 10,390,255 Shareholders' Equity Common stock, par value $ 0.01 per share; shares authorized 100,000,000 , shares issued and outstanding 30,173,200 and 29,925,612 , respectively 298 296 Additional paid-in capital 382,284 374,888 Retained earnings 967,019 1,061,456 Accumulated other comprehensive loss ( 124,177 ) ( 162,357 ) Total Shareholders' Equity 1,225,424 1,274,283 Total Liabilities and Shareholders' Equity $ 11,285,052 $ 11,664,538 See Notes to Consolidated Financial Statements. 3 EAGLE BANCORP, INC. Consolidated Statements of Operations (Unaudited) (dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest Income Interest and fees on loans $ 139,836 $ 132,273 $ 415,446 $ 382,116 Interest and dividends on investment securities 12,578 13,732 37,663 41,518 Interest on balances with other banks and short-term investments 21,296 15,067 65,726 34,070 Interest on federal funds sold 103 77 311 202 Total interest income 173,813 161,149 519,146 457,906 Interest Expense Interest on deposits 81,190 70,929 237,419 179,305 Interest on customer repurchase agreements 332 311 977 946 Interest on other short-term borrowings 20,448 18,152 62,856 56,989 Interest on long-term borrowings — 1,038 — 3,112 Total interest expense 101,970 90,430 301,252 240,352 Net Interest Income 71,843 70,719 217,894 217,554 Provision for Credit Losses 10,094 5,644 54,228 17,046 (Reversal of) Provision for Credit Losses for Unfunded Commitments ( 1,593 ) ( 839 ) ( 529 ) 327 Net Interest Income After (Reversal of) Provision for Credit Losses 63,342 65,914 164,195 200,181 Noninterest Income Service charges on deposits 1,747 1,631 5,099 4,767 Gain (loss) on sale of loans 20 ( 5 ) 57 395 Net gain (loss) on sale of investment securities 3 5 10 ( 14 ) Increase in the cash surrender value of bank-owned life insurance 731 669 2,143 1,972 Other income 4,450 4,047 8,563 11,522 Total noninterest income 6,951 6,347 15,872 18,642 Noninterest Expense Salaries and employee benefits 21,675 21,549 65,171 67,680 Premises and equipment expenses 2,794 3,095 8,747 9,639 Marketing and advertising 1,588 768 4,109 2,288 Data processing 3,435 3,194 10,223 9,647 Legal, accounting and professional fees 3,433 2,162 8,645 8,065 FDIC insurance 7,399 3,342 19,728 7,409 Goodwill impairment — — 104,168 — Other expenses 3,290 3,523 9,311 11,467 Total noninterest expense 43,614 37,633 230,102 116,195 Income (Loss) Before Income Tax Expense 26,679 34,628 ( 50,035 ) 102,628 Income Tax Expense 4,864 7,245 12,290 22,319 Net Income (Loss) $ 21,815 $ 27,383 $ ( 62,325 ) $ 80,309 Earnings (Loss) Per Common Share Basic $ 0.72 $ 0.91 $ ( 2.07 ) $ 2.63 Diluted $ 0.72 $ 0.91 $ ( 2.07 ) $ 2.63 See Notes to Consolidated Financial Statements. 4 EAGLE BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net Income (Loss) $ 21,815 $ 27,383 $ ( 62,325 ) $ 80,309 Other Comprehensive Income (Loss), Net of Tax: Unrealized gain (loss) on securities available-for-sale 35,338 ( 21,314 ) 33,901 ( 15,452 ) Reclassification adjustment for (gain) loss included in net income (loss) ( 2 ) ( 4 ) ( 8 ) 10 Total unrealized gain (loss) on investment securities available-for-sale 35,336 ( 21,318 ) 33,893 ( 15,442 ) Amortization of unrealized loss on securities transferred to held-to-maturity 1,355 1,400 4,062 3,444 Total unrealized gain on investment securities held-to-maturity 1,355 1,400 4,062 3,444 Unrealized (loss) gain on derivatives ( 25 ) — 225 — Total unrealized (loss) gain on derivatives ( 25 ) — 225 — Other comprehensive income (loss) 36,666 ( 19,918 ) 38,180 ( 11,998 ) Comprehensive Income (Loss) $ 58,481 $ 7,465 $ ( 24,145 ) $ 68,311 See Notes to Consolidated Financial Statements. 5 EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Three Months Ended September 30, 2024 and 2023 (dollars in thousands except share and per share data) Accumulated Other Comprehensive Income (Loss) Common Additional Paid-in Capital Retained Earnings Shareholders' Equity Shares Amount Balance July 1, 2024 30,180,482 $ 297 $ 380,142 $ 949,863 $ ( 160,843 ) $ 1,169,459 Net Income — — — 21,815 — 21,815 Other comprehensive income, net of tax — — — — 36,666 36,666 Stock-based compensation expense — — 2,019 — — 2,019 Forfeitures of time-based stock awards and shares withheld for payroll taxes ( 23,925 ) 1 ( 1 ) — — — Time-based stock awards granted 10,082 — — — — — Issuance of common stock related to employee stock purchase plan 6,561 — 124 — — 124 Cash dividends declared ($ 0.165 per share) — — — ( 4,659 ) — ( 4,659 ) Balance September 30, 2024 30,173,200 $ 298 $ 382,284 $ 967,019 $ ( 124,177 ) $ 1,225,424 Balance July 1, 2023 29,912,082 $ 296 $ 370,278 $ 1,040,779 $ ( 191,587 ) $ 1,219,766 Net Income — — — 27,383 — 27,383 Other comprehensive loss, net of tax — — — — ( 19,918 ) ( 19,918 ) Stock-based compensation expense — — 1,969 — — 1,969 Forfeitures of time-based stock awards and shares withheld for payroll taxes ( 15,250 ) — — — — — Time-based stock awards granted 14,280 — — — — — Issuance of common stock related to employee stock purchase plan 6,870 — 145 — — 145 Cash dividends declared ($ 0.45 per share) — — — ( 13,463 ) — ( 13,463 ) Common stock repurchased — — 2 — — 2 Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ ( 211,505 ) $ 1,215,884 See Notes to Consolidated Financial Statements. 6 EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders' Equity - Continued (Unaudited) Nine Months Ended September 30, 2024 and 2023 (dollars in thousands except share and per share data) Accumulated Other Comprehensive Income (Loss) Common Additional Paid-in Capital Retained Earnings Shareholders' Equity Shares Amount Balance January 1, 2024 29,925,612 $ 296 $ 374,888 $ 1,061,456 $ ( 162,357 ) $ 1,274,283 Net Loss — — — ( 62,325 ) — ( 62,325 ) Other comprehensive income, net of tax — — — — 38,180 38,180 Stock-based compensation expense — — 7,051 — — 7,051 Forfeitures of time-based stock awards and shares withheld for payroll taxes ( 66,845 ) 2 ( 2 ) — — — Vesting of performance-based stock awards, net of shares withheld for payroll taxes 12,013 — — — — — Time-based stock awards granted 285,978 — — — — — Issuance of common stock related to employee stock purchase plan 16,442 — 347 — — 347 Cash dividends declared ($ 1.065 per share) — — — ( 32,112 ) — ( 32,112 ) Balance September 30, 2024 30,173,200 $ 298 $ 382,284 $ 967,019 $ ( 124,177 ) $ 1,225,424 Balance January 1, 2023 31,346,903 $ 310 $ 412,303 $ 1,015,215 $ ( 199,507 ) $ 1,228,321 Net Income — — — 80,309 — 80,309 Other comprehensive loss, net of tax — — — — ( 11,998 ) ( 11,998 ) Stock-based compensation expense — — 7,653 — — 7,653 Forfeitures of time-based stock awards and shares withheld for payroll taxes ( 59,314 ) 1 ( 1 ) — — — Vesting of performance-based stock awards, net of shares withheld for payroll taxes 27,296 — — — — — Time-based stock awards granted 187,822 — — — — — Issuance of common stock related to employee stock purchase plan 15,275 — 459 — — 459 Cash dividends declared ($ 1.35 per share) — — — ( 40,825 ) — ( 40,825 ) Common stock repurchased ( 1,600,000 ) ( 15 ) ( 48,020 ) — — ( 48,035 ) Balance September 30, 2023 29,917,982 $ 296 $ 372,394 $ 1,054,699 $ ( 211,505 ) $ 1,215,884 See Notes to Consolidated Financial Statements. 7 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2024 2023 Cash Flows From Operating Activities: Net (Loss) Income $ ( 62,325 ) $ 80,309 Adjustments to reconcile Net (Loss) Income to net cash provided by operating activities: Provision for credit losses 54,228 17,046 (Reversal of ) provision for unfunded commitments ( 529 ) 327 Goodwill impairment 104,168 — Depreciation and amortization 2,162 2,649 Gain on sale of loans ( 57 ) ( 395 ) (Gain) loss on mortgage servicing rights ( 1,512 ) 108 Securities premium amortization, net 4,178 4,766 Origination of loans held for sale — ( 29,690 ) Proceeds from sale of loans held for sale — 36,819 Net gain on sale of other real estate owned — ( 134 ) (Gain) loss on call/sale of investment securities ( 10 ) 14 Net increase in cash surrender value of BOLI ( 2,143 ) ( 1,972 ) Stock-based compensation expense 7,051 7,653 Decrease (increase) in other assets 5,943 ( 29,589 ) Increase in other liabilities 2,528 51,058 Net Cash Provided by Operating Activities 113,682 138,969 Cash Flows From Investing Activities: Investment securities available-for-sale: Proceeds from maturities 89,035 92,647 Proceeds from call/sale 27,000 8,303 Investment securities held-to-maturity: Proceeds from maturities 53,187 60,312 Proceeds from call 4,644 2,906 Proceeds from (purchase of) Federal Reserve stock ( 222 ) 39,378 Purchase of Federal Home Loan Bank stock ( 11,758 ) — Proceeds from sale of mortgage servicing rights 4,798 — Net increase in loans ( 32,828 ) ( 287,673 ) Redemption of BOLI — 736 Proceeds from sale of OREO 656 609 Net change in premises and equipment ( 183 ) ( 298 ) Net Cash Provided by (Used in) Investing Activities 134,329 ( 83,080 ) Cash Flows From Financing Activities: Decrease in deposits ( 267,189 ) ( 336,876 ) Increase (decrease) in customer repurchase agreements 1,453 ( 9,411 ) Net (decrease) increase in short-term borrowings ( 130,000 ) 325,000 Net proceeds from long-term borrowings 75,812 — Proceeds from employee stock purchase plan 347 459 Common stock repurchased — ( 48,035 ) Cash dividends paid ( 40,634 ) ( 40,825 ) Net Cash Used in Financing Activities ( 360,211 ) ( 109,688 ) Net Decrease in Cash and Cash Equivalents ( 112,200 ) ( 53,799 ) Cash and Cash Equivalents at Beginning of Period 722,684 311,854 Cash and Cash Equivalents at End of Period $ 610,484 $ 258,055 See Notes to Consolidated Financial Statements. 8 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows - Continued (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2024 2023 Supplemental Cash Flows Information: Interest paid $ 309,165 $ 266,633 Income taxes paid $ 5,980 $ 16,940 Non-Cash Investing Activities: Transfer of loans for investment to loans held for sale $ 5,000 $ — Transfers from loans to other real estate owned $ 2,370 $ — See Notes to Consolidated Financial Statements. 9 EAGLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the "Company"), with all significant intercompany transactions eliminated. EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Parent's principal subsidiary. The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry. The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited. The Consolidated Balance Sheet as of December 31, 2023 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Certain reclassifications have been made to 2023 amounts previously reported to conform to the 2024 presentation. Reclassifications had no effect on net income or shareholders' equity. These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Nature of Operations The Company, through the Bank, conducts a full-service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination. The Bank offers its products and services through twelve banking offices, four lending centers and various digital capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank that previously offered access to insurance products and services through a referral program with a third party insurance broker, continues to receive fee income in connection with such program. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements. Investment Securities The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale ("AFS") when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity. AFS Securities are acquired as part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. AFS Securities are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders' equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations. 10 Premiums and discounts on investment securities are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality. Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity Transfers of debt securities into the HTM category from the AFS category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the HTM securities. Such amounts are amortized over the remaining life of the security. The Company does not intend to sell the HTM investments, and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity. Loans The Company classifies loans in its portfolio as either held for investment (“HFI”) or held for sale (“HFS”). HFS loans are reported at the lower of cost or fair value on the Consolidated Balance Sheets. HFI loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan. Past due loans are placed on nonaccrual status when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, this conclusion is reached when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Allowance for Credit Losses The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Operations for the applicable periods: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2024 2023 2024 2023 Provision for credit losses - loans $ 10,869 $ 5,643 $ 54,947 $ 15,802 Provision for (reversal of) credit losses - HTM debt securities ( 775 ) 1 ( 719 ) 1,244 Provision for credit losses - AFS debt securities — — — — Total $ 10,094 $ 5,644 $ 54,228 $ 17,046 Allowance for Credit Losses - Loans The allowance for credit losses ("ACL") - loans is an estimate of the expected credit losses in the HFI loans portfolio. The Company's ACL on the loan portfolio is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Reserves on loans that do not share similar risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes, and a loan-level probability of default ("PD") / loss given default ("LGD") cash flow method is applied using an exposure at default ("EAD") model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers. 11 A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments ("RUC") on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring current expected credit losses ("CECL"). A summary of our primary portfolio segments is as follows: Commercial. The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses. Income producing - commercial real estate. Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who generally have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates. Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities. Real estate mortgage – residential . Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property. Construction – commercial and residential. The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing. Construction – commercial and industrial ("C&I") (owner occupied) . The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings. Home equity . The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property. Other consumer. The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default. 12 The ACL also includes an amount for inherent risks not reflected in the historical quantitative analysis associated with the reasonable and supportable forecast. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and we reevaluate all of its factors quarterly. During the first quarter of 2024, management enhanced the cash flow model to incorporate three macroeconomic variables in addition to national unemployment. The four economic variables selected, national unemployment, which was the original variable used, Commercial Real Estate ("CRE") Price Index, House Price Index and Gross Domestic Product ("GDP"), are incorporated by utilizing a Loss Driver Analysis approach that factors in historical losses, including during the Great Recession, of regional peer banks and the Bank. The updated model incorporates a weighting of three economic scenarios; baseline, upside and downside. The scenarios cover the four economic forecast variables, with each segment of the portfolio linked to two of these variables, depending on the segment. The loss driver analysis is spread over a reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound net worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound net worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual. Classified loans represent the sum of loans graded substandard and doubtful. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-basis allowance and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees and the Audit Committee of the Board of Directors (the "Board"). The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a borrower will result in financial difficulty. We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status. 13 Collateral Dependent Financial Assets Loans that do not share similar risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Loan Modifications to Borrowers in Financial Difficulty The Company evaluates loan restructurings to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there are principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $ 500 thousand or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status, foreclosure or repossession of the collateral to minimize economic loss to the Company. Allowance for Credit Losses - AFS Securities For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment. The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in other comprehensive income, net of deferred taxes. Changes in the ACL are recorded as a provision for or reversal of credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. We have made a policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately in accrued interest and other assets in the Consolidated Balance Sheets. AFS debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. 14 Allowance for Credit Losses - HTM Securities The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the ACL for HTM securities and included in the balance of HTM securities on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis may be performed and compared to the amortized cost basis. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a RUC on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Operations. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheets. Goodwill Assessment Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired. Goodwill is deemed to have an indefinite useful life and as such is not subject to amortization, and instead is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Goodwill is subject to impairment testing at the reporting unit level, which must be conducted at least annually, as well as when events or changes in circumstances indicate the assets might be impaired and/or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. The Company has determined that it has a single reporting unit. If the fair value of the reporting unit exceeds the book value, no write-down of recorded goodwill is required. If the fair value of the reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be recorded through a reduction of goodwill or other intangible asset and an offsetting charge to noninterest expense. Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded. 15 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 as of May 31, 2024. The impaired goodwill was primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios. New Authoritative Accounting Guidance Accounting Standards Pending Adoption ASU No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative" ("ASU 2023-06") incorporates into the Accounting Standards Codification ("ASC" or "Codification") several SEC disclosure requirements under Regulations S-K and S-X. The amendments in the ASU are intended to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. These requirements are similar to, but require more information than, generally accepted accounting principles. The new updates modify the disclosure or presentation requirements of a variety of Topics in the Codification. Entities should apply the amendments in ASU 2023-06 prospectively. For entities subject to the SEC's existing disclosure requirements and for entities that have to file or provide financial statements with or to the SEC for the purpose of selling or issuing securities that do not have contractual limits on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. As a result, the effective date will be different for each individual disclosure based on the effective date of the SEC's deletion of the related disclosure. Early adoption is prohibited. For all other entities, the effective date will be two years later. Early adoption is permitted for these entities, but not before the provisions of the ASU become effective for entities subject to SEC's regulation. The effective dates of the amendments are predicated on the SEC removing its related disclosure requirements from its regulations. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We are currently in the process of evaluating this guidance. ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"). The ASU requires additional income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 and interim periods within those fiscal years. The impact of ASU 2023-09 should be applied prospectively. We are currently in the process of evaluating this guidance. ASU No. 2024-01, "Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards" ("ASU 2024-01") clarifies how an entity determines whether a profits interest or similar award (hereafter a "profits interest award") is accounted for either (1) as a share-based payment arrangement, and therefore, within the scope of ASC 718 or (2) not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 also improves the clarity and operation of the guidance in ASC 718-10-15-3. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services. For public business entities, the amendments are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period. The amendments should be applied (i) retrospectively to all prior periods presented in the financial statements or (ii) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. If the amendments are applied prospectively, an entity is required to disclose the nature of and reason for the change in accounting principle. We are currently in the process of evaluating this guidance. 16 ASU No. 2024-02, "Codification Improvements—Amendments to Remove References to the Concepts Statements" ("ASU 2024-02") amends the Accounting Standard Codification (“Codification”) by removing references to various concepts statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior statements to provide guidance in certain topical areas. As stated in paragraph 105-10-05-3 of the Codification, FASB Concepts Statements are non-authoritative. These amendments will simplify the Codification which will further draw a distinction between authoritative and non-authoritative literature. The amendments are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments using one of the following transition methods: (i) prospectively to all new transactions recognized on or after the date that the entity first applies the amendments, or (ii) retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. We are currently in the process of evaluating this guidance. Accounting Standards Adopted in 2024 : ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ("ASU 2023-07") requires filers to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity’s chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 is effective for the Company for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Since early adoption is permitted, the Company adopted the guidance prescribed under ASU 2023-07 effective January 1, 2024. Adoption of this guidance did not have a material impact on our consolidated financial statements for fiscal year 2024. Note 2. Cash and Due from Banks For the nine months ended September 30, 2024 and 2023, the Bank maintained an average daily balance at the Federal Reserve Bank of $ 1.6 billion and $ 0.9 billion, respectively, on which interest is paid. Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank. Note 3. Investment Securities The amortized cost and estimated fair value of the Company's AFS and HTM securities are summarized as follows: (dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value September 30, 2024 Investment securities available-for-sale: U.S. treasury bonds $ 49,970 $ — $ ( 567 ) $ — $ 49,403 U.S. agency securities 690,699 — ( 37,422 ) — 653,277 Residential mortgage-backed securities 745,006 125 ( 75,086 ) — 670,045 Commercial mortgage-backed securities 53,711 — ( 3,495 ) — 50,216 Municipal bonds 8,652 — ( 385 ) — 8,267 Corporate bonds 2,000 — ( 185 ) ( 17 ) 1,798 Total available-for-sale securities $ 1,550,038 $ 125 $ ( 117,140 ) $ ( 17 ) $ 1,433,006 17 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value September 30, 2024 Investment securities held-to-maturity: Residential mortgage-backed securities $ 621,203 $ — $ ( 66,264 ) $ 554,939 Commercial mortgage-backed securities 89,269 — ( 10,008 ) 79,261 Municipal bonds 120,307 — ( 8,024 ) 112,283 Corporate bonds 132,383 — ( 10,441 ) 121,942 Total $ 963,162 $ — $ ( 94,737 ) $ 868,425 Allowance for credit losses ( 1,237 ) Total held-to-maturity securities, net of ACL $ 961,925 (dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value December 31, 2023 Investment securities available-for-sale: U.S. treasury bonds $ 49,894 $ — $ ( 1,993 ) $ — $ 47,901 U.S. agency securities 729,090 — ( 57,693 ) — 671,397 Residential mortgage-backed securities 823,992 45 ( 96,684 ) — 727,353 Commercial mortgage-backed securities 54,557 — ( 4,993 ) — 49,564 Municipal bonds 8,783 — ( 293 ) — 8,490 Corporate bonds 2,000 — ( 300 ) ( 17 ) 1,683 Total available-for-sale securities $ 1,668,316 $ 45 $ ( 161,956 ) $ ( 17 ) $ 1,506,388 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value December 31, 2023 Investment securities held-to-maturity: Residential mortgage-backed securities $ 670,043 $ — $ ( 79,980 ) $ 590,063 Commercial mortgage-backed securities 90,227 — ( 12,867 ) 77,360 Municipal bonds 125,114 5 ( 8,540 ) 116,579 Corporate bonds 132,309 — ( 14,729 ) 117,580 Total $ 1,017,693 $ 5 $ ( 116,116 ) $ 901,582 Allowance for credit losses ( 1,956 ) Total held-to-maturity securities, net of ACL $ 1,015,737 At September 30, 2024 and December 31, 2023, the Company held $ 37.7 million and $ 25.7 million, respectively, of equity securities in a combination of Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB") and FHLB stocks, which are required to be held for regulatory purposes. These securities cannot be disposed of other than through redemption by the issuer and, if redeemed, would be redeemed at the original cost. At September 30, 2024 and December 31, 2023, the Company had $ 46.5 million and $ 51.7 million, respectively, of unamortized unrealized losses outstanding following the transfer of investment securities from AFS to HTM in 2022. These unrealized losses are included in accumulated other comprehensive loss and are amortized through interest income as a yield adjustment over the remaining term of the securities. Accrued interest receivable on investment securities totaled $ 7.4 million and $ 7.6 million at September 30, 2024 and December 31, 2023, respectively. The accrued interest receivable is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets. 18 The following tables summarize AFS and HTM securities in an unrealized loss position by length of time: Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses September 30, 2024 Investment securities available-for-sale: U.S. treasury bonds 2 $ — $ — $ 49,403 $ ( 567 ) $ 49,403 $ ( 567 ) U. S. agency securities 76 2,498 ( 3 ) 650,779 ( 37,419 ) 653,277 ( 37,422 ) Residential mortgage-backed securities 146 — — 660,627 ( 75,086 ) 660,627 ( 75,086 ) Commercial mortgage-backed securities 13 — — 50,216 ( 3,495 ) 50,216 ( 3,495 ) Municipal bonds 1 — — 8,267 ( 385 ) 8,267 ( 385 ) Corporate bonds 1 — — 1,797 ( 185 ) 1,797 ( 185 ) Total 239 $ 2,498 $ ( 3 ) $ 1,421,089 $ ( 117,137 ) $ 1,423,587 $ ( 117,140 ) Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses September 30, 2024 Investment securities held-to-maturity: Residential mortgage-backed securities 141 $ — $ — $ 554,939 $ ( 66,264 ) $ 554,939 $ ( 66,264 ) Commercial mortgage-backed securities 16 — — 79,261 ( 10,008 ) 79,261 ( 10,008 ) Municipal bonds 38 3,503 ( 23 ) 107,779 ( 8,001 ) 111,282 ( 8,024 ) Corporate bonds 30 — — 109,899 ( 10,441 ) 109,899 ( 10,441 ) Total 225 $ 3,503 $ ( 23 ) $ 851,878 $ ( 94,714 ) $ 855,381 $ ( 94,737 ) Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses December 31, 2023 Investment securities available-for-sale: U.S. treasury bonds 2 $ — $ — $ 47,901 $ ( 1,993 ) $ 47,901 $ ( 1,993 ) U. S. agency securities 78 3,084 ( 4 ) 668,313 ( 57,689 ) 671,397 ( 57,693 ) Residential mortgage-backed securities 149 — — 718,042 ( 96,684 ) 718,042 ( 96,684 ) Commercial mortgage-backed securities 13 — — 49,564 ( 4,993 ) 49,564 ( 4,993 ) Municipal bonds 1 — — 8,490 ( 293 ) 8,490 ( 293 ) Corporate bonds 1 — — 1,683 ( 300 ) 1,683 ( 300 ) Total 244 $ 3,084 $ ( 4 ) $ 1,493,993 $ ( 161,952 ) $ 1,497,077 $ ( 161,956 ) 19 Less Than 12 Months 12 Months or Greater Total (dollars in thousands) Number of Securities Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses Estimated Fair Value Unrecognized Losses December 31, 2023 Investment securities held-to-maturity: Residential mortgage-backed securities 142 $ — $ — $ 590,063 $ ( 79,980 ) $ 590,063 $ ( 79,980 ) Commercial mortgage-backed securities 16 — — 77,360 ( 12,867 ) 77,360 ( 12,867 ) Municipal bonds 40 — — 113,031 ( 8,540 ) 113,031 ( 8,540 ) Corporate bonds 30 — — 105,523 ( 14,729 ) 105,523 ( 14,729 ) Total 228 $ — $ — $ 885,977 $ ( 116,116 ) $ 885,977 $ ( 116,116 ) Unrealized losses at September 30, 2024 were generally attributable to changes in market interest rates and interest spread relationships subsequent to the dates the securities were originally purchased and were considered to be temporary, and not due to credit quality concerns on the investment securities. The fair values of these securities are expected to recover as the securities approach their respective maturity dates. The Company does not intend to sell and it is likely that it will not be required to sell the securities prior to their anticipated recovery. The Company measures its AFS and HTM security portfolios for current expected credit losses as part of its ACL analysis. For further information on provision for credit losses on AFS and HTM securities, including balances for the three and nine months ended September 30, 2024 and 2023, see Allowance for Credit Losses discussion in "Note 1. Summary of Significant Accounting Policies". At September 30, 2024, the Company had a total allowance of $ 17 thousand on its AFS securities and $ 1.2 million on its HTM securities, each of which primarily comprise allowances for corporate bonds. 20 The following table summarizes the Company's investment in AFS securities and HTM securities by contractual maturity. Expected maturities for mortgage-backed securities ("MBS") will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 2024 (dollars in thousands) Amortized Cost Estimated Fair Value Investment securities available-for-sale: Within one year $ 226,404 $ 223,552 One to five years 419,569 394,901 Five to ten years 85,553 76,816 Beyond ten years 19,795 17,493 Residential mortgage-backed securities 745,006 670,045 Commercial mortgage-backed securities 53,711 50,216 Less: allowance for credit losses — ( 17 ) Total investment securities available-for-sale 1,550,038 1,433,006 Investment securities held-to-maturity: Within one year 7,699 7,636 One to five years 57,804 56,704 Five to ten years 118,626 107,212 Beyond ten years 68,561 62,673 Residential mortgage-backed securities: 621,203 554,939 Commercial mortgage-backed securities 89,269 79,261 Less: allowance for credit losses ( 1,237 ) — Total investment securities held-to-maturity 961,925 868,425 Total $ 2,511,963 $ 2,301,431 For the three and nine months ended September 30, 2024, gross realized gains on calls of investment securities were $ 3 thousand and $ 10 thousand, respectively, as compared to $ 5 thousand and $ 126 thousand for the three and nine months ended September 30, 2023. There were no gross realized losses on sales or calls of investment securities during the three and nine months ended September 30, 2024, no r during the three months ended September 30, 2023. During the nine months ended September 30, 2023, there were $ 140 thousand of gross realized losses on sales or calls of investment securities. Gross sales and call proceeds were $ 4.5 million and $ 31.6 million for the three and nine months ended September 30, 2024, respectively, and $ 2.6 million and $ 11.2 million for the same periods in 2023. The book value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2024 and December 31, 2023 was $ 1.4 billion and $ 2.1 billion, respectively. These balances were well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of September 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, that exceeded ten percent of shareholders' equity. 21 Note 4. Loans and Allowance for Credit Losses The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank's loan portfolio consists of loans to businesses secured by real estate and other business assets. HFI Loans, net of unamortized deferred fees and costs, at September 30, 2024 and December 31, 2023 are summarized by portfolio segment as follows: September 30, 2024 December 31, 2023 (dollars in thousands, except amounts in the footnote) Amount % Amount % Commercial $ 1,154,349 14 % $ 1,473,766 18 % PPP loans 348 — % 528 — % Income-producing - commercial real estate 4,155,120 52 % 4,094,614 51 % Owner-occupied - commercial real estate 1,276,240 16 % 1,172,239 15 % Real estate mortgage - residential 57,223 1 % 73,396 1 % Construction - commercial and residential 1,174,591 15 % 969,766 12 % Construction - C&I (owner-occupied) 100,662 1 % 132,021 2 % Home equity 51,567 1 % 51,964 1 % Other consumer 169 — % 401 — % Total loans 7,970,269 100 % 7,968,695 100 % Less: allowance for credit losses ( 111,867 ) ( 85,940 ) Net loans (1) $ 7,858,402 $ 7,882,755 (1) Excludes accrued interest receivable of $ 43.4 million and $ 45.3 million at September 30, 2024 and December 31, 2023, respectively, which were recorded in other assets on the Consolidated Balance Sheets. Unamortized net deferred costs amounted to $ 20.7 million and $ 27.0 million at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 and December 31, 2023, the Bank serviced $ 56.0 million and $ 328.0 million, respectively, of SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets. During the nine months ended September 30, 2024, the Company sold the servicing rights to all FHA loans. Real estate loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed-price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects. Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single-family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner-occupied commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or their agent. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition. Commercial permanent loans are generally secured by improved real property that is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0 . As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels. Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years. The Company's loan portfolio includes acquisition, development and construction ("ADC") real estate loans including both investment and owner-occupied projects. ADC loans amounted to $ 1.8 billion at September 30, 2024. A portion of the ADC portfolio, both speculative and non-speculative, includes loan-funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 59.6 % of the outstanding ADC loan portfolio at September 30, 2024. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit, including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides a means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower's ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines that are monitored on an ongoing basis and track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which include monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves. The following table details activity in the ACL by portfolio segment for the three and nine months ended September 30, 2024 and 2023. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories. (dollars in thousands) Commercial Income-Producing Commercial Real Estate Owner-Occupied -Commercial Real Estate Real Estate Mortgage Residential Construction - Commercial and Residential Construction - C&I (Owner-Occupied) Home Equity Other Consumer Total Three Months Ended September 30, 2024 Allowance for credit losses: Balance at beginning of period $ 21,011 $ 53,251 $ 15,641 $ 750 $ 13,510 $ 1,431 $ 677 $ 30 106,301 Loans charged-off ( 1,563 ) — ( 3,800 ) — — — — ( 17 ) ( 5,380 ) Recoveries of loans previously charged-off 53 — 24 — — — — — 77 Net loans (charged-off) recovered ( 1,510 ) — ( 3,776 ) — — — — ( 17 ) ( 5,303 ) Provision for (reversal of) credit losses 802 61 8,206 ( 12 ) 1,907 ( 134 ) 23 16 10,869 Ending balance $ 20,303 $ 53,312 $ 20,071 $ 738 $ 15,417 $ 1,297 $ 700 $ 29 $ 111,867 Nine Months Ended September 30, 2024 Allowance for credit losses: Balance at beginning of period $ 17,824 $ 40,050 $ 14,333 $ 861 $ 10,198 $ 1,992 $ 657 $ 25 $ 85,940 Loans charged-off ( 4,150 ) ( 21,329 ) ( 3,800 ) — ( 129 ) — — ( 88 ) ( 29,496 ) Recoveries of loans previously charged-off 220 185 71 — — — — — 476 Net loans (charged-off) recovered ( 3,930 ) ( 21,144 ) ( 3,729 ) — ( 129 ) — — ( 88 ) ( 29,020 ) Provision for (reversal of) credit losses 6,409 34,406 9,467 ( 123 ) 5,348 ( 695 ) 43 92 54,947 Ending balance $ 20,303 $ 53,312 $ 20,071 $ 738 $ 15,417 $ 1,297 $ 700 $ 29 $ 111,867 Three Months Ended September 30, 2023 Allowance for credit losses: Balance at beginning of period $ 15,374 $ 38,486 $ 12,805 $ 811 $ 8,018 $ 1,914 $ 595 $ 26 $ 78,029 Loans charged-off ( 467 ) — — — — — — — ( 467 ) Recoveries of loans previously charged-off 103 — 23 — — — — 1 127 Net loans (charged-off) recovered ( 364 ) — 23 — — — — 1 ( 340 ) Provision for (reversal of) credit losses 1,327 2,207 1,424 53 615 ( 20 ) 39 ( 2 ) 5,643 Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332 Nine Months Ended September 30, 2023 Allowance for credit losses: Balance at beginning of period $ 15,655 $ 35,688 $ 12,702 $ 969 $ 7,195 $ 1,606 $ 555 $ 74 $ 74,444 Loans charged-off ( 1,828 ) ( 5,306 ) — — ( 136 ) — — ( 50 ) ( 7,320 ) Recoveries of loans previously charged-off 335 — 31 — 34 — — 6 406 Net loans (charged-off) recovered ( 1,493 ) ( 5,306 ) 31 — ( 102 ) — — ( 44 ) ( 6,914 ) Provision for (reversal of) credit losses 2,175 10,311 1,519 ( 105 ) 1,540 288 79 ( 5 ) 15,802 Ending balance $ 16,337 $ 40,693 $ 14,252 $ 864 $ 8,633 $ 1,894 $ 634 $ 25 $ 83,332 The following table presents the amortized cost basis of collateral-dependent HFI loans by class of loans as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Business/Other Business/Other (dollars in thousands) Assets Real Estate Assets Real Estate Commercial $ 439 $ 1,817 $ 1,674 $ 1,240 Income-producing - commercial real estate 39,205 55,077 1,754 39,172 Owner-occupied - commercial real estate — 37,732 — 19,836 Real estate mortgage - residential — — — 1,692 Construction - commercial and residential — — — 525 Home equity — 257 — 242 Total $ 39,644 $ 94,883 $ 3,428 $ 62,707 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators inform an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment. The following are the definitions of the Company's credit quality indicators: Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention. Classified: Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. The Company's credit quality indicators are generally updated annually, however, credits rated "Special Mention" or below are reviewed more frequently. Based on the most recent analysis performed, the amortized cost basis of HFI loans by risk category, class and year of origination, along with any charge-offs that were recorded in the applicable loan segment, if applicable, were as follows: (dollars in thousands) Prior 2020 2021 2022 2023 2024 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total September 30, 2024 Commercial Pass $ 141,608 $ 27,799 $ 140,443 $ 121,922 $ 120,991 $ 67,565 $ 457,999 $ 5,967 $ 1,084,294 Special Mention 7,312 — — — — — 3,014 — 10,326 Substandard 11,401 7,860 1,948 220 — — 30,296 8,004 59,729 Total 160,321 35,659 142,391 122,142 120,991 67,565 491,309 13,971 1,154,349 YTD gross charge-offs ( 4,100 ) — — — — — — ( 50 ) ( 4,150 ) PPP loans Pass — — 348 — — — — — 348 Income producing - commercial real estate Pass 1,374,777 178,968 601,123 807,962 311,981 93,934 222,568 27,526 3,618,839 Special Mention 211,617 91,610 — — — — — — 303,227 Substandard 222,554 — — — — — 10,500 — 233,054 Total 1,808,948 270,578 601,123 807,962 311,981 93,934 233,068 27,526 4,155,120 YTD gross charge-offs ( 20,943 ) ( 386 ) — — — — — — ( 21,329 ) Owner occupied - commercial real estate Pass 650,594 33,225 220,650 47,551 138,686 76,133 509 — 1,167,348 Special Mention 51,430 — — — — — — — 51,430 Substandard 56,208 1,254 — — — — — — 57,462 Total 758,232 34,479 220,650 47,551 138,686 76,133 509 — 1,276,240 YTD Gross Charge-offs ( 3,800 ) — — — — — — — — ( 3,800 ) Real estate mortgage - residential Pass 22,324 2,450 14,340 12,235 5,874 — — — 57,223 Total 22,324 2,450 14,340 12,235 5,874 — — — 57,223 YTD Gross Charge-offs — — — — — — — — — Construction - commercial and residential Pass 26,733 8,614 238,650 564,369 161,581 6,546 127,331 — 1,133,824 Substandard 6,141 29,737 4,889 — — — — — 40,767 Total 32,874 38,351 243,539 564,369 161,581 6,546 127,331 — 1,174,591 YTD gross charge-offs ( 129 ) — — — — — — — ( 129 ) Construction - C&I (owner occupied) Pass 6,212 49,996 — 35,098 8,514 — 842 — 100,662 Total 6,212 49,996 — 35,098 8,514 — 842 — 100,662 Home equity Pass 1,481 71 35 116 — — 49,175 400 51,278 Substandard 62 — 227 — — — — — 289 Total 1,543 71 262 116 — — 49,175 400 51,567 Other consumer Pass 3 — — — — 69 96 1 169 Total 3 — — — — 69 96 1 169 YTD gross charge-offs ( 87 ) — — — — — — ( 1 ) ( 88 ) Total recorded investment $ 2,790,457 $ 431,584 $ 1,222,653 $ 1,589,473 $ 747,627 $ 244,247 $ 902,330 $ 41,898 $ 7,970,269 Total YTD gross charge-offs $ ( 29,059 ) $ ( 386 ) $ — $ — $ — $ — $ — $ ( 51 ) $ ( 29,496 ) (dollars in thousands) Prior 2019 2020 2021 2022 2023 Revolving Loans Amort. Cost Basis Revolving Loans Convert. to Term Total December 31, 2023 Commercial Pass $ 157,563 $ 48,524 $ 39,133 $ 194,555 $ 149,320 $ 191,889 $ 623,684 $ 5,207 $ 1,409,875 Special Mention 1,415 — — — — — 2,259 — 3,674 Substandard 13,797 58 10,337 1,509 222 — 33,670 624 60,217 Total 172,775 48,582 49,470 196,064 149,542 191,889 659,613 5,831 1,473,766 YTD gross charge-offs ( 885 ) — — — — — — ( 1,135 ) ( 2,020 ) PPP loans Pass — — — 528 — — — — 528 Total — — — 528 — — — — 528 Income producing - commercial real estate Pass 1,257,937 326,999 328,743 517,957 732,291 327,126 263,317 1,845 3,756,215 Special Mention 84,585 44,424 6,740 — — — — — 135,749 Substandard 139,961 62,689 — — — — — — 202,650 Total 1,482,483 434,112 335,483 517,957 732,291 327,126 263,317 1,845 4,094,614 YTD gross charge-offs ( 11,817 ) — — — — — — — ( 11,817 ) Owner occupied - commercial real estate Pass 534,525 103,034 35,385 202,776 41,907 125,934 673 55 1,044,289 Special Mention 54,288 13,348 — — — — — — 67,636 Substandard 37,167 — 1,274 — — — — 21,873 60,314 Total 625,980 116,382 36,659 202,776 41,907 125,934 673 21,928 1,172,239 YTD Gross Charge-offs — — — — — — — — — Real estate mortgage - residential Pass 22,877 7,545 2,186 15,967 14,756 5,895 — — 69,226 Substandard 4,170 — — — — — — — 4,170 Total 27,047 7,545 2,186 15,967 14,756 5,895 — — 73,396 YTD Gross Charge-offs — — — — — — — — — Construction - commercial and residential Pass 30,619 3,440 45,739 251,038 419,393 87,400 124,013 — 961,642 Substandard 8,124 — — — — — — — 8,124 Total 38,743 3,440 45,739 251,038 419,393 87,400 124,013 — 969,766 YTD Gross Charge-offs ( 136 ) ( 5,500 ) — — — — — — ( 5,636 ) Construction - C&I (owner occupied) Pass 18,551 4,265 56,361 618 33,237 12,619 6,370 — 132,021 Home equity Pass 1,590 — 87 151 118 — 49,035 643 51,624 Substandard — 36 — — — — 62 242 340 Total 1,590 36 87 151 118 — 49,097 885 51,964 YTD Gross Charge-offs — — — — — — — — — Other consumer Pass 1 — — — 46 — 354 — 401 Total 1 — — — 46 — 354 — 401 YTD gross charge-offs ( 50 ) — — — — — — — ( 50 ) Total recorded investment $ 2,367,170 $ 614,362 $ 525,985 $ 1,185,099 $ 1,391,290 $ 750,863 $ 1,103,437 $ 30,489 $ 7,968,695 Total YTD gross charge-offs $ ( 12,888 ) $ ( 5,500 ) $ — $ — $ — $ — $ — $ ( 1,135 ) $ ( 19,523 ) Nonaccrual and Past Due Loans Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following table presents, by portfolio segment, the nonaccrual HFI loans amortized cost basis as of September 30, 2024 and December 31, 2023: (dollars in thousands, except amounts in footnotes) Nonaccrual with No Allowance for Credit Losses Nonaccrual with an Allowance for Credit Losses Total Nonaccrual Loans September 30, 2024 Commercial $ 1,479 $ 451 $ 1,930 Income producing - commercial real estate 47,224 47,058 94,282 Owner occupied - commercial real estate 642 37,088 37,730 Real estate mortgage - residential — 172 172 Construction - commercial and residential — — — Home equity 257 — 257 Total (1) $ 49,602 $ 84,769 $ 134,371 December 31, 2023 Commercial $ 1,002 $ 1,047 $ 2,049 Income producing - commercial real estate 40,926 — 40,926 Owner occupied - commercial real estate 19,836 — 19,836 Real estate mortgage - residential — 1,946 1,946 Construction - commercial and residential — 525 525 Home equity 242 — 242 Total (1) $ 62,006 $ 3,518 $ 65,524 (1) Gross coupon interest income of approximately $ 5.9 million and $ 4.1 million would have been recorded for the nine months ended September 30, 2024 and 2023, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while no coupon interest income was actually recorded on such loans for the nine months ended September 30, 2024 and 2023, respectively. The table presents, by portfolio segment, an aging analysis and the recorded investments in HFI loans past due, on an amortized cost basis as of September 30, 2024 and December 31, 2023: (dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans September 30, 2024 Commercial $ 66 $ 17,996 $ — $ 18,062 $ 1,134,357 $ 1,930 $ 1,154,349 PPP loans — — — — 348 — 348 Income producing - commercial real estate 8,413 26,159 — 34,572 4,026,266 94,282 4,155,120 Owner occupied - commercial real estate 2,566 — — 2,566 1,235,944 37,730 1,276,240 Real estate mortgage - residential — — — — 57,051 172 57,223 Construction - commercial and residential 1,031 — — 1,031 1,173,560 — 1,174,591 Construction - C&I (owner occupied) — — — — 100,662 — 100,662 Home equity 106 — — 106 51,204 257 51,567 Other consumer — 1 — 1 168 — 169 Total $ 12,182 $ 44,156 $ — $ 56,338 $ 7,779,560 $ 134,371 $ 7,970,269 (dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 Days or More Past Due Total Past Due Loans Current Loans Nonaccrual Loans Total Recorded Investment in Loans December 31, 2023 Commercial $ 985 $ 7,048 $ — $ 8,033 $ 1,463,684 $ 2,049 $ 1,473,766 PPP loans — — — — 528 — 528 Income producing - commercial real estate — — — — 4,053,688 40,926 4,094,614 Owner occupied - commercial real estate 1,274 — — 1,274 1,151,129 19,836 1,172,239 Real estate mortgage – residential 2,089 — — 2,089 69,361 1,946 73,396 Construction - commercial and residential 2,056 — — 2,056 967,185 525 969,766 Construction - C&I (owner occupied) — — — — 132,021 — 132,021 Home equity 197 — — 197 51,525 242 51,964 Other consumer — — — — 401 — 401 Total $ 6,601 $ 7,048 $ — $ 13,649 $ 7,889,522 $ 65,524 $ 7,968,695 Loan Modifications for Borrowers Experiencing Financial Difficulty The Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows. The Company may offer various types of modifications when restructuring a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a loan restructuring often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a loan restructuring may also involve extending the interest-only payment period. Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for consumer and commercial loans that have been modified in a loan restructuring is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. 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. The following tables present the amortized cost basis as of September 30, 2024 and 2023 and the financial effect of HFI loans modified to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023: September 30, 2024 (dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Interest Rate Reduction and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Total Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Weighted Average Interest Rate Reduction Three months ended September 30, 2024 Commercial $ 11,328 $ 28,776 $ — $ — $ 40,104 3.5 % 10 months — % Income producing - commercial real estate 27,535 69,023 — — 96,558 2.3 % 12 months — % Owner occupied - commercial real estate — — — — — — % — — % Construction - commercial and residential — — — — — — % — — % Total $ 38,863 $ 97,799 $ — $ — $ 136,662 Nine months ended September 30, 2024: Commercial $ 27,325 $ 28,776 7,831 $ — $ 63,932 5.5 % 13 months 1.63 % Income producing - commercial real estate 27,535 171,851 — 3,513 202,899 4.9 % 10 months 3.59 % Owner occupied - commercial real estate 874 — — — 874 0.1 % 12 months — % Construction - commercial and residential — 11,030 — — 11,030 0.9 % 9 months — % Total $ 55,734 $ 211,657 $ 7,831 $ 3,513 $ 278,735 September 30, 2023 (dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Interest Rate Reduction and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Total Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Weighted Average Interest Rate Reduction Three months ended September 30, 2023: Commercial $ 29,898 $ — $ — $ — $ 29,898 2.1 % 4 months — % Income producing - commercial real estate 7,190 55,649 — 113,833 176,672 4.3 % 10 months 1.89 % Owner occupied - commercial real estate — 19,125 — — 19,125 1.6 % 3 months — % Total $ 37,088 $ 74,774 $ — $ 113,833 $ 225,695 Nine months ended September 30, 2023: Commercial $ 36,969 $ — $ — $ — $ 36,969 2.6 % 7 months — % Income producing - commercial real estate 7,190 57,808 — 113,833 178,831 4.3 % 13 months 2.55 % Owner occupied - commercial real estate — 19,125 — — 19,125 1.6 % 9 months — % Construction - commercial and residential 7,093 — — — 7,093 0.8 % 6 months — % Total $ 51,252 $ 76,933 $ — $ 113,833 $ 242,018 The following table presents the performance of HFI loans modified during the prior twelve months to borrowers experiencing financial difficulty: September 30, 2024 Payment Status (Amortized Cost Basis) (dollars in thousands) Current 30-89 Days Past Due Nonaccrual Commercial $ 60,611 $ 3,321 $ — Income producing - commercial real estate 158,916 12,371 57,558 Owner occupied - commercial real estate 874 — — Real estate mortgage - residential — — — Construction - commercial and residential 11,030 — — Total $ 231,431 $ 15,692 $ 57,558 The Company monitors loan payments on performing and nonperforming loans on an on-going basis to determine if a loan is considered to have a payment default. To determine the existence of a payment default, the Company analyzes the economic conditions that exist for each borrower and their ability to generate positive cash flow during a given loan's term. The following table presents the amortized cost basis of HFI loans that were experiencing payment default as of September 30, 2024 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty: September 30, 2024 Amortized Cost Basis (dollars in thousands) Term Extension Combination - Term Extension and Principal Payment Delay Combination - Term Extension, Principal Payment Delay and Interest Rate Reduction Commercial $ 3,321 $ — $ — Income producing - commercial real estate — 69,929 — Owner occupied - commercial real estate — — — Construction - commercial and residential — — — Total $ 3,321 $ 69,929 $ — The Company individually evaluates nonaccrual loans when performing its CECL estimate to calculate the ACL. Additionally, the Company utilizes historical internal and third-party service provider sourced loss data in the determination of its PD/LGD rates applied in the calculation of its CECL estimate. Upon determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount. Note 5. Leases The Company accounts for leases in accordance with ASC Topic 842. A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Substantially all of the leases in which the Company is the lessee comprise real estate for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases and are included in operating lease right-of-use ("ROU") assets and operating lease liabilities on the Consolidated Balance Sheets. As of September 30, 2024 and December 31, 2023, the Company had $ 15.2 million and $ 19.1 million of operating lease ROU assets, respectively, and $ 18.8 million and $ 23.2 million of operating lease liabilities, respectively, on the Company's Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets. The leases contain options to extend or terminate the lease, which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90 % probability that the Company will exercise the option. If these criteria are not met, the options are not included in ROU assets and lease liabilities. As of September 30, 2024, the Company's leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or its ability to incur additional financial obligations. During the nine months ended September 30, 2024, the Company did not enter into new leases nor renew any leases. However, during the same period, the Company did extend two existing leases, one each in Maryland and District of Columbia, and two additional leases expired. 22 The following table presents lease costs and other lease information. Three Months Ended Nine Months Ended (dollars in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Lease cost Operating lease cost (cost resulting from lease payments) $ 1,525 $ 1,604 $ 4,691 $ 4,987 Variable lease cost (cost excluded from lease payments) 231 245 709 754 Sublease income — ( 30 ) ( 40 ) ( 89 ) Net lease cost $ 1,756 $ 1,819 $ 5,360 $ 5,652 Operating lease - operating cash flows (fixed payments) $ 1,703 $ 1,760 $ 5,212 $ 5,433 (dollars in thousands) September 30, 2024 December 31, 2023 Right-of-use assets - operating leases $ 15,167 $ 19,129 Operating lease liabilities $ 18,755 $ 23,238 Weighted average lease term - operating leases 4.57 yrs 4.93 yrs Weighted average discount rate - operating leases 2.63 % 2.78 % Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2024 were as follows: (dollars in thousands) Twelve months ended: September 30, 2025 $ 6,821 September 30, 2026 3,580 September 30, 2027 2,753 September 30, 2028 2,207 September 30, 2029 1,857 Thereafter 2,413 Total future minimum lease payments 19,631 Amounts representing interest ( 876 ) Present value of net future minimum lease payments $ 18,755 23 Note 6. Goodwill and Intangibles Intangible assets are included in the Consolidated Balance Sheets as a separate line item, net of accumulated amortization and consist of the following items: (dollars in thousands) Gross Intangible Assets Additions Accumulated Amortization Impairment Net Intangible Assets September 30, 2024: Goodwill $ 104,168 $ — $ — $ ( 104,168 ) $ — Excess servicing (1) 37 — ( 16 ) — 21 Non-compete agreements 720 — ( 720 ) — — Total $ 104,925 $ — $ ( 736 ) $ ( 104,168 ) $ 21 December 31, 2023: Goodwill $ 104,168 $ — $ — $ — $ 104,168 Excess servicing (1) 65 — ( 28 ) — 37 Non-compete agreements — 1,234 ( 514 ) — 720 Total $ 104,233 $ 1,234 $ ( 542 ) $ — $ 104,925 (1) The Company recognizes a servicing asset for the computed value of servicing fees on the sale of multifamily FHA loans and the sale of the guaranteed portion of SBA loans. Assumptions related to loan terms and amortization are made to arrive at the initial recorded values. 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 as of May 31, 2024. The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios. Note 7. Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments. Cash Flow Hedges of Interest Rate Risk The Company historically utilized interest rate swaptions, accounted for as cash flow hedges, to protect itself against adverse fluctuations in interest rates on a forecasted issuance of debt. During the quarter ended March 31, 2024, the Company terminated its interest rate swaption contracts and discontinued the associated hedging relationship. The amount in accumulated other comprehensive loss related to the swaption contracts is being amortized over the remainder of the hedged transaction. The Company expects to reclassify the remaining $ 57 thousand out of accumulated other comprehensive loss over the next two quarters as a reduction of interest expense. 24 Interest Rate Products Interest rate derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net market risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. At September 30, 2024, the Company had posted $ 10.2 million of cash collateral with other financial institutions and held $ 9.2 million of cash collateral on behalf of other financial institutions. The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts in exchange for a fee. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. 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. Credit-Risk-Related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party's exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. 25 The table below identifies the balance sheet category and fair value of the Company's derivative instruments as of September 30, 2024 and December 31, 2023. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at September 30, 2024, it could have been required to settle its obligations under the agreement at the termination value. September 30, 2024 December 31, 2023 (dollars in thousands) Notional Amount Fair Value Balance Sheet Category Notional Amount Fair Value Balance Sheet Category Derivatives in an asset position: Derivatives designated as hedging instruments: Interest rate product $ — $ — Other assets $ 300,000 $ 374 Other assets Derivatives not designated as hedging instruments: Interest rate product 755,156 31,984 Other assets 651,429 30,288 Other assets Credit risk participation agreements 49,480 1 Other liabilities 49,480 3 Other liabilities Total 804,636 31,985 700,909 30,291 Total derivatives in an asset position: $ 804,636 $ 31,985 $ 1,000,909 $ 30,665 Derivatives in a liability position: Derivatives not designated as hedging instruments: Interest rate product $ 755,156 $ 30,588 Other liabilities $ 654,757 $ 30,555 Other liabilities The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023: The Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Operations Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2024 2023 2024 2023 Interest rate products Other income / (other expense) $ 843 $ 3,027 $ 1,321 $ 3,735 Note 8. Deposits The following table provides information regarding the Bank’s deposit composition at September 30, 2024 and December 31, 2023: (dollars in thousands) September 30, 2024 December 31, 2023 Noninterest-bearing demand $ 1,609,823 $ 2,279,081 Interest-bearing transaction 903,300 997,448 Savings and money market 3,316,819 3,314,043 Time deposits 2,710,908 2,217,467 Total $ 8,540,850 $ 8,808,039 26 The remaining maturity of time deposits at September 30, 2024 and December 31, 2023 were as follows: (dollars in thousands) September 30, 2024 December 31, 2023 2024 $ 411,016 $ 1,445,395 2025 1,907,109 576,379 2026 374,159 180,384 2027 6,443 5,482 2028 10,175 9,827 2029 2,006 — Total $ 2,710,908 $ 2,217,467 As of September 30, 2024 and December 31, 2023, time deposit accounts in excess of $250 thousand were as follows: (dollars in thousands) September 30, 2024 December 31, 2023 Three months or less $ 187,180 $ 119,880 More than three months through six months 182,214 318,353 More than six months through twelve months 798,285 368,103 Over twelve months 483,883 726,758 Total $ 1,651,562 $ 1,533,094 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 Certificates of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep ("ICS") two-way accounts. At December 31, 2023, total brokered deposits (excluding the CDARS and ICS two-way) were $ 2.5 billion, or 28.8 % of total deposits. 27 Note 9. Borrowings The following table summarizes the Company’s borrowings, which include repurchase agreements with the Company’s customers and borrowings, at September 30, 2024 and December 31, 2023: (dollars in thousands) Borrowings - Principal Unamortized Deferred Issuance Costs Net Borrowings Outstanding Available Capacity (1) Maturity Dates Interest Rates (2) September 30, 2024: Customer repurchase agreements $ 32,040 $ — $ 32,040 $ — N/A 3.31 % Short-term borrowings: Secured borrowings: FHLB 240,000 — 240,000 1,203,126 April 1, 2025 5.20 % FRB: BTFP 1,000,000 — 1,000,000 — January 15, 2025 4.76 % Discount window — — — 1,839,552 N/A N/A Raymond James repurchase agreement — — — 18,604 N/A N/A Subordinated notes — — — — N/A N/A Total 1,240,000 — 1,240,000 3,061,282 Long-term borrowings: Senior notes 77,665 ( 1,853 ) 75,812 — September 30, 2029 10.00 % Total borrowings $ 1,349,705 $ ( 1,853 ) $ 1,347,852 $ 3,061,282 December 31, 2023: Customer repurchase agreements $ 30,587 $ — $ 30,587 $ — N/A 3.42 % Short-term borrowings: Secured borrowings: FHLB — — — 1,271,846 N/A N/A FRB: BTFP 1,300,000 — 1,300,000 598,870 March 22, 2024 4.53 % Discount window — — — 601,504 N/A N/A Raymond James repurchase agreement — — — 17,993 N/A N/A Subordinated notes 70,000 ( 82 ) 69,918 — September 1, 2024 5.75 % Long-term borrowings: Senior notes — — — — N/A N/A Total borrowings $ 1,400,587 $ ( 82 ) $ 1,400,505 $ 2,490,213 (1) Available capacity on the Company's borrowing arrangements with the FHLB, the FRB and the Raymond James repurchase line comprise pledged collateral that has not been borrowed against. At September 30, 2024, the Company had total additional undrawn borrowing capacity of approximately $ 4.0 billion, comprising unencumbered securities available to be pledged of approximately $ 892.9 million and undrawn financing on pledged assets of $ 3.1 billion. (2) Represent the weighted average interest rate on customer repurchase agreements and the borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate. The Company’s repurchase agreements operate on a rolling basis and do not contain contractual maturity dates. The contractual maturity dates on FHLB secured borrowings represent the maturity dates of current advances and are not evidence of a termination date on the line. There are no prepayment penalties nor unused commitment fees on any of the Company’s borrowing arrangements. 28 Bank Term Funding Program ("BTFP") On March 12, 2023, the FRB, Department of Treasury and the Federal Deposit Insurance Corporation ("FDIC") issued a joint statement outlining actions they had taken to protect the U.S. economy by strengthening public confidence in the banking system as a result of and in response to recently announced bank closures. Among other actions, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of a new BTFP. The BTFP provides eligible depository institutions, including the Company's subsidiary bank, the Bank, an additional source of liquidity. Borrowings are funded based on a percentage of the principal of eligible collateral posted, as defined within the terms of the program. Interest is payable at a fixed rate over the term of the borrowing and there are no prepayment penalties. The Federal Reserve announced in January 2024 that the BTFP would stop originating new loans on March 11, 2024, as scheduled. The Federal Reserve also modified the terms of the program so that the interest rate for new loans would be no lower than the interest rate on reserve balances in effect on the day the loan is made. In January 2024, the Company borrowed an additional $ 500.0 million through the BTFP and refinanced $ 500.0 million under the program, both at an interest rate of 4.76 % that mature in January 2025. Senior Notes 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. Subordinated Notes On August 5, 2014, the Company completed the sale of $ 70.0 million of its 5.75 % subordinated notes, which matured and were repaid in September 2024 (the "2024 Notes"). The net proceeds were approximately $ 68.8 million which included $ 1.2 million in deferred financing costs, which were amortized over the life of the 2024 Notes. The 2024 Notes were offered to the public at par and qualified as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements and were fully phased out of regulatory capital as of December 31, 2023 as they approached maturity. 29 Note 10. Net Income (Loss) per Common Share The calculation of net income (loss) per common share for the three and nine months ended September 30, 2024 and 2023 was as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars and shares in thousands, except per share data) 2024 2023 2024 2023 Basic: Net income (loss) $ 21,815 $ 27,383 $ ( 62,325 ) $ 80,309 Average common shares outstanding 30,174 29,910 30,143 30,487 Basic net income (loss) per common share $ 0.72 $ 0.91 $ ( 2.07 ) $ 2.63 Diluted: Net income (loss) $ 21,815 $ 27,383 $ ( 62,325 ) $ 80,309 Average common shares outstanding 30,174 29,910 30,143 30,487 Adjustment for common share equivalents 68 34 — 48 Average common shares outstanding-diluted 30,242 29,944 30,143 30,535 Diluted net income (loss) per common share (1) $ 0.72 $ 0.91 $ ( 2.07 ) $ 2.63 Anti-dilutive shares 3 3 58 3 (1) For periods ended with a net loss, anti-dilutive financial instruments have been excluded from the calculation of GAAP diluted EPS. Basic net income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company. The computation of diluted per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on net income (loss) per share. Securities issued by the Company that could potentially dilute net income (loss) per share in future periods include stock options and restricted stock. To calculate diluted net income (loss) per share, the Company utilizes the Treasury Stock method which results in only an incremental number of shares added to shares outstanding during the period. 30 Note 11. Other Comprehensive (Loss) Income The following table presents the components of other comprehensive (loss) income for the three and nine months ended September 30, 2024 and 2023. (dollars in thousands) Before Tax Tax Effect Net of Tax Three Months Ended September 30, 2024 Net unrealized gain on securities available-for-sale $ 46,788 $ ( 11,450 ) $ 35,338 Less: Reclassification adjustment for net gain included in net income ( 3 ) 1 ( 2 ) Total unrealized gain on investment securities available-for-sale 46,785 ( 11,449 ) 35,336 Amortization of unrealized loss on securities transferred to held-to-maturity 1,768 ( 413 ) 1,355 Net unrealized loss on derivatives ( 32 ) 7 ( 25 ) Other comprehensive income $ 48,521 $ ( 11,855 ) $ 36,666 Three Months Ended September 30, 2023 Net unrealized loss on securities available-for-sale $ ( 28,150 ) $ 6,836 $ ( 21,314 ) Less: Reclassification adjustment for net gain included in net income ( 5 ) 1 ( 4 ) Total unrealized loss on investment securities available-for-sale ( 28,155 ) 6,837 ( 21,318 ) Amortization of unrealized loss on securities transferred to held-to-maturity 1,824 ( 424 ) 1,400 Other comprehensive loss $ ( 26,331 ) $ 6,413 $ ( 19,918 ) Nine Months Ended September 30, 2024 Net unrealized gain on securities available-for-sale $ 44,907 $ ( 11,006 ) $ 33,901 Less: Reclassification adjustment for net gain included in net income ( 10 ) 2 ( 8 ) Total unrealized gain on investment securities available-for-sale 44,897 ( 11,004 ) 33,893 Amortization of unrealized loss on securities transferred to held-to-maturity 5,224 ( 1,162 ) 4,062 Net unrealized gain on derivatives 298 ( 73 ) 225 Other comprehensive income $ 50,419 $ ( 12,239 ) $ 38,180 Nine Months Ended September 30, 2023 Net unrealized loss on securities available-for-sale $ ( 20,070 ) $ 4,618 $ ( 15,452 ) Less: Reclassification adjustment for net loss included in net income 14 ( 4 ) 10 Total unrealized loss on investment securities available-for-sale ( 20,056 ) 4,614 ( 15,442 ) Amortization of unrealized loss on securities transferred to held-to-maturity 5,638 ( 2,194 ) 3,444 Other comprehensive loss $ ( 14,418 ) $ 2,420 $ ( 11,998 ) 31 The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2024 and 2023. (dollars in thousands) Securities Available-For-Sale Securities Held-to-Maturity Derivatives Accumulated Other Comprehensive Income (Loss) Three Months Ended September 30, 2024 Balance at beginning of period $ ( 123,689 ) $ ( 37,222 ) $ 68 $ ( 160,843 ) Other comprehensive income (loss) before reclassifications 35,338 — ( 25 ) 35,313 Amounts reclassified from accumulated other comprehensive income (loss) ( 2 ) — — ( 2 ) Amortization of unrealized loss on securities transferred to held-to-maturity — 1,355 — 1,355 Net other comprehensive income (loss) during period 35,336 1,355 ( 25 ) 36,666 Balance at end of period $ ( 88,353 ) $ ( 35,867 ) $ 43 $ ( 124,177 ) Three Months Ended September 30, 2023 Balance at beginning of period $ ( 148,897 ) $ ( 42,690 ) $ — $ ( 191,587 ) Other comprehensive loss before reclassifications ( 21,314 ) — — ( 21,314 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 4 ) — — ( 4 ) Amortization of unrealized loss on securities transferred to held-to-maturity — 1,400 — 1,400 Net other comprehensive (loss) income during period ( 21,318 ) 1,400 — ( 19,918 ) Balance at end of period $ ( 170,215 ) $ ( 41,290 ) $ — $ ( 211,505 ) Nine Months Ended September 30, 2024 Balance at beginning of period $ ( 122,246 ) $ ( 39,929 ) $ ( 182 ) $ ( 162,357 ) Other comprehensive (loss) income before reclassifications 33,901 — 225 34,126 Amounts reclassified from accumulated other comprehensive income (loss) ( 8 ) — — ( 8 ) Amortization of unrealized loss on securities transferred to held-to-maturity — 4,062 — 4,062 Net other comprehensive income (loss) during period 33,893 4,062 225 38,180 Balance at end of period $ ( 88,353 ) $ ( 35,867 ) $ 43 $ ( 124,177 ) Nine Months Ended September 30, 2023 Balance at beginning of period $ ( 154,773 ) $ ( 44,734 ) $ — $ ( 199,507 ) Other comprehensive income before reclassifications ( 15,452 ) — — ( 15,452 ) Amounts reclassified from accumulated other comprehensive income 10 — — 10 Amortization of unrealized loss on securities transferred to held-to-maturity — 3,444 — 3,444 Net other comprehensive (loss) income during period ( 15,442 ) 3,444 — ( 11,998 ) Balance at end of period $ ( 170,215 ) $ ( 41,290 ) $ — $ ( 211,505 ) 32 The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023. Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Three Months Ended September 30, Affected Line Item in Consolidated Statements of Income (dollars in thousands) 2024 2023 Realized gain (loss) on sale of investment securities $ 3 $ 5 Net gain (loss) on sale of investment securities Income tax benefit (expense) ( 1 ) ( 1 ) Income tax expense Total reclassifications for the periods $ 2 $ 4 Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Nine Months Ended September 30, Affected Line Item in Consolidated Statements of Operations (dollars in thousands) 2024 2023 Realized gain (loss) on sale of investment securities $ 10 $ ( 14 ) Net gain (loss) on sale of investment securities Income tax benefit (expense) ( 2 ) 4 Income tax expense Total reclassifications for the periods $ 8 $ ( 10 ) Note 12. Fair Value Measurements The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. treasury and other U.S. Government and agency securities actively traded in over-the-counter markets. Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or inputs that can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. 33 Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023. (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Fair Value September 30, 2024 Assets: Investment securities available-for-sale: U.S treasury bonds $ — $ 49,403 $ — $ 49,403 U. S. agency securities — 653,277 — 653,277 Residential mortgage-backed securities — 670,045 — 670,045 Commercial mortgage-backed securities — 50,216 — 50,216 Municipal bonds — 8,267 — 8,267 Corporate bonds — 1,798 — 1,798 Interest rate product — 31,984 — 31,984 Credit risk participation agreements — 1 — 1 Total assets measured at fair value on a recurring basis $ — $ 1,464,991 $ — $ 1,464,991 Liabilities: Interest rate product $ — $ 30,588 $ — $ 30,588 Total liabilities measured at fair value on a recurring basis $ — $ 30,588 $ — $ 30,588 December 31, 2023 Assets: Investment securities available-for-sale: U.S. treasury bonds $ — $ 47,901 $ — $ 47,901 U. S. agency securities — 671,397 — 671,397 Residential mortgage-backed securities — 727,353 — 727,353 Commercial mortgage-backed securities — 49,564 — 49,564 Municipal bonds — 8,490 — 8,490 Corporate bonds — 1,683 — 1,683 Interest rate product — 30,662 — 30,662 Credit risk participation agreements — 3 — 3 Total assets measured at fair value on a recurring basis $ — $ 1,537,053 $ — $ 1,537,053 Liabilities: Interest rate product $ — $ 30,555 $ — $ 30,555 Total liabilities measured at fair value on a recurring basis $ — $ 30,555 $ — $ 30,555 Investment securities available-for-sale: AFS securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 2 securities include certain U.S. treasury bonds, U.S. agency debt securities, MBS issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, for which the carrying amounts approximate the fair value. 34 Credit risk participation agreements : The Company enters into RPAs with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. 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. Accordingly, RPAs fall within Level 2. Interest rate derivatives: The Company entered into an interest rate derivative agreement with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the derivatives strike rate. The fair value of the derivative is calculated by determining the total expected asset or liability exposure of the derivative. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the derivative falls within Level 2. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company measures certain assets at fair value on a nonrecurring basis, and the following is a general description of the methods used to value such assets. Loans: The fair value of individually assessed loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those individually assessed loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At September 30, 2024, substantially all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral, i.e. those that are collateral dependent, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. Other real estate owned ("OREO") : OREO is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. 35 Assets measured at fair value on a nonrecurring basis are included in the table below: (dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Fair Value September 30, 2024 Individually assessed loans: Commercial $ — $ — $ 2,489 $ 2,489 Income producing - commercial real estate — — 92,796 92,796 Owner occupied - commercial real estate — — 33,961 33,961 Home equity — — 257 257 Other real estate owned — — 2,743 2,743 Total assets measured at fair value on a nonrecurring basis as of September 30, 2024 $ — $ — $ 132,246 $ 132,246 December 31, 2023 Individually assessed loans: Commercial $ — $ — $ 2,475 $ 2,475 Income producing - commercial real estate — — 41,038 41,038 Owner occupied - commercial real estate — — 19,880 19,880 Real estate mortgage - residential — — 1,638 1,638 Consumer — — 396 396 Home equity — — 242 242 Other real estate owned — — 1,108 1,108 Total assets measured at fair value on a nonrecurring basis as of December 31, 2023 $ — $ — $ 66,777 $ 66,777 As shown in the table above, certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to collateral-dependent loans that are individually assessed and other real estate owned. For the collateral-dependent loans and other real estate owned, the Company measures the fair value utilizing a market valuation approach, based on an appraisal conducted by an independent, licensed appraiser. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). For loans that are not collateral dependent, the Company uses an income approach, specifically, the discounted cash flow method. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default. Fair Value of Financial Instruments The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists. Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values, including in certain cases, the Company's estimation of exit pricing, and should not be considered an indication of the fair value of the Company taken as a whole. 36 The estimated fair value of the Company's financial instruments at September 30, 2024 and December 31, 2023 are as follows: Fair Value Measurements (dollars in thousands) Carrying Value Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) September 30, 2024 Assets Cash and due from banks $ 16,383 $ 16,383 $ 16,383 $ — $ — Federal funds sold 9,610 9,610 — 9,610 — Interest-bearing deposits with other banks 584,491 584,491 — 584,491 — Investment securities available-for-sale 1,433,006 1,433,006 — 1,433,006 — Investment securities held-to-maturity 961,925 868,425 — 868,425 — Federal Reserve and Federal Home Loan Bank stock 37,728 N/A — — — Loans 7,970,269 7,649,112 — 7,649,112 Bank owned life insurance 115,064 115,064 — 115,064 — Annuity investment 12,636 12,636 — 12,636 — Interest rate product 31,984 31,984 — 31,984 — Accrued interest receivable 50,786 50,786 50,786 — — Liabilities Noninterest-bearing deposits $ 1,609,823 $ 1,609,823 $ — $ 1,609,823 $ — Interest-bearing deposits 4,220,119 4,220,119 — 4,220,119 — Time deposits 2,710,908 2,727,075 — 2,727,075 — Customer repurchase agreements 32,040 32,040 — 32,040 — Other short-term borrowings 1,240,000 1,240,000 — 1,240,000 — Long-term borrowings 75,812 82,399 — 82,399 Interest rate product 30,588 30,588 — 30,588 — Accrued interest payable 51,875 51,875 51,875 — — December 31, 2023 Assets Cash and due from banks $ 9,047 $ 9,047 $ 9,047 $ — $ — Federal funds sold 3,740 3,740 — 3,740 — Interest-bearing deposits with other banks 709,897 709,897 — 709,897 — Investment securities available-for-sale 1,506,388 1,506,388 — 1,506,388 — Investment securities held-to-maturity 1,015,737 901,582 — 901,582 — Federal Reserve and Federal Home Loan Bank stock 25,748 N/A — — — Loans 7,968,695 7,720,241 — — 7,720,241 Bank owned life insurance 112,921 112,921 — 112,921 — Annuity investment 13,112 13,112 — 13,112 — Credit risk participation agreements 3 3 — 3 — Interest rate product 30,662 30,662 — 30,662 — Accrued interest receivable 53,337 53,337 53,337 — — Liabilities Noninterest-bearing deposits $ 2,279,081 $ 2,279,081 $ — $ 2,279,081 $ — Interest-bearing deposits 4,311,491 4,311,491 — 4,311,491 — Time deposits 2,217,467 2,217,795 — 2,217,795 — Customer repurchase agreements 30,587 30,587 — 30,587 — Other short-term borrowings 1,369,918 1,368,621 — 1,368,621 — Long-term borrowings — — — — — Interest rate product 30,555 30,555 — 30,555 — Accrued interest payable 57,395 57,395 57,395 — — 37 Note 13. Legal Contingencies From time to time, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed, as well as regulatory and governmental investigations and inquiries that could result in penalties, fines or other sanctions against the Company. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such matters will have a material effect on the financial position of the Company. However, considering inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation. Under ASC 450, the Company accrues for a loss contingency when the loss is probable and reasonably estimable. The Company discloses the matter if a material loss is at least reasonably possible. Under ASC 450, a loss contingency is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”, and a loss contingency is “remote” if “the chance of the future event or events occurring is slight.” The Company is cooperating with an ongoing investigation by the U.S. Attorney’s Office for the Middle District of Pennsylvania into, among other things, the Company’s anti-money laundering controls between approximately 2011 and 2017 and the Company’s relationship with a former customer who pleaded guilty to a charge of bank fraud in 2020. Due to the inherent uncertainty in predicting the outcome of a pending investigation, we are unable to estimate reasonably possible losses, if any, resulting from this matter. 38