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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-30 · 635 added, 480 removed, 103 unchanged (92% of the section changed)

2 unchanged sentences

This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this annual report.

PERFORMANCE OVERVIEW

The Company recorded net income of $31.2 million for 2022 and net income of $15.4 million for 2021.

The basic and diluted income per share was $1.57 and $1.17 for fiscal year 2022 and 2021, respectively.

When comparing net income for 2022 to 2021, earnings increased due to increases in net interest income $37.2 million and noninterest income of $9.6 million primarily offset by an increase in noninterest expense of $23.5 million related to increases in salaries and wages, employee benefits, and other loan and customer expenses primarily due to the acquisition of Severn Bancorp, Inc.

(“Severn”) in the fourth quarter of 2021.

Total assets were $3.477 billion at December 31, 2022, a $17.1 million, or less than 1.0%, increase when compared to $3.460 billion at the end of 2021.

During 2022, the Company shifted its asset mix by deploying cash and cash equivalents into higher yielding loans and investment securities.

Total deposits decreased $16.5 million, or less than 1%, when compared to December 31, 2021.

The decrease in total deposits was due to decreases in money market and savings accounts of $85.7 million, noninterest-bearing deposits of $65.5 million and time deposits of $35.2 million, partially offset by an increase in interest bearing checking accounts of $170.0 million.

Total stockholders’ equity increased $13.6 million, or 3.9%, when compared to December 31, 2021, primarily due to current year earnings, partially offset by unrealized losses on available for sale securities of $9.1 million and dividends paid to common stockholders of $9.5 million.

At December 31, 2022, the ratio of total equity to total assets was 10.48% and the ratio of total tangible equity to total tangible assets was 8.67%, compared to 10.14% and 8.25% for 2021.

CRITICAL ACCOUNTING POLICIES

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These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses, accounting for loans acquired in business combinations, and goodwill are critical accounting policies.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses on loans, goodwill and bargain purchase gain, accounting for loans acquired in business combinations, and income taxes are critical accounting policies.

These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Loans Acquired in a Business Combination

Acquired loans are classified as either (i) purchase credit-impaired (“PCI”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments.

When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status.

The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans.

Estimates of cash flows for PCI loans require significant judgment.

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses.

Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans.

Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified as nonperforming by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows.

Purchased performing loans are recorded at fair value, including a credit discount.

The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans.

There is no allowance for loan losses established at the acquisition date for purchased performing loans.

A provision for loan losses may be required for any deterioration in these loans in future periods.

Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors impacting the loan portfolio, all of which may be susceptible to significant change.

The loan portfolio also represents the largest asset type on the consolidated balance sheets.

Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for credit losses.

A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Asset Quality - Provision for Credit Losses and Risk Management section below.

Goodwill Impairment

Allowance for Credit Losses on Loans

The Company adopted ASU No.

2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost.

The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date.

The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off.

Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan.

The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances.

The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate.

Changes in the ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results.

Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.

The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes.

Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans.

While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways.

Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis.

Refer to Note 1, “Summary of Significant Accounting Policies”, of the Notes to the Consolidated Financial Statements for additional detail concerning the determination of the ACL on loans.

Goodwill and Bargain Purchase Gain

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment.

Goodwill is tested at least annually for impairment, usually during the fourth quarter, and on an interim basis if circumstances dictate.

Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate.

Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill.

If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

As of December 31, 2022, the Company had banking and mortgage reporting units.

A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition.

Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement.

Bargain purchase gain is recorded within noninterest

income in the period it was generated.

An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise.

As of December 31, 2023, the Company had one reporting unit.

Loans Acquired in a Business Combination

The most significant assessment of fair value in our accounting for business combinations relates to the valuation of an acquired loan portfolio.

Management made significant estimates and exercised significant judgement in accounting for the acquisition of loans acquired in our business combinations.

At acquisition, loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) non-PCD loans and are recorded at fair value on the date of acquisition.

PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination.

Fair values are determined primarily through a discounted cash flow approach which considers the acquired loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, timing of principal and interest payments, current market rates, and remaining balances.

Estimates of fair value also include estimates of default, loss severity, and estimated prepayments.

The allowance for PCD loans is determined based upon the Company’s methodology for estimating the allowance under the current expected credit loss model (“CECL”), and is recorded as an adjustment to the acquired loan balance on the date of acquisition.

The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan.

Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL.

The allowance for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired.

The Company and its subsidiaries file a consolidated federal income tax return.

The Company accounts for income taxes using the liability method in accordance with required accounting guidance.

Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences.

These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities.

Deferred taxes result from such temporary differences.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized.

Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies.

The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets.

The Company recognizes accrued interest and penalties as a component of tax expense.

The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties.

In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company.

The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes.

The Company remains subject to examination for tax years ending on or after December 31, 2020.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

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To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements.

PERFORMANCE OVERVIEW

The Company recorded net income of $11.2 million for 2023 and net income of $31.2 million for 2022.

The basic and diluted income per share was $0.42 and $1.57 for fiscal year 2023 and 2022, respectively.

Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022.

The aggregate increase was primarily due to the acquisition of TCFC (“the merger”), with significant increases year over year in loans held for investment of $2.1 billion, or 81.6%, and cash and cash equivalents of $316.9 million, partially offset by an increase in allowance for credit losses of $40.7 million.

The ratio of the ACL to total loans increased from 0.65% at December 31, 2022, to 1.24% at December 31, 2023.

The increase was due to the adoption of CECL on January 1, 2023 and the merger.

Due to a lack of uniformity of historical data between the legacy banks in their respective models, beginning in the third quarter of 2023, management implemented a new post-merger model methodology.

The Bank's provision for credit losses for the twelve months ended December 31, 2023 was $31.0 million and was due primarily to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million related to the change in ACL methodology on SUB legacy loans.

Total borrowings were $72.3 million at December 31, 2023, a decrease of $10.8 million, or 13.0%, when compared to $83.1 million at December 31, 2022.

Total borrowings at December 31, 2023 were comprised of $43.1 million of subordinated debt and $29.2 million of trust preferred debentures.

The decrease in total borrowings at December 31, 2023 when compared to December 31, 2022 was primarily due to repayment of $40.0 million in FHLB short-term advances, partially offset by an increase of $29.2 million in subordinated debt and trust preferred debentures from the merger.

The Company's wholesale funding increased $4.5 million, which includes brokered deposits and FHLB advances, from $40.0 million in FHLB advances at December 31, 2022 to $44.5 million in brokered deposits at December 31, 2023.

The Bank redeemed callable brokered certificates of $67.0 million during the fourth quarter of 2023.

Total deposits increased $2.4 billion, or 79.0% to $5.4 billion at December 31, 2023 when compared to December 31, 2022.

The increase in total deposits when compared to December 31, 2022 was primarily due to the merger.

Increases within deposits during the year consisted of increases in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million and noninterest-bearing deposits of $396.0 million.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income remains the most significant factor affecting our results of operations.

Net interest income represents the excess of interest and fees earned on total average earning assets (loans, investment securities, federal funds sold and interest-bearing deposits with other banks) over interest owed on average interest-bearing liabilities (deposits and borrowings).

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments.

As shown in the table below, tax-equivalent net interest income for 2022 was $101.5 million.

This represented a $37.2 million, or 57.8%, increase from 2021.

The increase in net interest income when comparing 2022 to 2021 was primarily the result of higher average balances on earnings assets of $1.04 billion, or 47.4%, partially offset by an increase in interest bearing deposits of $684.5 million, higher rates paid on interest bearing deposits of 16bps, and additional interest on subordinated debt acquired in the 4 th quarter of 2021.

This was the result of a full year of integration with Severn, significant loan growth, and a rising interest rate environment resulting in higher yields on loans and deposits.

Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) is managed through loan and deposit pricing and asset/liability strategies.

The net interest margin was 3.15% for 2022 and 2.94% for 2021.

The net interest margin increased when comparing 2022 to 2021 primarily due to an increase in the average yield on total earning assets of 33bps, partially offset by higher interest rates paid on interest bearing deposits and borrowings.

The net interest spread, which is the difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities was 2.96% for 2022 and 2.80% for 2021.

The following table sets forth the major components of net interest income, on a tax-equivalent basis, for the presented years ended December 31.

(Dollars in thousands)

Summary of Financial Results

The Company reported net income for the twelve months ended December 31, 2023 of $11.2 million or diluted earnings per share of $0.42 compared to net income of $31.2 million or diluted earnings per share of $1.57 for the twelve months ended December 31, 2022.

The Company’s return on average assets, return on average common equity, and return on average tangible common equity were 0.24%, 2.54%, and 7.74% for the twelve months ended December 31, 2023 compared to 0.90%, 8.76%, and 11.96% for the twelve months ended December 31, 2022.

For additional details, see “Reconciliation of Non-GAAP Measures (Unaudited).

The decrease in net income in 2023 compared to 2022 was primarily due to merger-related expenses and increased provision for credit losses.

These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger.

The increase in noninterest income was principally due to the bargain purchase gain recognized in the third quarter of 2023 of $8.8 million.

Twelve Months Ended December 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Interest and dividend income $ 214,079 $ 113,845 $ 100,234 88.04 %

Interest expenses 78,772 12,543 66,229 528.02 %

Net interest income 135,307 101,302 34,005 33.57 %

Provision for credit loses 30,953 1,925 29,028 1,507.95 %

Noninterest income 33,159 23,086 10,073 43.63 %

Noninterest expenses 123,329 80,322 43,007 53.54 %

Income before income taxes 14,184 42,141 (27,957) (66.34) %

Income tax expense 2,956 10,964 (8,008) (73.04) %

Net income $ 11,228 $ 31,177 $ (19,949) (63.99) %

Net Interest Income

As shown in the table below, tax-equivalent net interest income increased $34.1 million to $135.6 million for 2023 compared to $101.5 million for 2022.

The increase in tax-equivalent net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which included an increase in interest and fees on loans of $95.2 million, or 96.1%.

The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $1.3 billion, or 58.7%, and an increase in net accretion income of $7.5 million due to the merger.

Twelve Months Ended December 31,

(Dollars in thousands) 2023 2022 $ Change % Change

Interest and dividend income

Loans, including fees $ 194,339 $ 99,122 $ 95,217 96.06 %

Interest and dividends on investment securities 16,970 11,513 5,457 47.40 %

Interest on deposits with banks 2,770 3,210 (440) (13.71) %

Total Interest and Dividend Income $ 214,079 $ 113,845 $ 100,234 88.04 %

Interest Expenses

Deposits $ 68,800 $ 9,983 $ 58,817 589.17 %

Short-term borrowings 5,518 74 5,444 7,356.76 %

Long-term debt 4,454 2,486 1,968 79.16 %

Total Interest Expenses $ 78,772 $ 12,543 $ 66,229 528.02 %

Taxable-equivalent adjustment 253 155 98 63.23 %

Tax Equivalent Net Interest Income $ 135,560 $ 101,457 $ 34,103 33.61 %

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Average Balances and Yields

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the twelve months ended December 31, 2023 and 2022.

Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022

(Dollars in thousands) Average Balance Interest (1),(4)

Yield/ Rate Average Balance Interest (1),(4)

Earning assets

Loans (2), (3)

Residential real estate $ 1,076,713 $ 54,583 5.07 % $ 699,192 $ 31,401 4.49 %

Commercial real estate 2,039,153 110,058 5.40 1,182,845 51,821 4.38

Commercial 184,214 13,607 7.39 194,785 7,829 4.02

Consumer 322,033 15,298 4.75 195,542 7,560 3.87

State and political 1,025 41 4.00 1,613 64 3.97

Credit Cards 3,147 315 10.01 — — —

Other 12,773 678 5.31 19,650 601 3.06

Total Loans 3,639,058 194,580 5.35 2,293,627 99,276 4.33

Investment securities:

Taxable 674,203 16,832 2.50 589,729 11,507 1.95

Tax-exempt 663 58 8.75 113 7 6.19

Federal funds sold 1,899 92 4.84 — — —

Interest-bearing deposits 41,032 2,770 6.75 337,203 3,210 0.95

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Cash and due from banks 43,555 18,158

Other assets 303,906 221,592

Allowance for credit losses (40,777) (15,441)

Total assets $ 4,663,539 $ 3,444,981

Interest-bearing liabilities

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Money market and savings deposits 1,275,088 20,039 1.57 1,043,032 3,609 0.35

Brokered deposits 56,101 2,919 5.20 — — —

Certificates of deposit $100,000 or more 492,226 16,583 3.37 239,927 1,364 0.57

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Advances from FHLB - long-term — — — 7,701 35 0.45

Subordinated debt

Subordinated debt and guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") 57,708 4,454 7.72 42,917 2,451 5.71

Total interest-bearing liabilities 3,154,635 78,772 2.50 2,178,764 12,543 0.58

Noninterest-bearing deposits 1,043,479 888,509

Other liabilities

Accrued expenses and other liabilities 23,635 21,858

Stockholders’ equity 441,790 355,850

Total liabilities and stockholders’ equity $ 4,663,539 $ 3,444,981

Net interest income $ 135,560 $ 101,457

Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022

(Dollars in thousands) Average Balance Interest (1),(4)

Yield/ Rate Average Balance Interest (1),(4)

Net interest spread 2.42 % 2.96 %

Net interest margin

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21% for 2022 and 2021, exclusive of nondeductible interest expense.

The tax-equivalent adjustment amounts used in the above table to compute yields aggregated $155 thousand in 2022 and $150 thousand in 2021.

(2) Average loan balances include nonaccrual loans and loans held for sale.

(3) Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

On a tax-equivalent basis, total interest income was $114.0 million for 2022 compared to $70.3 million for 2021.

The increase in interest income for 2022 compared to 2021 was primarily due to the increase in the average balance in earning assets of $1.04 billion which was due to both the acquisition of Severn and organic growth in 2022.

The interest on loans had the most significant impact on total interest income, which increased $34.3 million in 2022, due to the increase in the average balance of loans of $725.2 million, or 46.2%, combined with accretion income of approximately $3.0 million in relation to acquired loans.

The increase in interest income on taxable investment securities and interest-bearing deposits was due to increases in their respective average balances of $259.8 million and $50.4 million.

As a percentage of total average earning assets, loans, investment securities, and interest-bearing deposits were 71.2%, 18.3%, and 10.5%, respectively, for 2022.

The comparable percentages for 2021 were 71.8%, 15.1%, and 13.1%, respectively.

Interest expense was $12.5 million for 2022 compared to $6.0 million for 2021.

The increase in interest expense for 2022 was primarily due to the increase in the average rates paid on interest-bearing deposits, and a full year of interest on subordinated debt acquired from Severn.

During 2022, money market/savings deposits, demand deposits and certificates

of deposit over $100 thousand experienced significant growth with increases in the average balances of $348.0 million, $187.7 million and $95.7 million, respectively, while the average rates paid on these deposits increased 47 and 14bps on demand deposits and money market/savings deposits, respectively and decreased 27bps on certificates of deposit over $100 thousand.

The following Rate/Volume Variance Analysis identifies the portion of the changes in tax-equivalent net interest income attributable to changes in volume of average balances or to changes in the yield on earning assets and rates paid on interest-bearing liabilities.

The rate and volume variance for each category has been allocated on a consistent basis between rate and volume variances, based on a percentage of rate, or volume, variance to the sum of the absolute two variances.

2022 over (under) 2021

(Dollars in thousands)

Net interest margin ("NIM") 3.11 % 3.15 %

Cost of Funds 1.88 % 0.41 %

Cost of Deposits 1.71 % 0.33 %

Cost of Debt 5.90 % 4.82 %

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(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

There were $11.8 million and $1.5 million of accretion interest on loans for the twelve months ended December 31, 2023 and 2022, respectively.

(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment.

There were $(1.8) million and $0.6 million of amortization of deposits premium, and $(0.6) million and $(0.2) million of amortization of borrowing fair value adjustment for the twelve months ended December 31, 2023 and 2022, respectively.

The following table presents changes in interest income and interest expense for the periods indicated.

For each category of interest earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate);

and (2) changes in rate (changes in rate multiplied by old volume).

Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.

Twelve Months Ended December 31, 2023 Compared to the Twelve Months Ended December 31, 2022

Volume Due to Rate Total

Interest income from earning assets:

Residential real estate $ 19,141 $ 4,041 $ 23,182

Commercial real estate 46,241 11,996 58,237

Commercial (781) 6,559 5,778

Consumer 6,008 1,730 7,738

State and political (23) — (23)

Credit Cards 315 — 315

Other (365) 442 77

Taxable investment securities 2,112 3,213 5,325

Tax-exempt investment securities 48 3 51

Fed funds sold 92 — 92

Interest-bearing deposits (19,992) 19,552 (440)

Total interest income $ 52,796 $ 47,536 $ 100,332

Interest expense on deposits and borrowed funds:

Interest-bearing liabilities:

Interest-bearing demand deposits $ 5,606 $ 10,659 $ 16,265

Money market and savings deposits 3,643 12,787 16,430

Time deposits

Securities sold under repurchase agreements

and federal funds purchased

Certificate of deposits 13,834 12,288 26,122

Securities sold under repurchase agreements and federal funds purchased — (2) (2)

Advances from FHLB - Short-term 5,422 24 5,446

Advances from FHLB - Long-term — (35) (35)

Subordinated debt

Total interest expense

Net interest income

Subordinated debt and TRUPS 1,142 861 2,003

Total interest-bearing liabilities $ 29,647 $ 36,582 $ 66,229

Net change in net interest income $ 23,149 $ 10,954 $ 34,103

Net interest income for 2023 was $135.3 million an increase of $34.0 million, or 33.6%, when compared to 2022.

The increase in net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which includes an increase in interest and fees on loans of $95.2 million, or 96.1%.

The increase in interest and fees on loans was primarily due to increases in the average balance of loans of $1.3 billion, or 58.7%, largely due to the merger and the increase in loan yields.

Interest on investment securities increased $5.4 million, or 46.6%, primarily due to an increase in the average balance of $85.0 million, or 14.4%.

Increases to interest income were partially offset by increased interest expense of $66.2 million, or 528.0%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $859.9 million, or 40.5%, largely due to the merger.

The Company’s NIM decreased to 3.11% for 2023 from 3.15% for 2022.

The decrease in the NIM was primarily due to an increase in the average balance and rates paid on interest-bearing liabilities of $975.9 million and 192 basis points, partially offset by an increase in the average balance and rates earned on total earning assets of $1.1 billion and 138 basis points.

In the second half of 2023, the Company mitigated margin compression by selling the acquired AFS securities from the merger and used the proceeds to pay down more costly brokered deposits and FHLB borrowings.

However,margin also compressed as the Bank’s mix of average time deposit balances increased from 21% in 2022 to 26% in 2023.

For the comparable periods, the cost of funds increased 147 basis points to 1.88% for December 31, 2023 compared to 0.41% for December 31, 2022.

Total net accretion income for 2023 was $9.4 million, compared to $1.9 million for 2022.

Noninterest Income

Noninterest income increased $9.6 million, or 71.0%, in 2022 when compared to 2021.

The increase in noninterest income primarily consisted of increases in revenue associated with the mortgage division of $4.3 million, service charges on deposit accounts of $2.3 million, revenue from Mid-Maryland Title of $1.1 million and other noninterest income of $1.2 million.

The increase in other noninterest income was primarily due to increases in rental fee income of $1.3 million.

These changes were all primarily attributable to the acquisition of Severn in the 4 th quarter of 2021.

The following table summarizes our noninterest income for the presented years ended December 31.

Change from Prior Year

(Dollars in thousands)

Service charges on deposit accounts

Trust and investment fee income

Gains on sales and calls of investment securities

Interchange credits

Mortgage-banking revenue

Title Company revenue

Other noninterest income

Total noninterest income for 2023 of $33.2 million increased $10.1 million or 43.6% from $23.1 million for 2022.

The increase in noninterest income was primarily due to the bargain purchase gain of $8.8 million and an increase of $1.8 million in trust and investment fee income of which $1.1 million related to the transition of customers to a new broker of record for the Bank's wealth management

Both the bargain purchase gain and the transition payment were the result of the merger.

Additionally, interchange income increased $0.9 million due to a larger customer base and increased transaction activity.

These increases to noninterest income were partially offset by a $2.2 million loss on sales of investment securities in the third quarter and a decrease of $0.8 million in title company revenue.

Management sold virtually all of legacy CBTC’s AFS investment securities soon after the merger closed on July 1, 2023.

The $2.2 million loss relates to the difference in the fair values of the securities at the acquisition date compared to actual sales proceeds received.

Title company revenues decreased in 2023 as real estate settlement activity declined in 2023 due to the higher interest rate environment and historically low residential loans held for sale inventory.

Noninterest Expense

Noninterest expense, excluding merger related expenses, increased $29.9 million, or 62.0%, when compared to the same period in 2021.

The increase was mainly the result of increases in salaries and wages, employee related benefits, occupancy expense, data processing, amortization of intangible assets, FDIC insurance premium expense, and legal and professional fees which were all significantly impacted by adding Severn and its operations for the full year of 2022 as well as the addition of two new branches in 2022

The Company had 464 full-time equivalent employees at December 31, 2022, and 454 full-time equivalent employees at December 31, 2021.

The following table summarizes our noninterest expense for the years ended December 31.

Change from Prior Year

(Dollars in thousands)

Salaries and wages

Employee benefits

Occupancy expense

Furniture and equipment expense

Data processing

Directors’ fees

Amortization of intangible assets

FDIC insurance premium expense

Other real estate owned expenses, net

Legal and professional fees

Merger related expenses

Other noninterest expenses

The Company reported an income tax expense of $11.0 million for 2022, compared to an income tax expense of $5.8 million for 2021.

Total noninterest expense of $123.3 million for 2023 increased $43.0 million, or 53.5%, when compared to $80.3 million for 2022.

Almost all noninterest expense line items increased as a result of the merger and the expanded operations of the newly combined Company.

Merger-related expenses were $17.4 million for 2023, compared to $2.1 million for 2022.

Excluding merger and acquisition costs and core deposit intangible amortization, of $23.5 million for 2023 and $4.1 million for 2022, noninterest expense for the comparable periods was $99.9 million and $76.2 million, respectively.

Noninterest expense as a percentage of average assets increased to 2.6% for 2023 from 2.3% for 2022.

Excluding merger and acquisition costs and core deposit amortization for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.1% for 2023 compared to 2.2% for 2022.

As the Company continues its merger integration, a key focus of management will be to further streamline processes, unlock operational efficiencies and reduce overall noninterest expense.

The Company reported income tax expense of $3.0 million for 2023, and income tax expense of $11.0 million for 2022.

The effective tax rate was 20.8% for 2023, and 26.0% for 2022.

The Company’s effective tax rate decreased in 2022 primarily due to nondeductible expenses related to the acquisition of Severn in 2021, higher pre-tax earnings and reapportionment of assets and revenue for state income tax purposes.

Please refer to Note 18 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K for further information.

The primary drivers in the reduced effective tax rate for 2023 when compared to 2022, were due to the bargain purchase gain recorded in the third quarter and the reapportionment of assets and revenue for state income tax purposes, partially offset by nondeductible merger related costs, in connection with of the acquisition of TCFC.

The estimated tax rate applied to net deferred tax assets of the Bank was 26.0% and for the Parent Company 21%.

As of December 31, 2023 the Company recorded deferred tax assets relating to $31.1 million and $25.0 million of gross federal and state net operating loss carryovers.

These net operating loss carryovers will offset future taxable income to the Company.

REVIEW OF FINANCIAL CONDITION

Asset and liability composition, capital resources, asset quality, market risk, interest sensitivity and liquidity are all factors that affect our financial condition.

The following sections discuss each of these factors.

Interest-Bearing Deposits with Other Banks and Federal Funds Sold

The Company invests excess cash balances (i.e., the excess cash remaining after funding loans and investing in securities with deposits and borrowings) in interest-bearing accounts and federal funds sold offered by our correspondent banks.

These liquid investments are maintained at a level that management believes is necessary to meet current liquidity needs.

Total interest-bearing deposits with other banks decreased $548.9 million from $566.7 million at December 31, 2021 to $17.8 million at December 31, 2022.

The Company principally utilized the excess liquidity to fund increases in both loans held for investment of $436.9 million and investment securities of $128.3 million as compared to the prior year end.

Balance Sheet Summary

Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022.

The increase was primarily due to the merger, with significant increases in loans held for investment of $2.1 billion, or 81.6%, and cash and cash equivalents of $316.9 million, partially offset by an increase in the ACL of $40.7 million

The ratio of the ACL to total loans increased from 0.65% at December 31, 2022, to 1.24% at December 31, 2023.

The increase was due to the adoption of CECL on January 1, 2023 and the merger.

In July 2023, due to a lack of uniformity of historical data between the legacy banks in their respective models, management implemented a new post merger model methodology.

The Bank's provision for credit losses for the twelve months ended December 31, 2023 was $31.0 million and was due primarily to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million due to the change in ACL methodology on CBTC legacy loans.

Cash and Cash Equivalents

Cash and cash equivalents totaled $372.4 million at December 31, 2023, compared to $55.5 million at December 31, 2022.

Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands.

Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.

Investment Securities

The investment portfolio is structured to provide us with liquidity and also plays an important role in the overall management of interest rate risk.

Investment securities available for sale are stated at estimated fair value based on quoted prices and may be sold as part of the asset/liability management strategy or which may be sold in response to changing interest rates.

Net unrealized holding gains and losses on available for sale debt securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts.

We have the intent and current ability to hold such securities until maturity.

At December 31, 2022, 14% of the portfolio was classified as available for sale and 86% as held to maturity.

At December 31, 2021, 23% of the portfolio was classified as available for sale and 77% as held to maturity.

Total investment securities increased $128.3 million from $527.1 million at December 31, 2021 to $655.4 million at December 31, 2022.

The Bank purchased $208.1 million in debt securities in 2022, all of which were classified as held to maturity.

The investment strategy remained relatively consistent when comparing 2022 to 2021 due to excess liquidity, which was partially utilized to purchase securities with higher average yields than the then current overnight Fed funds rate.

The larger percentage of securities designated as held to maturity reflects the amount that management believes is not needed to support our anticipated growth and liquidity needs.

Investment securities available for sale were $83.6 million at the end of 2022 and $117.0 million at the end of 2021.

The Bank did not purchase any available for sale securities in 2022 and 2021.

At year-end 2022, 21.7% of the available for sale securities in the portfolio were U.S.

Government agencies, 76.0% of the securities were mortgage-backed securities and 2.3% were corporate bonds, compared to 19.1%, 79.2% and 1.7%, respectively, at year-end 2021.

Our investments in mortgage-backed securities are issued or guaranteed by U.S.

The investment portfolio includes debt and equity securities.

Debt securities are classified as either available for sale (“AFS”) or held to maturity (“HTM”).

AFS investment securities are stated at estimated fair value based on market prices.

They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates.

Net unrealized holding gains and losses on these securities are reported net of related income taxes as AOCI (loss), a separate component of stockholders’ equity.

Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL.

We have the intent and ability to hold such securities until maturity.

At December 31, 2023, 17.72% of the portfolio of debt securities was classified as AFS and 82.3% was classified as HTM, compared to 13.0% and 87.0% respectively, at December 31, 2022.

See Note 3 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities, including restricted stock and equity securities, totaled $647.3 million at December 31, 2023, an $8.1 million, or 1.2%, decrease compared to $655.4 million at December 31, 2022.

At December 31, 2023, AFS securities, carried at fair value, totaled $110.5 million compared to $83.6 million at December 31, 2022.

At December 31, 2023, AFS securities consisted of 76.0% mortgage-backed, 18.5% U.S.

Government agencies and 5.5% corporate bonds, compared to 76.0%, 21.8%, and 2.3%, respectively, at year-end 2022.

At December 31, 2023, AFS securities net unrealized losses were all related to changes in interest rates and were $10.3 million, or less than 1% of total assets and 2.0% of stockholder’s equity before AOCI of $518.6 million.

At December 31, 2023, HTM securities, carried at amortized cost, totaled $513.2 million compared to $559.5 million at December 31, 2022.

At December 31, 2023, HTM securities consisted of 69.7% mortgage-backed, 28.0% U.S.

Government agencies, 2.0% other debt securities, and 0.3% states and political subdivisions, compared to 71.3%, 26.5%, 2.0%, and 0.3%, respectively, at year-end 2022.At December 31, 2023, HTM securities unrealized losses were all related to changes in interest rates, except for a general CECL reserve of $94,000, and were $55.4 million or less than 1% of total assets and 10.7% of stockholder’s equity before AOCI of $518.6 million

At December 31, 2023 and December 31, 2022, 97.1% and 97.8% , respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S.

Government agencies or government-sponsored agencies.

Investment securities held to maturity amounted to $559.5 million at the end of 2022 and $404.6 million at the end of 2021.

The Bank purchased $208.1 million in held to maturity securities in 2022 and $255.5 million for 2021.

During 2022, the Bank purchased twenty-two mortgage-backed securities totaling $142.2 million, eleven government agency bonds totaling $62.4 million, two subordinated debt instruments from other banks amounting to $2.0 million and three community reinvestment bonds amounting to $1.5 million.

In 2021, the Bank purchased thirty-two mortgage-backed securities totaling $177.1 million, fifteen government agency bonds amounting to 75.9 million and two subordinated debt instruments from other banks amounting to $2.5 million.

At year-end 2022, 27.2% of the held to maturity securities in the portfolio were U.S.

Government agencies, 70.4% of the securities were mortgage-backed securities, 2.1% were subordinated debt instruments and less than 1% were community reinvestment bonds.

At year-end 2021, 21.5% of the held to maturity securities in the portfolio were U.S.

Government agencies, 74.8% of the securities were mortgage-backed securities, 3.6% of the securities were subordinated debt instruments and less than 1% were community reinvestment bonds.

The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31, 2023.

1 Year or Less

Over 10 Years

(Dollars in thousands)

Available for sale:

Government agencies

Mortgage-backed

Other Debt Securities

Total available for sale

Held to maturity:

Government agencies

Mortgage-backed

States and political subdivisions 1

Other Debt Securities

Total held to maturity

1 Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.

1 Year or Less

Over 10 Years

(Dollars in thousands)

Under 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years Total Investment Securities

(Dollars in thousands) Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Fair Value

December 31, 2023

Available for sale

Government agencies

Mortgage-backed

Treasury and government agencies $ 2,447 5.36 % $ 5,532 1.50 % $ 14,877 1.27 % $ 616 5.39 % $ 23,472 $ 20,475

Mortgage-backed securities — — % 10,959 2.39 % 8,300 2.60 % 72,021 3.12 % 91,280 84,027

Other debt securities — — % — — % 6,080 5.85 % — — % 6,080 6,019

Total available for sale

Total $ 2,447 5.36 % $ 16,491 2.09 % $ 29,257 2.60 % $ 72,637 3.14 % $ 120,832 $ 110,521

Under 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years Total Investment Securities

(Dollars in thousands) Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Average Yield Amortized Cost Fair Value

December 31, 2023

Held to Maturity

Government agencies

Mortgage-backed

States and political subdivisions 2

Treasury and government agencies $ 7,000 3.50 % $ 110,163 2.44 % $ 15,418 1.48 % $ 10,861 3.02 % $ 143,442 $ 133,065

Mortgage-backed securities — — % 6,295 4.64 % 27,620 3.73 % 323,955 2.20 % 357,870 314,006

Obligations of states and political subdivisions (1) — — % 310 4.52 % — — % 1,160 4.53 % 1,470 1,508

Other debt securities — — % 3,000 10.35 % 7,500 4.63 % — — % 10,500 9,251

Total held to maturity

Total $ 7,000 3.50 % $ 119,768 2.76 % $ 50,538 3.18 % $ 335,976 2.24 % $ 513,282 $ 457,830

_____________________________________________

(1) Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.

1 unchanged sentence

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value.

At December 31, 2022, the fair value of loans held for sale amounted to $4.2 million and $37.7 million at December 31, 2021.

At December 31, 2023 , the fair value of loans held for sale amounted to $8.8 million compared to $4.2 million at December 31, 2022.

When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things.

2 unchanged sentences

Loans Held for Investment

The loan portfolio is the primary source of our income.

Loans totaled $2.6 billion at December 31, 2022, an increase of $437.0 million, or 20.6%, from year end 2021.

The following table represents the composition of the Company’s loan portfolio for the presented years ended December 31.

December 31, 2022

Loans acquired from

(Dollars in thousands)

Severn acquisition

The following table summarizes the Company’s loan portfolio at December 31, 2023 and December 31, 2022.

(Dollars in thousands) December 31, 2023 % December 31, 2022 % $ Change % Change

Construction $ 299,000 6.40 % $ 246,319 9.60 % $ 52,681 21.40 %

Residential real estate 1,490,438 32.10 % 810,497 31.70 % 679,941 83.90 %

Commercial real estate 2,286,154 49.30 % 1,065,409 41.70 % 1,220,745 114.60 %

Total loans excluding PPP loans

Allowance for credit losses

Commercial 229,939 5.00 % 147,856 5.80 % 82,083 55.50 %

Consumer 328,896 7.10 % 286,026 11.20 % 42,870 15.00 %

Credit Cards 6,583 0.10 % — — % 6,583 — %

Total loans $ 4,641,010 100.00 % $ 2,556,107 100.00 % $ 2,084,903 81.60 %

Allowance for credit losses on loans (57,351) (16,643) (40,708) 244.60 %

Total loans, net $ 4,583,659 $ 2,539,464 $ 2,044,195 80.50 %

In relation to the merger with TCFC, the Bank added a consumer credit card portfolio noted in the table above.

The Bank has prior experience with consumer credit card lending and continued to maintain the operations and adopted the internal controls of legacy CBTC to properly manage this activity during 2023.

CRE Loan Portfolio

Our loan portfolio has a CRE loan concentration, which is generally defined as a combination of certain construction and CRE loans.

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

Pursuant to the supervisory criteria contained in the guidance for identifying instructions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital;

or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk.

Institutions which are deemed to have concentrations in CRE

lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital.

The Bank has a concentration in CRE loans, and experienced significant growth in its CRE portfolio with its acquisition of TCFC and its wholly-owned subsidiary CBTC.

Non-owner occupied CRE as a percentage of the Bank’s Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 was $2.0 billion or 382.6% and $1.0 billion or 289.4%, respectively.

Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 was $299.0 million or 56.7% and $246.3 million or 69.9%, respectively.

The CRE portfolio has increased significantly in the past two years.

Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio.

Monitoring practices are part of the Bank’s credit and risk departments annual test plans and are adjusted as needed on a quarterly basis if external or internal conditions merit changes.

The Bank’s CRE monitoring plans include stress testing analysis to evaluate changes in collateral values and changes in cash flow debt service coverage ratios as a result of increasing interest rates or declines in customer net operating revenues.

We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns.

CRE Non Owner-Occupied Real Estate Loans

December 31, 2023

Loans acquired from

(Dollars in thousands)

Severn acquisition

Residential real estate

Commercial real estate

Total loans excluding PPP loans

Allowance for credit losses

Total loans, net

The acquisition of Severn added $584.6 million in total loans as of the acquisition date, of which $372.2 million in total loans remained outstanding as of December 31, 2022.

Excluding these loans and legacy PPP loans, total legacy loans increased $635.9 million, or 41.1%, when compared to December 31, 2021.

At December 31, 2022 and December 31, 2021, PPP loans accounted for $187 thousand and $27.6 million of total loans, respectively.

Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans.

The increase in legacy loans, excluding PPP loans, was comprised of increases in residential real estate of $210.6 million, or 44.8%, commercial real estate loans of $199.4 million, or 29.3%, consumer loans of $160.8 million, or 129.2%, and construction loans of $81.8 million, or 56.3%, offset by a decrease in commercial loans $16.7 million, or 13.0%, at December 31, 2022 compared to December 31, 2021.

At December 31, 2022, the legacy loan portfolio, excluding PPP loans, was comprised of 40.3% commercial real estate, 31.2% residential real estate, 10.4% construction, 5.1% commercial and 13.1% consumer.

That compares to 43.9%, 30.4%, 9.4%, 8.3% and 8.0, respectively, at December 31, 2021.

At December 31, 2022, 22.9% of the loan portfolio had fixed interest rates and 77.1% had adjustable interest rates, compared to 72.6% and 27.4%, respectively, at December 31, 2021.

See the discussion below under the caption “Asset Quality - Provision for Credit Losses and Risk Management” and Note 4, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements for additional information.

We do not engage in foreign or subprime lending activities.

Non-owner occupied real estate loans (dollars in thousands) Amount Average Loan Size % of Non-Owner

CRE Loans % of Total

Portfolio Loans,

Retail $ 469,226 $ 2,133 23.2 % 10.1 %

Office/Office Condo 404,227 1,497 20.0 % 8.7 %

Multi-Family (5+ Units) 262,475 2,169 13.0 % 5.6 %

Motel/Hotel 213,414 3,335 10.6 % 4.6 %

668,910 592 33.1 % 14.4 %

Total non-owner occupied CRE loans (2)

$ 2,018,252 $ 1,945 100.0 % 43.4 %

Total Portfolio loans, gross (3)

(1) Other non owner-occupied CRE loans include industrial loans of $209.4 million, mini-storage loans of $74.0 million, restaurant loans of $48.9 million, and other loans of $336.6 million.

(2) The balances for our non-owner occupied commercial real estate portfolio as of December 31, 2023, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines.

Within the non-owner occupied balances presented in this table, the Company has included certain loans secured by multifamily residential properties and other investor owned 1-4 family residential properties that are reported in the residential real estate caption in other areas of this report.

As such, the total balance of loans presented in this table when added to the balance of the table presented below detailing owner occupied commercial real estate may not reconcile to the commercial real estate caption included in other tables and footnotes.

(3) Includes Loans held for sale of $8.8 million.

CRE Owner-Occupied Real Estate Loans

December 31, 2023

Owner-occupied CRE Loans (dollars in thousands) Amount Average Loan Size % of Owner-

Loans % of Total

Portfolio Loans,

Office/Office Condo $ 137,334 $ 505 18.0 % 3.0 %

Industrial Warehouse 106,216 610 13.9 % 2.3 %

Church 72,560 942 9.5 % 1.6 %

Marine/Boat Slip 66,112 2,449 8.7 % 1.4 %

381,575 784 50.0 % 8.2 %

Total owner-occupied CRE loans $ 763,797 $ 1,058 100.0 % 16.4 %

Total Portfolio loans, gross (2)

(1) Other owner-occupied CRE loan include restaurant loans of $59.7 million, retail loans of $56.5 million, fire/CMS building loans of $42.0 million and other loans of $223.4 million.

(2) Includes Loans held for sale of $8.8 million.

Office CRE Portfolio

The Bank’s office CRE portfolio, which included owner-occupied and non-owner occupied CRE loans, was $541.6 million or 10.6% of total loans of $4.6 billion at December 31, 2023.

The Bank had only 24 office CRE loans totaling $189.8 million that were greater than $5.0 million at December 31, 2023.

There were 507 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million at December 31, 2023.

Loan to value estimates are less than 70% for $385.9 million or 74.0% of the office CRE portfolio

and the average loan debt-service coverage ratio was 2.4x and average loan to value was 47.7% at December 31, 2023.

Collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews.

The office CRE portfolio is 74% geographically located in rural or suburban areas with limited exposure to metropolitan cities.

This portfolio included $142.9 million or 26.4% with medical tenants and $75.2 million or 14.4% with government or government contractor tenants.

Only 6% of the total value of the office CRE loans consists of buildings that are 5 stories or more.

The maturity and repricing schedule in 2024 for the office CRE portfolio is $29.8 million and $5.8 million, respectively.

Only $2.8 million of office CRE loans are special mention or substandard.

Maturity of Loan Portfolio

The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2023.

Maturing after

one but within

five but within

Maturing after

(Dollars in thousands)

within one year

fifteen years

Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

(Dollars in thousands) Maturing within one year Maturing after one but within five years Maturing after five but within fifteen years Maturing after fifteen years Total

Construction $ 188,934 $ 70,495 $ 35,664 $ 3,907 $ 299,000

Residential real estate 44,337 263,398 187,161 995,542 1,490,438

Commercial real estate 104,494 571,996 805,362 804,302 2,286,154

Commercial 8,388 100,827 61,855 58,869 229,939

Consumer 1,311 68,479 118,440 140,666 328,896

Credit Cards 6,583 — — — 6,583

Totals $ 354,047 $ 1,075,195 $ 1,208,482 $ 2,003,286 $ 4,641,010

Fixed-interest rate loans $ 316,009 $ 969,513 $ 841,484 $ 471,631 $ 2,598,637

Adjustable-interest rate loans 38,038 105,682 366,997 1,531,656 2,042,373

Total $ 354,047 $ 1,075,195 $ 1,208,481 $ 2,003,287 $ 4,641,010

Asset Quality

The following table summarizes asset quality information and ratios at December 31, 2023 and December 31, 2022.

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

ASSET QUALITY

Total portfolio loans $ 4,641,010 $ 2,556,107

Classified assets 14,851 2,663

Allowance for credit losses on loans (57,351) (16,643)

Past due loans - 31 to 89 days $ 10,853 $ 13,081

Past due loans >= 90 days 738 1,841

Total past due (delinquency) loans $ 11,591 $ 14,922

Non-accrual loans $ 12,784 $ 1,908

Accruing borrowers experiencing financial difficulty ("BEFD") modifications

Other real estate owned ("OREO") 179 197

Non-accrual loans, OREO and BEFD modifications $ 13,116 $ 6,510

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

ASSET QUALITY RATIOS

Classified assets to total assets 0.25 % 0.08 %

Classified assets to risk-based capital 2.75 % 0.73 %

Allowance for credit losses on loans to total portfolio loans 1.24 % 0.65 %

Allowance for credit losses on loans to non-accrual loans 448.62 % 872.27 %

Past due loans - 31 to 89 days to total portfolio loans 0.23 % 0.51 %

Past due loans >=90 days and non-accrual to total loans 0.29 % 0.15 %

Total past due and non-accrual loans to total portfolio loans 0.53 % 0.66 %

Non-accrual loans to total portfolio loans 0.28 % 0.07 %

Non-accrual loans and BEFD modifications to total loans 0.28 % 0.25 %

Non-accrual loans and OREO to total assets 0.22 % 0.06 %

Non-accrual loans and OREO to total portfolio loans and OREO 0.28 % 0.08 %

Non-accrual loans, OREO and BEFD modifications to total assets 0.22 % 0.19 %

____________________________________

(1) Classified assets consist of substandard loans and OREO.

Classified assets do not include special mention loans.

(2) On January 1, 2023, the Company adopted ASU 2022-02– Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , which eliminated the trouble debt restructuring recognition and measurement guidance.

As such, loans designated as TDRs prior to January 1, 2023 and are currently performing are no longer reported as a BEFD loan beginning in the quarter ended March 31, 2023, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

(3) BEFD modification loans include both non-accrual and accruing performing loans.

All BEFD modification loans are included in the calculation of asset quality financial ratios.

Non-accrual BEFD modification loans are included in the non-accrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance.

ACL and Provision for Credit Losses

The following is a breakdown of the Company’s general and specific allowances as a percentage of total portfolio loans at December 31, 2023 and December 31, 2022:

Breakdown of general and specific allowance as a percentage of total portfolio loans

December 31, 2023 December 31, 2022

General allowance $ 56,428 $ 16,516

Specific allowance 923 127

$ 57,351 $ 16,643

General allowance 1.22 % 0.65 %

Specific allowance 0.02 % — %

Allowance to total gross loans 1.24 % 0.65 %

Total gross loans $ 4,641,010 $ 2,556,107

On January 1, 2023, the Company adopted ASU 2016-13 and implemented CECL.

The ACL is a valuation allowance that is deducted from loans' amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged-off against the ACL when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries may not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Bank uses data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans.

Historical loss experience serves as the foundation for our estimated credit losses.

Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S.

Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduce the estimated value of any underlying collateral.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company adopted ASU 2016-13 using the modified retrospective method.

Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Upon the adoption of ASC 326, the Company recorded a $10.8 million increase to the ACL.

ACL balances increased to 1.24% of portfolio loans at December 31, 2023 compared to 0.65% at December 31, 2022.

At December 31, 2023, the Company's ACL increased $40.7 million or 244.60% to $57.4 million from $16.6 million at December 31, 2022.

The increase in the general allowance was primarily due to the merger with TCFC and the impact of the adoption of ASC 326.

The Company recorded a provision for credit losses on loans of $30.4 million for the year ended December 31, 2023 compared to $1.9 million for the year ended December 31, 2022.

Net recoveries amounted to $774 thousand, or 0.03% of average loans for the year ended December 31, 2022 compared to net charge-offs of $2.0 million or 0.06% of average loans for the year ended December 31, 2023.

Included in the net charge-offs for 2023 were $1.2 million in charge-offs related to the strategic sale of $10.7 million in loans that reduced classified assets and CRE concentrations.

Management believes that the ACL was adequate at December 31, 2023.

The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions.

Management’s determination of the adequacy of the ACL is based on a periodic evaluation of the loan portfolio.

For additional information regarding the ACL, refer to Notes 1 and 4 of the Consolidated Financial Statements and the Critical Accounting Policy section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table allocates the ACL by portfolio loan category at the dates indicated.

The allocation of the ACL to each category is not necessarily indicative of future losses and does not restrict the use of the ACL to absorb losses in any category.

December 31, 2023 December 31, 2022

(dollars in thousands) Amount % (1)

Construction $ 3,935 6.40 % $ 2,973 9.60 %

Residential real estate 21,949 32.10 % 2,622 31.70 %

Commercial real estate 20,975 49.30 % 4,899 41.70 %

Commercial 2,671 5.00 % 1,652 5.80 %

Consumer 7,601 7.10 % 4,497 11.20 %

Credit Cards 220 0.10 % — — %

Total allowance for credit losses $ 57,351 100.00 % $ 16,643 100.00 %

____________________________________

(1) Percent of loans in each category to total portfolio loans.

The following table indicates net charge-offs or recoveries by average portfolio loan category for the years ended as indicated:

December 31, 2023 December 31, 2022

(dollars in thousands) Net (Charge-offs) Recoveries Average Balance (1) % Net (Charge-offs) Recoveries Average Balance (1)

Construction $ 15 $ 311,360 — % $ 13 $ 243,045 0.01 %

Residential real estate (75) 1,151,181 0.01 % 137 707,965 0.02 %

Commercial real estate (1,326) 1,713,825 0.08 % 945 965,108 0.59 %

Commercial (232) 127,441 0.18 % (319) 159,288 0.16 %

Consumer (290) 322,904 0.09 % (2) 202,979 — %

Credit Cards (111) 2,811 3.95 % — — — %

(2,019) 3,629,522 0.06 % 774 2,278,385 0.03 %

Allowance for credit losses — (40,777) — % — (15,441) — %

Total net charge-off and average loans $ (2,019) $ 3,588,745 0.06 % $ 774 $ 2,262,944 0.03 %

____________________________________

(1) Excludes Loans Held for Sale

Off Balance Sheet Credit Exposure Reserve

The Company's reserve for off balance sheet credit exposures was $1.1 million at December 31, 2023 and increased compared to December 31, 2022 due to impact of the adoption of ASC 326, the merger, and growth in unfunded commitments for residential real estate loans.

The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage.

The Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity.

Classified Assets and Special Mention Assets

Classified assets increased $12.2 million from $2.7 million at December 31, 2022 to $14.9 million at December 31, 2023.

Management considers classified assets to be an important measure of asset quality.

Increases in classified and special mention loan categories were due to loans related to our marine lending portfolio of $7.2 million and residential mortgages of $3.2 million all of which are diverse in origination date and not indicative of recurring trends.

The Company’s risk rating process for classified loans is an important input into the Company’s allowance methodology.

Risk ratings are an important input into the Company’s ACL qualitative framework.

The following is a breakdown of the Company’s classified and special mention assets at December 31, 2023 and December 31, 2022, respectively:

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

Classified loans

Substandard $ 14,672 $ 2,466

Total classified loans 14,672 2,466

Special mention loans 28,263 3,539

Total classified loans and special mention loans $ 42,935 $ 6,005

Classified loans $ 14,672 $ 2,466

Classified securities — —

Total classified assets $ 14,851 $ 2,663

Total classified assets and special mention loans $ 43,114 $ 6,202

Total classified assets as a percentage of total assets 0.25 % 0.08 %

Total classified assets as a percentage of risk based capital 2.75 % 0.73 %

Nonperforming Assets

At December 31, 2023, nonperforming assets were $13.7 million, an increase of $9.8 million, or 247.21%, when compared to December 31, 2022.

The increase in nonperforming assets was primarily due to the increase in nonaccrual loans acquired in the merger, partially offset by a decrease in loans 90 days past due and still accruing.

At December 31, 2023, the ratio of nonaccrual loans to total assets was 0.21%, an increase from 0.05% at December 31, 2022.

The ratio of nonperforming assets to total assets at December 31, 2023 was 0.23% compared to 0.11% at December 31, 2022.

The Company continues to focus on the resolution of its nonperforming and problem loans.

The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon;

obtaining updated appraisals;

provisioning for credit losses;

charging off loans;

transferring loans to OREO;

aggressively marketing OREO;

and selling loans.

The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.

The following table summarizes our nonperforming assets for the years ended December 31, 2023 and December 31, 2022.

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

Nonperforming assets

Nonaccrual loans $ 12,784 $ 1,908

Total loans 90 days or more past due and still accruing 738 1,841

Total nonperforming assets $ 13,701 $ 3,946

As a percent of total loans:

Nonaccrual loans 0.28 % 0.07 %

As a percent of total loans and OREO:

Nonperforming assets 0.30 % 0.15 %

As a percent of total assets:

Nonaccrual loans 0.21 % 0.05 %

Nonperforming assets 0.23 % 0.11 %

The following is a breakdown of the Company’s deposit portfolio at December 31, 2023 and December 31, 2022:

December 31, 2023 December 31, 2022

(dollars in thousands) Balance % Balance % $ Change % Change

Noninterest-bearing demand $ 1,258,037 23.36 % $ 862,015 28.64 % $ 396,022 45.9 %

Interest-bearing:

Demand 1,165,546 21.64 % 694,101 23.06 % 471,445 67.9 %

Money market deposits 1,430,603 26.56 % 709,132 23.56 % 721,471 101.7 %

Savings 347,324 6.45 % 320,188 10.64 % 27,136 8.5 %

Certificates of deposit 1,184,610 21.99 % 424,348 14.10 % 760,262 179.2 %

Total interest-bearing 4,128,083 76.64 % 2,147,769 71.36 % 1,980,314 92.2 %

Total Deposits $ 5,386,120 100.0 % $ 3,009,784 100.0 % $ 2,376,336 79.0 %

Total deposits increased $2.4 billion, or 79.0%, to $5.4 billion at December 31, 2023 when compared to December 31, 2022.

The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million, and noninterest-bearing deposits of $396.0 million.

Total estimated uninsured deposits were $1.05 billion, or 19.5% of total deposits, at December 31, 2023.

At December 31, 2023, there were $156.1 million included in uninsured deposits that the Bank secured using the market value of pledged collateral.

The Bank’s uninsured deposits, excluding deposits secured by the market value of pledged collateral, at December 31, 2023 was $893.5 million, or 16.6% of total deposits.

For FDIC call reporting purposes, reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion.

Reciprocal deposits increased $816.0 million to $1.3 billion at December 31, 2023 compared to $475.6 million at December 31, 2022.

Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2023 and December 31, 2022 were 24.0% and 15.8%, respectively.

For call reporting purposes, $204.8 million of reciprocal deposits were considered brokered at December 31, 2023 compared to none at December 31, 2022.

The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance.

This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously.

Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits.

At December 31, 2023, the Bank had four local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million or 11.11% of total deposits of $5.4 billion.

At December 31, 2022,

there were two customer deposit relationships that exceeded 2% of total deposits, totaling $217.8 million or 7.24% of total deposits of $3.0 billion.

The Bank uses deposits primarily to fund loans and to purchase investment securities.

Total deposits decreased from $3.03 billion at December 31, 2021 to $3.01 billion at December 31, 2022.

When compared to December 31, 2021 total deposits decreased $16.5 million, or less than 1%.

The decrease in deposit products consisted of the following:

money market/savings deposits of $85.7, noninterest-bearing deposits of $65.5 million and time deposits of $35.2 million.

Interest bearing checking accounts increased $170.0 million.

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31.

Average Balances

(Dollars in thousands)

Average total deposits increased from $3.0 billion at December 31, 2022 to $4.0 billion at December 31, 2023, an increase of $1.0 billion, or 33.67%.

The following table sets forth the average balances of deposits and percentage of each major category to total average deposits for the year ended December 31, 2023 and December 31, 2022.

December 31, 2023 December 31, 2022

(Dollars in thousands) Average Balance % Average Balance %

Noninterest-bearing demand $ 1,043,479 25.9 % $ 888,509 29.5 %

Interest-bearing deposits

Demand 883,976 21.9 % 638,105 21.2 %

Money market and savings 1,275,088 31.6 % 1,043,032 34.6 %

Certificates of deposit, $100,000 to $249,999

Certificates of deposit, $250,000 or more

Certificates of deposit of $100,000 or more 492,226 12.2 % 239,927 8.0 %

Other time deposits 334,245 8.3 % 204,536 6.8 %

Total interest-bearing $ 2,985,535 74.1 % $ 2,125,600 70.5 %

Total Deposits $ 4,029,014 100.0 % $ 3,014,109 100.0 %

Average interest-bearing deposits increased $859.9 million, or 40.5%, in 2023, compared to an increase of $684.5 million, or 47.5%, in 2022.

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Deposits provided funding for approximately 92.5% and 93.6% of average earning assets for 2023 and 2022, respectively.

The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2022.

(Dollars in thousands)

The following table sets forth the aggregate amount and maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2023, as well as the portion that is uninsured.

(Dollars in thousands) Total Uninsured

Three months or less $ 90,670 $ 39,593

2 unchanged sentences

Over 12 months 19,500 7,249

Total estimated uninsured deposits amounted to $871.5 million and $974.8 million at December 31, 2022 and December 31, 2021, respectively.

Total $ 354,578 $ 142,752

Note 8 to the Consolidated Financial Statements includes the scheduled contractual maturities of total certificates of deposits of $1.2 billion at December 31, 2023.

Securities Sold Under Retail Repurchase Agreements

Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors.

There were no securities sold under retail purchase agreements at the end of 2022.

Short-Term and Long-Term Advances from the FHLB

There were no securities sold under retail purchase agreements at the end of 2023 and 2022.

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

The Company borrows from the FHLB on a short-term basis to meet short term liquidity needs.

At December 31, 2023, there were no short-term borrowings outstanding, compared to short-term advances with the FHLB of $40.0 million at December 31, 2022.

The Company’s wholesale funding increased $4.5 million, which includes FHLB advances and brokered deposits, from $40.0 million in FHLB advances at December 31, 2022 to $44.5 million in brokered deposits at December 31, 2023.

Brokered deposits for the Company’s measurement of wholesale funding exclude reciprocal deposit balances that exceeded 2% of total deposits.

The Bank decreased wholesale funding by $380.0 million during the third quarter of 2023 and $62.0 million in the fourth quarter of 2023.

Cash proceeds from the sale of TCFC’s AFS securities acquired in the merger and increases in on-balance sheet cash were utilized to curtail FHLB advances and brokered deposits.

Contractual Obligations

The Company has various contractual obligations that affect its cash flows and liquidity.

Our operating leases are primarily related to branch premises and equipment.

Purchase obligations arise from agreements to purchase goods and services that are enforceable and legally binding.

Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations.

For information regarding material contractual obligations please see Note 6 Leases in the Notes to the Consolidated Financial Statements and Note 23 Revenue Recognition.

Long-Term Debt

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

We also borrow from FHLB on a short-term basis to meet short term liquidity needs.

At the end of 2022 short-term advances from FHLB were $40 million.

There were no long-term FHLB borrowings at the end of 2022.

Subordinated Debt

There were no long-term borrowings from the FHLB outstanding at December 31, 2023 and December 31, 2022.

On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

The Company has used the net proceeds of the offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios.

The Notes were structured to qualify as Tier 2 capital of the Company for regulatory capital purposes.

The Notes bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears.

From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears.

The Notes are redeemable by the Company at its option, in whole or in part, on or after September 1, 2025.

Initial debt issuance costs were $611 thousand.

The debt balance of $24.7 million is presented net of unamortized issuance costs of $326 thousand at December 31, 2022.

Acquired from Severn

On October 31, 2021, the Company acquired from the Severn merger, Junior Subordinated Debt Securities due in 2035 (“2035 Debentures”) which had an outstanding principal balance of $20.6 million.

The debt balance of $18.4 million is presented net of the remaining $2.2 million acquisition discount at December 31, 2022.

The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee.

The 2035 Debentures pay interest quarterly at a floating rate of interest of 3-month LIBOR plus 200 basis points and mature on January 7, 2035.

Payments of principal, interest, premium, and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture.

The 2035 Debentures are currently redeemable, in whole or in part, by the Company.

regulators have directed banks to cease offering new

LIBOR-based products after December 31, 2021.

Existing LIBOR contracts, per above, can continue to be serviced through the June 30, 2023 cessation date;

however, Wells Fargo Bank, as Trustee, will be working with holders of the 2035 Debentures to move to an (ARR) in advance of LIBOR cession, where possible.

The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company.

The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures.

The 2035 Debentures held by the Trust are the sole assets of the Trust.

Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures.

The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures.

We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee.

Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing.

As of December 31, 2022, we were current on all interest due on the 2035 Debentures.

Capital Resources Management

As a result of the acquisition of Severn Bancorp, Inc.

(“Severn”), effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million.

The debt balance of $18.6 million at December 31, 2023 and $18.4 million at December 31, 2022 was presented net of fair value adjustments of $2.0 million and $2.2 million, respectively.

Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million.

The debt balance of $10.6 million at December 31, 2023 was presented net of a fair value adjustment of $1.4 million.

In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a principal balance of $19.5 million at December 31, 2023.

The debt balance of $18.3 million at December 31, 2023 was presented net of fair value adjustment of $1.2 million.

For additional information regarding the long-term debt, refer to Note 9 to the Consolidated Financial Statements.

Stockholders’ Equity

Total stockholders’ equity was $511.1 million at December 31, 2023, compared to $364.3 million at December 31, 2022.

The increase in stockholders’ equity in 2022 was primarily due to current year earnings, partially offset by an increase in unrealized losses on available for sale securities of $9.1 million, net of tax, and dividends paid to stockholders of $9.5 million.

The increase in stockholders’ equity in 2023 was primarily due to the $153.1 million increase in paid in capital due to the merger and net income of $11.2 million, partially offset by a $7.8 million CECL adjustment, net of tax in the first quarter of 2023 and dividends paid of $12.7 million.

The ratio of period-end equity to total assets was 8.50% for 2023, as compared to 10.48% for 2022.

We record unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

At December 31, 2022, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $9.0 million compared to net unrealized holding gain, net of tax, of $56 thousand at December 31, 2021.

The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies.

(Dollars in thousands) December 31, 2023 December 31, 2022 $ Change % Change

Common Stock at par value of $0.01 $ 332 $ 199 $ 133 66.83 %

Additional paid in capital 356,007 201,494 154,513 76.68 %

Retained earnings 162,290 171,613 (9,323) (5.43) %

Accumulated other comprehensive loss (7,494) (9,021) 1,527 (16.93) %

Total Stockholders' Equity $ 511,135 $ 364,285 $ 146,850 40.31 %

We record unrealized holding gains (losses), net of tax, on investment securities available for sale as AOCI (loss), a separate component of stockholders’ equity.

At December 31, 2023, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $7.5 million compared to a net unrealized holding loss, net of tax, of $9.1 million at December 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is our ability to fund operations and meet present and future financial obligations through the sale or repayment of existing assets or by obtaining additional funding through liability management.

Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities.

Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs.

Many of these obligations and commitments are expected to expire without being drawn upon;

therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank.

The Bank’s most liquid assets are cash, cash equivalents and federal funds sold.

The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time.

The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.

We believe our level of liquid assets is sufficient to meet current anticipated funding needs.

Liquidity is provided by access to funding sources, which include core deposits and brokered deposits.

Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta.

The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.

We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets.

As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $316.9 million for the year ended December 31, 2023 compared to a decrease of $528.1 million for the year ended December 31, 2022.

The increase in cash and cash equivalents in 2023 was mainly due to proceeds from the sale of acquired investment securities of $434.2 million after the merger as well as increases in the Bank’s deposits subsequent to the merger.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funding markets.

The Bank has arrangements with other correspondent banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

At December 31, 2023, the Bank had approximately $1.3 billion of available liquidity including:

$372.4 million in cash and cash equivalents, $344.8 million in unpledged securities, $659.0 million in secured borrowing capacity at the FHLB, and the other correspondent banks of $45.0 million.

The Bank is a member of the FHLB, which provides another source of liquidity.

The Bank has pledged, under a blanket lien, all qualifying residential and CRE loans under borrowing agreements with the FHLB.

Comparison of Cash Flows for the Years Ending December 31, 2023 and 2022

During the year ended December 31, 2023, all financing activities provided $121.9 million in cash compared to $0.8 million in cash provided for the same period in 2022.

The Company was provided $121.1 million more cash from financing activities compared to the prior year, primarily due to increased deposits of $243.2 million from management’s efforts to expand deposit relationships.

The Company used less cash in 2023 compared to 2022 for net long-term debt activity.

Short-term borrowings activity used $144.9 million more cash in 2023 compared to 2022 as the Bank paid down wholesale funding.

The Company used $3.2 million more in cash for stock related activities in 2023 compared to 2022.

The increase was primarily due to a $3.2 million increase in common stock dividend payments.

The Bank’s principal use of cash has been in investing activities including its investments in loans, investment securities and other assets.

In 2023, the level of net cash provided from investing activities increased $753.9 million to $172.3 million from net cash used of $581.6 million in 2022.

The increase in cash provided was primarily the result of proceeds from sale of investment securities of $434.2 million acquired from the merger partially offset by cash used for loan activities.

Cash used for loan activities decreased $109.7 million to $317.3 million, for the year ended December 31, 2023 from $427.0 million for the year ended December 31, 2022 as organic loan growth slowed in 2023 as management focused on merger integration as well as safe and sound moderate loan growth in the current economic environment.The use of funds to purchase investment securities decreased $148.1 million to $68.7 million for the year ended December 31, 2023 from $216.7 million for the year ended December 31, 2022.

Cash provided increased $471.5 million as total proceeds from sales of acquired investment securities, redemption of restricted securities and principal payments of securities for year ended December 31, 2023 increased compared to the year ended December 31, 2022.

Operating activities provided less cash of $29.7 million as cash provided decreased $22.7 million for the year ended December 31, 2023 compared to $52.6 million of cash provided for the same period of 2022.

The Company has no business other than holding the stock of the Bank and does not currently have any material funding requirements, except for the payment of dividends on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense.

Capital Requirements

The Company evaluates capital resources by the ability to maintain adequate regulatory capital ratios.

The Company and the Bank annually update its strategic plan that includes a three-year capital plan.

In developing its plan, the Company considers the impact to capital of asset growth, loan concentrations, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing.

The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.

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The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of CET 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%.

The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

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The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion.

The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the acquisition of Severn in the fourth quarter of 2021.

As such, the Company was required to comply with the consolidated capital requirements for the first quarterly report date following the effective date of the business combination as its total assets exceeded $3 billion.

As of December 31, 2023, the Bank and Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations.

The following table compares the Company’s capital ratios to the minimum regulatory requirements as of December 31.

(Dollars in thousands)

Common equity Tier 1 capital

Tier 1 capital

Tier 2 capital

Total risk-based capital

Net risk-weighted assets

Adjusted average total assets

Risk-based capital ratios:

Common equity Tier 1

Total capital

Tier 1 leverage ratio

includes phased in capital conservation buffer of 2.50%

The following tables present the applicable capital ratios for the Company and the Bank as of December 31, 2023 and December 31, 2022.

December 31, 2023 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio

The Company 7.74 % 8.69 % 9.31 % 11.48 %

The Bank 8.33 % 10.02 % 10.02 % 11.27 %

December 31, 2022 Tier 1 Leverage Ratio Common Equity Tier 1 Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio

The Company 9.52 % 11.62 % 12.33 % 13.91 %

The Bank 9.92 % 12.82 % 12.82 % 13.47 %

See Note 16 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank and Company.

Asset Quality - Provision for Credit Losses and Risk Management

Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the types of loans being made, the credit-worthiness of the borrowers over the terms of the loans, the quality of the collateral for the loans, if any, as well as general economic conditions.

Through the Company’s and the Bank’s Asset/Liability Management Committees, the Company’s Audit Committee and the Company’s Board actively reviews critical risk positions, including credit, market, liquidity and operational risk.

The Company’s goal in managing risk is to reduce earnings volatility, control exposure to unnecessary risk, and ensure appropriate returns for risk assumed.

Senior members of management actively manage risk at the product level, supplemented with corporate level oversight through the Asset/Liability Management Committee and internal audit function.

The risk management structure is designed to identify risk through a systematic process, enabling timely and appropriate action to avoid and mitigate risk.

Credit risk is mitigated through loan portfolio diversification, limiting exposure to any single industry or customer, collateral protection, and prudent lending policies and underwriting criteria.

The following discussion provides information and statistics on the overall quality of the Company’s loan portfolio.

Note 1 to the Consolidated Financial Statements describes the accounting policies related to nonperforming loans (nonaccrual and delinquent 90 days or more), TDRs and loan charge-offs and describes the methodologies used to develop the allowance for credit losses, including the specific, historical formula, and qualitative formula components (also discussed below).

Management believes the policies governing nonperforming loans, TDRs and charge-offs are consistent with regulatory standards.

The amount of the allowance for credit losses and the resulting provision are reviewed monthly by senior members of management and approved quarterly by the Board of Directors.

The allowance is increased by provisions for credit losses charged to expense and recoveries of loans previously charged off.

It is decreased by loans charged off in the current period.

Loans, or portions thereof, are charged off when considered uncollectible by management.

Provisions for credit losses are made to bring the allowance for credit losses within the range of balances that are considered appropriate.

The adequacy of the allowance for credit losses is determined based on management’s estimate of the inherent risks associated with lending activities, estimated fair value of collateral or expected future cash flows, past experience and present indicators such as loan delinquency trends, nonaccrual loans and current market conditions.

Management believes the current allowance is adequate to provide for probable and estimable losses inherent in our loan portfolio;

however, future changes in the composition of the loan portfolio and financial condition of borrowers may result in additions to the

Examination of the portfolio and allowance by various regulatory agencies and consultants engaged by the Company may result in the need for additional provisions based on information available at the time of the examination.

The Bank’s allowance for credit losses, is available to absorb losses from all loan segments of the portfolio.

The allowance set by the Bank is subject to regulatory examination and determination as to its adequacy.

The allowance for credit losses is comprised of three parts:

(i) the specific allowance;

(ii) the historical formula allowance;

and (iii) the qualitative formula allowance.

The specific allowance is established against impaired loans until charge offs are made.

Loans are considered impaired when it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms when due.

The qualitative formula allowance is determined based on management’s assessment of industry trends, economic factors in the markets in which we operate, as well as other portfolio related factors.

The determination of the qualitative formula allowance involves a higher risk of uncertainty and considers current risk factors that may not have yet manifested themselves in our historical loss factors.

The specific allowance is used to individually allocate an allowance to loans identified as impaired.

An impaired loan may involve deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.

If it is determined that there is a loss associated with an impaired loan, a specific allowance is established until a charge off is made.

Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The historical formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired.

Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer).

Each loan type is assigned allowance factors based on management’s estimate of the risk, within a particular category using average historical charge-offs by segment over the last 16 quarters.

The qualitative formula allowance is used to estimate the losses on loans stemming from more global factors such as delinquencies, loss history, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors that would cause current estimated losses to deviate from the historical loss experience.

Loans that are identified as pass-watch, special mention, substandard and doubtful are considered to have elevated credit risk.

These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.

The provision for credit losses was $1.9 million for 2022 and $(358) thousand for 2021.

The increase in provision for credit losses was primarily a result of the increase in loans held for investment in 2022 of $436.9 million.

Net loan recoveries totaled $774 thousand in 2022, compared to net loan recoveries of $414 thousand in 2021.

The allowance for credit losses was $16.6 million, or 0.78% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2022, compared to an allowance of $13.9 million, or 0.93% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2021.

The decrease in the percentage of the allowance for credit losses to total period end loans was primarily driven by lower historical loss experience and the elimination of pandemic related qualitative factors.

The ratio of net (recoveries) to average loans was (0.03) % for 2022, compared to (0.03) % for 2021.

Nonperforming loans increased at year end 2022 as compared to 2021 primarily due to increases in loans 90 days past due and still accruing of $1.3 million which was primarily a result of timing of the renewal process for certain loans that had matured, and not specific credit concerns related to the underlying borrowers.

Accruing TDRs declined $1.3 million when comparing 2022 to 2021 which reflects continued workout efforts on outstanding problem loans.

When comparing 2022 to 2021 loan risk categories, special mention and substandard loans decreased $4.4 million and $1.3 million, respectively.

The decrease in substandard and special mention loans was primarily due to payoffs and credit risk rating upgrades during 2022.

Pass/Watch loans decreased $46.4 million during 2022 when compared to 2021.

Management will continue to monitor and charge off nonperforming assets as rapidly as possible and focus on the generation of healthy loan growth and new business development opportunities.

The following table sets forth a summary of our loan loss experience for the presented years ended December 31.

December 31, 2022

December 31, 2021

Percentage of net

charge-offs (recoveries)

(annualized) to

average loans

Net (charge-offs)

(Dollars in thousands)

Average balances

during the year

Average balances

during the year

Residential real estate

Commercial real estate

Allowance for credit losses at period end as a percentage of total period end loans (1)

Allowance for credit losses at period end as a percentage of total period end loans (2)

Allowance for credit losses at period end as a percentage of average loans (3)

Allowance for credit losses at period end as a percentage of period end nonaccrual loans

(1) As of December 31, 2022 and December 31, 2021, these ratios included all loans held for investment, including PPP loans of $187 thousand and $27.6 million, respectively.

(2) As of December 31, 2022 and December 31, 2021, these ratios exclude PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest.

(3) As of December 31, 2022 and December 31, 2021, these ratios included all loans held for investment, including PPP loans of $6.7 million and $85.5 million, respectively.

The following table sets forth the allocation of the allowance for credit losses and the percentage of loans in each category to total loans for the presented years ended December 31.

(Dollars in thousands)

Residential real estate

Commercial real estate

At December 31, 2022, nonperforming assets were $3.9 million, an increase of $902 thousand, or 29.6%, when compared to December 31, 2021.

The increase in nonperforming assets was primarily due to the increase in loans 90 days past due and still accruing, partially offset by a decrease in other real estate owned properties.

Accruing TDRs were $4.4 million at December 31, 2022, a decrease of $1.3 million, or 22.3%, when compared to December 31, 2021.

At December 31, 2022, the ratio of nonaccrual loans to total assets was 0.05%, a decrease from 0.06% at December 31, 2021.

The ratio of accruing TDRs to total assets at December 31, 2022 was 0.13% improving from 0.16% at December 31, 2021.

The Company continues to focus on the resolution of its nonperforming and problem loans.

The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon;

obtaining updated appraisals;

provisioning for credit losses;

charging off loans;

transferring loans to other real estate owned;

aggressively marketing other real estate owned;

and selling loans.

The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.

The following table summarizes our nonperforming assets and accruing TDRs for the years ended December 31.

(Dollars in thousands)

Nonperforming assets

Nonaccrual loans

Total loans 90 days or more past due and still accruing

Other real estate owned

Total nonperforming assets

Total accruing TDRs

As a percent of total loans:

Nonaccrual loans

Accruing TDRs

Nonaccrual loans and accruing TDRs

As a percent of total loans and other real estate owned:

Nonperforming assets

Nonperforming assets and accruing TDRs

As a percent of total assets:

Nonaccrual loans

Nonperforming assets

Accruing TDRs

Nonperforming assets and accruing TDRs

Market Risk Management and Interest Sensitivity

The Company’s net income is largely dependent on its net interest income.

Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets.

When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.

Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders’ equity.

The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin as a percentage of interest-earning assets.

Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets;

by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched;

by maintaining a pool of administered core deposits;

and by adjusting pricing rates to market conditions on a continuing basis.

The Company’s Board of Directors has established a comprehensive asset liability management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”).

The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in the yield curve of U.S.

Treasury interest rates for maturities from one day to thirty years.

The Company evaluates the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by outsourcing simulation analysis through the use of computer modeling.

The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts.

As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company.

When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model.

As an example, certain money market deposit accounts are

assumed to reprice at 50% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement.

As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Company’s net interest margin.

Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.

The Company presents a current base case and several alternative simulations at least once a quarter and reports the analysis to the Board of Directors.

In addition, more frequent forecasts could be produced when interest rates are particularly uncertain or when other business conditions so dictate.

The statement of condition is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk.

Average interest rates are shocked by +/- 100, 200, 300 and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment.

It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.

These measures are typically based upon a relatively brief period, usually one year.

They do not necessarily indicate the long-term prospects or economic value of the institution.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities.

The difference between these discounted values of the assets and liabilities is the EVE, which, in theory, approximates the fair value of the Company’s net assets.

The following tables present the projected change in the Bank’s net interest income and EVE at December 31, 2022 and 2021 that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change:

Estimated Changes in Net Interest Income

Change in Interest Rates:

December 31, 2022

December 31, 2021

Estimated Changes in Economic Value of Equity

Change in Interest Rates:

December 31, 2022

December 31, 2021

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.

For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.

Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset.

Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial condition

and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation.

As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation.

A prolonged period of inflation could cause interest rates, wages, and other costs to increase and could adversely affect our results of operations unless mitigated by increases in our revenues correspondingly.

Off-Balance Sheet Arrangements

Credit Commitments

In the normal course of business, to meet the financing needs of its customers, the Bank is party to financial instruments with off-balance sheet risk.

These financial instruments include commitments to extend credit and standby letters of credit.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments.

The Bank uses the same credit policies in making commitments and conditional obligations as they use for on-balance sheet instruments.

The Bank generally requires collateral or other security to support the financial instruments with credit risk.

The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty.

The Bank evaluates each customer’s creditworthiness on a case-by-case basis.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Further information about these arrangements is provided in Note 23 to the Consolidated Financial Statements.

Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

We maintain and account for derivatives, in the form of interest rate lock commitments (“IRLCs”) and mandatory forward contracts, in accordance with the Financial Accounting Standards Board (“FASB”) guidance on accounting for derivative instruments and hedging activities.

We recognize gains and losses on IRLCs, mandatory forward contracts, and best effort forward contracts on the loan pipeline through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives.

We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold.

The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days.

For these IRLCs, we attempt to protect the Bank from changes in interest rates through the use of to be announced (“TBA”) securities, which are forward contracts, as well as loan level commitments, on a limited basis, in the form of best efforts and mandatory forward contracts.

Mandatory forward contracts are also considered derivatives.

Best efforts forward contracts are not derivatives, however, we have elected to measure and report these commitments at fair value.

These assets and liabilities are included in the Consolidated Statements of Financial Condition in other assets and accrued expenses and other liabilities, respectively.

See Note 15 to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for more information on our derivatives.

Liquidity Management

Liquidity describes our ability to meet financial obligations that arise during the normal course of business.

Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of customers and to fund current and planned expenditures.

Liquidity is derived through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets.

We have arrangements with correspondent banks whereby we

have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

The Bank is also a member of the FHLB, which provides another source of liquidity, and had credit availability of approximately $298.7 million from the FHLB as of December 31, 2022.

At December 31, 2022, our loan to deposit ratio was approximately 85.0%, higher than the 70.0% at year-end 2021.

This increase is the result of our loans increasing $436.9 million, or 20.6% since year end 2021.

Investment securities available for sale totaling $83.6 million at the end of 2022 were available for the management of liquidity and interest rate risk, subject to certain pledging requirements, which can be easily transitioned to held to maturity securities.

The comparable amount was $117.0 million at December 31, 2021.

Cash and cash equivalents were $55.5 million at December 31, 2022, a decrease of $528.1 million, or 90.5%, compared to the $583.6 million at year-end 2021, which reflects the use of such funds to invest in loans and investment securities during 2022.

Management is not aware of any demands, commitments, events or uncertainties that will materially affect our ability to maintain liquidity at satisfactory levels.

Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item may be found in Item 7 of Part II of this annual report under the caption “Market Risk Management and Interest Sensitivity”, which is incorporated herein by reference.

USE OF NON-GAAP FINANCIAL MEASURES

Statements included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures.

The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company.

Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.

Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

See Non-GAAP reconciliation schedules that immediately follow:

Reconciliation of Non-GAAP Measures

Reconciliation of U.S.

GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

This Annual Report on Form 10-K, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP.

This financial information includes certain performance measures, which exclude intangible assets.

These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

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

Total assets $ 6,010,918 $ 3,477,276

intangible assets

Goodwill 63,266 63,266

Core deposit intangibles 48,090 5,547

Total intangible assets 111,356 68,813

Tangible assets $ 5,899,562 $ 3,408,463

Total common equity $ 511,135 $ 364,285

intangible assets 111,356 68,813

Tangible common equity $ 399,779 $ 295,472

Common shares outstanding at end of period 33,161,532 19,864,956

Common equity to assets 8.50 % 10.48 %

Tangible common equity to tangible assets 6.78 % 8.67 %

Common book value per share $ 15.41 $ 18.34

Tangible common book value per share $ 12.06 $ 14.87

Return on Average Common Equity

Return on average common equity is a financial ratio that measures the profitability of a company in relation to the average stockholders’ equity.

This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time.

For the Year Ended

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

Net income (as reported) $ 11,228 $ 31,177

Return on Average Common Equity

2.54 % 8.76 %

Average stockholders’ equity

$ 441,790 $ 355,850

Return on Average Tangible Common Equity

Return on average tangible common equity is computed by dividing net earnings applicable to common shareholders by average tangible common stockholders’ equity.

Management believes that return on average tangible common equity is meaningful because it measures the performance of a business consistently, whether acquired or internally developed.

ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

For the Year Ended

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

Net income (as reported) $ 11,228 $ 31,177

Core deposit intangible amortization (net of tax) 4,254 1,471

Merger and acquisition costs (net of tax) 11,637 1,553

Net earnings applicable to common shareholders $ 27,119 $ 34,201

Return of Average Tangible Common Equity 7.74 % 11.96 %

Average stockholders' equity $ 441,790 $ 355,850

Average goodwill and core deposit intangible (91,471) (69,845)

Average tangible stockholders' common equity $ 350,319 $ 286,005

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

What changed 10-K

Item 7. Management’s Discussion and Analysis