EAGLE BANCORP INC [EGBN] Filings

10-Q 1 egbn-20230930.htm 10-Q egbn-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 0-25923

Eagle Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland

52-2061461

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

7830 Old Georgetown Road, Third Floor, Bethesda, Maryland

20814

(Address of principal executive offices)

(Zip Code)

(301) 986-1800

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

EGBN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Yes ☐ No ☒

As of November 2, 2023, the registrant had 29,926,182 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets at September 30, 2023 and December 31, 2022 (unaudited)	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)	8
	Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	65

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	67

Item 3.	Defaults Upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

Signatures		69

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except share and per share data)


	September 30, 2023		December 31, 2022
Assets
Cash and due from banks	$	8,625	$	12,655
Federal funds sold	13,611		33,927
Interest-bearing deposits with banks and other short-term investments	235,819		265,272
Investment securities available-for-sale (amortized cost of $1,700,233 and $1,803,898, respectively, and allowance for credit losses of $17 and $17, respectively).	1,474,945		1,598,666
Investment securities held-to-maturity, net of allowance for credit losses of $2,010 and $766, respectively (fair value of $872,710 and $968,707, respectively)	1,032,485		1,093,374
Federal Reserve and Federal Home Loan Bank stock	25,689		65,067
Loans held for sale	—		6,734
Loans	7,916,391		7,635,632
Less: allowance for credit losses	(83,332)		(74,444)
Loans, net	7,833,059		7,561,188
Premises and equipment, net	11,216		13,475
Operating lease right-of-use assets	20,151		24,544
Deferred income taxes	98,987		96,567
Bank-owned life insurance	112,234		110,998
Goodwill and other intangible assets, net	105,239		104,233
Other real estate owned	1,487		1,962
Other assets	190,667		162,192
Total Assets	$	11,164,214	$	11,150,854

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand	$	2,072,665	$	3,150,751
Interest-bearing transaction	932,779		1,138,235
Savings and money market	3,129,773		3,640,697
Time	2,241,089		783,499
Total deposits	8,376,306		8,713,182
Customer repurchase agreements	25,689		35,100
Other short-term borrowings	1,300,001		975,001
Long-term borrowings	69,887		69,794
Operating lease liabilities	24,422		29,267
Reserve for unfunded commitments	6,183		5,857
Other liabilities	145,842		94,332
Total Liabilities	9,948,330		9,922,533

Shareholders' Equity
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 29,917,982 and 31,346,903, respectively	296		310
Additional paid-in capital	372,394		412,303
Retained earnings	1,054,699		1,015,215
Accumulated other comprehensive loss	(211,505)		(199,507)
Total Shareholders' Equity	1,215,884		1,228,321
Total Liabilities and Shareholders' Equity	$	11,164,214	$	11,150,854

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest Income
Interest and fees on loans	$	132,273	$	93,744	$	382,116	$	249,716
Interest and dividends on investment securities	13,732		13,463		41,518		37,890
Interest on balances with other banks and short-term investments	15,067		4,100		34,070		7,608
Interest on federal funds sold	77		220		202		269
Total interest income	161,149		111,527		457,906		295,483
Interest Expense
Interest on deposits	70,929		26,125		179,305		44,022
Interest on customer repurchase agreements	311		55		946		90
Interest on other short-term borrowings	18,152		412		56,989		992
Interest on long-term borrowings	1,038		1,038		3,112		3,112
Total interest expense	90,430		27,630		240,352		48,216
Net Interest Income	70,719		83,897		217,554		247,267
Provision for Credit Losses	5,644		3,022		17,046		730
(Reversal of) Provision for Credit Losses for Unfunded Commitments	(839)		774		327		1,316
Net Interest Income After (Reversal of) Provision for Credit Losses	65,914		80,101		200,181		245,221

Noninterest Income
Service charges on deposits	1,631		1,339		4,767		3,970
(Loss) gain on sale of loans	(5)		821		395		3,168
Net gain (loss) on sale of investment securities	5		4		(14)		(172)
Increase in the cash surrender value of bank-owned life insurance	669		631		1,972		1,889
Other income	4,047		2,513		11,522		9,470
Total noninterest income	6,347		5,308		18,642		18,325
Noninterest Expense
Salaries and employee benefits	21,549		21,538		67,680		60,362
Premises and equipment expenses	3,095		3,275		9,639		9,926
Marketing and advertising	768		1,181		2,288		3,431
Data processing	3,194		3,445		9,647		9,054
Legal, accounting and professional fees	2,162		2,332		8,065		6,030
FDIC insurance	3,342		1,287		7,409		3,251

Other expenses	3,523		3,148		11,467		34,126
Total noninterest expense	37,633		36,206		116,195		126,180
Income Before Income Tax Expense	34,628		49,203		102,628		137,366
Income Tax Expense	7,245		11,906		22,319		38,629
Net Income	$	27,383	$	37,297	$	80,309	$	98,737

Earnings Per Common Share
Basic	$	0.91	$	1.16	$	2.63	$	3.08
Diluted	$	0.91	$	1.16	$	2.63	$	3.07

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)


	Three Months Ended September 30,			Nine Months Ended September 30,
		2023		2022		2023		2022
Net Income		$	27,383	$	37,297	$	80,309	$	98,737

Other Comprehensive (Loss) Income, Net of Tax:
Unrealized (loss) gain on securities available-for-sale		(21,314)		(60,029)		(15,452)		(151,453)
Reclassification adjustment for (gain) loss included in net income		(4)		(3)		10		114
Total unrealized (loss) gain on investment securities available-for-sale		(21,318)		(60,032)		(15,442)		(151,339)
Unrealized loss on securities transferred to held-to-maturity (1)		—		—		—		(49,095)
Amortization of unrealized loss on securities transferred to held-to-maturity		1,400		1,762		3,444		3,753
Total unrealized gain (loss) on investment securities held-to-maturity		1,400		1,762		3,444		(45,342)
Unrealized gain on derivatives		—		—		—		284


Other comprehensive (loss) income		(19,918)		(58,270)		(11,998)		(196,397)
Comprehensive Income (Loss)		$	7,465	$	(20,973)	$	68,311	$	(97,660)

(1) Represents unamortized accumulated other comprehensive loss on securities transferred to held-to-maturity status.

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands except share and per share data)


								Accumulated Other Comprehensive Income (Loss)
	Common			Additional Paid-in Capital		Retained Earnings				Shareholders' Equity
	Shares	Amount
Balance July 1, 2023	29,912,082	$	296	$	370,278	$	1,040,779	$	(191,587)	$	1,219,766

Net Income	—	—		—		27,383		—		27,383
Other comprehensive loss, net of tax	—	—		—		—		(19,918)		(19,918)
Stock-based compensation expense	—	—		1,969		—		—		1,969

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(15,250)	—		—		—		—		—

Time-based stock awards granted	14,280	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	6,870	—		145		—		—		145
Cash dividends declared ($0.45 per share)	—	—		—		(13,463)		—		(13,463)
Common stock repurchased	—	—		2		—		—		2

Balance September 30, 2023	29,917,982	$	296	$	372,394	$	1,054,699	$	(211,505)	$	1,215,884

Balance July 1, 2022	32,081,241	$	318	$	440,418	$	964,353	$	(152,369)	$	1,252,720

Net Income	—	—		—		37,297		—		37,297
Other comprehensive loss, net of tax	—	—		—		—		(58,270)		(58,270)
Stock-based compensation expense	—	—		2,274		—		—		2,274
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes	—	—		—		—		—		—
Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(2,893)	—		—		—		—		—

Time-based stock awards granted	—	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	3,973	—		188		—		—		188
Cash dividends declared ($0.45 per share)	—	—		—		(14,438)		—		(14,438)

Balance September 30, 2022	32,082,321	$	318	$	442,880	$	987,212	$	(210,639)	$	1,219,771

See Notes to Consolidated Financial Statements.


EAGLE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity - Continued (Unaudited)
(dollars in thousands except share and per share data)

								Accumulated Other Comprehensive Income (Loss)
	Common			Additional Paid-in Capital		Retained Earnings				Shareholders' Equity
	Shares	Amount
Balance January 1, 2023	31,346,903	$	310	$	412,303	$	1,015,215	$	(199,507)	$	1,228,321

Net Income	—	—		—		80,309		—		80,309
Other comprehensive income, net of tax	—	—		—		—		(11,998)		(11,998)
Stock-based compensation expense	—	—		7,653		—		—		7,653

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(59,314)	1		(1)		—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	27,296	—		—		—		—		—
Time-based stock awards granted	187,822	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	15,275	—		459		—		—		459
Cash dividends declared ($1.35 per share)	—	—		—		(40,825)		—		(40,825)
Common stock repurchased	(1,600,000)	(15)		(48,020)		—		—		(48,035)

Balance September 30, 2023	29,917,982	$	296	$	372,394	$	1,054,699	$	(211,505)	$	1,215,884

Balance January 1, 2022	31,950,092	$	316	$	434,640	$	930,061	$	(14,242)	$	1,350,775

Net Income	—	—		—		98,737		—		98,737
Other comprehensive loss, net of tax	—	—		—		—		(196,397)		(196,397)
Stock-based compensation expense	—	—		7,587		—		—		7,587
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes	3,289	—		97		—		—		97
Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(68,931)	2		(2)		—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	21,026	—		—		—		—		—
Time-based stock awards granted	166,471	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	10,374	—		558		—		—		558
Cash dividends declared ($1.30 per share)	—	—		—		(41,586)		—		(41,586)

Balance September 30, 2022	32,082,321	$	318	$	442,880	$	987,212	$	(210,639)	$	1,219,771

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash Flows From Operating Activities:
Net Income	$	80,309	$	98,737
Adjustments to reconcile Net Income to net cash provided by operating activities:
Provision for credit losses	17,046		730
Provision for credit losses for unfunded commitments	327		1,316
Depreciation and amortization	2,649		2,483
Gain on sale of loans	(395)		(3,168)
Loss (gain) on mortgage servicing rights	108		(872)
Securities premium amortization, net	4,766		7,191
Origination of loans held for sale	(29,690)		(264,765)
Proceeds from sale of loans held for sale	36,819		305,764

Net gain on sale of other real estate owned	(134)		(107)
Net loss on sale of investment securities	14		172
Net increase in cash surrender value of BOLI	(1,972)		(1,889)
Stock-based compensation expense	7,653		7,587

Increase in other assets	(29,589)		(19,055)
Increase in other liabilities	51,058		5,503
Net Cash Provided by Operating Activities	138,969		139,627
Cash Flows From Investing Activities:
Investment securities available-for-sale:
Purchases	—		(414,935)
Proceeds from maturities	92,647		182,767
Proceeds from sale/call	8,303		6,225
Investment securities held-to-maturity:
Purchases	—		(290,740)
Proceeds from maturities	60,312		82,163
Proceeds from call	2,906		19,944
Proceeds from (purchase of) sale of Federal Reserve stock	39,378		(8,158)


Net increase in loans	(287,673)		(239,089)
Redemption of BOLI	736		—
Proceeds from sale of OREO	609		241
Net change in premises and equipment	(298)		(1,518)
Net Cash Used in Investing Activities	(83,080)		(663,100)
Cash Flows From Financing Activities:
Decrease in deposits	(336,876)		(1,218,190)
Decrease in customer repurchase agreements	(9,411)		(2,453)
Proceeds from short-term borrowings	325,000		215,000



Proceeds from employee stock purchase plan	459		558
Proceeds from exercise of equity compensation plans	—		97
Common stock repurchased	(48,035)		—

Cash dividends paid	(40,825)		(41,586)
Net Cash Used in Financing Activities	(109,688)		(1,046,574)
Net Decrease in Cash and Cash Equivalents	(53,799)		(1,570,047)
Cash and Cash Equivalents at Beginning of Period	311,854		1,714,222
Cash and Cash Equivalents at End of Period	$	258,055	$	144,175

See Notes to Consolidated Financial Statements.


EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows - Continued (Unaudited)
(dollars in thousands)

	Nine Months Ended September 30,
	2023		2022
Supplemental Cash Flows Information:
Interest paid	$	266,633	$	49,273
Income taxes paid	$	16,940	$	16,150


Non-Cash Investing Activities
Transfers of investment securities from available-for-sale to held-to-maturity	$	—	$	922,795
Transfers from loans to other real estate owned	$	—	$	475

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. (the "Parent") and its subsidiaries (together with the Parent, the "Company"), with all significant intercompany transactions eliminated. EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Parent's principal subsidiary.

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry. The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited. The Consolidated Balance Sheet as of December 31, 2022 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Certain reclassifications have been made to 2022 amounts previously reported to conform to the 2023 presentation. Reclassifications had no effect on net income or shareholders' equity. These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Nature of Operations

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration ("FHA") loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration ("SBA"), is typically sold to third party investors in a transaction apart from the loan's origination.

The Bank offers its products and services through thirteen banking offices, four lending centers and various digital capabilities, including remote deposit services and mobile banking services. During the nine months ended September 30, 2023, the Company closed three branches following the leases' expiration. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

The Company commenced the cessation of first lien residential mortgage origination for secondary sale during the three months ended March 31, 2023. The Company has completed residual origination and sales activities as of June 30, 2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Investment Securities

The Company recognizes acquired securities on the trade date. Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity. Debt securities are classified as available-for-sale when management may have the intent to sell them prior to maturity. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Premiums and discounts on investment securities available-for-sale and held-to-maturity are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality.

Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity

Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security.

Loans

Loans held for investment are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan.

Past due loans are placed on nonaccrual status when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, this conclusion is reached when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Allowance for Credit Losses - Loans

The allowance for credit losses - loans ("ACL") is an estimate of the expected credit losses in the loans held for investment portfolio.

Accounting Standards Codification ("ASC") 326, "Financial Instruments-Credit Losses" requires that an estimate of current expected credit losses ("CECL") be immediately recognized and reevaluated over the contractual life of the financial asset when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes, and a loan-level probability of default ("PD") / Loss Given Default ("LGD") cash flow method is applied using an exposure at default ("EAD") model. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments.

The Company uses regression analysis of historical internal and peer data provided by a third-party service provider (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers.

A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period.

For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default.

For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

In addition to the quantitative model and individual evaluation conducted in connection with CECL, the Company applies qualitative and environmental factors into its methodology for the calculation of its ACL for its loan portfolio. The factors include: (i) changes in the nature and volume of the portfolio; (ii) changes in the volume and severity of past due financial assets and the volume and severity of adversely classified assets; (iii) changes in the value of underlying collateral for loans not individually evaluated; (iv) changes in lending policies and procedures; (v) changes in the quality of credit review function; (vi) changes in lending management and staff; (vii) concentrations of credit; (viii) other external factors (competition, legal, regulatory, etc.); and (ix) changes in national, regional, and local economic and business conditions. The Company's quantitative model may reflect assumptions by management that are not covered by the qualitative and environmental factors. The Company reevaluates the qualitative and environmental factors on a quarterly basis.

While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses.

A summary of our primary portfolio segments is as follows:

Commercial. The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses.

Income producing commercial real estate. Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who generally have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates.

Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities.

Real estate mortgage – residential. Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property.

Construction – commercial and residential. The construction commercial and residential loan portfolio comprises loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing.

Construction – commercial and industrial ("C&I") (owner occupied). The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings.

Home equity. The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property.

Other consumer. The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process.

We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans.

Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual.

Classified loans represent the sum of loans graded substandard and doubtful.

The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the allowance on collectively assessed and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Risk Committee, the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements.

When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a borrower will result in financial difficulty.

We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.

Collateral Dependent Financial Assets

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Loan Modifications to Borrowers in Financial Difficulty

On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, which eliminated the recognition and measurement of troubled debt restructurings ("TDR"). Due to the removal of the TDR designation, the Company evaluates loan restructurings to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there are principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications.

A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $1.0 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.

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

Allowance for Credit Losses - Available-for-Sale Securities

The Company utilizes ASC 326 to evaluate its available-for-sale ("AFS") and held-to-maturity ("HTM") debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

Allowance for Credit Losses - Held-to-Maturity Debt Securities

The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and enhanced analysis is performed. This may consist of evaluating the security as if it were a below investment grade rated security or a discounted cash flow analysis may be performed and compared to the amortized cost basis.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheet.

The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Provision for credit losses - loans	$	5,643	$	3,046	$	15,802	$	532
Provision for (reversal of) credit losses - HTM debt securities	1		(24)		1,244		800
Reversal of credit losses - AFS debt securities	—		—		—		(602)
Total	$	5,644	$	3,022	$	17,046	$	730

Goodwill Assessment

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.

Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.

In the second quarter of 2023, Management determined that a triggering event had occurred as a result of a sustained decrease in the Company's stock price and as a result of a revision in the earnings outlook in comparison to budget for the remainder of 2023 due primarily to the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent events in the banking sector. The Company performed a qualitative assessment and quantitative impairment test on its only reporting unit as of May 31, 2023 and determined that there was no impairment as the fair value exceeded the carrying amount of the Company. Management has evaluated and will continue to evaluate economic conditions in interim periods for triggering events.

New Authoritative Accounting Guidance

Accounting Standards Adopted in 2023:

ASU No. 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02") eliminates the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. Effective January 1, 2023, the Company adopted the guidance prescribed under ASU 2022-02. Refer to the "Loan Modifications" subsection above and Note 4 for additional disclosure.

Note 2. Cash and Due from Banks

For the nine months ended September 30, 2023 and 2022, the Bank maintained an average daily balance at the Federal Reserve Bank of $892.8 million and $1.4 billion, respectively, on which interest is paid.

Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank.

Note 3. Investment Securities

The amortized cost and estimated fair value of the Company's available-for-sale and held-to-maturity securities are summarized as follows:


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
September 30, 2023
Investment securities available-for-sale:
U.S. treasury bonds	$	49,868	$	—	$	(2,818)	$	—	$	47,050
U.S. agency securities	736,078		1		(79,802)		—		656,277
Residential mortgage-backed securities	848,555		—		(134,407)		—		714,148
Commercial mortgage-backed securities	54,904		—		(6,900)		—		48,004
Municipal bonds	8,828		—		(1,026)		—		7,802
Corporate bonds	2,000		—		(319)		(17)		1,664

Total available-for-sale securities	$	1,700,233	$	1	$	(225,272)	$	(17)	$	1,474,945


(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value
September 30, 2023
Investment securities held-to-maturity:


Residential mortgage-backed securities	$	685,648	$	—	$	(109,590)	$	576,058
Commercial mortgage-backed securities	91,337		—		(16,805)		74,532
Municipal bonds	125,224		2,828		(19,533)		108,519
Corporate bonds	132,286		—		(18,685)		113,601

Total	$	1,034,495	$	2,828	$	(164,613)	$	872,710
Allowance for credit losses	(2,010)
Total held-to-maturity securities, net of ACL	$	1,032,485


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
December 31, 2022
Investment securities available-for-sale:
U.S. treasury bonds	$	49,793	$	—	$	(3,466)	$	—	$	46,327
U.S. agency securities	747,777		—		(78,049)		—		669,728
Residential mortgage-backed securities	937,557		18		(117,072)		—		820,503
Commercial mortgage-backed securities	56,071		—		(5,858)		—		50,213
Municipal bonds	10,700		45		(658)		—		10,087
Corporate bonds	2,000		—		(175)		(17)		1,808
Total available-for-sale securities	$	1,803,898	$	63	$	(205,278)	$	(17)	$	1,598,666


(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value
December 31, 2022
Investment securities held-to-maturity:


Residential mortgage-backed securities	$	741,057	$	—	$	(88,390)	$	652,667
Commercial mortgage-backed securities	92,557		—		(11,993)		80,564
Municipal bonds	128,273		—		(12,092)		116,181
Corporate bonds	132,253		—		(12,958)		119,295

Total	$	1,094,140	$	—	$	(125,433)	$	968,707
Allowance for credit losses	(766)
Total held-to-maturity securities, net of ACL	$	1,093,374

In addition, at September 30, 2023 and December 31, 2022 the Company held $25.7 million and $65.1 million, respectively, in equity securities in a combination of Federal Reserve Bank and FHLB stocks, which were required to be held for regulatory purposes and which were not marketable, and therefore are carried at cost.

The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $1.1 billion of mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized. At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through the provision for credit losses. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $66.2 million was included in other comprehensive loss at the time of transfer and, as of September 30, 2023, $53.5 million remains in accumulated other comprehensive loss, to be amortized through interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer. Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities.

Accrued interest receivable on available-for-sale securities totaled $4.0 million and $4.3 million at September 30, 2023 and December 31, 2022, respectively, and accrued interest receivable on held-to-maturity securities totaled $3.6 million and $3.5 million at September 30, 2023 and December 31, 2022, respectively. The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets.

The following tables summarizes available-for-sale and held-to-maturity securities in an unrealized loss position by length of time:

Less Than 12 Months

12 Months or Greater

Total

(dollars in thousands)

Number of Securities

Estimated Fair Value

Unrealized Losses

Estimated Fair Value

Unrealized Losses

Estimated Fair Value

Unrealized Losses

September 30, 2023

Investment securities available-for-sale:

U.S. treasury bonds