EAGLE BANCORP INC [EGBN] Filings

10-Q 1 egbn-20240630.htm 10-Q egbn-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2024

☐ 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 August 1, 2024, the registrant had 30,177,326 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets at June 30, 2024 and December 31, 2023 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	4
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	7
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (unaudited)	8
	Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73

Item 4.	Controls and Procedures	73

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	74

Item 1A.	Risk Factors	74

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74

Item 3.	Defaults Upon Senior Securities	74

Item 4.	Mine Safety Disclosures	74

Item 5.	Other Information	74

Item 6.	Exhibits	75

Signatures		76

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

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


	June 30, 2024		December 31, 2023
Assets
Cash and due from banks	$	10,803	$	9,047
Federal funds sold	5,802		3,740
Interest-bearing deposits with banks and other short-term investments	526,228		709,897
Investment securities available-for-sale (amortized cost of $1,584,435 and $1,668,316, respectively, and allowance for credit losses of $17 and $17, respectively).	1,420,618		1,506,388
Investment securities held-to-maturity, net of allowance for credit losses of $2,012 and $1,956, respectively (fair value of $856,275 and $901,582, respectively)	982,955		1,015,737
Federal Reserve and Federal Home Loan Bank stock	54,274		25,748
Loans:
Loans held for sale, at lower of cost or fair value	5,000		—
Loans held for investment, at amortized cost	8,001,739		7,968,695
Less: allowance for credit losses	(106,301)		(85,940)
Loans held for investment, net of allowance	7,895,438		7,882,755
Total Loans	7,900,438		7,882,755
Premises and equipment, net	8,788		10,189
Right-of-use assets - operating leases	16,250		19,129
Deferred income taxes	86,236		86,620
Bank-owned life insurance	114,333		112,921
Goodwill and other intangible assets, net	129		104,925
Other real estate owned	773		1,108
Other assets	174,396		176,334
Total Assets	$	11,302,023	$	11,664,538

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand	$	1,693,955	$	2,279,081
Interest-bearing transaction	1,123,980		997,448
Savings and money market	3,165,314		3,314,043
Time	2,284,099		2,217,467
Total deposits	8,267,348		8,808,039
Customer repurchase agreements	39,220		30,587
Borrowings	1,659,979		1,369,918

Operating lease liabilities	20,016		23,238
Reserve for unfunded commitments	6,653		5,590
Other liabilities	139,348		152,883
Total Liabilities	10,132,564		10,390,255

Shareholders' Equity
Common stock, par value $0.01 per share; shares authorized 100,000,000, shares issued and outstanding 30,180,482 and 29,925,612, respectively	297		296
Additional paid-in capital	380,142		374,888
Retained earnings	949,863		1,061,456
Accumulated other comprehensive loss	(160,843)		(162,357)
Total Shareholders' Equity	1,169,459		1,274,283
Total Liabilities and Shareholders' Equity	$	11,302,023	$	11,664,538

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Interest Income
Interest and fees on loans	$	137,616	$	128,993	$	275,610	$	249,843
Interest and dividends on investment securities	12,405		14,241		25,085		27,786
Interest on balances with other banks and short-term investments	19,568		13,229		44,430		19,003
Interest on federal funds sold	142		47		208		125
Total interest income	169,731		156,510		345,333		296,757
Interest Expense
Interest on deposits	76,846		59,422		156,229		108,376
Interest on customer repurchase agreements	330		333		645		635
Interest on borrowings	21,202		24,944		42,408		40,911

Total interest expense	98,378		84,699		199,282		149,922
Net Interest Income	71,353		71,811		146,051		146,835
Provision for Credit Losses	8,959		5,238		44,134		11,402
Provision for Credit Losses for Unfunded Commitments	608		318		1,064		1,166
Net Interest Income After Provision for Credit Losses	61,786		66,255		100,853		134,267

Noninterest Income
Service charges on deposits	1,653		1,626		3,352		3,136
Gain on sale of loans	37		95		37		400
Net gain (loss) on sale of investment securities	3		2		7		(19)
Increase in the cash surrender value of bank-owned life insurance	709		648		1,412		1,303
Other income	2,930		6,224		4,113		7,475
Total noninterest income	5,332		8,595		8,921		12,295
Noninterest Expense
Salaries and employee benefits	21,770		21,957		43,496		46,131
Premises and equipment expenses	2,894		3,227		5,953		6,544
Marketing and advertising	1,662		884		2,521		1,520
Data processing	3,495		3,354		6,788		6,453
Legal, accounting and professional fees	2,705		2,649		5,212		5,903
FDIC insurance	5,917		2,581		12,329		4,067

Goodwill impairment	104,168		—		104,168		—
Other expenses	3,880		3,326		6,021		7,944
Total noninterest expense	146,491		37,978		186,488		78,562
(Loss) Income Before Income Tax Expense	(79,373)		36,872		(76,714)		68,000
Income Tax Expense	4,429		8,180		7,426		15,074
Net (Loss) Income	$	(83,802)	$	28,692	$	(84,140)	$	52,926

(Loss) Earnings Per Common Share
Basic	$	(2.78)	$	0.94	$	(2.79)	$	1.72
Diluted	$	(2.78)	$	0.94	$	(2.79)	$	1.72

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net (Loss) Income	$	(83,802)	$	28,692	$	(84,140)	$	52,926

Other Comprehensive (Loss) Income, Net of Tax:
Unrealized gain (loss) on securities available-for-sale	3,629		(12,074)		(1,437)		5,862
Reclassification adjustment for (gain) loss included in net income	(2)		(2)		(6)		14
Total unrealized gain (loss) on investment securities available-for-sale	3,627		(12,076)		(1,443)		5,876
Amortization of unrealized loss on securities transferred to held-to-maturity	1,322		1,403		2,707		2,044
Total unrealized gain on investment securities held-to-maturity	1,322		1,403		2,707		2,044
Unrealized (loss) gain on derivatives	(24)		—		250		—

Total unrealized (loss) gain on derivatives	(24)		—		250		—
Other comprehensive income (loss)	4,925		(10,673)		1,514		7,920
Comprehensive (Loss) Income	$	(78,877)	$	18,019	$	(82,626)	$	60,846

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 April 1, 2024	30,185,732	$	297	$	377,334	$	1,047,550	$	(165,768)	$	1,259,413

Net Income	—	—		—		(83,802)		—		(83,802)
Other comprehensive loss, net of tax	—	—		—		—		4,925		4,925
Stock-based compensation expense	—	—		2,664		—		—		2,664

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(11,371)	—		—		—		—		—

Time-based stock awards granted	—	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	6,121	—		144		—		—		144
Cash dividends declared ($0.45 per share)	—	—		—		(13,885)		—		(13,885)


Balance June 30, 2024	30,180,482	$	297	$	380,142	$	949,863	$	(160,843)	$	1,169,459

Balance April 1, 2023	31,111,647	$	308	$	397,012	$	1,025,552	$	(180,914)	$	1,241,958

Net Income	—	—		—		28,692		—		28,692
Other comprehensive loss, net of tax	—	—		—		—		(10,673)		(10,673)
Stock-based compensation expense	—	—		2,736		—		—		2,736
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	(6,960)	—		—		—		—		—

Time-based stock awards granted	2,008	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	5,387	—		179		—		—		179
Cash dividends declared ($0.45 per share)	—	—		—		(13,465)		—		(13,465)
Common stock repurchased	(1,200,000)	(12)		(29,649)		—		—		(29,661)
Balance June 30, 2023	29,912,082	$	296	$	370,278	$	1,040,779	$	(191,587)	$	1,219,766

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, 2024	29,925,612	$	296	$	374,888	$	1,061,456	$	(162,357)	$	1,274,283

Net Loss	—	—		—		(84,140)		—		(84,140)
Other comprehensive income, net of tax	—	—		—		—		1,514		1,514
Stock-based compensation expense	—	—		5,032		—		—		5,032

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(42,920)	1		(1)		—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	12,013	—		—		—		—		—
Time-based stock awards granted	275,896	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	9,881	—		223		—		—		223
Cash dividends declared ($0.90 per share)	—	—		—		(27,453)		—		(27,453)


Balance June 30, 2024	30,180,482	$	297	$	380,142	$	949,863	$	(160,843)	$	1,169,459

Balance January 1, 2023	31,346,903	$	310	$	412,303	$	1,015,215	$	(199,507)	$	1,228,321

Net Income	—	—		—		52,926		—		52,926
Other comprehensive loss, net of tax	—	—		—		—		7,920		7,920
Stock-based compensation expense	—	—		5,684		—		—		5,684

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes	(44,064)	2		(2)		—		—		—
Vesting of performance-based stock awards, net of shares withheld for payroll taxes	27,296	—		—		—		—		—
Time-based stock awards granted	173,542	—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	8,405	—		314		—		—		314
Cash dividends declared ($0.90 per share)	—	—		—		(27,362)		—		(27,362)
Common stock repurchased	(1,600,000)	(16)		(48,021)		—		—		(48,037)
Balance June 30, 2023	29,912,082	$	296	$	370,278	$	1,040,779	$	(191,587)	$	1,219,766

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Six Months Ended June 30,
	2024		2023
Cash Flows From Operating Activities:
Net (Loss) Income	$	(84,140)	$	52,926
Adjustments to reconcile Net (Loss) Income to net cash provided by operating activities:
Provision for credit losses	44,134		11,402
Provision for credit losses for unfunded commitments	1,064		1,166
Goodwill impairment	104,168		—
Depreciation and amortization	1,492		1,778
Gain on sale of loans	(37)		(400)
(Gain) loss on mortgage servicing rights	(1,335)		70
Securities premium amortization, net	2,798		3,272
Origination of loans held for sale	—		(29,690)
Proceeds from sale of loans held for sale	—		36,824

Net gain on sale of other real estate owned	—		(134)
(Gain) loss on sale of investment securities	(7)		19
Net increase in cash surrender value of BOLI	(1,412)		(1,303)
Stock-based compensation expense	5,032		5,684

Decrease (increase) in other assets	283		(15,623)
Increase (decrease) in other liabilities	(13,947)		25,558
Net Cash Provided by Operating Activities	58,093		91,549
Cash Flows From Investing Activities:
Investment securities available-for-sale:

Proceeds from maturities	55,386		60,999
Proceeds from sale/call	27,000		8,303
Investment securities held-to-maturity:

Proceeds from maturities	34,783		39,006
Proceeds from call	102		341
Purchase of Federal Reserve stock	(142)		(158)
Redemption (purchase) of Federal Home Loan Bank stock	(28,384)		19,026

Proceeds from sale of mortgage servicing rights	3,618
Net increase in loans	(62,045)		(137,661)
Redemption of BOLI	—		736
Proceeds from sale of OREO	656		609
Net change in premises and equipment	(30)		(221)
Net Cash Provided by (Used in) Investing Activities	30,944		(9,020)
Cash Flows From Financing Activities:
Decrease in deposits	(540,691)		(995,055)
Increase in customer repurchase agreements	8,633		1,917
Proceeds from borrowings	2,650,000		5,683,000
Repayment of borrowings	(2,360,000)		(4,821,242)



Proceeds from employee stock purchase plan	223		314

Common stock repurchased	—		(48,037)

Cash dividends paid	(27,053)		(27,362)
Net Cash Used in Financing Activities	(268,888)		(206,465)
Net Decrease in Cash and Cash Equivalents	(179,851)		(123,936)
Cash and Cash Equivalents at Beginning of Period	722,684		311,854
Cash and Cash Equivalents at End of Period	$	542,833	$	187,918

See Notes to Consolidated Financial Statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows - Continued (Unaudited)

(dollars in thousands)


	Six Months Ended June 30,
	2024		2023
Supplemental Cash Flows Information:
Interest paid	$	180,999	$	164,083
Income taxes paid	$	—	$	9,930
Non-Cash Investing Activities:
Transfer from loans to loans held for sale	$	5,000	$	—
Transfers from loans to other real estate owned	$	400	$	—

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, 2023 was derived from the audited Consolidated Balance Sheet as of that date. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring adjustments, that in the opinion of management are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the accounting policies described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Certain reclassifications have been made to 2023 amounts previously reported to conform to the 2024 presentation. Reclassifications had no effect on net income or shareholders' equity. These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

Nature of Operations

The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination of small business loans, 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 twelve banking offices, four lending centers and various digital capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank that previously offered access to insurance products and services through a referral program with a third party insurance broker, continues to receive fee income in connection with such program. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. In April 2024, the Company closed a branch following the lease's expiration.

Use of Estimates

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

Investment Securities

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

AFS Securities are acquired as part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. AFS Securities are carried at fair value, with unrealized gains or losses, other than impairment losses, being reported as accumulated other comprehensive income/(loss), a separate component of shareholders' equity, net of deferred income tax. Realized gains

and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations.

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

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

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

The Company does not intend to sell the HTM investments, and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

Loans

The Company classifies loans in its portfolio as either held for investment (“HFI”) or held for sale (“HFS”) HFS loans are reported at the lower of cost or fair value on the Consolidated Balance Sheets. HFI loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is recognized at the contractual rate on the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan.

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

Allowance for Credit Losses

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


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2024		2023		2024		2023
Provision for credit losses - loans	$	8,904	$	5,250	$	44,078	$	10,158
Provision for credit losses - HTM debt securities	55		2		56		1,244
Provision for credit losses - AFS debt securities	—		(14)		—		—
Total	$	8,959	$	5,238	$	44,134	$	11,402

Allowance for Credit Losses - Loans

The allowance for credit losses ("ACL") - loans is an estimate of the expected credit losses in the HFI loans portfolio. The Company's ACL on the loan portfolio is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Reserves on loans that do not share 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.

The ACL also includes an amount for inherent risks not reflected in the historical quantitative analysis associated with the reasonable and supportable forecast. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Our model may reflect assumptions by management that are not covered by the qualitative and environmental factors, and we reevaluate all of its factors quarterly.

During the first quarter of 2024, management enhanced the cash flow model to incorporate three macroeconomic variables in addition to national unemployment. The four economic variables selected, national unemployment, which was the original variable used, Commercial Real Estate ("CRE") Price Index, House Price Index and Gross Domestic Product ("GDP"), are incorporated by utilizing a Loss Driver Analysis approach that factors in historical losses, including during the Great Recession, of regional peer banks and the Bank. The updated model incorporates a weighting of three economic scenarios; baseline, upside and downside. The scenarios cover the four economic forecast variables, with each segment of the portfolio linked to two of these variables, depending on the segment. The loss driver analysis is spread over a reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

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 current expected credit losses ("CECL").

A summary of our primary portfolio segments is as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company evaluates loan restructurings to determine if we have a loan modification and whether it results in a new loan or the continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there are principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications.

A loan that is considered a modified loan may be subject to an individually-evaluated loan analysis if the commitment is $500 thousand or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated provisions are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.

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

Allowance for Credit Losses - AFS Securities

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

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

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

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

Allowance for Credit Losses - HTM Securities

The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the ACL for HTM securities and included in the balance of HTM securities on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis may be performed and compared to the amortized cost basis.

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

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

The Company records a RUC on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company's Consolidated Statement of Operations.

The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company's Consolidated Balance Sheets.

Goodwill Assessment

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired. Goodwill is deemed to have an indefinite useful life and as such is not subject to amortization, and instead is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of December 31, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.

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

The Company has determined that it has a single reporting unit. If the fair value of the reporting unit exceeds the book value, no write-down of recorded goodwill is required. If the fair value of the reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be recorded through a reduction of goodwill or other intangible asset and an offsetting charge to noninterest expense.

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

During the three months ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters. During the past twelve months ended June 30, 2024, changes in macroeconomic conditions, market volatility due to rising interest rates resulted in fluctuations of the Company's stock price with a sustained decrease. As a result of the triggering event, the Company engaged a third-party service provider to assist Management with the determination of the fair value of the Company in the second quarter of 2024. The resulting calculations indicated that the fair value did not exceed the carrying amount of the Company's only reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired. The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's goodwill. The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.

New Authoritative Accounting Guidance

Accounting Standards Pending Adoption

ASU No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative" ("ASU 2023-06") incorporates into the Accounting Standards Codification ("ASC" or "Codification") several SEC disclosure requirements under Regulations S-K and S-X. The amendments in the ASU are intended to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. These requirements are similar to, but require more information than, generally accepted accounting principles. The new updates modify the disclosure or presentation requirements of a variety of Topics in the Codification. Entities should apply the amendments in ASU 2023-06 prospectively. For entities subject to the SEC's existing disclosure requirements and for entities that have to file or provide financial statements with or to the SEC for the purpose of selling or issuing securities that do not have contractual limits on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. As a result, the effective date will be different for each individual disclosure based on the effective date of the SEC's deletion of the related disclosure. Early adoption is prohibited. For all other entities, the effective date will be two years later. Early adoption is permitted for these entities, but not before the provisions of the ASU become effective for entities subject to SEC's regulation. The effective dates of the amendments are predicated on the SEC removing its related disclosure requirements from its regulations. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We are currently in the process of evaluating this guidance.

ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"). The ASU requires additional income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 and interim periods within those fiscal years. The impact of ASU 2023-09 should be applied prospectively. We are currently in the process of evaluating this guidance.

ASU No. 2024-01, "Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards" ("ASU 2024-01") clarifies how an entity determines whether a profits interest or similar award (hereafter a "profits interest award") is accounted for either (1) as a share-based payment arrangement, and therefore, within the scope of ASC 718 or (2) not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 also improves the clarity and operation of the guidance in ASC 718-10-15-3. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non employees in exchange for goods or services. For public business entities, the amendments are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period. The amendments should be applied (i) retrospectively to all prior periods presented in the financial statements or (ii) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. If the amendments are applied prospectively, an entity is required to disclose the nature of and reason for the change in accounting principle. We are currently in the process of evaluating this guidance.

ASU No. 2024-02, "Codification Improvements—Amendments to Remove References to the Concepts Statements" ("ASU 2024-02") amends the Accounting Standard Codification (“Codification”) by removing references to various concepts statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior statements to provide guidance in certain topical areas. As stated in paragraph 105-10-05-3 of the Codification, FASB Concepts Statements are non authoritative. These amendments will simplify the Codification which will further draw a distinction between authoritative and non authoritative literature. The amendments are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments using one of the following transition methods: (i) prospectively to all new transactions recognized on or after the date that the entity first applies the amendments, or (ii) retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. We are currently in the process of evaluating this guidance.

Accounting Standards Adopted in 2024:

ASU No. 2023-07,"Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ("ASU 2023-07") requires filers to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity’s chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 is effective for the Company for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Since early adoption is permitted, the Company adopted the guidance prescribed under ASU 2023-07 effective January 1, 2024. Adoption of this guidance did not have a material impact on our consolidated financial statements for fiscal year 2024.

Note 2. Cash and Due from Banks

For the six months ended June 30, 2024 and 2023, the Bank maintained an average daily balance at the Federal Reserve Bank of $1.7 billion and $0.9 billion, respectively, on which interest is paid.

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

Note 3. Investment Securities

The amortized cost and estimated fair value of the Company's AFS and HTM securities are summarized as follows:


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
June 30, 2024
Investment securities available-for-sale:
U.S. treasury bonds	$	49,944	$	—	$	(1,223)	$	—	$	48,721
U.S. agency securities	696,652		—		(55,685)		—		640,967
Residential mortgage-backed securities	773,275		30		(101,099)		—		672,206
Commercial mortgage-backed securities	53,868		—		(5,021)		—		48,847
Municipal bonds	8,696		—		(514)		—		8,182
Corporate bonds	2,000		—		(288)		(17)		1,695

Total available-for-sale securities	$	1,584,435	$	30	$	(163,830)	$	(17)	$	1,420,618


(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value
June 30, 2024
Investment securities held-to-maturity:


Residential mortgage-backed securities	$	638,039	$	—	$	(89,274)	$	548,765
Commercial mortgage-backed securities	89,674		—		(13,058)		76,616
Municipal bonds	124,895		—		(11,259)		113,636
Corporate bonds	132,359		—		(15,101)		117,258

Total	$	984,967	$	—	$	(128,692)	$	856,275
Allowance for credit losses	(2,012)
Total held-to-maturity securities, net of ACL	$	982,955


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
December 31, 2023
Investment securities available-for-sale:
U.S. treasury bonds	$	49,894	$	—	$	(1,993)	$	—	$	47,901
U.S. agency securities	729,090		—		(57,693)		—		671,397
Residential mortgage-backed securities	823,992		45		(96,684)		—		727,353
Commercial mortgage-backed securities	54,557		—		(4,993)		—		49,564
Municipal bonds	8,783		—		(293)		—		8,490
Corporate bonds	2,000		—		(300)		(17)		1,683
Total available-for-sale securities	$	1,668,316	$	45	$	(161,956)	$	(17)