Eagle Bancorp Inc.

02/27/2025 | Press release | Distributed by Public on 02/27/2025 15:27

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company as of the dates and periods indicated. The Company's primary subsidiary is the Bank, and the Company's other direct and indirect active subsidiaries are Bethesda Leasing, LLC, Eagle Insurance Services, LLC and Landroval Municipal Finance, Inc.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report as that disclosure is included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission ("SEC") on February 29, 2024. You can reference the discussion and analysis of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2023 in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" within that report.
Caution About Forward Looking Statements. This report contains forward looking statements. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements and are typically identified with words such as "may," "will," "can," "anticipates," "believes," "expects," "plans," "outlook," "estimates," "potential," "assume," "probable," "possible," "continue," "should," "could," "would," "strive," "seeks," "deem," "projections," "forecast," "consider," "indicative," "uncertainty," "likely," "unlikely," "likelihood," "unknown," "attributable," "depends," "intends," "generally," "feel," "typically," "judgment," "subjective" and similar words or phrases. These forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements.
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward looking statements:
•Changes in the general economic, political, social and health conditions, including the macroeconomic and other challenges and uncertainties resulting from the effects of pandemics and natural disasters;
•The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
•The willingness of customers to substitute competitors' products and services for our products and services;
•Our management of liquidity risks in our operations, including, but not limited to, risks related to customer deposits, deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance coverage limits, access to capital markets and securities and market values;
•The effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
•Our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of, and our ability to sell, properties which stand as collateral for loans we make;
•The growth and profitability of noninterest or fee income being less than expected;
•Changes in the level of our nonperforming assets and charge-offs;
•Changes in consumer spending and savings habits;
•The impact of climate change or government action and societal responses to climate change;
•Difficulty recruiting or retaining successful bankers, executive officers or other key personnel;
•Changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
•The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance and the application thereof by regulatory bodies;
•The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System ("Federal Reserve Board," "Federal Reserve" or "FRB"), inflation, interest rate, market and monetary fluctuations;
•Results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses, to write-down assets, to hold more capital or to incur costs to remediate supervisory findings;
•The effects or impact of any litigation, governmental investigations and proceedings, including enforcement proceedings and any possibly resulting fines, judgments, expenses or restrictions on our business activities;
•Unanticipated regulatory or judicial proceedings;
•The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board ("PCAOB") or the Financial Accounting Standards Board ("FASB");
•Cybersecurity breaches, threats, and cyber-fraud that cause the Bank to sustain financial losses;
•Technological and social media changes;
•Our management of risks inherent in the use of statistical and quantitative data and modeling;
•The strength of the United States economy, in general, and the strength of the local economies in which we conduct operations;
•Changes in trade, immigration, fiscal and monetary policies;
•Political uncertainty in the United States and its effects on the economy of the Washington, D.C. metropolitan area;
•Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; and
•The factors discussed under the caption "Risk Factors" in this report.
If one or more of the factors affecting our forward looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward looking information and statements contained in this report. No undue reliance should be placed on our forward looking information and statements. We will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements.
GENERAL
The Company provides general commercial and consumer banking services through the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve. The Company was organized in October 1997 and to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company's primary market area. The Company's philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twelve branch offices (six in Suburban Maryland, three in Washington, D.C. and three in Northern Virginia), a principal corporate office, four lending centers (two are co-located with branches and one co-located in the principal corporate office) and one operations center. Refer to the Business Section above, which describes in detail the various banking services offered.
General economic, political, social and health conditions affect financial markets, and therefore, our business. As the economy experienced higher levels of inflation in the recent past, interest rates increased in 2023, however as inflationary pressure during 2024 subsided, the Federal Reserve decreased interest rates three times for a total of 100 basis points. Fiscal and monetary policies have a direct and indirect impact on the level and volatility of interest rates, liquidity of financial markets, the availability and cost of capital, and market conditions of financing. Actual real U.S. GDP growth for 2024 was 3.1%, compared to 3.3% growth in 2023, as the economy continues to grow despite continuing to experience the effects of inflationary pressures and higher interest rates which were raised in 2022 and 2023. Unemployment slightly increased through 2024 as the U.S. unemployment rate ended the year at 4.0%, up from 3.7% at the end of 2023.
Longer-term U.S. interest rates increased in 2024, with the ten year U.S. Treasury rate averaging 4.21% in 2024 as compared to 3.96% in 2023. The yield curve steepened in 2024 as short-term rates decreased due to Federal Reserve rate cuts while long-term rates increased compared to 2023.
We believe the Company's primary market, the Washington, D.C. metropolitan area, continues to exhibit resilience relative to other parts of the country despite the volatility in the current economic environment. The Washington, D.C. metropolitan area maintains a diverse economy which includes the public sector, a large healthcare component, substantial business services and a highly educated work force. The private sector, in particular, the Leisure and Hospitality sector has seen some recovery in recent years following the adverse effects of the pandemic. The multi-family commercial real estate leasing sector, notwithstanding increased supply of units in the Bank's market area, has held up relatively well, particularly for well-located close-in projects. While commercial real estate office properties continue to experience challenges, the Company has remained focused on monitoring this sector and working with borrowers in order to mitigate credit losses within our loan portfolio. Overall, we believe commercial real estate values have generally decreased and we continue to be cautious of the cap rates at which such assets are trading, resulting in conservative valuations.
At December 31, 2024, the Company had total assets of approximately $11.1 billion, total loans of $7.9 billion, total deposits of $9.1 billion and twelve branches in the Washington, D.C. metropolitan area. We have remained cognizant of the volatility in our industry, capital markets and interest rate markets. While we remain cautious with regard to commercial real estate ("CRE") market conditions, principally office, the strength of the Washington D.C. metro area in certain sectors, particularly multi-family commercial real estate and the housing market, continue to drive premiums for well-located properties.
The Company has the financial resources to meet, and remains committed to meeting, the credit needs of its community. Loan balances increased in the CRE segments in 2024 which, combined with the higher levels of interest rates, resulted in changes in our liquidity mix as increases in interest-bearing deposits offset a decrease in non-interest bearing deposits. The yield on earning assets continued to increase in 2024. During the year ended December 31, 2024, the yield on earning assets increased by 20 basis points (from 5.45% to 5.65%) while cost of funds increased 42 basis points (from 3.17% to 3.59%) which resulted in a decrease of 16 basis points in the net interest margin.
The Company's capital position remained strong in 2024 as a result of its strong retained earnings position, despite the impact of the goodwill impairment on 2024 net loss. As a result of the Company's strong capital position, we were able to continue our quarterly dividend in 2024. The quarterly cash dividend amount was recalibrated to $0.165 in the third quarter of 2024 to reflect the company's growth plans.
The Company believes its strategy of remaining growth-oriented, retaining talented staff and maintaining focus on seeking quality lending and deposit relationships has proven successful. Additionally, the Company believes this strategy of relationship building has fostered future growth opportunities, as the Company's reputation in the marketplace remains strong.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies, including those identified below for the year ended December 31, 2024, inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility.
Allowance for Credit Losses and Provision for Unfunded Commitments
A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments ("RUC") as estimates of those losses. The amount of the ACL on loans is based on management's assessment of current expected credit losses in the portfolio.
The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and regional unemployment rates, which management estimates by using a national forecast and estimating a regional adjustment based on historical differences between the two.
Management has significant discretion in making the judgments inherent in the determination of the provisions for credit loss, ACL and the RUC. Our determination of these amounts requires significant reliance on estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors and the reliance on our reasonable and supportable forecasts.
We estimate the ACL on loans using a quantitative model that uses a probability of default ("PD") / loss given default ("LGD") cash flow method with an exposure at default ("EAD") model to estimate expected credit losses for our loan segments. The modeling of expected prepayment speeds is based on historical internal data and adjustments to account for loan-specific risk characteristics after pooling our loan portfolio based on similar risk characteristics.
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 loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will react to forecasted levels of the loss drivers. During the three months ended March 31, 2024, management enhanced the cash flow model to incorporate three additional macroeconomic variables. The four economic variables selected, national unemployment (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.
Loans that have evidence of credit deterioration are excluded from the loan segments subject to the quantitative model described above and are individually assessed.
The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors reflected in the qualitative component of the reserve include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff and trends in delinquencies.
Management has developed an analytical process to monitor the adequacy of the ACL. Our methodology for determining our ACL was developed utilizing, among other factors, the guidance from federal banking regulatory agencies and relevant available information from internal and external sources and relating to past events, current conditions and reasonable and supportable forecasts. The process is being continually enhanced and refined based on periodic reviews. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the effects of the COVID-19 pandemic and related hybrid or fully remote working environment has negatively impacted the performance outlook in the central business district office CRE segment of our loan portfolio, which informed our CECL economic forecast and continued to adversely impact our loss reserve as of December 31, 2024. See Notes 1, 3 and 4 to the Consolidated Financial Statements, the "Provision for Credit Losses" and "Allowance for Credit Losses" section in Management's Discussion and Analysis of Financial Condition and Results of Operations and the risk factors related to our business and economic conditions in Item 1A for more information on the provision for credit losses and ACL for the loan portfolio.
The RUC represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws.
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.
SELECTED FINANCIAL DATA
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2024. The information contained in this section should be read together with the December 31, 2024 audited Consolidated Financial Statements and the accompanying Notes included in Item 8 Financial Statements And Supplementary Data of this Form 10-K.
This section of this Form 10-K generally discusses 2024 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Form 10-K for the fiscal year ended December 31, 2023.
(dollars in thousands) December 31, 2024 December 31, 2023
Consolidated Balance Sheets:
Securities - available for sale $ 1,267,404 $ 1,506,388
Securities - held to maturity 938,647 1,015,737
Loans 7,934,888 7,968,695
Allowance for credit losses (114,390) (85,940)
Goodwill and intangible assets, net 16 104,925
Total assets 11,129,508 11,664,538
Deposits 9,131,078 8,808,039
Other short-term borrowings 490,000 1,369,918
Long-term borrowings 76,108 -
Total liabilities 9,903,447 10,390,255
Total shareholders' equity 1,226,061 1,274,283
Tangible common equity(1)
1,226,045 1,169,358
Years Ended December 31,
(dollars in thousands except per share data) 2024 2023 2022
Consolidated Statements of Operations:
Interest income $ 687,563 $ 625,327 $ 424,613
Interest expense 398,875 334,781 91,746
Provision for credit losses
66,360 31,536 266
Noninterest income 19,939 21,536 23,654
Goodwill impairment
104,168 - -
Noninterest expense (including goodwill impairment)
274,634 153,293 165,098
Income (loss) before income tax expense
(30,240) 127,520 189,680
Income tax expense 16,795 26,986 48,750
Net income (loss)
(47,035) 100,534 140,930
Cash dividends declared 32,117 54,293 55,776
Total net revenue (2)
308,627 312,082 356,521
Per Common Share Data:
Net income (loss), basic $ (1.56) $ 3.31 $ 4.40
Net income (loss), diluted (1.56) 3.31 4.39
Dividends declared 1.07 1.80 1.75
Book value 40.60 42.58 39.18
Tangible book value (3)
40.59 39.08 35.86
Common shares outstanding 30,202,003 29,925,612 31,346,903
Weighted average common shares outstanding, basic 30,157,051 30,345,504 32,004,251
Weighted average common shares outstanding, diluted 30,157,051 30,393,100 32,078,070
Years Ended December 31,
2024 2023 2022
Ratios:
Net interest margin 2.37 % 2.53 % 2.93 %
Efficiency ratio(4)
88.99 % 49.12 % 46.31 %
Return on average assets (0.38) % 0.84 % 1.20 %
Return on average common equity (3.77) % 8.11 % 10.99 %
Return on average tangible common equity(1)
(3.93) % 8.85 % 11.97 %
CET1 capital (to risk weighted assets) 14.63 % 13.90 % 14.03 %
Total capital (to risk weighted assets) 15.86 % 14.79 % 14.94 %
Tier 1 capital (to risk weighted assets) 14.63 % 13.90 % 14.03 %
Tier 1 capital (to average assets) 10.74 % 10.73 % 11.63 %
Tangible common equity ratio 11.02 % 10.12 % 10.18 %
Dividend payout ratio (68.28) % 54.00 % 39.58 %
(dollars in thousands) December 31, 2024 December 31, 2023
Asset Quality:
Nonperforming assets and loans 90+ past due $ 211,449 $ 66,632
Nonperforming assets and loans 90+ past due to total assets 1.90 % 0.57 %
Nonperforming loans to total loans 2.63 % 0.82 %
Allowance for credit losses to loans 1.44 % 1.08 %
Allowance for credit losses to nonperforming loans 54.81 % 131.16 %
Years Ended December 31,
(dollars in thousands) 2024 2023 2022
Asset Quality Activity:
Net charge-offs $ 38,555 $ 18,850 $ 624
Net charge-offs to average loans 0.48 % 0.24 % 0.01 %
(1)Tangible common equity and return on average tangible common equity are non-GAAP financial measures. Tangible common equity is defined as total common shareholders' equity reduced by goodwill and other intangible assets.
(2)Total net revenue calculated as net interest income plus noninterest income.
(3)Tangible book value per common share, a non-GAAP financial measure, is defined as tangible common shareholders' equity divided by total common shares outstanding.
(4)Computed by dividing noninterest expense by total net revenue.
Use of Non-GAAP Financial Measures
Management uses non-GAAP measures because they provide information to investors about the underlying operational performance and trends of the Company. Additionally, certain non-GAAP measures are monitored by regulators. These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures.
The following tables reconcile the GAAP financial measures to the associated non-GAAP financial measures:
(dollars in thousands except per share data) December 31, 2024 December 31, 2023
Tangible common equity
Common shareholders' equity $ 1,226,061 $ 1,274,283
Less: Intangible assets (16) (104,925)
Tangible common equity (Non-GAAP) $ 1,226,045 $ 1,169,358
Tangible common equity ratio
Total assets $ 11,129,508 $ 11,664,538
Less: Intangible assets (16) (104,925)
Tangible assets $ 11,129,492 $ 11,559,613
Tangible common equity ratio (Non-GAAP) 11.02 % 10.12 %
Tangible book value per share calculations
Book value per common share $ 40.60 $ 42.58
Less: Intangible book value per common share (0.01) (3.50)
Tangible book value per common share (Non-GAAP) $ 40.59 $ 39.08
Years Ended December 31,
(dollars in thousands) 2024 2023 2022
Average tangible common equity
Average common shareholders' equity $ 1,246,168 $ 1,240,118 $ 1,281,921
Less: Average intangible assets (50,868) (104,534) (104,248)
Average tangible common equity (Non-GAAP) $ 1,195,300 $ 1,135,584 $ 1,177,673
Return on average tangible common equity
Net income (loss) available to common shareholders $ (47,035) $ 100,534 $ 140,930
Average tangible common equity $ 1,195,300 1,135,584 1,177,673
Return on average tangible common equity (Non-GAAP) (3.93) % 8.85% 11.97%
Operating return on average tangible common equity
Net income (loss) available to common shareholders $ (47,035) $ 100,534 $ 140,930
Add back of goodwill impairment 104,168 - -
Operating net income (Non-GAAP) $ 57,133 $ 100,534 $ 140,930
Average tangible common equity $ 1,195,300 1,135,584 1,177,673
Operating return on average tangible common equity (Non-GAAP) 4.78 % 8.85 % 11.97 %
Years Ended December 31,
(dollars in thousands) 2024 2023 2022
Efficiency ratio
Net interest income $ 288,688 $ 290,546 $ 332,867
Noninterest income
19,939 21,536 23,654
Total net revenue 308,627 312,082 356,521
Noninterest expense 274,634 153,293 165,098
Exclude goodwill impairment (104,168) - -
Operating noninterest expense (Non-GAAP) 170,466 153,293 165,098
Efficiency ratio (Non-GAAP) 88.99 % 49.12 % 46.31 %
Operating efficiency ratio (Non-GAAP) 55.23 % 49.12 % 46.31 %
Operating net income
Net income (loss) $ (47,035) $ 100,534 $ 140,930
Add back of goodwill impairment 104,168 - -
Operating net income (Non-GAAP) $ 57,133 $ 57,133 $ 100,534 $ 140,930
Operating earnings per share (diluted)
Earnings (loss) per share (diluted) (1)
$(1.56) $3.31 $4.39
Add back of goodwill impairment per share (diluted) 3.45 - -
Operating earnings per share (diluted) (Non-GAAP) $1.89 $3.31 $4.39
(1)For periods ended with a net loss, anti-dilutive financial instruments have been excluded from the calculation of earnings per share (diluted). Operating earnings per share (diluted) calculations include the impact of outstanding equity-based awards for all periods.
RESULTS OF OPERATIONS
Year Ended December 31, 2024 Compared with Year Ended December 31, 2023
Overview
Net loss for the year ended December 31, 2024 was $47.0 million, as compared to net income of $100.5 million, for the same period in 2023. This decrease was primarily attributable to the recognition of goodwill impairment of $104.2 million in the second quarter of 2024 and an increase in provision for credit losses of $34.8 million, partially offset by a reduction of income tax expense of $10.2 million. For more information on the drivers and the components of these changes, see the "Provision for Credit Losses" and "Income Tax Expenses" sections below. Refer to the "Intangible Assets" section below for additional details on goodwill impairment..
Net interest income decreased to $288.7 million for 2024 compared to $290.5 million for 2023. Net interest income decreased primarily due to increased interest expense due to higher rates on deposits and borrowings, which was partially offset by an increase in interest income on loans. Total noninterest income in 2024 was $19.9 million, as compared to $21.5 million in 2023, a 7% decrease. For further information on the components and drivers of these changes, see the "Net Interest Income and Net Interest Margin" and "Noninterest Income" sections below. Operating net revenue (non-GAAP) was $308.6 million for the year ended December 31, 2024, as compared to $312.1 million for the same period in 2023.
The net interest margin, which measures the difference between interest income and interest expense as a percentage of earning assets, was 2.37% for 2024 and 2.53% for 2023, a decrease of 16 basis points. The drivers of the change are detailed in the "Net Interest Income and Net Interest Margin" section below.
The provision for credit losses in 2024 was $66.4 million as compared to $31.5 million in 2023. For information on the components and drivers of these changes see "Provision for Credit Losses" section below.
Noninterest expenses in 2024 totaled $274.6 million, as compared to $153.3 million in 2023, a 79% increase. The increase was primarily attributable to the recognition of goodwill impairment of $104.2 million in the second quarter of 2024 and higher FDIC insurance assessments during the year. Additional details on these expenses and other noninterest expenses are provided in "Noninterest Expense" section below.
The efficiency ratio, inclusive of the goodwill impairment charge, which measures the ratio of noninterest expense to total revenue, was 88.99% for 2024 as compared to 49.12% for 2023. Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 55.23%.
At December 31, 2024, total loan balances were $7.9 billion, and remained flat as compared to December 31, 2023, and average loans were 2% higher in 2024 as compared to 2023, driven by originations and advances which outpaced payoffs and paydowns.
Total deposits at December 31, 2024 increased by $323.0 million as compared to December 31, 2023. The increase consists of $1.0 billion in interest bearing deposits which was partially offset by a decrease of $0.7 billion in noninterest bearing deposits. This was primarily driven by a significant increase in short term interest rates and related migration to interest-bearing deposit accounts.
In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented 66% and 68% of average earning assets for 2024 and 2023, respectively. For 2024, as compared to 2023, average loans, excluding loans held for sale, increased by $181.8 million, or 2%, driven by originations and advances that outpaced payoffs and paydowns.
Average investment securities for 2024 were 20% of average earning assets compared to 23% for 2023. The combination of federal funds sold and interest bearing deposits with other banks represented 14% and 9% of average earning assets for 2024 and 2023, respectively.
The ratio of common equity to total assets increased to 11.02% at December 31, 2024 from 10.92% at December 31, 2023, due primarily to a decrease in total assets, in connection with decreases in loans and interest-bearing deposits with banks and other short-term investments. For the year ended December 31, 2024 and 2023, the Company had average tangible common equity, a non-GAAP measure, of $1.2 billion and $1.1 billion, respectively. For 2024, the return on average assets ("ROAA"), inclusive of the goodwill impairment charge, was (0.38)%, as compared to 0.84% for 2023. Total shareholders' equity was $1.23 billion at December 31, 2024 as compared to $1.27 billion at December 31, 2023, a decrease of 4%. The return on average common equity ("ROACE") for 2024 was (3.77)% as compared to 8.11% for 2023. The ROATCE for 2024, a non-GAAP financial measure, was (3.93)% as compared to 8.85% for 2023. The adverse change in returns was primarily attributable to the recognition of goodwill impairment of $104.2 million in 2024. Excluding the goodwill impairment charge, operating return on average tangible common equity (non-GAAP) was 4.78%. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans, investment securities and interest bearing deposits with other banks and other short term investments. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings, which consist primarily of federal funds purchased, advances from secured financing arrangements, including the Federal Home Loan Bank of Atlanta ("FHLB") and Discount Window, and senior notes. Noninterest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
Net interest income in 2024 was $288.7 million compared to $290.5 million in 2023. The 1% decrease for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to increases in average deposit rates (4.25% compared to 4.02%, respectively) and other short-term borrowings (4.90% compared to 4.82%, respectively), which were partially offset by higher average loan balances and yields (6.86% compared to 6.63%, respectively). Net interest income represented 94% and 93% of the Company's total net revenue for the years ended December 31, 2024 and December 31, 2023, respectively,
Net interest margin decreased by 16 basis points to 2.37% in 2024 from 2.53% in 2023. The decrease reflects the increase in the cost of funds on deposits, primarily in connection with an increase in rates, and borrowings, in connection with both an increase in volume and rates, offset by an increase in the yield on loans. The cost of funds on interest-bearing liabilities increased 42 basis points from 3.17% in 2023 to 3.59% in 2024, while the yield on interest-earning assets increased by 20 basis points from 5.45% in 2023 to 5.65% in 2024.
Average loans held for investment were $8.0 billion for the year ended December 31, 2024, compared to $7.8 billion for the same period in 2023. Average investment securities were $2.5 billion for the year ended December 31, 2024, compared to $2.6 billion for the same period in 2023. Average interest-bearing deposits with other banks and other short term investments were $1.7 billion for 2024 compared to $1.0 billion for 2023. Interest income on loans, the largest component of interest income on earning assets, had a yield of 6.86% in 2024, compared to 6.63% in 2023, an increase of 23 basis points.
Average interest-bearing deposits increased from $6.4 billion in the year ended December 31, 2023 to $7.5 billion in the year ended December 31, 2024, while average noninterest bearing demand deposits decreased to $2.0 billion for the year ended December 31, 2024 from $2.5 billion for the year ended December 31, 2023.
Average borrowings decreased from $1.6 billion in the year ended December 31, 2023 to $1.5 billion in the year ended December 31, 2024. Refer to the "Deposits and Other Borrowings" section below for further discussion of deposits and borrowings.
The table below presents the average balances and rates of the major categories of the Company's assets and liabilities for the years ended December 31, 2024, 2023 and 2022. Included in the table are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin, together with net interest income, provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.
Eagle Bancorp, Inc.
Consolidated Average Balances, Interest Yields And Rates (Unaudited)
(dollars in thousands)
Years Ended December 31,
2024
2023 2022
Average
Balance 		Interest Average
Yield /
Rate 		Average
Balance 		Interest Average
Yield /
Rate 		Average
Balance 		Interest Average
Yield /
Rate
Assets
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments $ 1,706,439 $ 88,770 5.20 % $ 1,015,199 $ 52,300 5.15 % $ 1,235,768 $ 13,304 1.08 %
Loans held for sale 3,241 101 3.12 % 1,212 73 6.02 % 15,356 650 4.23 %
Loans (1) (2)
7,997,653 548,288 6.86 % 7,815,832 518,007 6.63 % 7,206,158 358,317 4.97 %
Investment securities available-for-sale (2)
1,473,095 28,774 1.95 % 1,584,239 32,074 2.02 % 2,003,475 33,641 1.68 %
Investment securities held-to-maturity 983,309 21,197 2.16 % 1,057,445 22,586 2.14 % 857,584 17,840 2.08 %
Federal funds sold 10,741 433 4.03 % 9,120 287 3.15 % 48,402 861 1.78 %
Total interest earning assets 12,174,478 687,563 5.65 % 11,483,047 625,327 5.45 % 11,366,743 424,613 3.74 %
Noninterest earning assets 449,904 501,722 475,563
Less: allowance for credit losses 104,020 79,218 74,726
Total noninterest earning assets 345,884 422,504 400,837
Total Assets $ 12,520,362 $ 11,905,551 $ 11,767,580
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Interest bearing transaction $ 1,700,301 $ 60,573 3.56 % $ 1,459,795 $ 46,140 3.16 % $ 893,137 $ 6,721 0.75 %
Savings and money market 3,411,971 139,539 4.09 % 3,176,203 132,374 4.17 % 4,683,850 65,777 1.40 %
Time deposits 2,432,713 120,309 4.95 % 1,774,184 79,030 4.45 % 669,824 10,763 1.61 %
Total interest bearing deposits 7,544,985 320,421 4.25 % 6,410,182 257,544 4.02 % 6,246,811 83,261 1.33 %
Customer repurchase agreements and federal funds purchased 37,872 1,271 3.36 % 36,663 1,218 3.32 % 30,745 356 1.16 %
Other short-term borrowings
1,476,550 72,386 4.90 % 1,521,160 73,253 4.82 % 172,717 3,980 2.30 %
Long-term borrowings 66,321 4,797 7.23 % 69,861 2,766 3.96 % 69,737 4,149 5.95 %
Total interest bearing liabilities 9,125,728 398,875 4.37 % 8,037,866 334,781 4.17 % 6,520,010 91,746 1.41 %
Noninterest bearing liabilities:
Noninterest bearing demand 1,987,886 2,508,687 3,871,773
Other liabilities 160,580 118,880 93,876
Total noninterest bearing liabilities 2,148,466 2,627,567 3,965,649
Shareholders' equity 1,246,168 1,240,118 1,281,921
Total Liabilities and Shareholders' Equity $ 12,520,362 $ 11,905,551 $ 11,767,580
Net interest income $ 288,688 $ 290,546 $ 332,867
Net interest spread 1.28 % 1.28 % 2.33 %
Net interest margin 2.37 % 2.53 % 2.93 %
Cost of funds (3)
3.59 % 3.17 % 0.88 %
(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $17.2 million, $16.7 million and $15.3 million, for the years ended December 31, 2024, 2023 and 2022, respectively.
(2)Interest and fees on loans and investments exclude tax equivalent adjustments.
Rate/Volume Analysis of Net Interest Income
The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities and the changes in net interest income due to changes in interest rates. As the table shows, the decrease in net interest income in 2024 as compared to 2023 was primarily due to increase in interest bearing liabilities replacing non-interest bearing deposits.
Year Ended December 31, 2024 Compared with
Year Ended December 31, 2023
Year Ended December 31, 2023
Compared with
Year Ended December 31, 2022
(dollars in thousands) Change
Due to
Volume 		Change
Due to
Rate 		Total
Increase
(Decrease) 		Change
Due to
Volume 		Change
Due to
Rate 		Total
Increase
(Decrease)
Interest earned on:
Loans $ 12,049 $ 18,232 $ 30,281 $ 30,315 $ 129,375 $ 159,690
Loans held for sale 122 (94) 28 (599) 22 (577)
Investment securities available-for sale (2,250) (1,050) (3,300) (7,040) 5,473 (1,567)
Investment securities held-to-maturity (1,583) 194 (1,389) 4,158 588 4,746
Interest bearing bank deposits 35,611 859 36,470 (2,375) 41,371 38,996
Federal funds sold 51 95 146 (699) 125 (574)
Total interest income 44,000 18,236 62,236 23,760 176,954 200,714
Interest paid on:
Interest bearing transaction 7,602 6,831 14,433 4,264 35,155 39,419
Savings and money market 9,826 (2,661) 7,165 (21,172) 87,769 66,597
Time deposits 29,334 11,945 41,279 17,745 50,522 68,267
Customer repurchase agreements 40 13 53 69 793 862
Borrowings
(2,288) 3,452 1,164 45,216 22,674 67,890
Total interest expense 44,514 19,580 64,094 46,122 196,913 243,035
Net interest income $ (514) $ (1,344) $ (1,858) $ (22,362) $ (19,959) $ (42,321)
Provision for Credit Losses
The provision for credit losses represents the amount of expense charged to current earnings to record the ACL on loans and the ACL on HTM investment securities. The amount of the ACL on loans is based on management's assessment of current expected credit losses in the portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company.
Refer to the discussion under "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations above and in Note 1 to the Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table in the "Allowance for Credit Losses" section which reflects activity in the ACL.
The total provision for credit losses was $66.4 million during the year ended December 31, 2024, as compared to $31.5 million during the year ended December 31, 2023. During the year ended December 31, 2024, the Company's provision for credit losses included a provision of $67.0 million on loans and net charge-offs of $38.6 million on loans. The provision for credit losses on loans for the same period in 2023 was $30.3 million and included $18.9 million of net charge offs.
The change in the provision for credit losses for the year ended December 31, 2024, was primarily attributable to the following factors: 1) specific reserves on individually evaluated non-performing loans; 2) changes in the qualitative component of the model relating to CRE office properties; and, 3) enhancements to the quantitative model during Q1 to include additional economic factors. Additionally, the change in provision for credit losses during the year ended December 31, 2024 was also impacted by the partial charge off of a CRE office loan after an updated valuation was received in the first quarter of 2025.
The provision for loan credit losses for the year ended December 31, 2023 was driven by adjustments to the qualitative components of the CECL model combined with smaller increases in the quantitative components. The changes in qualitative components were due to perceived weakness in the commercial real estate market, in addition to high inflationary environment offset by a reduction in the quantitative reserves based on a decline in individually evaluated loans. The changes in quantitative components were related to changes in the nature and volume of the portfolio, changes in delinquencies and loss experience.
The provision for credit losses for the held-to-maturity securities portfolio was recorded primarily on several corporate bonds. During the year ended December 31, 2024, there was a reversal of provision for credit losses of $645 thousand for the held-to-maturity securities portfolios, compared to a provision expense of $1.2 million for the year ended December 31, 2023.
The provision for credit losses for unfunded commitments is presented separately on the Statement of Operations. This provision considers the probability that unfunded commitments will fund among other factors. There was a reversal of $2.1 million in 2024, compared to $0.3 million reversal in 2023.
Noninterest Income
Noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance ("BOLI") and other income. The following table summarizes the comparative noninterest income for the years ended December 31, 2024 and 2023:
Years Ended December 31,
(dollars in thousands) 2024 2023 Dollar Change Percent Change
Service charges on deposits $ 6,843 $ 6,455 $ 388 6 %
Gain on sale of loans 57 418 (361) (86) %
Net loss on sale of investment securities 14 (11) 25 (227) %
Increase in the cash surrender value of bank-owned life insurance 2,885 2,659 226 8 %
Other income 10,140 12,015 (1,875) (16) %
Total $ 19,939 $ 21,536 $ (1,597) (7) %
Total noninterest income for the year ended December 31, 2024 was $19.9 million as compared to $21.5 million for the year ended December 31, 2023. The 7% decrease was primarily based on the prior year nonrecurring items including income from Small Business Investment Companies ("SBIC") fund and lower swap fees income during the current year.
Noninterest Expense
Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional fees, FDIC insurance assessments and other expenses. The following table summarizes the comparative noninterest expense for the years ended December 31, 2024 and 2023:
Years Ended December 31,
(dollars in thousands) 2024 2023 Dollar Change Percent Change
Salaries and employee benefits $ 87,768 $ 86,096 $ 1,672 2 %
Premises and equipment expenses 11,382 12,606 (1,224) (10) %
Marketing and advertising 5,449 3,359 2,090 62 %
Data processing 14,093 13,083 1,010 8 %
Legal, accounting and professional fees 9,286 10,787 (1,501) (14) %
FDIC insurance 29,009 11,853 17,156 145 %
Goodwill impairment
104,168 - 104,168 100 %
Other expenses 13,479 15,509 (2,030) (13) %
Total $ 274,634 $ 153,293 $ 121,341 79 %
Total noninterest expense was $274.6 million for 2024, as compared to $153.3 million for 2023, a 79% increase. The increase for the year ended December 31, 2024 was primarily due to the goodwill impairment charge of $104.2 million to reduce fully the carrying value of the Company's goodwill. Refer to the "Intangible Assets" section below for additional details. Excluding the goodwill impairment charge, total operating noninterest expense (non-GAAP) was $170.5 million for the year ended December 31, 2024. Refer to the "Use of Non-GAAP Financial Measures" section for additional details and a reconciliation of GAAP to non-GAAP financial measures.
Marketing expenses were $5.4 million and $3.4 million, respectively, for the year ended December 31, 2024 and 2023, a 62% increase. The increase in marketing expenses was primarily due to higher marketing expenses related to our digital banking channel.
FDIC insurance expense was $29.0 million for 2024 as compared to $11.9 million for 2023, an increase of $17.1 million, or 145%. The increases in 2024 compared to 2023 were due to increases in FDIC deposit insurance assessments.
The major components of other expenses include broker fees, franchise taxes, insurance expenses and director compensation. Other expenses were $13.5 million for 2024 as compared to $15.5 million for 2023, a decrease of 13%. The decrease in 2024, as compared to 2023, was primarily due to a reduction in director fees and real estate taxes.
The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 88.99% for the year ended December 31, 2024, as compared to 49.12% for the same period in 2023. The adverse change in the efficiency ratio for the year ended December 31, 2024 was primarily driven by the recognition of goodwill impairment of $104.2 million. Excluding the goodwill impairment charge, the operating efficiency ratio (non-GAAP) was 55.23% for the year ended December 31, 2024. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
As a percentage of average assets, total noninterest expense (annualized) was 2.19% for the year ended December 31, 2024 as compared to 1.29% for the same period in 2023. The higher ratio for the current year is attributable to the goodwill impairment discussed above.
Income Tax Expense
Income tax expense was $16.8 million for 2024 as compared to $27.0 million for 2023. The decrease in the tax provisions over the comparative years ended December 31, 2024 and 2023 was primarily driven by the decreases in pre-tax income period over period. The impact of the change in mix of the components noted above can be seen in the reconciliation of statutory federal income tax rate table in Note 13 to the Consolidated Financial Statements.
The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022 which made significant changes to the U.S. tax law, including the introduction of a corporate alternative minimum tax of 15% of the "adjusted financial statement income" of certain domestic corporations as well as a 1% excise tax on the fair market value of stock repurchases by certain domestic corporations, effective for tax years beginning in 2023. Effective January 1, 2023, the Company became subject to the tax laws under the Inflation Reduction Act. The Company has not experienced and currently does not expect the tax-related provisions of the Inflation Reduction Act to have a material impact on our financial results.
BALANCE SHEET ANALYSIS
Overview
Total assets at December 31, 2024 were $11.1 billion as compared to $11.7 billion at December 31, 2023, a 5% decrease. The decrease in total assets in 2024 was primarily due to decreases in investment securities and interest-bearing deposits with other banks, and the impairment charge of goodwill related to a 2014 acquisition.
The largest component of assets, total loans with an amortized cost basis, were approximately $7.9 billion at December 31, 2024, and remained relatively flat as compared to $8.0 billion at December 31, 2023. There were no loans held for sale at December 31, 2024 and 2023. Refer to the "Loan Portfolio" section below for further discussion on loans.
Investment securities, at amortized cost net of the allowance for credit losses, were $2.3 billion at December 31, 2024 as compared to $2.7 billion at December 31, 2023, a $336.5 million decrease, or 13%. The components and drivers of the change are discussed in the "Investment Securities and Short-Term Investments" section below.
In terms of funding, total deposits at December 31, 2024 were $9.1 billion as compared to $8.8 billion at December 31, 2023, an increase of 4%. Total borrowed funds (excluding customer repurchase agreements) were $566.1 million and $1.4 billion at December 31, 2024 and 2023, respectively. The components and drivers of the change are discussed in the "Deposits and Other Borrowings" section below.
Total shareholders' equity at December 31, 2024 was $1.2 billion as compared to $1.3 billion at December 31, 2023, a 4% decrease. The decrease in shareholders' equity in 2024 was primarily from the net loss from operations and payment of cash dividends, partially offset by an increase in other comprehensive income and share-based compensation.
In order to be considered well-capitalized, the Bank must have a CET1 risk based capital ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank exceed all these requirements and satisfy the capital conservation buffer of 2.5% of CET1 capital. Failure to maintain the required
capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
The Company's capital ratios remain substantially in excess of regulatory minimums and buffer requirements. The total risk based capital ratio was 15.86% at December 31, 2024, as compared to 14.79% at December 31, 2023. The common equity tier one capital ("CET1") risk based capital ratio was 14.63% at December 31, 2024, as compared to 13.90% at December 31, 2023. The tier 1 risk based capital ratio was 14.63% at December 31, 2024, as compared to 13.90% at December 31, 2023. The tier 1 leverage ratio was 10.74% at December 31, 2024, as compared to 10.73% at December 31, 2023.
The ratio of common equity to total assets was 11.02% at December 31, 2024 as compared to 10.92% at December 31, 2023, as common equity levels declined 4% over the year ended December 31, 2024. Book value per share was $40.60 at December 31, 2024, a 4.7% decrease over $42.58 at December 31, 2023. These declines were primarily due to the goodwill impairment charge of $104.2 million.
In addition, the tangible common equity ratio was 11.02% at December 31, 2024, compared to 10.12% at December 31, 2023. Tangible book value per share was $40.59 at December 31, 2024, a 3.9% increase from $39.08 at December 31, 2023. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.
Investment Securities and Short-Term Investments
The tables below and Note 3 to the Consolidated Financial Statements provide additional information regarding the Company's investment securities categorized as "available-for-sale" or AFS and as "held-to-maturity" or HTM. The Company classifies its investment securities as either AFS or HTM. The AFS classification requires that investment securities be recorded at fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any discount accretion or premium amortization) reported as a component of shareholders' equity (accumulated other comprehensive income (loss)), net of deferred income taxes, while securities classified as HTM are recorded and presented at their amortized cost. At December 31, 2024, the Company had a net unrealized loss in AFS securities of $141.5 million with a deferred tax asset of $34.8 million, as compared to a net unrealized loss in AFS securities of $161.9 million with a deferred tax asset of $39.8 million at December 31, 2023.
The AFS portfolio comprises U.S. treasury bonds (2.0% of AFS securities), U.S. agency securities (44.1% of AFS securities) with an average duration of 2.5 years, seasoned MBS that are 100% agency issued (49.3% of AFS securities for residential mortgage-backed and 3.9% for commercial mortgage-backed), which have an average duration of 4 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (0.6% of AFS securities), which have an average duration of 6 years, and corporate bonds (0.1% of AFS securities), which have an average duration of 5.6 years.
The HTM portfolio comprises seasoned MBS that are 100% agency issued (64.5% of HTM securities for residential mortgage-backed and 9.4% for commercial mortgage-backed), which have an average duration of 5.4 years with contractual maturities of the underlying mortgages of up to thirty years, municipal bonds (12.1% of HTM securities), which have an average duration of 6.7 years, and corporate bonds (14.0% of HTM securities), which have an average duration of 4.3 years.
At December 31, 2024, the AFS investment portfolio was $1.3 billion as compared to $1.5 billion at December 31, 2023, a decrease of 16%. At December 31, 2024, the HTM investment portfolio was $0.9 billion as compared to $1.0 billion at December 31, 2023, a decrease of 8%. The investment portfolio is managed to achieve goals related to liquidity, income, interest rate risk management and to provide collateral for customer repurchase agreements and other borrowing relationships.
During the first quarter of 2022, we evaluated our securities portfolio and determined that certain securities will be maintained for the life of the instrument and made a decision to transfer $1.1 billion of securities designated as AFS to HTM, including $237.0 million of securities acquired in the first quarter of 2022 for which the intention to hold to maturity was finalized. The transferred securities had unrealized losses of $66.2 million, and, as of December 31, 2024, $44.8 million remains in accumulated other comprehensive loss and will be amortized ratably over the remaining lives of the securities through accumulated other comprehensive loss. The securities transferred were generally municipal bonds, corporate bonds, bonds that qualify for Community Reinvestment Act credit and MBS with longer final maturity dates.
The following table provides information regarding the composition of the investment securities portfolio at the dates indicated. AFS securities are reported at estimated fair value and HTM securities are reported at amortized cost. At December 31, 2024, the investment portfolio balances for both AFS securities at fair value and HTM securities at amortized cost basis decreased as compared to December 31, 2023, and the composition of portfolio changed, as follows:
December 31,
2024
2023
(dollars in thousands) Fair Value Percent of Total Fair Value Percent of Total
Investment securities available-for-sale:
U.S. treasury bonds $ 24,776 2 % $ 47,901 3 %
U.S. agency securities 558,535 44 % 671,397 45 %
Residential mortgage-backed securities 625,316 49 % 727,353 48 %
Commercial mortgage-backed securities 48,945 4 % 49,564 3 %
Municipal bonds 8,014 1 % 8,490 1 %
Corporate bonds 1,818 - % 1,683 - %
Total $ 1,267,404 100 % $ 1,506,388 100 %
December 31,
2024
2023
(dollars in thousands) Amortized Cost Percent of Total Amortized Cost Percent of Total
Investment securities held-to-maturity:
Residential mortgage-backed securities $ 605,904 65 % $ 670,043 66 %
Commercial mortgage-backed securities 88,575 9 % 90,227 9 %
Municipal bonds 114,060 12 % 125,114 12 %
Corporate bonds 131,414 14 % 132,309 13 %
Total 939,953 100 % 1,017,693 100 %
Allowance for credit losses (1,306) (1,956)
Total held-to-maturity securities, net of ACL $ 938,647 $ 1,015,737
At December 31, 2024, there were no issuers, other than the U.S. Government, U.S. agencies and U.S. Government-sponsored enterprises, whose securities owned by the Company had a book or fair value exceeding 10% of the Company's shareholders' equity.
The following tables provide information, on an amortized cost basis, for AFS and HTM portfolios regarding the expected maturity and weighted-average yield of the investment portfolio at December 31, 2024. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax exempt securities have not been calculated on a tax equivalent basis.
One Year or Less After One Year
Through Five Years 		After Five Years
Through Ten Years 		After Ten Years Total
(dollars in thousands) Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield
Available-for-sale:
U.S. treasury bonds $ 24,988 0.69 % $ - - % $ - - % $ - $ 24,988 0.69 %
U.S. agency securities 163,511 1.18 % 359,242 1.57 % 66,580 1.92 % 10,944 1.25 % 600,277 1.50 %
Residential mortgage-backed securities - - % 4,917 1.83 % 143,010 1.46 % 571,888 1.92 % 719,815 1.83 %
Commercial mortgage-backed securities 5,002 3.33 % 23,220 2.04 % 15,053 2.26 % 9,973 3.58 % 53,248 2.51 %
Municipal bonds - - % - - % - - % 8,607 2.67 % 8,607 2.67 %
Corporate bonds - - % - - % 2,000 5.50 % - - 2,000 5.50 %
Total $ 193,501 1.17 % $ 387,379 1.60 % $ 226,643 1.68 % $ 601,412 1.95 % $ 1,408,935 1.70 %
One Year or Less After One Year
Through Five Years 		After Five Years
Through Ten Years 		After Ten Years Total
(dollars in thousands) Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield 		Amortized
Cost 		Weighted
Average
Yield
Held-to-maturity:
Residential mortgage-backed securities $ - - % $ 691 2.70 % $ 16,867 2.28 % $ 588,346 2.63 % $ 605,904 2.62 %
Commercial mortgage-backed securities - - % 11,602 2.76 % 25,337 2.57 % 51,636 2.64 % 88,575 2.64 %
Municipal bonds 6,946 2.86 % 12,605 2.97 % 26,018 3.00 % 68,491 3.46 % 114,060 3.26 %
Corporate bonds - - % 51,456 4.47 % 79,958 3.84 % - - % 131,414 4.09 %
Total $ 6,946 2.86 % $ 76,354 3.95 % $ 148,180 3.30 % $ 708,473 2.71 % 939,953 2.90 %
Allowance for credit losses (1,306)
Total held-to-maturity securities, net of ACL $ 938,647
Federal funds sold were $2.6 million at December 31, 2024, as compared to $3.7 million at December 31, 2023. These funds represent excess daily liquidity which is invested on an unsecured basis with well capitalized banks, in amounts generally limited both in the aggregate and to any one bank.
Interest bearing deposits with banks and other short-term investments primarily consist of liquid assets held at the Federal Reserve to meet general liquidity needs of the Company, such as future loan demand and future increases in investment securities, among others. Interest bearing deposits with banks and other short-term investments were $619.0 million at December 31, 2024, as compared to $709.9 million at December 31, 2023, a decrease of $90.9 million or 13%, primarily due to decrease in deposits at the Federal Reserve. Refer to the "Deposits and Other Borrowings" section below for further discussion.
The Bank did not hold any time deposits at December 31, 2024 or December 31, 2023.
Loan Portfolio
In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. We believe superior customer service, local decision making and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.
Total loan balances remained relatively flat over the past year as loans outstanding were $7.9 billion at December 31, 2024, as compared to $8.0 billion at December 31, 2023, a decrease of $33.8 million or 0.4%. The loan portfolio mix continues to evolve as the Bank has experienced a reduction in commercial loans, offset by an increase in fundings of ongoing construction projects for commercial and residential properties. Market rates year to date in 2024 for our new loan originations on average have been fairly consistent with the market rates at the end of 2023, since short-term interest rates remained unchanged for most of 2024. In September 2024 and the fourth quarter of 2024, the Federal Reserve adjusted short-term interest rates downwards three times for a total decrease of 100 basis points. We continue to see opportunities for growth in the commercial lending market in our focused sectors; our processes for evaluating these opportunities are designed to ensure they are subject to reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Following origination, we continue to monitor our borrowers' business plans and assess primary and alternative sources for loan repayment and, if necessary, obtain collateral to mitigate credit loss in the event of default.
The Bank has a large portion of its loan portfolio related to real estate, with 83% consisting of commercial real estate and real estate construction loans as of December 31, 2024. Non-owner occupied commercial real estate represented 66% of the loan portfolio while the remaining 17% is represented by the "owner occupied-commercial real estate" and "construction-C&I (owner occupied)" loans.
The following table shows the trends in the composition of the loan portfolio over the past two years. The table reflects loan balances, net of amortized deferred fees and costs, at December 31, 2024 and 2023 by major category.
December 31,
2024
2023
(dollars in thousands) Amount % Amount %
Commercial $ 1,183,341 15 % $ 1,473,766 18 %
PPP loans 287 - % 528 - %
Income producing - commercial real estate 4,064,846 51 % 4,094,614 51 %
Owner occupied - commercial real estate 1,269,669 16 % 1,172,239 15 %
Real estate mortgage - residential 50,535 1 % 73,396 1 %
Construction - commercial and residential 1,210,763 15 % 969,766 12 %
Construction - C&I (owner occupied) 103,259 1 % 132,021 2 %
Home equity 51,130 1 % 51,964 1 %
Other consumer 1,058 - % 401 - %
Total loans 7,934,888 100 % 7,968,695 100 %
Less: allowance for credit losses (114,390) (85,940)
Loans, net(1)
$ 7,820,498 $ 7,882,755
(1)Excludes accrued interest receivable of $42.9 million and $45.3 million at December 31, 2024 and 2023, respectively, which is recorded in other assets.
As noted above, a significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C. metropolitan area and is secured by real estate or other collateral in that market. While our basic market is the Washington, D.C. metropolitan area, the Bank has made loans outside that market where the borrower or its key decision makers have a meaningful relationship with the Bank and generally operate in or are based in our market. Although all of these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the real estate market could continue to have an adverse impact on this portfolio of loans and the Company's earnings and financial position. Management believes that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices and ongoing portfolio monitoring and market analysis.
The Company's concentration in the Washington, D.C. metro area, includes "Washington's Maryland Suburbs," which comprise Frederick, Prince George's and Montgomery counties and "Northern Virginia," which comprises Alexandria, Arlington, Falls Church, Fairfax, Loudoun and Prince William counties. At December 31, 2024, 31.3%, 27.4%, 23.9%, 5.8%, and 11.6% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. At December 31, 2023, 31.5%, 26.4%, 25.1%, 5.5% and 11.5% of the loan portfolio, as a percentage of total amortized cost, was concentrated in Washington D.C., Washington's Maryland Suburbs, Northern Virginia, other counties in Maryland and other locations in the United States, respectively. While we remain cautious with regard to CRE market conditions, principally office, the strength of the Washington D.C. metro area in certain sectors, particularly multi-family commercial real estate and the housing market, continue to drive premiums for well-located properties.
As part of its lending strategy, the Company maintains a substantial portfolio of CRE loans, with $6.5 billion and $6.1 billion, or 81.5% and 77.0% of total loans, of amortized cost outstanding at December 31, 2024 and December 31, 2023, respectively. Management meets regularly in order to monitor its existing CRE loan portfolio and to evaluate the pipeline for CRE loan investment. Income producing CRE loans collateralized by office properties comprised approximately $862.2 million and $949.0 million, or 10.9% and 11.9% of total loans, at December 31, 2024 and December 31, 2023, respectively.
Office loans within Washington D.C., Washington's Maryland Suburbs and Northern Virginia were $795.0 million and $879.0 million, or 10.0% and 11.0% of total loans, at December 31, 2024 and December 31, 2023, respectively. As a percentage of total principal balance of income producing - CRE office loans, 39.0%, 35.7%, 15.0%, and 10.3% were located in Washington's Maryland Suburbs, Northern Virginia, the central business district of Washington D.C., and Washington, D.C. (outside the central business district), respectively, at December 31, 2024.
The following table summarizes the Company's income producing - commercial real estate loans, at principal, by collateral location and type, at December 31, 2024:
December 31, 2024
Maryland
Virginia
(dollars in thousands)
Washington D.C.
Washington Suburbs
Other
Northern Virginia
Other
Other
Total
Percent of Total
Collateral Type:
Hotel & motel
$136,553 $80,445 $82,634 $60,223 $ - $21,545 $ 381,400 10%
Industrial
874 72,209 40,370 17,731 11,258 - 142,442 4%
Mixed use
323,391 44,175 371 54,497 25,687 4,970 453,091 11%
Multifamily
372,756 192,117 313 120,330 84,975 48,173 818,664 20%
Office
220,632 327,187 4,254 248,855 63,023 - 863,951 21%
Retail
78,818 99,962 60,770 74,167 65,162 1,509 380,388 9%
Single / 1-4 Family & Res. Condo
68,968 2,573 2,111 10,239 6,460 4,043 94,394 2%
Other
179,784 181,378 30,435 441,885 8,572 97,168 939,222 23%
Total
$1,381,776 $1,000,046 $221,258 $1,027,927 $265,137 $177,408 $4,073,552 100%
Percent of total
34 % 25 % 5 % 25 % 7 % 4 % 100 %
Percent of Principal by Loan Size:
Less than $1 million
2 % 2 % 3 % 1 % 2 % 1 %
$1 million to $5 million
9 % 10 % 20 % 7 % 11 % 11 %
$5 million to $10 million
7 % 7 % 25 % 5 % 12 % 31 %
$10 million to $25 million
19 % 13 % 32 % 34 % 41 % 8 %
$25 million to $50 million
47 % 28 % 20 % 41 % 34 % 21 %
Greater than $50 million
16 % 40 % - % 12 % - % 28 %
Total
100 % 100 % 100 % 100 % 100 % 100 %
At December 31, 2024 and 2023, $287.0 million and $240.7 million, respectively, of principal of CRE loans collateralized by office properties were criticized or classified.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital.
The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of December 31, 2024, non-owner occupied commercial real estate loans (including construction, land and land development loans) represented 372.6% of consolidated risk based capital. Although growth in that segment over the past 36 months at 26.8% did not exceed the 50% threshold laid out in the regulatory guidance, we expect the heightened supervisory expectations to continue to apply to us given the federal banking regulators' general focus on commercial real estate exposures at banks. Construction, land and land development loans represented 122.6% of consolidated risk based capital. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain risk management procedures and underwriting criteria with respect to its commercial real estate portfolio designed to address the risks inherent in that asset class. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to raise additional capital, increasing our funding costs or diluting our shareholders, or take other action to retain capital, adversely affecting shareholder returns. The Company seeks to manage the risks relating to commercial real estate and its capital adequacy through the development and implementation of its Capital Policy and Capital Plan, the preparation of pro-forma projections including stress testing and the development of internal minimum targets for regulatory capital ratios that are subject to approval by the Board of Directors (the "Board") and in excess of well capitalized ratio requirements.
The Company monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries or similar collateral. An industry for this purpose is defined as a group of businesses that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.
Certain directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of the Company's lending business; were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties; and, in the opinion of management, did not involve more than the normal risk of collectability or present other unfavorable features. Refer to Note 4 to the Consolidated Financial Statements for further detail regarding related party loans.
Loan Maturity
The following table sets forth the time to contractual maturity of the loan portfolio as of December 31, 2024. Loans are shown in the period based on final contractual maturity. Demand loans, having no contractual maturity, and overdrafts are reported as due in one year or less.
Due In
(dollars in thousands) Total One Year or Less Over One to Five Years Over Five to Fifteen Years Over Fifteen Years
Commercial $ 1,183,341 $ 427,540 $ 636,875 $ 115,432 $ 3,494
PPP loans 287 - 287 - -
Income producing - commercial real estate(1)
4,064,846 1,754,660 2,076,013 234,173 -
Owner occupied - commercial real estate 1,269,669 244,067 463,328 322,976 239,298
Real estate mortgage - residential 50,535 12,566 28,716 376 8,877
Construction - commercial and residential 1,210,763 633,672 543,766 3,584 29,741
Construction - C&I (owner occupied) 103,259 27,561 2,714 9,796 63,188
Home equity 51,130 2,570 740 1,281 46,539
Other consumer 1,058 719 15 - 324
Total $ 7,934,888 $ 3,103,355 $ 3,752,454 $ 687,618 $ 391,461
Loans with:
Predetermined fixed interest rate
Commercial $ 320,770 $ 92,282 $ 152,054 $ 76,434 $ -
PPP loans 287 - 287 - -
Income producing - commercial real estate 1,930,656 702,661 1,077,264 150,731 -
Owner occupied - commercial real estate 663,483 194,330 251,802 159,625 57,726
Real estate mortgage - residential 46,761 11,571 27,572 43 7,575
Construction - commercial and residential 53,573 19,655 33,918 - -
Construction - C&I (owner occupied) 10,283 3,415 1,748 5,120 -
Home equity 404 207 - 197 -
Other consumer 74 44 15 - 15
Total $ 3,026,291 $ 1,024,165 $ 1,544,660 $ 392,150 $ 65,316
Floating or adjustable interest rate
Commercial $ 862,571 $ 335,257 $ 484,821 $ 38,999 $ 3,494
Income producing - commercial real estate 2,134,190 1,052,000 998,748 83,442 -
Owner occupied - commercial real estate 606,186 49,738 211,526 163,350 181,572
Real estate mortgage - residential 3,774 994 1,144 334 1,302
Construction - commercial and residential 1,157,190 614,018 509,848 3,583 29,741
Construction - C&I (owner occupied) 92,976 24,146 966 4,676 63,188
Home equity 50,726 2,362 741 1,084 46,539
Other consumer 984 675 - - 309
Total $ 4,908,597 $ 2,079,190 $ 2,207,794 $ 295,468 $ 326,145
(1)Income producing CRE office loans with total principal of $864.0 million and multifamily loans with total principal of $818.7 million at December 31, 2024 are included within income producing - commercial real estate. The charts below represent their maturities schedules.
Allowance for Credit Losses
The ACL is an estimate based on many factors which reflect management's assessment of the risk in the loan portfolio. Those factors include economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio and internal loan processes of the Company and Bank. A full discussion of the accounting for ACL is contained in Note 1 to the Consolidated Financial Statements and activity in the ACL is contained in Note 4 to the Consolidated Financial Statements. Also, please refer to the discussion under the caption "Critical Accounting Policies and Estimates" within Management's Discussion and Analysis of Financial Condition and Results of Operation for further discussion of the methodology which management employs to maintain an adequate ACL, as well as the discussion under the caption "Provision for Credit Losses" for a discussion of the Company's calculation of the provision for credit losses during the years ended December 31, 2024 and 2023.
The ACL for loans at December 31, 2024 was $114.4 million, which reflected a $28.5 million increase from $85.9 million at December 31, 2023, reflecting a provision for credit losses of $67.0 million and $38.6 million in net charge-offs during the year ended December 31, 2024. Net charge-offs of $38.6 million during 2024 represented 0.48% of average loans held for investment, an increase from net charge-offs of $18.9 million during 2023, which represented 0.24% of average loans held for investment. Net charge-offs during the year ended December 31, 2024, included $29.0 million of charge offs on two CRE office lending relationships. The ACL represented 1.44% of total loans at December 31, 2024 as compared to 1.08% at December 31, 2023. At December 31, 2024, the allowance represented 55% of nonperforming loans as compared to 131% at December 31, 2023.
As part of its comprehensive loan review process, the Bank's Risk Committee evaluates loans which are past due 30 days or more. The Committee makes an assessment of the conditions and circumstances surrounding delinquent and potential problem loans. The Bank's loan policy requires that loans be placed on nonaccrual if they are 90 days past due or if their collection is deemed to be doubtful, unless they are well secured and in the process of collection. The Credit Administration department analyzes the status of development and construction projects, including sales activities and utilization of interest reserves in order to assess potential increased levels of risk which may require additional reserves.
As the loan portfolio and ACL review processes continue to evolve there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance maintained. Management did conduct sensitivity analysis on the CECL model by using Moody's upside and downside scenarios across the forecast period.
At December 31, 2024 and 2023, the Company had $208.7 million and $65.5 million, respectively, of loans classified as nonperforming. Please refer to Note 1 to the Consolidated Financial Statements under the caption "Loans" for a discussion of the Company's policy regarding individual evaluation of loans to record a provision for expected credit losses. Please refer to the "Nonperforming Assets" section for a discussion of problem and potential problem assets.
As of December 31, 2024 and 2023, loans rated special mention had an amortized cost of $244.8 million and $207.1 million, respectively, and loans rated substandard had an amortized cost of $426.4 million and $335.8 million, respectively. The increases in special mention and substandard loans were primarily attributable to additions in CRE loans in the Washington, D.C. metropolitan area, particularly in income producing - commercial real estate and commercial loans. The increases in substandard loans were primarily attributable to certain CRE loans in the Washington, D.C. metropolitan area. At December 31, 2024, 100% and 46% of special mention and substandard loans, respectively, were current. Based upon their status as potential problem loans, loans risk rated special mention or substandard receive heightened scrutiny and ongoing intensive risk
management. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio.
At December 31, 2024 and 2023, the Company's performing office coverage ratio, which calculates the ACL attributable to loans collateralized by performing office properties as a percentage of total loans, was 3.81% and 1.91%, respectively.
Portfolio management and the risk rating process are core parts of the Company's credit risk management, including for commercial real estate loans. The Bank conducts analysis of credit requests and the management of problem credits. The Bank has developed and implemented analytical procedures for evaluating credit requests, has refined the Company's risk rating system and has adopted enhanced monitoring of the loan portfolio and the adequacy of the ACL, in particular on its commercial real estate and construction loans (including those collateralized by office properties). These analyses include stress testing. The loan portfolio analysis process is ongoing and proactive to support the Company's objective of maintaining a portfolio of quality credits and quickly identifying weaknesses before they become more severe.
The following table sets forth activity in the allowance for credit losses:
Years Ended December 31,
(dollars in thousands)
2024
2023 2022
Balance at beginning of year $ 85,940 $ 74,444 $ 74,965
Charge-offs:
Commercial (4,906) (2,020) (1,561)
Income producing - commercial real estate (30,284) (11,817) -
Owner occupied - commercial real estate (3,800) - (1,355)
Construction - commercial and residential (129) (5,636) -
Other consumer (88) (50) (79)
Total charge-offs (39,207) (19,523) (2,995)
Recoveries:
Commercial 373 576 713
Income producing - commercial real estate 185 - -
Owner occupied - commercial real estate 94 55 25
Construction - commercial and residential - 36 1,627
Other consumer - 6 6
Total recoveries 652 673 2,371
Net charge-offs (38,555) (18,850) (624)
Provision for credit losses - loans 67,005 30,346 103
Balance at end of year $ 114,390 $ 85,940 $ 74,444
Ratio of allowance for credit losses to total loans outstanding at year end 1.44 % 1.08 % 0.97 %
Ratio of net charge-offs during the year to average loans outstanding during the year 0.48 % 0.24 % 0.01 %
The following table reflects the allocation of the ACL at December 31, 2024 and 2023 by loan category and the percentage of allowance in each category. The allocation of the allowance at December 31, 2024 includes allowance for credit losses of $17.1 million against individually assessed loans of $208.7 million, as compared to allowance for credit losses of $0.6 million against individually assessed loans of $66.1 million at December 31, 2023. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the usage of the allowance to absorb losses in any category.
December 31,
2024
2023
(dollars in thousands) Amount % of Total ACL % of Total Loans Amount % of Total ACL % of Total Loans
Commercial $ 19,390 17 % 15 % $ 17,824 21 % 18 %
Income producing - commercial real estate 55,185 48 % 51 % 40,050 47 % 51 %
Owner occupied - commercial real estate 22,654 19 % 16 % 14,333 16 % 15 %
Real estate mortgage - residential 610 1 % 1 % 861 1 % 1 %
Construction - commercial and residential 14,585 13 % 15 % 10,198 12 % 12 %
Construction - C&I (owner occupied) 1,282 1 % 1 % 1,992 2 % 2 %
Home equity 653 1 % 1 % 657 1 % 1 %
Other consumer 31 - % - % 25 - % - %
Total $ 114,390 100 % 100 % $ 85,940 100 % 100 %
Nonperforming Assets
The Company's level of nonperforming assets, which is comprised of the amortized cost of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of loan modifications, and the carrying value of other real estate owned ("OREO") totaled $211.4 million at December 31, 2024, representing 1.90% of total assets, as compared to $66.6 million at December 31, 2023, representing 0.57% of total assets. The increase is primarily due to the increase in nonperforming loans discussed below.
The Company had no accruing loans that were 90 days or more past due at December 31, 2024 or December 31, 2023. Management prioritizes remaining attentive to early signs of deterioration in borrowers' financial conditions and to taking action designed to mitigate risk. The Company places loans on nonaccrual status if it deems collection to be doubtful. The Company believes, based on its loan portfolio risk analysis that its ACL at 1.44% of total loans at December 31, 2024, is adequate to absorb expected credit losses within the loan portfolio at that date.
Total nonperforming loans had an amortized cost of $208.7 million at December 31, 2024, representing 2.63% of total loans, compared to $65.5 million at December 31, 2023, representing 0.82% of total loans. The increase was primarily from the addition of four income-producing commercial real estate loans and one owner-occupied commercial real estate loan.
The CECL standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on nonaccrual, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan's original contract rate and include adjustments for risk of default.
Nonperforming assets include loans that the Company considers to be individually assessed. Individually assessed loans are defined as those as to which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement. Loans that do not share risk characteristics consistent with similar loans 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 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. Generally, all appraisals associated with individually assessed loans are updated on a not less than annual basis.
The Company evaluates all loan modifications according to the accounting guidance to determine if the modification results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Modifications with terms not as favorable to the Company as the terms for comparable loans to other customers with similar collection risk who are not refinancing or restructuring a loan with the Company and which have a direct impact on cash flows are considered modified loans to borrowers experiencing financial difficulty. A loan that is considered a modified loan may be evaluated for disclosure if the commitment is $500 thousand or greater. 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.
Commercial and consumer loans modified are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
During the year ended December 31, 2024, the Bank modified 41 loans with a total amortized cost of $401.8 million at December 31, 2024 (5.1% of the loan portfolio). These loans received extended loan terms of between approximately one to 36 months.
As of December 31, 2024, the payment status of six loans that were modified in the preceding twelve months, which totaled $137.1 million of amortized cost basis, including two loans with an amortized cost basis of $5.4 million were 30 to 89 days past due, and the other four loans with a total amortized cost basis of $131.7 million were on nonaccrual status. As of December 31, 2024, additional loans that were modified in the preceding twelve months which were performing under their modified terms totaled $264.7 million of amortized cost basis.
Management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant, and therefore, such modifications are not considered to be loan restructurings to a borrower experiencing financial difficulty, as the accommodation of a borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing.
Included in nonperforming assets at December 31, 2024 is OREO of $2.7 million, consisting of five foreclosed properties, compared to OREO of $1.1 million, consisting of three foreclosed properties at December 31, 2023. OREO properties are carried at the lower of cost or at fair value less estimated costs to sell.
It is the Company's policy to generally obtain third party appraisals prior to foreclosure and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, a scenario in which the Company is considering legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There were two OREO sales in 2024 and two in 2023, generating proceeds of $656 thousand and $987 thousand, respectively.
The following table shows the amounts of nonperforming assets, including loans at amortized cost and OREO at the lower of cost or fair value less estimated costs to sell, at the dates indicated:
(dollars in thousands) December 31, 2024 December 31, 2023
Nonaccrual Loans:
Commercial $ 2,048 $ 2,049
Income producing - commercial real estate 168,454 40,926
Owner occupied - commercial real estate 37,744 19,836
Real estate mortgage - residential 157 1,946
Construction - commercial and residential - 525
Home equity 303 242
Total nonperforming loans (1)
208,706 65,524
Other real estate owned 2,743 1,108
Total nonperforming assets $ 211,449 $ 66,632
Coverage ratio, allowance for credit losses to total nonperforming loans 55 % 131 %
Ratio of nonperforming loans to total loans 2.63 % 0.82 %
Ratio of nonperforming assets to total assets 1.90 % 0.57 %
(1)Gross interest income of $8.8 million, and $4.2 million would have been recorded for 2024, and 2023, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans was $4.1 million, and $1.5 million at December 31, 2024 and 2023, respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company's policy for placing loans on nonaccrual status.
Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.
At December 31, 2024, there were $426.4 million of Substandard loans. Based upon their status as potential problem loans, loans risk rated special mention or substandard receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company's loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio.
Other Earning Assets
Bank owned life insurance at December 31, 2024 amounted to $115.8 million, as compared to $112.9 million at December 31, 2023. Refer to Note 18 to Consolidated Financial Statements for further detail.
Intangible Assets
The Company recognized a servicing asset for the computed value of servicing fees on the sales of multifamily FHA loans prior to selling those in 2024. The Company currently recognizes a servicing asset for the guaranteed portion of Small Business Administration ("SBA") loans and other loans sold with retained servicing which is in excess of the normal servicing fees. Assumptions related to loan term and amortization are made to arrive at the initial recorded value, which is included in intangible assets, net, on the Consolidated Balance Sheets. At December 31, 2024 and 2023, the balance of excess servicing fees was $16 thousand and $37 thousand, respectively, and were amortized as a reduction of actual service fees collected, which is a component of other income.
In 2008, the Company recorded an unidentified intangible asset (goodwill) incident to the acquisition of Fidelity of $2.2 million. In 2014, the Company recorded an initial amount of unidentified intangible (goodwill) incident to the acquisition of Virginia Heritage of approximately $102 million.
During the second quarter ended June 30, 2024, Management determined that a triggering event had occurred as a result of the share price trading under book value for more than four quarters due to changes in macroeconomic conditions and market volatility in the financial markets and the banking industry due to the impact from rising interest rates. 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 sole reporting unit as of May 31, 2024 which resulted in a determination that goodwill had become fully impaired. The goodwill impairment charge of $104.2 million reduced fully the carrying value of the Company's
goodwill as of May 31, 2024. The impaired goodwill is primarily related to the acquisition of the Virginia Heritage Bank in October 2014. The impairment charge did not impact our cash flows, liquidity ratios, core operating performance, or regulatory capital ratios.
The method employed to determine the fair value of the reporting unit was a combination of a risk-weighted income and market valuation methodologies, comprised of the discounted cash flow method, the guideline public company method and the guideline transaction method. Significant judgment is necessary in the determination of the fair value of a reporting unit. Refer to "Critical Accounting Policies" for additional details.
Refer to Note 7 to the Consolidated Financial Statements for information on the initial and current carrying values as well as additions and amortization.
Deposits and Other Borrowings
The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, Negotiable Order of Withdrawal ("NOW") accounts, savings accounts, and certificates of deposits. The deposit base includes transaction accounts, time and savings accounts and accounts which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank regularly utilizes alternative funding sources such as secured borrowings from the FHLB, federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms. Additionally, the Bank participated in the BTFP established by Federal Reserve Bank in March 2023. The Federal Reserve announced in January 2024 that the BTFP will stop originating new loans on March 11, 2024, as scheduled. In January 2024, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program, each at an interest rate of 4.76% and a maturity date in January 2025. These loans were repaid in the fourth quarter of 2024.
For the year ended December 31, 2024, deposits were $9.1 billion as compared to $8.8 billion at December 31, 2023, an increase of 4%. The increase was primarily attributable to a $558.2 million increase in interest bearing time deposits and a $285.2 million increase in savings and money market accounts, offset by a $734.7 million reduction in noninterest bearing deposits. These deposit changes were the result of growth in time deposits from the company's digital acquisition channel, partially offset by a decline in deposits from a third party payment processor related to the fluctuations in deposit levels resulting from its business, as well as declines in some public and brokered fundings.
Noninterest bearing deposits decreased $734.7 million or 32% to $1.5 billion at December 31, 2024 as compared to $2.3 billion at December 31, 2023, while interest bearing deposits increased by $499.5 million, or 12%. Within interest bearing deposits, money market and savings accounts collectively amounted to $3.6 billion at December 31, 2024, or 39% of total deposits, as compared to $3.3 billion, or 38% of total deposits, at December 31, 2023, an increase of $285.2 million, or 9%.
No single depositor represented more than 10% of total deposits as of December 31, 2024. The ten largest depositors not associated with brokered pass-through relationships represented approximately 23% of total deposits in the aggregate as of December 31, 2024. The Company maintains a significant deposit relationship with a third-party payments processor, whose business results in deposit inflows and outflows on an ongoing basis, which contributes to variations in period end compared to average deposit balances.
Average total deposits for the year ended December 31, 2024 were $9.5 billion, as compared to $8.9 billion for the same period in 2023, a 7% increase.
Time deposits were $2.8 billion at December 31, 2024, which was 30% of deposits. This was an increase from $2.2 billion at December 31, 2023, which was 25% of deposits. The increase in time deposits was driven by growth in the Company's digital acquisition channel.
The following table summarizes time deposits in excess of $250 thousand by maturity:
(dollars in thousands) December 31, 2024 December 31, 2023
Three months or less $ 189,817 $ 119,880
More than three months through six months 387,849 318,353
More than three months through twelve months 710,021 368,103
Over twelve months 421,530 726,758
Total $ 1,709,217 $ 1,533,094
Maturities of time deposits with balances of $250 thousand or more represented 19% and 17% of total deposits as of December 31, 2024 and 2023, respectively. See Note 10 to the Consolidated Financial Statements for additional information
regarding the maturities of time deposits and the Average Balances Table in the "Net Interest Income and Net Interest Margin" section for the average rates paid on interest-bearing deposits. Time deposits of $250 thousand or more can be more volatile and more expensive than time deposits of less than $250 thousand. However, because the Bank focuses on relationship banking, and its marketplace demographics are favorable, its historical experience has been that large time deposits have not been more volatile or significantly more expensive than smaller denomination certificates.
From time to time, when appropriate in order to fund strong loan demand or account for increased deposit outflow, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from a regional brokerage firm and other national brokerage networks, including IntraFi Network, LLC ("IntraFi"). Additionally, the Bank participates in the CDARS and the ICS products, which provide for reciprocal ("two-way") transactions among banks facilitated by IntraFi for the purpose of maximizing FDIC insurance. ICS also allows for the sale of deposits into the IntraFI Network ("One-Way Sale") which provides FDIC insurance for the depositor without reciprocal deposits returned to the Bank. Deposits sold through the IntraFi One-Way Sale process are not included in the Bank's deposit totals.The sale of ICS deposits allows the Bank to moderate the fluctuation of deposit balances. As of December 31, 2024, the Bank sold $115.3 million through the IntraFi One-Way Sale network. The total of reciprocal deposits at December 31, 2024 was $1.4 billion (16% of total deposits) as compared to $1.7 billion (19% of total deposits) at December 31, 2023. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank, but there can be no assurance that they will continue to be adequate or appropriate to meet our liquidity needs. The Bank also is able to obtain one way CDARS deposits and participates in IntraFi's Insured Network Deposit Program, ("IND"). The Bank had $894.7 million and $786.5 million of IND brokered deposits as of December 31, 2024 and 2023, respectively. However, to the extent that the condition or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, or if aggregate funding available to banks change due to changes in the marketplace, we may experience an outflow of brokered deposits or difficulty with obtaining them in the future. In that event we would be required to obtain alternate sources for funding, which may increase our cost of funds and negatively impact our net interest margin.
We have used brokered deposits and intend to continue to use brokered deposits as one of our funding sources to support future growth. At December 31, 2024, total brokered deposits were $4.0 billion, or 43.61% of total deposits, of which $1.4 billion were attributable to CDARS and ICS two-way accounts. At December 31, 2023, total brokered deposits (which did not include the CDARS and ICS two-way) were $2.5 billion, or 28.8% of total deposits. These brokered deposits were comprised of savings, money market and other interest-bearing transaction accounts of $2.7 billion and $1.1 billion, and time deposits of $1.3 billion and $1.5 billion at December 31, 2024 and 2023, respectively. The increase in the proportion of total deposits classified as brokered deposits reflected that CDARS and ICS two-way were included in brokered deposits at December 31, 2024. The Company uses the Call Report definitions for regulatory reporting by the Bank to classify its deposits as brokered deposits.
At December 31, 2024 and 2023, total deposits included estimated totals of $2.2 billion and $2.8 billion of uninsured deposits, which represented 24% and 31% of total deposits, respectively. The decrease in the percentage of the Bank's deposits that are uninsured was in part due to customers' increased use of the products facilitated by IntraFi that enable customers to maximize FDIC deposit insurance coverage for their deposits.
At December 31, 2024, the Company had $1.5 billion in noninterest bearing demand deposits, representing 17% of total deposits compared to $2.3 billion of noninterest bearing demand deposits at December 31, 2023, or 26% of total deposits. The decrease in noninterest bearing demand deposits was offset by the increase in time deposits during the year ended December 31, 2024, due to continued elevated interest rates in 2024. Average noninterest bearing deposits over total deposits for years ended December 31, 2024 and 2023 were 21% and 28%, respectively. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.
As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or "customer repurchase agreement," allowing qualifying businesses to earn interest on short-term excess funds, which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $33.2 million at December 31, 2024 compared to $30.6 million at December 31, 2023. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. agency securities and/or U.S. agency backed MBS. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.
At December 31, 2024, the Company had $2.8 billion in time deposits, an increase of $0.6 billion from year end December 31, 2023. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered certificates of deposits ("CDs") to meet the needs of its community of savers and as part of its interest rate
risk management and liquidity planning. Throughout the year, the Bank raised rates in most of its time deposit accounts in response to the continued elevated interest rate environment.
The following tables summarize the Company's borrowings at December 31, 2024 and 2023 and activities on borrowings for the years ended December 31, 2024 and 2023:
(dollars in thousands) Borrowings - Principal Unamortized Deferred Issuance Costs Net Borrowings Outstanding
Interest Rates (1)
December 31, 2024
Customer repurchase agreements $ 33,157 $ - $ 33,157 2.67 %
Short-term borrowings:
FHLB 490,000 - 490,000 4.81 %
Long-term borrowings:
Senior notes
77,665 (1,557) 76,108 10.00 %
Total $ 600,822 $ (1,557) $ 599,265
December 31, 2023
Customer repurchase agreements $ 30,587 $ - $ 30,587 3.42 %
Short-term borrowings:
FRB BTFP secured borrowings 1,300,000 - 1,300,000 4.53 %
Subordinated notes 70,000 (82) 69,918 5.75 %
Total $ 1,400,587 $ (82) $ 1,400,505
Years Ended December 31,
2024
2023
(dollars in thousands)
Average Daily Balance (2)
Maximum Month-End Balance (2)
Average Daily Balance (2)
Maximum Month-End Balance (2)
Customer repurchase agreements and federal funds purchased $ 37,872 $ 44,454 $ 36,663 $ 54,851
Short-term borrowings:
FHLB secured borrowings
$ 373,544 $ 601,100 $ 549,522 $ 1,770,156
FRB: BTFP secured borrowings
$ 1,103,005 $ 1,800,000 $ 971,507 $ 1,300,000
Subordinated notes, 5.75% $ 47,049 $ 70,000 $ 70,000 $ 70,000
Long-term borrowings:
Senior notes
$ 19,735 $ 77,665 $ - $ -
(1)Represent the weighted average interest rate on customer repurchase agreements, borrowings outstanding and the coupon interest rate on the subordinated notes, which approximates the effective interest rate.
(2)The average daily balance and maximum month-end balance are calculated on the principal balance on the borrowings.
Outstanding short-term advances and borrowings are part of the overall asset liability strategy to support loan growth.
The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at December 31, 2024 and 2023.
At December 31, 2024 and 2023, the Company had outstanding balances of $490.0 million and $0.0 million, respectively, of FHLB advances borrowed as part of the overall asset liability strategy. Outstanding FHLB advances are secured by collateral consisting of specifically pledged marketable investment securities, a blanket lien on qualifying loans in the Bank's commercial mortgage, residential mortgage and home equity loan portfolios.
Additionally, at December 31, 2024, the Company had no advances outstanding under the BTFP, and $1.3 billion, outstanding at December 31, 2023. In March, 2023, the Federal Reserve announced that it would make available additional funding to eligible depository institutions through the creation of a new BTFP, which provided eligible depository institutions, including the Company's subsidiary bank, EagleBank, an additional source of liquidity. This program has ended as scheduled.
The subordinated notes outstanding at December 31, 2023 comprised the Company's August 5, 2014 issuance of $70.0 million of subordinated notes, which matured and were repaid in September 2024.
On September 30, 2024, the Company closed a private placement of its 10.00% senior unsecured debt totaling $77.7 million maturing on September 30, 2029 (the "2029 Senior Notes" or "Original Notes"). At December 31, 2024, the carrying value of these 2029 Senior Notes was $76.1 million which reflected $1.6 million in unamortized deferred financing costs that are being amortized over the life of the 2029 Senior Notes.
In connection with the issuance of the 2029 Senior Notes, the Company also entered into a registration rights agreement dated September 30, 2024 with the purchasers of the 2029 Senior Notes (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company filed an exchange offer registration statement with the SEC to exchange the Senior Notes for substantially identical notes registered under the Securities Act (the "Exchange Notes"). The terms of the Exchange Notes are identical to the terms of the Original Notes, except that the transfer restrictions and registration rights applicable to the Original Notes do not apply to the Exchange Notes. The Company completed the exchange offer on January 16, 2025.
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table shows details on these fixed and determinable obligations as of December 31, 2024, in the time period indicated.
(dollars in thousands) Within One
Year 		One to
Three Years 		Three to
Five Years 		Over Five
Years 		Total
Deposits without a stated maturity (1)
$ 6,355,415 $ - $ - $ - $ 6,355,415
Time deposits (1)
2,210,348 522,376 42,939 - 2,775,663
Borrowed funds (2)
523,157 - 76,108 - 599,265
Operating lease obligations 5,060 6,105 5,046 7,604 23,815
Outside data processing(3)
5,857 13,059 7,258 - 26,174
George Mason sponsorship (4)
688 1,400 1,400 3,975 7,463
LIHTC investments(5)
15,110 4,769 665 429 20,973
Total $ 9,115,635 $ 547,709 $ 133,416 $ 12,008 $ 9,808,768
(1)Excludes accrued interest payable at December 31, 2024.
(2)Borrowed funds include customer repurchase agreements and other short-term and long-term borrowings.
(3)The Bank has outstanding obligations under its current core data processing contract that expires in June 2029.
(4)The Bank has the option of terminating the George Mason University ("George Mason") agreement at the end of contract year 15 (that is, effective June 30, 2030). Should the Bank elect to exercise its right to terminate the George Mason contract, its contractual obligation would decrease by $3.6 million for the option period (years 16-20).
(5)Low Income Housing Tax Credits ("LIHTC") expected payments for unfunded affordable housing commitments.
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company's loans outstanding.
Unfunded loan commitments are agreements whereby the Bank has made a commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract, and the borrower has accepted the commitment in writing. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Collateral obtained varies and may include certificates of deposit, accounts receivable, inventory, property and equipment, residential and CRE. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since lines of credit may expire without being drawn, the total unfunded line of credit amount does not necessarily represent future cash requirements.
Letters of credit include standby and commercial letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank's customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary. At December 31, 2024, approximately 71% of the dollar amount of standby letters of credit was collateralized.
Loan commitments outstanding and lines and letters of credit at December 31, 2024 and 2023 were as follows:
(dollars in thousands) 2024
2023
Unfunded loan commitments $ 1,318,133 $ 1,981,334
Unfunded lines of credit 88,305 98,614
Letters of credit 69,051 87,146
Total $ 1,475,489 $ 2,167,094
Unfunded loan commitments declined in 2024 by $663.2 million, as compared to 2023, as previously committed construction projects advanced toward completion, while new construction loan commitments during the year were limited as the Bank advanced its strategic goals.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. See Note 19 to the Consolidated Financial Statements for a summary list of loan commitments at December 31, 2024 and 2023.
In connection with deposit guarantees, the Bank collateralizes certain public funds using qualified investment securities.
With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, capital expenditures or capital resources, that is material to investors.
LIQUIDITY MANAGEMENT
Liquidity is a measure of the Company's and Bank's ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank's primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. Approximately 57% of the Company's investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. As of December 31, 2024, the unrealized losses recorded on the available-for-sale securities were acting as a deterrent to any sale of those securities to raise liquidity. However, these securities can be utilized as pledged assets that provide secondary liquidity through the form of additional available borrowings. Investment securities that are classified as held-to-maturity can also be used as collateral to pledge against additional borrowings. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial.
The following table summarizes the Company's secondary sources of liquidity in use and available at December 31, 2024:
(dollars in thousands)
Secondary Sources of Liquidity in Use
Secondary Sources of Remaining Liquidity Available
Unsecured brokered deposits(1)
$ 1,099,075 $ 1,308,598
FHLB secured borrowings
490,000 874,270
FRB:
Discount window secured borrowings
- 1,800,646
Federal funds lines
- 145,000
Customer repurchase agreements
33,151 -
Unpledged assets: (2)
Interest-bearing deposits with banks
N/A 21,406
Investment securities
N/A 1,280,156
Total
$ 1,622,226 $ 5,430,076
(1)The available liquidity from the unsecured brokered deposits represents unsecured funds under one-way CDARS and ICS brokered deposits that would require then current market rates and be dependent on the availability of funds in those networks.
(2)Comprise unencumbered assets that could be liquidated or used as collateral to obtain additional liquidity through debt financing.
The funding mix has continued to change throughout the year ended December 31, 2024. Deposits at year end were $9.1 billion and $8.8 billion at December 31, 2024 and 2023, respectively. The increase was primarily attributable to a $558.2 million increase in interest bearing time deposits, offset by a $734.7 million reduction in noninterest bearing deposits and a $285.2 million reduction in savings and money market accounts. The growth in interest bearing deposits was driven by the increase in time deposit through the digital acquisition channel during the year ended December 31, 2024, as discussed in "Deposits and Other Borrowings" above. Short-term borrowings were $0.5 billion and $1.4 billion at December 31, 2024 and December 31, 2023, respectively. The decrease in short-term borrowings was due to the early retirement of BTFP borrowings during the fourth quarter of the year ended December 31, 2024 partially offset by an increase in FHLB borrowings.
Additionally, the Bank can purchase up to $145.0 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at December 31, 2024 and can borrow unsecured funds under one-way CDARS and ICS brokered deposits in the amount of $1.1 billion, against which there was $73 million outstanding at December 31, 2024. At December 31, 2024, the Bank also has custodial agreements with various broker-dealers through IntraFi's IND program which provided $894.7 million of brokered deposits.
At December 31, 2024, the Bank was also eligible to draw advances from the FHLB up to $1.4 billion based on assets pledged as collateral to the FHLB, against which the Bank borrowed $490.0 million as of December 31, 2024. The Bank posted additional collateral to the FHLB during the year ended December 31, 2024 to increase its availability to meet its ongoing liquidity needs and expects to continue utilizing this source of funding in the future.
In March 2023, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of the BTFP. The BTFP provided eligible depository institutions, including the Bank, an additional source of liquidity. In January 2024, the Company borrowed an additional $500.0 million through the BTFP and refinanced $500.0 million under the program at an interest rate of 4.76% and a maturity in January 2025. The Federal Reserve discontinued the origination of new loans on March 11, 2024, as scheduled. During the year ended December 31, 2024, this alternative source of liquidity was being utilized for balance sheet optimization. The Company repaid $500.0 million in November 2024, and the remaining $500.0 million was repaid in December 2024.
The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond ("Federal Reserve Bank"). This facility, which can be used to borrow up to $1.8 billion, is collateralized with specific loan assets identified to the Federal Reserve Bank. During the third quarter, additional collateral in the form of acceptable loans was pledged to the Discount Window increasing available contingent capacity. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding
only. There can be no assurance, however, that these alternative sources of liquidity will continue to be available or will be sufficient to meet our ongoing liquidity needs.
In total, the Bank's aggregate borrowing capacity at December 31, 2024 was $4.0 billion, which consists of $0.9 billion and $1.8 billion additional aggregate capacity to borrow from the FHLB and the Federal Reserve's Discount Window, respectively, on assets that have been pledged. The Bank's aggregate borrowing capacity also includes unencumbered securities totaling approximately $1.3 billion available for pledging to the FHLB or Federal Reserve for additional borrowing capacity.
The loss of deposits, including through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank makes competitive deposit interest rate comparisons weekly and makes adjustments from time to time to ensure its interest rate offerings are competitive.
There is, however, a risk that the cost of funds will increase significantly as the Bank competes for deposits or that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks' lines of credit to offset a decline in deposits in the short run, but the use of such sources may negatively impact our net interest margin and our earnings. The continuing elevated cost of funding negatively impacted our net interest margin. In September 2024 and the fourth quarter of 2024, the Federal Reserve decreased interest rates by a total of 100 basis points, which had minimal impact on net interest margin for most of the year ended December 31, 2024.
There can be no assurance that the mix of sources of funds available to us at any particular time in the future will be adequate to meet our future liquidity needs. However, the market for customer and brokered deposits is highly competitive and the risk of disintermediation is high, particularly in a high interest rate environment. Most of our noninterest bearing deposits are operating deposits or compensating balances that are held in connection with lending relationships. The potential outflow of such deposits is a risk unless we pay a more competitive rate of interest on them, which could significantly and negatively impact the Bank's interest expense and net interest margin, as the transfer of some noninterest-bearing deposits to interest-bearing deposits did in 2024. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee ("ALCO") has adopted policy guidelines, which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan.
The Company believes it maintains sufficient primary and secondary sources of liquidity to fund its operations. During the year ended December 31, 2024, average short term liquidity was $3.2 billion comprising interest bearing deposits with other banks and other short-term investments and AFS securities, which is above the Bank's average needs. Secondary sources of liquidity at December 31, 2024 were $5.4 billion, which include the FHLB, other insured brokered deposit sweep programs, unpledged securities, Fed funds lines, and the FRB Discount Window. At December 31, 2024, the Company held total securities available to be pledged with an estimated fair value of $1.3 billion. At December 31, 2024, under the Bank's liquidity formula, it had $6.8 billion of primary and secondary liquidity sources. Management believes the amount is adequate to meet current and projected funding needs.
CAPITAL RESOURCES AND ADEQUACY
The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company's current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.
The federal banking regulators have issued guidance for those institutions, which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution's total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. Although growth in that segment over the past 36 months at 26.8% did not exceed the 50% threshold laid out in the regulatory guidance, we expect the
heightened supervisory expectations to continue to apply to us given the federal banking regulators' general focus on commercial real estate exposures at banks.
At December 31, 2024, we did exceed the construction, land development, and other land acquisitions regulatory concentration threshold, and we continue to monitor our concentration in commercial real estate lending and remain in compliance with the guidance issued by the federal banking regulators. Construction, land and land development loans represent 122.60% of consolidated risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio.
Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, as our commercial real estate concentration fluctuates each quarter, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company seeks to manage the risks relating to commercial real estate and its capital adequacy through the development and implementation of its Capital Policy and Capital Plan, the preparation of pro-forma projections including stress testing and the development of internal minimum targets for regulatory capital ratios that are subject to approval by the Board and in excess of well capitalized ratios (as defined in the section "Regulation" above).
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
At December 31, 2024, the capital position of the Company and its wholly owned subsidiary, the Bank, continue to exceed regulatory requirements and well-capitalized guidelines. The primary indicators relied on by bank regulators in measuring the capital position are four ratios as follows: Tier 1 risk-based capital ratio, Total risk-based capital ratio, the Leverage ratio and the CET1 ratio. Tier 1 capital consists of common and qualifying preferred shareholders' equity less goodwill and other intangibles. Total risk-based capital consists of Tier 1 capital, plus qualifying subordinated debt and the qualifying portion of the ACL. Risk-based capital ratios are calculated with reference to risk-weighted assets, which are prescribed by regulation. The measure of Tier 1 capital to average assets for the prior quarter is often referred to as the leverage ratio. The CET1 ratio is the Tier 1 capital ratio but excluding preferred stock.
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required. If a bank is not well-capitalized, interest rate restrictions apply.
The FRB and the FDIC have adopted the Basel III Rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. Under the Basel III Rules, the Company and Bank are required to maintain a CET1 ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%; a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, or 8.5% with the fully phased in capital conservation buffer; a minimum total capital to risk-weighted assets ratio of 10.5% with the fully phased-in capital conservation buffer; and a minimum leverage ratio of 4.0%. The Basel III Rules also increased risk weights for certain assets and off-balance-sheet exposures. See the "Regulation" section for additional information regarding regulatory capital requirements. At December 31, 2024, the Company and the Bank met all these requirements.
The Company announced a regular quarterly cash dividend on January 22, 2025 of $0.165 per share to shareholders of record on February 7, 2025 and it was paid on February 21, 2025. Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. See further detail In "Item 5 - Market for Registrant's Common Equity" section.
The ability of the Company to continue to grow is dependent on its earnings and those of the Bank, the ability to obtain additional funds for contribution to the Bank's capital, through additional borrowings, through the sale of additional common stock or preferred stock or through the issuance of additional qualifying capital instruments, such as subordinated debt. The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank's concentrations in commercial real estate loans. See further detail at the "Regulation" and "Risk Factors" sections.
The Company's capital ratios were all well in excess of requirements established by the Federal Reserve Board and the Bank's capital ratios were in excess of those required to be classified as a "well capitalized" institution under the prompt
corrective action provisions of the Federal Deposit Insurance Act. The actual capital amounts and ratios for the Company and Bank as of December 31, 2024 and 2023 are presented in the table below:
Company Bank
Minimum Required
For Capital
Adequacy Purposes (1)
To Be Well
Capitalized
Under Prompt
Corrective Action
Regulations (2)
(dollars in thousands) Actual
Amount 		Ratio Actual
Amount 		Ratio
As of December 31, 2024
CET1 capital (to risk weighted assets) $ 1,369,643 14.63 % $ 1,373,857 14.76 % 7.00 % 6.50 %
Total capital (to risk weighted assets) 1,484,420 15.86 % 1,488,635 16.00 % 10.50 % 10.00 %
Tier 1 capital (to risk weighted assets) 1,369,643 14.63 % 1,373,857 14.76 % 8.50 % 8.00 %
Tier 1 capital (to average assets) 1,369,643 10.74 % 1,373,857 10.82 % 4.00 % 5.00 %
As of December 31, 2023
CET1 capital (to risk weighted assets) $ 1,335,967 13.90 % $ 1,330,001 13.92 % 7.00 % 6.50 %
Total capital (to risk weighted assets) 1,421,347 14.79 % 1,415,381 14.81 % 10.50 % 10.00 %
Tier 1 capital (to risk weighted assets) 1,335,967 13.90 % 1,330,001 13.92 % 8.50 % 8.00 %
Tier 1 capital (to average assets) 1,335,967 10.73 % 1,330,001 10.72 % 4.00 % 5.00 %
(1)The risk-based ratios reflect the minimum requirement plus the capital conservation buffer of 2.50%.
(2)Applies to Bank only
In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the option provided by the March 2020 interim final rule.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto have been prepared in accordance with GAAP in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.
NEW AUTHORITATIVE ACCOUNTING GUIDANCE
Refer to Note 1 to the Consolidated Financial Statements for New Authoritative Accounting Guidance and their expected impact on the Company's Financial Statements.