SANDY SPRING BANCORP INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2022

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

For the transition period from to ____________

Commission File Number: 0-19065

SANDY SPRING BANCORP, INC.

(Exact name of registrant as specified in its charter)


Maryland						52-1532952
(State of incorporation)						(I.R.S. Employer Identification Number)


17801 Georgia Avenue, Olney, Maryland						20832
(Address of principal executive office)						(Zip Code)

301-774-6400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

SASR

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer ☒ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☐ Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ☐ No ☒

The number of outstanding shares of common stock as of November 2, 2022

Common stock, $1.00 par value – 44,644,269 shares

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statements of Condition - Unaudited as of September 30, 2022 and December 31, 2021			3

Condensed Consolidated Statements of Income - Unaudited for the Three and Nine Months Ended September 30, 2022 and 2021			4

Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three and Nine Months Ended September 30, 2022 and 2021			5

Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three and Nine Months Ended September 30, 2022 and 2021			6

Condensed Consolidated Statements of Cash Flows – Unaudited for the Nin e Months Ended S e ptember 30, 2022 and 2021			8

Notes to the Condensed Consolidated Financial Statements			9

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			39

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			70

Item 4. CONTROLS AND PROCEDURES			70

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS			71

Item 1A. RISK FACTORS			71

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			71

Item 3. DEFAULTS UPON SENIOR SECURITIES			71

Item 4. MINE SAFETY DISCLOSURES			71

Item 5. OTHER INFORMATION			71

Item 6. EXHIBITS			71

SIGNATURES			72

Part I

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED


	September 30,		December 31,
(Dollars in thousands)	2022		2021
Assets:
Cash and due from banks	$	88,780	$	65,630
Federal funds sold	213		312
Interest-bearing deposits with banks	169,815		354,078
Cash and cash equivalents	258,808		420,020
Residential mortgage loans held for sale (at fair value)	11,469		39,409
Investments held-to-maturity, at cost (fair value of $226,030)	265,648		—
Investments available-for-sale (at fair value)	1,244,335		1,465,896
Other investments, at cost	77,296		41,166
Total loans	11,218,813		9,967,091
Less: allowance for credit losses - loans	(128,268)		(109,145)
Net loans	11,090,545		9,857,946
Premises and equipment, net	64,703		59,685
Other real estate owned	739		1,034
Accrued interest receivable	37,074		34,349
Goodwill	363,436		370,223
Other intangible assets, net	21,262		25,920
Other assets	330,282		275,078
Total assets	$	13,765,597	$	12,590,726

Liabilities:
Noninterest-bearing deposits	$	3,993,480	$	3,779,630
Interest-bearing deposits	6,756,006		6,845,101
Total deposits	10,749,486		10,624,731
Securities sold under retail repurchase agreements and federal funds purchased	206,287		141,086
Advances from FHLB	840,000		—
Subordinated debt	370,056		172,712
Total borrowings	1,416,343		313,798
Accrued interest payable and other liabilities	147,906		132,518
Total liabilities	12,313,735		11,071,047

Stockholders' equity:
Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding
44,644,269 and 45,118,930 at September 30, 2022 and December 31, 2021, respectively	44,644		45,119
Additional paid in capital	732,239		751,072
Retained earnings	818,049		732,027
Accumulated other comprehensive loss	(143,070)		(8,539)
Total stockholders' equity	1,451,862		1,519,679
Total liabilities and stockholders' equity	$	13,765,597	$	12,590,726

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	121,327	$	104,384	$	327,042	$	319,563
Interest on loans held for sale	161		379		504		1,465
Interest on deposits with banks	774		302		1,245		395
Interest and dividends on investment securities:
Taxable	5,735		3,958		14,472		12,230
Tax-advantaged	2,422		2,106		7,100		6,560
Interest on federal funds sold	3		—		4		—
Total interest income	130,422		111,129		350,367		340,213
Interest expense:
Interest on deposits	9,490		3,521		15,578		12,202
Interest on retail repurchase agreements and federal funds purchased	977		43		1,232		139
Interest on advances from FHLB	3,049		—		3,066		2,649
Interest on subordinated debt	3,946		961		10,130		5,973
Total interest expense	17,462		4,525		30,006		20,963
Net interest income	112,960		106,604		320,361		319,250
Provision/ (credit) for credit losses	18,890		(8,229)		23,571		(47,141)
Net interest income after provision/ (credit) for credit losses	94,070		114,833		296,790		366,391
Non-interest income:
Investment securities gains	2		49		48		178
Gain/ (loss) on disposal of assets	(183)		—		16,516		—
Service charges on deposit accounts	2,591		2,108		7,384		5,936
Mortgage banking activities	1,566		4,942		5,347		20,887
Wealth management income	8,867		9,392		27,302		27,243
Insurance agency commissions	—		2,285		2,927		5,685
Income from bank owned life insurance	693		818		2,191		2,203
Bank card fees	438		1,775		3,916		5,078
Other income	2,908		3,025		7,091		12,309
Total non-interest income	16,882		24,394		72,722		79,519
Non-interest expense:
Salaries and employee benefits	40,126		38,653		119,049		114,295
Occupancy expense of premises	4,759		5,728		14,527		16,712
Equipment expense	3,825		3,214		10,920		9,456
Marketing	1,370		1,376		3,843		3,640
Outside data services	2,509		2,317		7,492		6,860
FDIC insurance	1,268		361		3,330		3,303
Amortization of intangible assets	1,432		1,635		4,406		4,991
Merger, acquisition and disposal expense	1		—		1,068		45
Professional fees and services	2,207		3,031		6,596		7,927
Other expenses	8,283		6,866		21,687		27,100
Total non-interest expense	65,780		63,181		192,918		194,329
Income before income tax expense	45,172		76,046		176,594		251,581
Income tax expense	11,588		19,070		44,275		61,878
Net income	$	33,584	$	56,976	$	132,319	$	189,703

Per share information:
Basic net income per common share	$	0.75	$	1.21	$	2.93	$	4.00
Diluted net income per common share	$	0.75	$	1.20	$	2.92	$	3.98
Dividends declared per share	$	0.34	$	0.32	$	1.02	$	0.96

The accompanying notes are an integral part of these statements

ANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/ (LOSS) – UNAUDITED


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2022		2021		2022		2021
Net income	$	33,584	$	56,976	$	132,319	$	189,703
Other comprehensive loss:
Investments available-for-sale:
Net change in unrealized losses on investments available-for-sale	(61,726)		(8,183)		(166,506)		(27,149)
Related income tax expense	15,551		2,073		42,409		6,931
Net investment gains reclassified into earnings	(2)		(49)		(48)		(178)
Related income tax expense/ (benefit)	—		12		12		45
Net effect on other comprehensive loss	(46,177)		(6,147)		(124,133)		(20,351)

Investments held-to-maturity:
Net change in unrealized loss	613		—		(14,514)		—
Related income tax expense/ (benefit)	(181)		—		3,697		—
Net effect on other comprehensive loss	432		—		(10,817)		—

Defined benefit pension plan:
Net change of unrealized loss	196		228		587		682
Related income tax benefit	(68)		(41)		(168)		(162)
Net effect on other comprehensive loss	128		187		419		520
Total other comprehensive loss	(45,617)		(5,960)		(134,531)		(19,831)
Comprehensive income/ (loss)	$	(12,033)	$	51,016	$	(2,212)	$	169,872

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED


(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/ (Loss)		Total Stockholders' Equity
Balances at July 1, 2022	$	44,630	$	730,285	$	799,707	$	(97,453)	$	1,477,169
Net income	—		—		33,584		—		33,584
Other comprehensive loss, net of tax	—		—		—		(45,617)		(45,617)
Total comprehensive loss									(12,033)
Common stock dividends - $0.34 per share	—		—		(15,242)		—		(15,242)
Stock compensation expense	—		1,561		—		—		1,561
Common stock issued pursuant to:

Stock option plan - 2,342 shares	3		33		—		—		36


Employee stock purchase plan - 10,422 shares	10		397		—		—		407
Restricted stock vesting, net of tax withholding - 1,808 shares	1		(37)		—		—		(36)


Balances at September 30, 2022	$	44,644	$	732,239	$	818,049	$	(143,070)	$	1,451,862

Balances at July 1, 2021	$	47,313	$	850,555	$	659,578	$	4,834	$	1,562,280
Net income	—		—		56,976		—		56,976
Other comprehensive loss, net of tax	—		—		—		(5,960)		(5,960)
Total comprehensive income									51,016
Common stock dividends - $0.32 per share	—		—		(15,253)		—		(15,253)
Stock compensation expense	—		1,331		—		—		1,331
Common stock issued pursuant to:


Stock option plan - 53,079 shares	53		514		—		—		567

Employee stock purchase plan - 11,010 shares	11		468		—		—		479
Restricted stock vesting, net of tax withholding- 3,831 shares	4		(43)		—		—		(39)

Repurchase of common stock - 1,261,828 shares	(1,262)		(53,059)		—		—		(54,321)
Balances at September 30, 2021	$	46,119	$	799,766	$	701,301	$	(1,126)	$	1,546,060

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED


(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/ (Loss)		Total Stockholders' Equity
Balances at January 1, 2022	$	45,119	$	751,072	$	732,027	$	(8,539)	$	1,519,679
Net income	—		—		132,319		—		132,319
Other comprehensive loss, net of tax	—		—		—		(134,531)		(134,531)
Total comprehensive loss									(2,212)
Common stock dividends - $1.02 per share	—		—		(46,297)		—		(46,297)
Stock compensation expense	—		6,211		—		—		6,211
Common stock issued pursuant to:

Stock option plan - 12,703 shares	13		263		—		—		276


Employee stock purchase plan - 32,627 shares	32		1,305		—		—		1,337
Restricted stock vesting, net of tax withholding - 105,719 shares	105		(2,250)		—		—		(2,145)

Repurchase of common stock - 625,710 shares	(625)		(24,362)		—		—		(24,987)
Balances at September 30, 2022	$	44,644	$	732,239	$	818,049	$	(143,070)	$	1,451,862

Balances at January 1, 2021	$	47,057	$	846,922	$	557,271	$	18,705	$	1,469,955
Net income	—		—		189,703		—		189,703
Other comprehensive loss, net of tax	—		—		—		(19,831)		(19,831)
Total comprehensive income									169,872
Common stock dividends - $0.96 per share	—		—		(45,673)		—		(45,673)
Stock compensation expense	—		3,640		—		—		3,640
Common stock issued pursuant to:


Stock option plan - 193,602 shares	193		2,390		—		—		2,583

Employee stock purchase plan - 48,685 shares	49		1,532		—		—		1,581
Restricted stock vesting, net of tax withholding - 81,838 shares	82		(1,659)		—		—		(1,577)

Repurchase of common stock - 1,261,828 shares	(1,262)		(53,059)		—		—		(54,321)
Balances at September 30, 2021	$	46,119	$	799,766	$	701,301	$	(1,126)	$	1,546,060

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED


	Nine Months Ended September 30,
(Dollars in thousands)	2022		2021
Operating activities:
Net income	$	132,319	$	189,703
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,926		10,777
Provision/ (credit) for credit losses	23,571		(47,141)
Share based compensation expense	6,211		3,640
Gain on disposal of assets	(16,516)		—
Deferred income tax/ (benefit)	(6,493)		12,280
Origination of loans held for sale	(296,464)		(1,211,421)
Proceeds from sales of loans held for sale	330,643		1,272,148
Gains on sales of loans held for sale	(6,239)		(27,111)
Losses on sale of other real estate owned	24		237
Investment securities gains	(48)		(178)

Tax benefit associated with share based compensation	(632)		1,316
Net (increase)/ decrease in accrued interest receivable	(2,725)		10,212
Net increase in other assets	(1,221)		(39,456)
Net increase/ (decrease) accrued expenses and other liabilities	2,377		(22,402)
Other, net	(3,301)		1,026
Net cash provided by operating activities	170,432		153,630
Investing activities:
Sales/ (purchases) of other investments	(36,131)		24,663
Purchases of investments available-for-sale	(447,070)		(708,727)
Proceeds from sales of investment available-for-sale	1,261		360,945
Proceeds from maturities, calls and principal payments of investments available-for-sale	196,121		264,461

Proceeds from maturities, calls and principal payments of investments held-to-maturity	25,149		—
Net (increase)/ decrease in loans	(1,244,402)		696,399
Proceeds from the sales of other real estate owned	271		620




Proceeds from sale of business activity, net	23,821		—
Expenditures for premises and equipment	(10,566)		(7,114)
Net cash provided by/ (used in) investing activities	(1,491,546)		631,247
Financing activities:
Net increase in deposits	126,348		957,888
Net increase/ (decrease) in in retail repurchase agreements and federal funds purchased	65,201		(395,653)
Proceeds from FHLB advances	1,716,625		—
Repayment of FHLB advances	(876,625)		(379,075)
Proceeds from issuance of subordinated debt	200,000		—
Retirement of subordinated debt	—		(53,000)
Proceeds from issuance of common stock	1,783		4,164
Stock tendered for payment of withholding taxes	(2,315)		(1,577)
Repurchase of common stock	(24,987)		(54,321)
Cash dividends paid	(46,128)		(45,673)
Net cash provided by financing activities	1,159,902		32,753
Net increase/ (decrease) in cash and cash equivalents	(161,212)		817,630
Cash and cash equivalents at beginning of period	420,020		297,003
Cash and cash equivalents at end of period	$	258,808	$	1,114,633

Supplemental disclosures:
Interest payments	$	27,631	$	31,173
Income tax payments, net of refunds of $966 and $2,673 in 2022 and 2021, respectively	42,414		58,348

Transfers from loans to other real estate owned	—		295

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Sandy Spring Bancorp, Inc. ("Bancorp" or, together with its subsidiaries, the "Company"), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”). Independent and community-oriented, the Bank offers a broad range of commercial banking, retail banking, mortgage services and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. The Bank also offers a comprehensive menu of wealth management services through its subsidiaries, West Financial Services, Inc. (“West Financial”) and Rembert Pendleton Jackson (“RPJ”).

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”), prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, the interim financial statements do not include all of the information and notes required for complete financial statements. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2022. In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods have been included. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2021 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 18, 2022. There have been no significant changes to any of the Company’s accounting policies as disclosed in the 2021 Annual Report on Form 10-K.

Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, Sandy Spring Bank, and its subsidiaries, West Financial and RPJ and former results of Sandy Spring Insurance Corporation. Consolidation has resulted in the elimination of all intercompany accounts and transactions. See Note 17 for more information on the Company’s segments and consolidation.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, in addition to affecting the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for credit losses and the related allowance, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether available-for-sale debt securities with fair values less than amortized costs are impaired and require an allowance for credit losses, valuation of other real estate owned, valuation of share based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, the calculation of current and deferred income taxes, and the actuarial projections related to pension expense and the related liability.

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits with banks (items with stated original maturity of three months or less).

Revenue from Contracts with Customers

The Company’s revenue includes net interest income on financial instruments and non-interest income. Specific categories of revenue are presented in the Condensed Consolidated Statements of Income. Most of the Company’s revenue is not within the scope of Accounting Standard Codification (“ASC”) 606 – Revenue from Contracts with Customers. For revenue within the scope of ASC 606, the Company provides services to customers and has related performance obligations. The revenue from such services is recognized upon satisfaction of all contractual performance obligations. The following discusses key revenue streams within the scope of this revenue recognition guidance.

Wealth Management Income

West Financial and RPJ provide comprehensive investment management and financial planning services. Wealth management income is comprised of income for providing trust, estate and investment management services. Trust services include acting as a trustee for corporate or personal trusts. Investment management services include investment management, record-keeping and reporting of security portfolios. Fees for these services are recognized based on a contractually-agreed fixed percentage applied to net assets under management at the end of each reporting period. The Company does not charge/recognize any performance-based fees.

Insurance Agency Commissions

Prior to the sale of its assets in June 2022, Sandy Spring Insurance Corporation performed the function of an insurance intermediary by introducing the policyholder and insurer and was compensated by a commission fee for placement of an insurance policy. Sandy Spring Insurance did not provide any captive management services or any claim handling services. Commission fees were set as a percentage of the premium for the insurance policy for which Sandy Spring Insurance was a producer. Sandy Spring Insurance recognized revenue when the insurance policy was contractually agreed to by the insurer and policyholder (at transaction date).

Service Charges on Deposit Accounts

Service charges on deposit accounts are earned on depository accounts for consumer and commercial account holders and include fees for account and overdraft services. Account services include fees for event-driven services and periodic account maintenance activities. An obligation for event-driven services is satisfied at the time of the event when service is delivered and revenue recognized as earned. Obligation for maintenance activities is satisfied over the course of each month and revenue is recognized at month end. The overdraft services obligation is satisfied at the time of the overdraft and revenue is recognized as earned.

Loan Financing Receivables

The Company’s financing receivables consist primarily of loans that are stated at their principal balance outstanding, net of any unearned income, acquisition fair value marks and deferred loan origination fees and costs. Interest income on loans is accrued at the contractual rate based on the principal balance outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Loans are considered past due or delinquent when the principal or interest due in accordance with the contractual terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Immaterial shortfalls in payment amounts do not necessarily result in a loan being considered delinquent or past due. If any payments are past due and subsequent payments are resumed without payment of the delinquent amount, the loan shall continue to be considered past due. Whenever any loan is reported delinquent on a principal or interest payment or portion thereof, the amount reported as delinquent is the outstanding principal balance of the loan.

Loans, except for consumer installment loans, are placed into non-accrual status when any portion of the loan principal or interest becomes 90 days past due. Management may determine that certain circumstances warrant earlier discontinuance of interest accruals on specific loans if an evaluation of other relevant factors (such as bankruptcy, interruption of cash flows, etc.) indicates collection of amounts contractually due is unlikely. These loans are considered, collectively, to be non-performing loans. Consumer installment loans that are not secured by real estate are not placed on non-accrual, but are charged down to their net realizable value when they are four months past due. Loans designated as non-accrual have all previously accrued but unpaid interest reversed. Interest income is not recognized on non-accrual loans. All payments received on non-accrual loans are applied using a cost-recovery method to reduce the outstanding principal balance until the loan returns to accrual status. Loans may be returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans considered to be TDRs are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured collateral-dependent loans are individually assessed for allowance for credit losses and may either be in accruing or non-accruing status. Non-accruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category if the borrower is no longer experiencing financial difficulty, a re-underwriting event took place, and the revised loan terms of the subsequent restructuring agreement are considered to be consistent with terms that can be obtained in the market for loans with comparable credit risk.

Allowance for Credit Losses

The allowance for credit losses (“allowance” or “ACL”) represents an amount which, in management's judgment, reflects the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance is measured and recorded upon the initial recognition of a financial asset. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision or credit for credit losses, which is recorded as a current period expense.

Determination of the appropriateness of the allowance is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the allowance is reviewed periodically by the Risk Committee of the Board of Directors and formally approved quarterly by that same committee of the Board.

The Company’s methodology for estimating the allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates; (2) collective qualitative factors that consider the expected impact of certain factors not fully captured in the collective quantified reserve, including concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations; and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable. The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income as loans are moved to non-accrual status.

Loans are pooled into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. Portfolio segments used to estimate the allowance are the same as portfolio segments used for general credit risk management purposes. Refer to Note 5 for more details on the Company’s portfolio segments.

The Company applies two calculation methodologies to estimate the collective quantified component of the allowance: discounted cash flows method and weighted average remaining life method. Allowance estimates on commercial acquisition, development and construction (“AD&C”) and residential construction segments are based on the weighted average remaining life method. Allowance estimates on all other portfolio segments are based on the discounted cash flows method. Segments utilizing the discounted cash flows method are further sub-segmented into risk level pools, determined either by risk rating for commercial loans or Beacon Scores ranges for residential and consumer loans. To better manage risk and reasonably determine the sufficiency of reserves, this segregation allows the Company to monitor the allowance component applicable to higher risk loans separate from the remainder of the portfolio. Collective calculation methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a two-year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis. Economic variables that have the most significant impact on the allowance include: unemployment rate, house price index and business bankruptcies. Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience.

The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determines that a foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When a repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When the repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the collateral’s appraised value, less estimated costs to sell. Third-party appraisals used in the individual reserve assessment are conducted at least annually with underlying assumptions that are reviewed by management. Third-party appraisals may be obtained on a more frequent basis if deemed necessary. Internal evaluations of collateral value are conducted quarterly to ensure any further deterioration of the collateral value is recognized on a timely basis. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s remaining life. The Company may receive updated appraisals which contradict the preliminary determination of fair value used to establish an individual allowance on a loan. In these instances the individual allowance is adjusted to reflect the Company’s evaluation of the updated appraised fair value. In the event a loss was previously confirmed and the loan was charged down to the estimated fair value based on a previous appraisal, the balance of partially charged-off loans are not subsequently increased, but could be further decreased depending on the direction of the change in fair value. Payments on fully or partially charged-off loans are accounted for under the cost-recovery method. Under

this method, all payments received are applied on a cash basis to reduce the entire outstanding principal balance, then to recognize a recovery of all previously charged-off amounts before any interest income may be recognized. Based on the individual reserve assessment, if the Company determines that the fair value of the collateral is less than the amortized cost basis of the loan, an individual allowance will be established measured as the difference between the fair value of the collateral (less costs to sell) and the amortized cost basis of the loan. Once a loss has been confirmed, the loan is charged-down to its estimated fair value.

Large groups of smaller non-accrual homogeneous loans are not individually evaluated for allowance and include residential permanent and construction mortgages and consumer installment loans. These portfolios are reserved for on a collective basis using historical loss rates of similar loans over the weighted average life of each pool.

Unfunded lending commitments are reviewed to determine if they are considered unconditionally cancellable. The Company establishes reserves for unfunded commitments that do not meet that criteria as a liability in the Condensed Consolidated Statements of Condition. Changes to the liability are recorded through the provision for credit losses in the Condensed Consolidated Statements of Income. The establishment of the reserves for unfunded commitments considers both the likelihood that the funding will occur and an estimate of the expected credit losses over the life of the respective commitments.

Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP. However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

Held-to-maturity debt securities

Debt securities that are purchased with the positive intent and ability to be held until their maturity are classified as held-to-maturity (“HTM”). HTM debt securities are recorded at cost adjusted for amortization of premiums and accretion of discounts. Transfers of debt securities from available-for-sale ("AFS") category to HTM category are made at fair value as of the transfer date. The unrealized gain or loss at the date of transfer continues to be reported in accumulated other comprehensive income and in the carrying amount of the HTM securities. Both amounts are amortized over the remaining life of the security as a yield adjustment in interest income and effectively offset each other.

Leases

The Company determines if an arrangement is a lease at inception. All of the Company’s leases are currently classified as operating leases and are included in other assets and other liabilities on the Company’s Condensed Consolidated Statements of Condition. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's Condensed Consolidated Statements of Income.

Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.

Pending Accounting Pronouncements

In March 2020, the FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of LIBOR likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022, and can be adopted at any time during this period. The Company has not yet fully adopted this standard. A cross-functional working group has been established to guide the Company’s transition from LIBOR to alternative reference rates. The Company has identified its

products that are either directly or indirectly influenced by LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The Company is evaluating existing platforms and systems and preparing to offer new rates. The Company stopped originating any new loans referencing LIBOR during 2021. Currently, the Company does not expect that the adoption of this standard will have a material impact on its Consolidated Financial Statements.

In March 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance on troubled debt restructurings (“TDR”) and amends the guidance on “vintage disclosures” to require disclosure of current period gross charge-offs by year of origination. The ASU also adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The objective of the disclosures is to provide information about the type and magnitude of modifications and the degree of their success in mitigating potential credit losses. For entities that have adopted the guidance in ASC 326, the amendments are effective for fiscal years beginning after December 15, 2022, and interim periods therein. Early adoption of the amendments is permitted for entities that have adopted ASC 326, including adoption in an interim period. An entity may elect to early adopt the amendments related to TDRs separately from the amendments related to vintage disclosures. The Company is in process of reviewing the enhanced modification disclosure requirements.

NOTE 2 – INVESTMENTS

Investments available-for-sale and held-to-maturity

During the first quarter ended March 31, 2022, the Company transferred certain debt securities from available-for-sale to held-to-maturity. The total amortized cost of debt securities transferred was $305.6 million with the associated fair value of $289.4 million and unrealized losses of $16.2 million at the date of transfer. All of these investments are either issued by a direct governmental entity or a government-sponsored entity and have no historical evidence supporting expected credit losses. Therefore, the Company has estimated these losses at zero and will monitor this assumption in the future for any economic or governmental policies that could affect this assumption.

The amortized cost and estimated fair values of investments available-for-sale and held-to-maturity at the dates indicated are presented in the following table:


	September 30, 2022								December 31, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale debt securities:
U.S. treasuries and government agencies	$	100,740	$	—	$	(7,935)	$	92,805	$	68,487	$	202	$	(150)	$	68,539
State and municipal	342,492		5		(65,558)		276,939		323,286		6,561		(3,445)		326,402
Mortgage-backed and asset-backed	968,111		94		(93,614)		874,591		1,074,577		8,203		(11,825)		1,070,955




Total available-for-sale debt securities	$	1,411,343	$	99	$	(167,107)	$	1,244,335	$	1,466,350	$	14,966	$	(15,420)	$	1,465,896
Held-to-maturity debt securities:


Mortgage-backed and asset-backed	265,648		—		(39,618)		226,030		—		—		—		—
Total held-to-maturity debt securities	$	265,648	$	—	$	(39,618)	$	226,030	$	—	$	—	$	—	$	—
Total debt securities	$	1,676,991	$	99	$	(206,725)	$	1,470,365	$	1,466,350	$	14,966	$	(15,420)	$	1,465,896

Any unrealized losses in the U.S. treasuries and government agencies, state and municipal, mortgage-backed and asset-backed available-for-sale debt securities at September 30, 2022 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at September 30, 2022. Unrealized losses on available-for-sale debt securities are expected to recover over time as these securities approach maturity. The Company does not intend to sell, nor is it more likely than not it will be required to sell, these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.

The available-for-sale and held-to-maturity mortgage-backed securities portfolio at September 30, 2022 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($503.3 million), GNMA, FNMA or FHLMC mortgage-backed securities ($686.8 million) or SBA asset-backed securities ($43.7 million).

Gross unrealized losses and fair value by length of time that the individual available-for-sale debt securities have been in an unrealized loss position at the dates indicated are presented in the following tables:


	September 30, 2022
	Number of Securities	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasuries and government agencies	10	$	88,079	$	7,672	$	4,724	$	263	$	92,803	$	7,935
State and municipal	160	222,651		42,761		52,441		22,797		275,092		65,558
Mortgage-backed and asset-backed	328	635,793		61,543		214,757		32,071		850,550		93,614

Total	498	$	946,523	$	111,976	$	271,922	$	55,131	$	1,218,445	$	167,107


	December 31, 2021
	Number of Securities	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasuries and government agencies	5	$	49,695	$	150	$	—	$	—	$	49,695	$	150
State and municipal	32	63,206		2,288		21,740		1,157		84,946		3,445
Mortgage-backed and asset-backed	104	665,813		10,145		37,857		1,680		703,670		11,825

Total	141	$	778,714	$	12,583	$	59,597	$	2,837	$	838,311	$	15,420

The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following tables using the expected average life of the individual securities based on statistics provided by independent third-party industry sources. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

The estimated fair values and amortized costs of available-for-sale and held-to-maturity debt securities by contractual maturity are provided in the following tables.


	September 30, 2022				December 31, 2021
(In thousands)	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Available-for-sale debt securities
U.S. treasuries and government agencies:
One year or less	$	—	$	—	$	12,029	$	11,995
One to five years	92,805		100,740		56,510		56,492
Five to ten years	—		—		—		—
After ten years	—		—		—		—
State and municipal:
One year or less	4,297		4,306		12,821		12,709
One to five years	68,727		71,754		27,408		26,637
Five to ten years	31,787		37,090		42,960		42,661
After ten years	172,128		229,342		243,213		241,279
Mortgage-backed and asset-backed:
One year or less	5,602		5,639		9,272		9,239
One to five years	48,806		50,257		14,752		14,575
Five to ten years	318,785		353,118		388,918		390,569
After ten years	501,398		559,097		658,013		660,194










Total available-for-sale debt securities	$	1,244,335	$	1,411,343	$	1,465,896	$	1,466,350


	September 30, 2022				December 31, 2021
(In thousands)	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Held-to-maturity debt securities










Mortgage-backed and asset-backed:
One year or less	$	—	$	—	$	—	$	—
One to five years	—		—		—		—
Five to ten years	36,205		40,229		—		—
After ten years	189,825		225,419		—		—
Total held-to-maturity debt securities	$	226,030	$	265,648	$	—	$	—

At September 30, 2022 and December 31, 2021, available-for-sale and held-to-maturity debt securities with a book value of $549.7 million and $531.6 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at September 30, 2022 and December 31, 2021.

Other investments

Other investments are presented in the following table:


(In thousands)	September 30, 2022		December 31, 2021
Federal Reserve Bank stock, at cost	$	38,826	$	34,097
Federal Home Loan Bank of Atlanta stock, at cost	37,793		6,392
Other	677		677
Other investments	$	77,296	$	41,166

NOTE 3 – LOANS

Outstanding loan balances at September 30, 2022 and December 31, 2021, are net of unearned income, including net deferred loan fees of $11.8 million and $14.3 million, respectively. Net deferred loan fees at September 30, 2022 and December 31, 2021, includes $0.4 million and $4.6 million, respectively, related to the loans originated under the Paycheck Protection Program (“PPP”).

The loan portfolio segment balances at the dates indicated are presented in the following table:


(In thousands)	September 30, 2022		December 31, 2021
Commercial real estate:
Commercial investor real estate	$	5,066,843	$	4,141,346
Commercial owner-occupied real estate	1,743,724		1,690,881
Commercial AD&C	1,143,783		1,088,094
Commercial business	1,393,634		1,481,834
Total commercial loans	9,347,984		8,402,155
Residential real estate:
Residential mortgage	1,218,552		937,570
Residential construction	229,243		197,652
Consumer	423,034		429,714
Total residential and consumer loans	1,870,829		1,564,936
Total loans	$	11,218,813	$	9,967,091

Portfolio Segments

The Company currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments (classes) which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are:

•Commercial investor real estate loans - Commercial investor real estate loans consist of loans secured by nonowner-occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This commercial investor real estate

category contains mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan.

•Commercial owner-occupied real estate loans - Commercial owner-occupied real estate loans consist of commercial mortgage loans secured by owner occupied properties where an established banking relationship exists and involves a variety of property types to conduct the borrower’s operations. The decision to extend a loan is based upon the borrower’s financial health and the ability of the borrower and the business to repay. The primary source of repayment for this type of loan is the cash flow from the operations of the business.

•Commercial acquisition, development and construction loans - Commercial acquisition, development and construction loans are intended to finance the construction of commercial properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of additional factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

•Commercial business loans - Commercial loans are made to provide funds for equipment and general corporate needs. Repayment of a loan primarily comes from the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. Loans issued under the PPP are also included in this category, a substantial portion of which are expected to be forgiven by the Small Business Administration pursuant to the CARES Act.

•Residential mortgage loans - The residential mortgage loans category contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming.

•Residential construction loans - The Company makes residential construction loans generally to provide interim financing on residential property during the construction period. Borrowers are typically individuals who will ultimately occupy the single-family dwelling. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections.

•Consumer loans - This category of loans includes primarily home equity loans and lines, installment loans, personal lines of credit, and other loans. The home equity category consists mainly of revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes. Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.

NOTE 4 – CREDIT QUALITY ASSESSMENT

Allowance for Credit Losses

Summary information on the allowance for credit losses on loans for the period indicated is provided in the following table:


	Nine Months Ended September 30,
(In thousands)	2022		2021
Balance at beginning of period	$	109,145	$	165,367



Provision/ (credit) for credit losses - loans (1)	18,773		(47,141)
Loan charge-offs	(1,029)		(11,496)
Loan recoveries	1,379		1,190
Net charge-offs	350		(10,306)
Balance at period end	$	128,268	$	107,920

(1) Excludes the total provision expense on unfunded loan commitments for nine months ended September 30, 2022 of $4.8 million.

The following table provides summary information regarding collateral dependent loans individually evaluated for credit loss at the dates indicated:


(In thousands)	September 30, 2022		December 31, 2021
Collateral dependent loans individually evaluated for credit loss with an allowance	$	9,022	$	9,510
Collateral dependent loans individually evaluated for credit loss without an allowance	20,926		24,024
Total individually evaluated collateral dependent loans	$	29,948	$	33,534

Allowance for credit losses related to loans evaluated individually	$	6,548	$	6,593
Allowance for credit losses related to loans evaluated collectively	121,720		102,552
Total allowance for credit losses - loans	$	128,268	$	109,145

The following tables provide information on the activity in the allowance for credit losses by the respective loan portfolio segment for the period indicated:


	For the Nine Months Ended September 30, 2022
	Commercial Real Estate												Residential Real Estate
(Dollars in thousands)	Commercial Investor R/E			Commercial Owner- Occupied R/E			Commercial AD&C			Commercial Business			Residential Mortgage			Residential Construction			Consumer			Total
Balance at beginning of period	$	45,289		$	11,687		$	20,322		$	23,170		$	5,384		$	1,048		$	2,245		$	109,145
Provision/ (credit) for credit losses - loans	18,561			(610)			(3,475)			1,586			2,782			170			(241)			18,773
Charge-offs	—			—			—			(716)			(130)			—			(183)			(1,029)
Recoveries	319			22			—			786			27			8			217			1,379
Net recoveries (charge-offs)	319			22			—			70			(103)			8			34			350
Balance at end of period	$	64,169		$	11,099		$	16,847		$	24,826		$	8,063		$	1,226		$	2,038		$	128,268

Total loans	$	5,066,843		$	1,743,724		$	1,143,783		$	1,393,634		$	1,218,552		$	229,243		$	423,034		$	11,218,813
Allowance for credit losses on loans to total loans ratio	1.27		%	0.64		%	1.47		%	1.78		%	0.66		%	0.53		%	0.48		%	1.14		%

Average loans	$	4,546,440		$	1,722,522		$	1,104,901		$	1,344,608		$	1,071,634		$	217,978		$	422,941		$	10,431,024
Annualized net charge-offs/ (recoveries) to average loans	(0.01)		%	—		%	—		%	(0.01)		%	0.01		%	—		%	(0.01)		%	—		%

Balance of loans individually evaluated for credit loss	$	14,038		$	6,294		$	—		$	7,769		$	1,506		$	—		$	341		$	29,948
Allowance related to loans evaluated individually	$	134		$	1,122		$	—		$	5,292		$	—		$	—		$	—		$	6,548
Individual allowance to loans evaluated individually ratio	0.95		%	17.83		%	—		%	68.12		%	—		%	—		%	—		%	21.86		%

Balance of loans collectively evaluated for credit loss	$	5,052,805		$	1,737,430		$	1,143,783		$	1,385,865		$	1,217,046		$	229,243		$	422,693		$	11,188,865
Allowance related to loans evaluated collectively	$	64,035		$	9,977		$	16,847		$	19,534		$	8,063		$	1,226		$	2,038		$	121,720
Collective allowance to loans evaluated collectively ratio	1.27		%	0.57		%	1.47		%	1.41		%	0.66		%	0.53		%	0.48		%	1.09		%


	For the Year Ended December 31, 2021
	Commercial Real Estate												Residential Real Estate
(Dollars in thousands)	Commercial Investor R/E			Commercial Owner- Occupied R/E			Commercial AD&C			Commercial Business			Residential Mortgage			Residential Construction			Consumer			Total
Balance at beginning of period	$	57,404		$	20,061		$	22,157		$	46,806		$	11,295		$	1,502		$	6,142		$	165,367



Provision for credit losses - loans	(6,598)			(8,238)			172			(20,132)			(6,321)			(459)			(3,980)			(45,556)
Charge-offs	(5,802)			(136)			(2,007)			(4,069)			—			—			(299)			(12,313)
Recoveries	285			—			—			565			410			5			382			1,647
Net recoveries (charge-offs)	(5,517)			(136)			(2,007)			(3,504)			410			5			83			(10,666)
Balance at end of period	$	45,289		$	11,687		$	20,322		$	23,170		$	5,384		$	1,048		$	2,245		$	109,145

Total loans	$	4,141,346		$	1,690,881		$	1,088,094		$	1,481,834		$	937,570		$	197,652		$	429,714		$	9,967,091
Allowance for credit losses on loans to total loans ratio	1.09		%	0.69		%	1.87		%	1.56		%	0.57		%	0.53		%	0.52		%	1.10		%

Average loans	$	3,689,769		$	1,661,015		$	1,110,420		$	1,952,537		$	979,754		$	178,171		$	463,200		$	10,034,866
Net charge-offs/ (recoveries) to average loans	0.15		%	0.01		%	0.18		%	0.18		%	(0.04)		%	—		%	(0.02)		%	0.11		%

Balance of loans individually evaluated for credit loss	$	12,489		$	9,306		$	650		$	9,033		$	1,704		$	—		$	352		$	33,534
Allowance related to loans evaluated individually	$	213		$	79		$	504		$	5,797		$	—		$	—		$	—		$	6,593
Individual allowance to loans evaluated individually ratio	1.71		%	0.85		%	77.54		%	64.18		%	—		%	—		%	—		%	19.66		%

Balance of loans collectively evaluated for credit loss	$	4,128,857		$	1,681,575		$	1,087,444		$	1,472,801		$	935,866		$	197,652		$	429,362		$	9,933,557
Allowance related to loans evaluated collectively	$	45,076		$	11,608		$	19,818		$	17,373		$	5,384		$	1,048		$	2,245		$	102,552
Collective allowance to loans evaluated collectively ratio	1.09		%	0.69		%	1.82		%	1.18		%	0.58		%	0.53		%	0.52		%	1.03		%

The following tables present collateral dependent loans individually evaluated for credit loss with the associated allowances for credit losses by the applicable portfolio segment and for the periods indicated:


	September 30, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Loans individually evaluated for credit loss with an allowance:
Non-accruing	$	554	$	1,850	$	—	$	3,016	$	—	$	—	$	—	$	5,420
Restructured accruing	—		—		—		571		—		—		—		571
Restructured non-accruing	—		—		—		3,031		—		—		—		3,031
Balance	$	554	$	1,850	$	—	$	6,618	$	—	$	—	$	—	$	9,022

Allowance	$	134	$	1,122	$	—	$	5,292	$	—	$	—	$	—	$	6,548

Loans individually evaluated for credit loss without an allowance:
Non-accruing	$	6,053	$	479	$	—	$	362	$	—	$	—	$	—	$	6,894
Restructured accruing	—		—		—		—		1,506		—		—		1,506
Restructured non-accruing	7,431		3,965		—		789		—		—		341		12,526
Balance	$	13,484	$	4,444	$	—	$	1,151	$	1,506	$	—	$	341	$	20,926

Total individually evaluated loans:
Non-accruing	$	6,607	$	2,329	$	—	$	3,378	$	—	$	—	$	—	$	12,314
Restructured accruing	—		—		—		571		1,506		—		—		2,077
Restructured non-accruing	7,431		3,965		—		3,820		—		—		341		15,557
Balance	$	14,038	$	6,294	$	—	$	7,769	$	1,506	$	—	$	341	$	29,948

Total unpaid contractual principal balance	$	14,849	$	7,747	$	—	$	9,359	$	1,506	$	—	$	364	$	33,825


	December 31, 2021
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Loans individually evaluated for credit loss with an allowance:
Non-accruing	$	808	$	79	$	650	$	4,849	$	—	$	—	$	—	$	6,386
Restructured accruing	—		—		—		613		—		—		—		613
Restructured non-accruing	336		—		—		2,175		—		—		—		2,511
Balance	$	1,144	$	79	$	650	$	7,637	$	—	$	—	$	—	$	9,510

Allowance	$	213	$	79	$	504	$	5,797	$	—	$	—	$	—	$	6,593

Loans individually evaluated for credit loss without an allowance:
Non-accruing	$	3,498	$	4,775	$	—	$	434	$	—	$	—	$	—	$	8,707
Restructured accruing	—		—		—		—		1,554		—		—		1,554
Restructured non-accruing	7,847		4,452		—		962		150		—		352		13,763
Balance	$	11,345	$	9,227	$	—	$	1,396	$	1,704	$	—	$	352	$	24,024

Total individually evaluated loans:
Non-accruing	$	4,306	$	4,854	$	650	$	5,283	$	—	$	—	$	—	$	15,093
Restructured accruing	—		—		—		613		1,554		—		—		2,167
Restructured non-accruing	8,183		4,452		—		3,137		150		—		352		16,274
Balance	$	12,489	$	9,306	$	650	$	9,033	$	1,704	$	—	$	352	$	33,534

Total unpaid contractual principal balance	$	12,857	$	11,132	$	695	$	10,573	$	2,778	$	—	$	364	$	38,399

The following tables present average principal balance of total non-accrual loans and contractual interest due on non-accrual loans for the periods indicated below:


	For the Nine Months Ended September 30, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Average non-accrual loans for the period	$	12,379	$	7,888	$	771	$	7,879	$	7,852	$	27	$	5,999	$	42,795
Contractual interest income due on non- accrual loans during the period	$	609	$	301	$	—	$	389	$	260	$	—	$	243	$	1,802


	For the Year Ended December 31, 2021
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Average non-accrual loans for the period	$	31,590	$	9,444	$	9,236	$	12,678	$	9,439	$	36	$	7,369	$	79,792
Contractual interest income due on non- accrual loans during the period	$	2,169	$	555	$	597	$	1,096	$	271	$	2	$	402	$	5,092

There was no interest income recognized on non-accrual loans during the nine months ended September 30, 2022. See Note 1 for additional information on the Company's policies for non-accrual loans. Loans designated as non-accrual have all previously accrued but unpaid interest reversed from interest income. During the nine months ended September 30, 2022 new loans placed on non-accrual status totaled $6.7 million and the related amount of reversed uncollected accrued interest was $0.1 million.

Credit Quality

The following section provides information on the credit quality of the loan portfolio for the periods indicated below:


	For the Nine Months Ended September 30, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Analysis of non-accrual loan activity:
Balance at beginning of period	$	12,489	$	9,306	$	650	$	8,420	$	8,441	$	55	$	6,725	$	46,086
Loans placed on non-accrual	2,922		453		—		1,229		1,454		—		605		6,663
Non-accrual balances transferred to OREO	—		—		—		—		—		—		—		—
Non-accrual balances charged-off	—		—		—		(677)		(132)		—		(29)		(838)
Net payments or draws	(1,373)		(2,519)		(650)		(1,774)		(1,420)		(55)		(1,739)		(9,530)
Non-accrual loans brought current	—		(946)		—		—		(829)		—		(389)		(2,164)
Balance at end of period	$	14,038	$	6,294	$	—	$	7,198	$	7,514	$	—	$	5,173	$	40,217


	For the Year Ended December 31, 2021
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Analysis of non-accrual loan activity:
Balance at beginning of period	$	45,227	$	11,561	$	15,044	$	22,933	$	10,212	$	—	$	7,384	$	112,361

Loans placed on non-accrual	699		3,676		49		1,339		695		62		1,626		8,146
Non-accrual balances transferred to OREO	—		(257)		—		—		—		—		—		(257)
Non-accrual balances charged-off	(5,803)		(136)		(2,007)		(3,547)		—		—		(100)		(11,593)
Net payments or draws	(26,813)		(5,538)		(12,436)		(12,305)		(2,406)		(7)		(1,725)		(61,230)
Non-accrual loans brought current	(821)		—		—		—		(60)		—		(460)		(1,341)
Balance at end of period	$	12,489	$	9,306	$	650	$	8,420	$	8,441	$	55	$	6,725	$	46,086


	September 30, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Performing loans:
Current	$	5,033,645	$	1,729,541	$	1,138,204	$	1,383,499	$	1,195,498	$	227,881	$	415,339	$	11,123,607
30-59 days	15,615		1,859		2,725		139		9,251		1,362		2,327		33,278
60-89 days	3,545		6,030		2,854		261		4,616		—		161		17,467
Total performing loans	5,052,805		1,737,430		1,143,783		1,383,899		1,209,365		229,243		417,827		11,174,352
Non-performing loans:
Non-accrual loans	14,038		6,294		—		7,198		7,514		—		5,173		40,217
Loans greater than 90 days past due	—		—		—		1,966		167		—		34		2,167
Restructured loans	—		—		—		571		1,506		—		—		2,077
Total non-performing loans	14,038		6,294		—		9,735		9,187		—		5,207		44,461
Total loans	$	5,066,843	$	1,743,724	$	1,143,783	$	1,393,634	$	1,218,552	$	229,243	$	423,034	$	11,218,813


	December 31, 2021
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Performing loans:
Current	$	4,127,009	$	1,680,635	$	1,085,642	$	1,471,669	$	919,199	$	197,597	$	419,558	$	9,901,309
30-59 days	1,656		86		1,802		753		5,157		—		3,021		12,475
60-89 days	192		854		—		379		2,662		—		410		4,497
Total performing loans	4,128,857		1,681,575		1,087,444		1,472,801		927,018		197,597		422,989		9,918,281
Non-performing loans:
Non-accrual loans	12,489		9,306		650		8,420		8,441		55		6,725		46,086
Loans greater than 90 days past due	—		—		—		—		557		—		—		557
Restructured loans	—		—		—		613		1,554		—		—		2,167
Total non-performing loans	12,489		9,306		650		9,033		10,552		55		6,725		48,810
Total loans	$	4,141,346	$	1,690,881	$	1,088,094	$	1,481,834	$	937,570	$	197,652	$	429,714	$	9,967,091

The credit quality indicators for commercial loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented is based on the most recent credit review performed. These credit quality indicators are defined as follows:

Pass - A pass rated credit is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention credit has potential weaknesses that deserve management’s close attention. If uncorrected, such weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard loan is inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – A loan that is classified as doubtful has all the weaknesses inherent in a loan classified as substandard with added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.

Loss – Loans classified as a loss are considered uncollectible and of such little value that their continuing to be carried as a loan is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

The following table provides information about credit quality indicators by the year of origination as of September 30, 2022:


	September 30, 2022
	Term Loans by Origination Year												Revolving
(In thousands)	2022		2021		2020		2019		2018		Prior		Loans		Total
Commercial Investor R/E:
Pass	$	1,381,369	$	1,273,121	$	672,407	$	553,928	$	311,952	$	781,407	$	16,657	$	4,990,841
Special Mention	22,470		17,199		2,738		95		804		5,355		—		48,661
Substandard	10,859		2,210		—		2,256		8,133		3,883		—		27,341
Doubtful	—		—		—		—		—		—		—		—
Total	$	1,414,698	$	1,292,530	$	675,145	$	556,279	$	320,889	$	790,645	$	16,657	$	5,066,843
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Owner-Occupied R/E:
Pass	$	340,349	$	326,010	$	233,459	$	260,539	$	148,150	$	402,013	$	900	$	1,711,420
Special Mention	5,587		—		916		622		2,090		6,753		—		15,968
Substandard	1,723		163		754		7,946		2,496		3,254		—		16,336
Doubtful	—		—		—		—		—		—		—		—
Total	$	347,659	$	326,173	$	235,129	$	269,107	$	152,736	$	412,020	$	900	$	1,743,724
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial AD&C:
Pass	$	231,277	$	424,256	$	167,110	$	88,831	$	57,611	$	—	$	172,830	$	1,141,915
Special Mention	—		1,073		—		—		—		—		795		1,868
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	$	231,277	$	425,329	$	167,110	$	88,831	$	57,611	$	—	$	173,625	$	1,143,783
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Business:
Pass	$	250,297	$	232,246	$	105,358	$	111,407	$	82,473	$	82,304	$	491,495	$	1,355,580
Special Mention	107		493		1,188		8,770		1,032		736		14,006		26,332
Substandard	2,133		1,795		1,289		2,162		591		2,321		1,431		11,722
Doubtful	—		—		—		—		—		—		—		—
Total	$	252,537	$	234,534	$	107,835	$	122,339	$	84,096	$	85,361	$	506,932	$	1,393,634
Current period gross charge-offs	$	174	$	—	$	—	$	—	$	138	$	404	$	—	$	716

Residential Mortgage:
Beacon score:
660-850	$	293,717	$	292,392	$	167,273	$	44,299	$	56,623	$	271,371	$	—	$	1,125,675
600-659	4,876		15,609		2,695		2,820		3,878		26,061		—		55,939
540-599	1,501		1,914		1,251		1,786		2,538		6,504		—		15,494
less than 540	1,081		3,937		2,390		1,788		1,750		10,498		—		21,444
Total	$	301,175	$	313,852	$	173,609	$	50,693	$	64,789	$	314,434	$	—	$	1,218,552
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	130	$	—	$	130

Residential Construction:
Beacon score:
660-850	$	99,230	$	106,230	$	17,328	$	1,683	$	1,432	$	1,161	$	—	$	227,064
600-659	—		1,595		—		—		—		—		—		1,595
540-599	—		—		—		—		—		—		—		—
less than 540	584		—		—		—		—		—		—		584
Total	$	99,814	$	107,825	$	17,328	$	1,683	$	1,432	$	1,161	$	—	$	229,243
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Beacon score:
660-850	$	3,526	$	2,565	$	1,288	$	2,088	$	2,663	$	24,438	$	350,546	$	387,114
600-659	575		319		32		331		333		5,009		12,360		18,959
540-599	36		63		26		509		109		3,294		3,770		7,807
less than 540	133		106		41		170		373		3,166		5,165		9,154
Total	$	4,270	$	3,053	$	1,387	$	3,098	$	3,478	$	35,907	$	371,841	$	423,034
Current period gross charge-offs	$	—	$	5	$	15	$	—	$	13	$	16	$	134	$	183

Total loans	$	2,651,430	$	2,703,296	$	1,377,543	$	1,092,030	$	685,031	$	1,639,528	$	1,069,955	$	11,218,813

The following table provides information about credit quality indicators by the year of origination as of December 31, 2021:


	December 31, 2021
	Term Loans by Origination Year												Revolving
(In thousands)	2021		2020		2019		2018		2017		Prior		Loans		Total
Commercial Investor R/E:
Pass	$	1,391,969	$	748,236	$	616,761	$	357,640	$	328,327	$	633,913	$	19,239	$	4,096,085
Special Mention	2,210		510		4,646		596		2,204		10,438		—		20,604
Substandard	807		336		4,308		8,568		10,064		574		—		24,657
Doubtful	—		—		—		—		—		—		—		—
Total	$	1,394,986	$	749,082	$	625,715	$	366,804	$	340,595	$	644,925	$	19,239	$	4,141,346
Current period gross charge-offs	$	—	$	—	$	—	$	903	$	3,975	$	924	$	—	$	5,802

Commercial Owner-Occupied R/E:
Pass	$	360,169	$	254,350	$	319,348	$	178,416	$	172,354	$	363,685	$	1,149	$	1,649,471
Special Mention	156		1,476		4,388		9,035		4,456		9,106		—		28,617
Substandard	1,968		1,800		4,028		2,265		354		2,378		—		12,793
Doubtful	—		—		—		—		—		—		—		—
Total	$	362,293	$	257,626	$	327,764	$	189,716	$	177,164	$	375,169	$	1,149	$	1,690,881
Current period gross charge-offs	$	—	$	—	$	—	$	136	$	—	$	—	$	—	$	136

Commercial AD&C:
Pass	$	454,207	$	226,332	$	148,260	$	87,934	$	13,938	$	—	$	152,896	$	1,083,567
Special Mention	2,888		—		—		—		—		—		989		3,877
Substandard	349		—		301		—		—		—		—		650
Doubtful	—		—		—		—		—		—		—		—
Total	$	457,444	$	226,332	$	148,561	$	87,934	$	13,938	$	—	$	153,885	$	1,088,094
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	2,007	$	—	$	—	$	2,007

Commercial Business:
Pass	$	403,871	$	165,194	$	137,069	$	96,800	$	55,100	$	53,764	$	533,893	$	1,445,691
Special Mention	220		1,998		7,030		1,701		548		577		9,212		21,286
Substandard	3,777		3,262		2,609		797		811		2,065		1,536		14,857
Doubtful	—		—		—		—		—		—		—		—
Total	$	407,868	$	170,454	$	146,708	$	99,298	$	56,459	$	56,406	$	544,641	$	1,481,834
Current period gross charge-offs	$	—	$	—	$	88	$	1,674	$	46	$	2,236	$	25	$	4,069

Residential Mortgage:
Beacon score:
660-850	$	246,612	$	165,623	$	46,925	$	65,865	$	102,628	$	223,420	$	—	$	851,073
600-659	11,102		3,285		3,583		4,255		4,645		20,052		—		46,922
540-599	1,472		1,864		2,162		4,522		1,599		8,201		—		19,820
less than 540	452		4,293		1,575		1,829		2,079		9,527		—		19,755
Total	$	259,638	$	175,065	$	54,245	$	76,471	$	110,951	$	261,200	$	—	$	937,570
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential Construction:
Beacon score:
660-850	$	134,335	$	45,890	$	8,063	$	2,078	$	1,347	$	1,160	$	—	$	192,873
600-659	1,922		—		650		—		—		—		—		2,572
540-599	—		—		—		—		—		462		—		462
less than 540	1,745		—		—		—		—		—		—		1,745
Total	$	138,002	$	45,890	$	8,713	$	2,078	$	1,347	$	1,622	$	—	$	197,652
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Beacon score:
660-850	$	3,179	$	1,393	$	3,130	$	3,060	$	1,648	$	26,156	$	350,466	$	389,032
600-659	352		123		324		716		430		4,906		14,119		20,970
540-599	58		8		311		160		89		2,809		4,926		8,361
less than 540	88		58		536		544		98		3,101		6,926		11,351
Total	$	3,677	$	1,582	$	4,301	$	4,480	$	2,265	$	36,972	$	376,437	$	429,714
Current period gross charge-offs	$	—	$	—	$	7	$	2	$	—	$	106	$	184	$	299

Total loans	$	3,023,908	$	1,626,031	$	1,316,007	$	826,781	$	702,719	$	1,376,294	$	1,095,351	$	9,967,091

The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:


	For the Nine Months Ended September 30, 2022
	Commercial Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		All Other Loans		Total
Troubled debt restructurings:
Restructured accruing	$	—	$	—	$	—	$	32	$	—	$	32
Restructured non-accruing	—		—		—		1,200		—		1,200
Balance	$	—	$	—	$	—	$	1,232	$	—	$	1,232

Individual allowance	$	—	$	—	$	—	$	1,200	$	—	$	1,200

Restructured and subsequently defaulted	$	—	$	—	$	—	$	—	$	—	$	—


	For the Year Ended December 31, 2021
	Commercial Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		All Other Loans		Total
Troubled debt restructurings:
Restructured accruing	$	—	$	—	$	—	$	—	$	—	$	—
Restructured non-accruing	9,594		3,157		—		1,824		—		14,575
Balance	$	9,594	$	3,157	$	—	$	1,824	$	—	$	14,575

Individual allowance	$	—	$	—	$	—	$	461	$	—	$	461

Restructured and subsequently defaulted	$	—	$	—	$	—	$	—	$	—	$	—

During the nine months ended September 30, 2022, the Company restructured $1.2 million in loans that were designated as TDRs. TDR loans are subject to periodic credit reviews to determine the necessity and appropriateness of an individual credit loss allowance based on the collectability of the recorded investment in the TDR loan. Loans restructured as TDRs during the nine months ended September 30, 2022 had individual reserves of $1.2 million at September 30, 2022. For the year ended December 31, 2021, the Company restructured $14.6 million in loans. Loans restructured as TDRs during 2021 had individual reserves of $0.5 million at December 31, 2021. During both the nine months ended September 30, 2022 and the year ended December 31, 2021 TDR modifications consisted principally of interest rate concessions, term extensions and did not result in the reduction of the recorded investment in the associated loan balances. The commitments to lend additional funds on loans that have been restructured at September 30, 2022 and December 31, 2021 were not significant.

Other Real Estate Owned

Other real estate owned ("OREO") totaled $0.7 million and $1.0 million at September 30, 2022 and December 31, 2021, respectively. There were seven consumer mortgage loans secured by residential real estate property for which formal foreclosure proceedings were in process as of September 30, 2022 with the total amount of $2.0 million.

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

The amount of goodwill by reportable segment is presented in the following table:


(In thousands)	Community Banking		Insurance		Investment Management		Total
Balances at December 31, 2021	$	331,689	$	6,787	$	31,747	$	370,223

Disposal of subsidiary's assets	—		(6,787)		—		(6,787)
Balances at September 30, 2022	$	331,689	$	—	$	31,747	$	363,436

The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at the dates indicated in the following table:


	September 30, 2022						Weighted Average Remaining Life	December 31, 2021						Weighted Average Remaining Life
(Dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	29,038	$	(15,713)	$	13,325	6.7 years	$	29,038	$	(12,624)	$	16,414	7.4 years
Other identifiable intangibles	13,906		(5,969)		7,937		9.0 years	13,906		(4,400)		9,506		9.7 years
Total amortizing intangible assets	$	42,944	$	(21,682)	$	21,262		$	42,944	$	(17,024)	$	25,920

Goodwill	$	363,436			$	363,436		$	370,223			$	370,223

The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:


(In thousands)	Amount
Remaining 2022	$	1,408
2023	5,040
2024	4,290
2025	3,530
2026	2,702
Thereafter	4,292
Total amortizing intangible assets	$	21,262

NOTE 6 – DEPOSITS

The following table presents the composition of deposits at the dates indicated:


(In thousands)	September 30, 2022		December 31, 2021
Noninterest-bearing deposits	$	3,993,480	$	3,779,630
Interest-bearing deposits:
Demand	1,362,809		1,604,714
Money market savings	3,169,832		3,415,663
Regular savings	540,575		533,862


Time deposits of less than $250,000	1,289,642		910,464
Time deposits of $250,000 or more	393,148		380,398
Total interest-bearing deposits	6,756,006		6,845,101
Total deposits	$	10,749,486	$	10,624,731

NOTE 7 – BORROWINGS

Subordinated Debt

On March 15, 2022, the Company completed an offering of $200.0 million aggregate principal amount Fixed to Floating Rate Subordinated Notes due in 2032. The notes bear a fixed interest rate of 3.875% per year through March 29, 2027. Commencing on March 30, 2027, the notes will bear interest at a floating rate per annum equal to the benchmark rate (which is expected to be the three-month SOFR rate) plus a spread of 196.5 basis points, payable quarterly in arrears. The total amount of debt issuance

costs incurred was $3.1 million, which are being amortized through the contractual life of the debt. The entire amount of the subordinated debt is considered Tier 2 capital under current regulatory guidelines.

On November 5, 2019, the Company completed an offering of $175.0 million aggregate principal amount Fixed to Floating Rate Subordinated Notes due in 2029. The notes bear a fixed interest rate of 4.25% per year through November 14, 2024. Beginning November 15, 2024, the interest rate will become a floating rate equal to three month LIBOR, or an alternative benchmark rate as determined pursuant to the terms of the indenture for the notes in the event LIBOR has been discontinued by November 15, 2024, plus 262 basis points through the remaining maturity or early redemption date of the notes. The interest will be paid in arrears semi-annually during the fixed rate period and quarterly during the floating rate period. The Company incurred $2.9 million of debt issuance costs which are being amortized through the contractual life of the debt. The entire amount of the subordinated debt is considered Tier 2 capital under current regulatory guidelines.

In conjunction with the acquisition of WashingtonFirst Bankshares, Inc. ("WashingtonFirst") in 2018, the Company assumed $25.0 million in subordinated debt with an associated purchase premium at acquisition of $2.2 million. The premium was amortized over the contractual life of the obligation. The subordinated debt had a maturity of 10 years, maturing on October 15, 2025, and was non-callable through October 15, 2020. The subordinated debt held a fixed interest rate of 6.00% per annum through October 5, 2020 at which point the rate became variable at the three-month LIBOR plus 457 basis points payable quarterly. On July 15, 2021, the Company redeemed the entire outstanding principal balance of the WashingtonFirst subordinated debt.

In conjunction with the acquisition of Revere Bank ("Revere") in 2020, the Company assumed $31.0 million in subordinated debt with an associated purchase premium at acquisition of $0.2 million, which was amortized through the call date. The subordinated debt had a 10-year term, maturing on September 30, 2026, and was non-callable until September 30, 2021. The subordinated debt had a fixed interest rate of 5.625% per annum, payable semi-annually, through December 31, 2021 at which point the interest rate reset quarterly to an amount equal to three month LIBOR plus 441 basis points. On September 30, 2021, the Company redeemed the entire outstanding principal balance of the Revere subordinated debt.

The following table provides information on subordinated debt as of the date indicated:


(In thousands)	September 30, 2022		December 31, 2021
Fixed to floating rate subordinated debt, 3.875%	$	200,000	$	—
Fixed to floating rate subordinated debt, 4.25%	175,000		175,000


Total subordinated debt	375,000		175,000


Less: Debt issuance costs	(4,944)		(2,288)




Long-term borrowings	$	370,056	$	172,712

Other Borrowings

At September 30, 2022 and December 31, 2021, the Company had $91.3 million and $141.1 million, respectively, of outstanding retail repurchase agreements.

The Company had $115.0 million of outstanding federal funds purchased at September 30, 2022 and did not have any outstanding at December 31, 2021. The available borrowing capacity under unsecured lines of credit with the correspondent banks was $1.4 billion and $1.3 billion at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.3 billion. FHLB availability based on pledged collateral at September 30, 2022, amounted to $2.5 billion, with $840.0 million outstanding. At December 31, 2021, the Company possessed the ability to extend its lines of credit with the FHLB totaling $3.9 billion based on collateral that was available to be pledged. The availability of FHLB borrowings based on the collateral pledged at December 31, 2021 was $2.7 billion with no outstanding borrowings.

Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $1.1 billion, commercial real estate loans amounting to $3.6 billion, home equity lines of credit (“HELOC”) amounting to $215.0 million, and multifamily loans amounting to $476.1 million at September 30, 2022, as collateral under the borrowing agreement with the FHLB. At December 31, 2021, the Company had pledged collateral of qualifying mortgage loans of $829.1 million, commercial real estate loans of $3.1 billion, HELOC loans of $224.4 million, and multifamily loans of $333.4 million under the FHLB borrowing agreement.

The Company also had secured lines of credit available from the Federal Reserve Bank and correspondent banks of $734.7 million and $509.4 million at September 30, 2022 and December 31, 2021, respectively, collateralized by loans, with no borrowings outstanding at the end of either period.

NOTE 8 – STOCKHOLDERS' EQUITY

On March 30, 2022, the Company's board of directors authorized a stock repurchase plan that permits the repurchase of up to $50.0 million of the Company's common stock. During the nine months ended September 30, 2022, the Company repurchased and retired 625,710 common shares at an average price of $39.93 per share for the total cost of $25.0 million.

During 2021, the Company completed its previously authorized stock repurchase plan with the repurchase of all 2,350,000 shares of common stock at an average price of $45.65 per share for a total cost of $107.3 million.

NOTE 9 – SHARE BASED COMPENSATION

The Company’s 2015 Omnibus Incentive Plan ("Omnibus Incentive Plan") was approved on May 6, 2015 and provides for the granting of incentive stock options, non-qualifying stock options, stock appreciation rights, restricted stock grants, restricted stock units and performance share units to selected directors and employees on a periodic basis at the discretion of the Company’s Board of Directors. The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, of which 636,578 are available for issuance at September 30, 2022, has a term of 10 years, and is administered by a committee of at least three directors appointed by the Board of Directors. Grants of restricted stock units made in 2022 allow continued vesting upon retirement. Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven or 10 years from the date of grant depending on the terms of the grant agreement. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatilities are generally based on historical volatilities. The expected term of share options granted is generally derived from historical experience.

Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option, restricted stock, restricted stock unit grant or performance share units. The Company recognized compensation expense of $1.6 million and $1.3 million for the three months ended September 30, 2022 and 2021, respectively, and of $6.2 million and $3.6 million, for the nine months ended September 30, 2022 and 2021, respectively, related to the awards of restricted stock award grants, restricted stock unit grants and performance share unit grants. There was no unrecognized compensation cost related to stock options as of September 30, 2022. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $8.9 million as of September 30, 2022. That cost is expected to be recognized over a weighted average period of approximately 1.92 years.

During the nine months ended September 30, 2022, the Company granted 169,190 restricted stock units and performance share units, of which 45,567 units are subject to achievement of certain performance conditions measured over a three-year performance period and 123,623 restricted stock units are subject to a three year vesting schedule. The Company did not grant any stock options under the Omnibus Incentive Plan during the nine months ended September 30, 2022.

A summary of the activity for the Company’s restricted stock, restricted stock units and performance share units for the period indicated is presented in the following table:


	Number of Common Shares/Units	Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2022	390,520	$	32.67
Granted	169,190	$	44.99
Vested	(154,384)	$	32.68
Forfeited/ cancelled	(12,317)	$	36.37
Non-vested at September 30, 2022	393,009	$	37.43

A summary of share option activity for the period indicated is reflected in the following table:


	Number of Common Shares	Weighted Average Exercise Share Price		Weighted Average Contractual Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Balance at January 1, 2022	159,741	$	17.18	2.4 years	$	5,264
Granted	—	$	—

Exercised	(12,703)	$	21.67		$	299
Forfeited	—	$	—
Expired	(1,416)	$	41.41
Balance at September 30, 2022	145,622	$	16.55	1.8 years	$	3,541

Exercisable at September 30, 2022	145,622	$	16.55	1.8 years	$	3,541

NOTE 10 – PENSION PLAN

Defined Benefit Pension Plan

The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”). Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus salary increases and additional years of service after such date no longer affect the defined benefit provided by the Plan, although additional vesting may continue to occur.

The Company's funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the Plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds.

On March 30, 2022, the Board of Directors approved the termination of the Plan to be effective as of June 30, 2022. The Company has executed plan amendments regarding the Plan termination and filed an Application for Determination for Terminating Plan with the Internal Revenue Service (“IRS”) for a determination as to the tax-qualified status of the Plan at the time of termination. Over the next several months, the Company intends to prepare and file appropriate notices and documents related to the Plan’s termination and wind-down with the Pension Benefit Guaranty Corporation (“PBGC”).

After receiving approval from the IRS and the PBGC, which is expected to be in 2023, the Company will make an additional cash contribution, if necessary, in order to fully fund the Plan on a plan termination basis, followed by the purchase of annuity contracts to transfer its remaining liabilities under the Plan. The actual amount of this cash contribution, if any, will depend upon the nature and timing of participant settlements, as well as prevailing market conditions. In addition, the Company expects to recognize a non-cash pension settlement charge upon settlement of the obligations of the Plan.

All participants who are not already receiving annuities will be given the opportunity to elect a lump sum payout. Benefit obligations of participants who do not elect a lump sum or who are being paid in an annuity form will be transferred under an annuity contract from a highly-rated insurance company that will pay and administer future benefit payments. There will be no change in the benefit earned by Plan participants as a result of these actions. The Plan termination is subject to regulatory approvals and the Company has the right to change the effective date of the Plan termination or to revoke its decision to terminate the Plan, but it has no intent to do so.

The components of net periodic benefit cost for the periods indicated are presented in the following table:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2022		2021		2022		2021
Interest cost on projected benefit obligation	$	325	$	316	$	976	$	952
Expected return on plan assets	(353)		(312)		(1,058)		(936)
Recognized net actuarial loss	196		228		587		682

Net periodic benefit cost	$	168	$	232	$	505	$	698

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of Plan assets in the current economy and, since the Plan is currently frozen, the remaining investment horizon of the Plan. The Company did not make any contribution to the Plan during the nine months ended September 30, 2022. Management continues to monitor the funding level of the Plan and may make additional contributions as necessary during 2022.

NOTE 11 – NET INCOME PER COMMON SHARE

The calculation of net income per common share for the periods indicated is presented in the following table:


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars and amounts in thousands, except per share data)	2022		2021		2022		2021
Net income	$	33,584	$	56,976	$	132,319	$	189,703
Distributed and undistributed earnings allocated to participating securities	(114)		(354)		(575)		(1,219)
Net income attributable to common shareholders	$	33,470	$	56,622	$	131,744	$	188,484

Total weighted average outstanding shares	44,793		47,197		45,131		47,409
Less: Weighted average participating securities	(153)		(294)		(198)		(307)
Basic weighted average common shares	44,640		46,903		44,933		47,102
Dilutive weighted average common stock equivalents	141		184		165		213
Diluted weighted average common shares	44,781		47,087		45,098		47,315

Basic net income per common share	$	0.75	$	1.21	$	2.93	$	4.00
Diluted net income per common share	$	0.75	$	1.20	$	2.92	$	3.98

Anti-dilutive shares	8		—		20		—

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE LOSS

Comprehensive income/ (loss) is defined as net income/ (loss) plus transactions and other occurrences that are the result of non-owner changes in equity. For Condensed Consolidated Financial Statements presented for the Company, non-owner changes in equity are comprised of unrealized gains or losses on investments available-for-sale and held-to-maturity, and any minimum pension liability adjustments.

During the quarter ended March 31, 2022, the Company transferred certain debt securities from available-for-sale to held-to-maturity. The total amortized cost of debt securities transferred was $305.6 million with the associated after tax unrealized loss $12.1 million at the date of transfer. This after tax unrealized loss continues to be reported in accumulated other comprehensive income and is amortized over the remaining lives of debt securities as a yield adjustment.

The following table presents the activity in net accumulated other comprehensive income/ (loss) and the components of the activity for the periods indicated:


(In thousands)	Unrealized Gains/(Losses) on Debt Securities Available-for-Sale		Defined Benefit Pension Plan		Unrealized Losses on Debt Securities Transferred from Available-for-Sale to Held-to-Maturity		Total
Balance at January 1, 2022	$	(336)	$	(8,203)	$	—	$	(8,539)
Other comprehensive loss before reclassification from accumulated other comprehensive loss, net of tax	(124,097)		—		(12,083)		(136,180)
Reclassifications from accumulated other comprehensive loss to earnings, net of tax	(36)		419		1,266		1,649
Current period change in other comprehensive loss, net of tax	(124,133)		419		(10,817)		(134,531)
Balance at September 30, 2022	$	(124,469)	$	(7,784)	$	(10,817)	$	(143,070)


(In thousands)	Unrealized Gains/ (Losses) on Debt Securities Available-for-Sale		Defined Benefit Pension Plan		Total
Balance at January 1, 2021	$	28,175	$	(9,470)	$	18,705
Other comprehensive income before reclassification, net of tax	(20,218)		—		(20,218)
Reclassifications from accumulated other comprehensive income, net of tax	(133)		520		387
Current period change in other comprehensive income, net of tax	(20,351)		520		(19,831)
Balance at September 30, 2021	$	7,824	$	(8,950)	$	(1,126)

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income/ (loss) for the periods indicated:


	Nine Months Ended September 30,
(In thousands)	2022		2021
Unrealized gains on available-for-sale debt securities:
Affected line item in the Statements of Income:
Investment securities gains	$	48	$	178
Income before taxes	48		178
Tax expense	(12)		(45)
Net income	$	36	$	133

Amortization of unrealized losses on debt securities transferred from available-for-sale to held-to-maturity:
Affected line item in the Statements of Income:
Interest and dividends on investment securities (1)	$	(1,735)	$	—
Income before taxes	(1,735)		—
Tax benefit	469		—
Net loss	$	(1,266)	$	—

Amortization of defined benefit pension plan items:
Affected line item in the Statements of Income:
Recognized actuarial loss (2)	$	(587)	$	(682)

Loss before taxes	(587)		(682)
Tax benefit	168		162
Net loss	$	(419)	$	(520)

(1)Amortization of unrealized losses on held-to-maturity debt securities is fully offset by accretion of a discount on held-to-maturity debt securities with no overall impact on net income and yield.

(2)This amount is included in the computation of net periodic benefit cost. See Note 10 for additional information on the pension plan.

NOTE 13 – LEASES

The Company leases real estate properties for its network of bank branches, financial centers and corporate offices. All of the Company’s leases are currently classified as operating. Most lease agreements include one or more options to renew, with renewal terms that can extend the original lease term from one to twenty years or more. The Company does not sublease any of its leased real estate properties.

The following table provides information regarding the Company's leases as of the dates indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Components of lease expense:
Operating lease cost (resulting from lease payments)	$	2,707	$	3,047	$	8,211	$	9,333




Supplemental cash flow information related to leases:
Operating cash flows from operating leases	$	2,866	$	3,208	$	8,698	$	9,762
ROU assets obtained in the exchange for lease liabilities due to:
New leases	$	—	$	—	$	—	$	803
Acquisitions	$	—	$	—	$	—	$	—

					September 30, 2022		December 31, 2021
Supplemental balance sheet information related to leases:
Operating lease ROU assets					$	51,302	$	57,872
Operating lease liabilities					$	59,962	$	67,138

Other information related to leases:
Weighted average remaining lease term of operating leases					8.6 years		9.0 years
Weighted average discount rate of operating leases					2.97%		2.92%

At September 30, 2022, the maturities of the Company’s operating lease liabilities were as follows:


(In thousands)	Amount
Maturity:
Remaining 2022	$	2,869
2023	11,515
2024	9,594
2025	7,769
2026	6,999
Thereafter	30,538
Total undiscounted lease payments	69,284
Less: Present value discount	(9,322)
Lease liability	$	59,962

At September 30, 2022, the Company had no operating leases that have not yet commenced operations. The Company does not have any lease arrangements with any of its related parties as of September 30, 2022.

NOTE 14 – DERIVATIVES

The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and, therefore, has no credit risk. The notional value of the swaps outstanding was $337.2 million as of September 30, 2022 compared to $396.3 million as of December 31, 2021. The fair values of swap positions net to zero to minimize the potential impact on the Company’s Condensed Consolidated Financial Statements. Fair values of the swaps are carried as both gross assets and gross liabilities in other assets and other liabilities, respectively, in the Condensed Consolidated Statements of Condition. The associated net gains and losses on the swaps are recorded in Other income in the Condensed Consolidated Statements of Income.

NOTE 15 – LITIGATION

In the ordinary course of business, the Company and its subsidiaries are subject to various pending or threatened legal proceedings in which claims for monetary damages are asserted. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these legal matters will have a material adverse effect on the Company's financial condition, operating results or liquidity.

NOTE 16 – FAIR VALUE

GAAP provides entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes in fair value must be recorded in earnings. The Company applies the fair value option on residential mortgage loans held for sale. The fair value option on residential mortgage loans held for sale allows the recognition of gains on the sale of mortgage loans to more accurately reflect the timing and economics of the transaction.

The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below.

Basis of Fair Value Measurement:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, changes to interest rates could result in higher or lower measurements of the fair values.

Assets and Liabilities

Residential mortgage loans held for sale

Residential mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 in the fair value hierarchy.

Investment securities available-for-sale

U.S. treasuries and government agencies securities and mortgage-backed and asset-backed securities

Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms, and databases coupled with extensive quality control programs. Quality control evaluation processes use available market, credit and deal level information to support the evaluation of the security. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not adjust the quoted price for such securities. Such instruments are classified within Level 2 in the fair value hierarchy.

State and municipal securities

The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. The Company independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, including references to dealer or other market quotes, by reviewing valuations of comparable instruments, and by comparing the prices realized on the sale of similar securities. Such securities are classified within Level 2 in the fair value hierarchy.

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.

Assets Measured at Fair Value on a Recurring Basis

The following tables set forth the Company’s financial assets and liabilities at the dates indicated that were accounted for or disclosed at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	September 30, 2022
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Residential mortgage loans held for sale (1)	$	—	$	11,469	$	—	$	11,469
Available-for-sale debt securities:
U.S. treasuries and government agencies	—		92,805		—		92,805
State and municipal	—		276,939		—		276,939
Mortgage-backed and asset-backed	—		874,591		—		874,591

Total available-for-sale debt securities	—		1,244,335		—		1,244,335
Interest rate swap agreements	—		19,546		—		19,546
Total assets	$	—	$	1,275,350	$	—	$	1,275,350

Liabilities:
Interest rate swap agreements	$	—	$	(19,546)	$	—	$	(19,546)
Total liabilities	$	—	$	(19,546)	$	—	$	(19,546)

(1) The outstanding principal balance for residential loans held for sale as of September 30, 2022 was $11.6 million.


	December 31, 2021
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Residential mortgage loans held for sale (1)	$	—	$	39,409	$	—	$	39,409
Investments available-for-sale:
U.S. treasuries and government agencies	—		68,539		—		68,539
State and municipal	—		326,402		—		326,402
Mortgage-backed and asset-backed	—		1,070,955		—		1,070,955




Total investments available-for-sale	—		1,465,896		—		1,465,896
Interest rate swap agreements	—		5,880		—		5,880
Total assets	$	—	$	1,511,185	$	—	$	1,511,185

Liabilities:
Interest rate swap agreements	$	—	$	(5,880)	$	—	$	(5,880)
Total liabilities	$	—	$	(5,880)	$	—	$	(5,880)

(1) The outstanding principal balance for residential loans held for sale as of December 31, 2021 was $38.2 million.

Assets Measured at Fair Value on a Nonrecurring Basis

The following tables set forth the Company’s financial assets subject to fair value adjustments on a nonrecurring basis at the date indicated that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	September 30, 2022
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Loans (1)	$	—	$	—	$	193	$	193	$	(883)
Other real estate owned	—		—		739		739		(81)
Total	$	—	$	—	$	932	$	932	$	(964)

(1) Amounts represent the fair value of collateral for collateral dependent non-accrual loans allocated to the allowance for credit losses. Fair values are determined using actual market prices (Level 2), independent third-party valuations and borrower records, discounted as appropriate (Level 3).


	December 31, 2021
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Loans (1)	$	—	$	—	$	404	$	404	$	(1,353)
Other real estate owned	—		—		1,034		1,034		(81)
Total	$	—	$	—	$	1,438	$	1,438	$	(1,434)

At September 30, 2022, loans totaling $29.9 million were written down to fair value of $23.4 million as a result of individual credit loss allowances of $6.5 million associated with the collateral dependent loans. Loans totaling $33.5 million were written down to fair value of $26.9 million at December 31, 2021 as a result of individual credit loss allowances of $6.6 million associated with the collateral dependent loans.

Fair value of the collateral dependent loans is measured based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly, based on the factors identified above.

OREO is adjusted to fair value upon acquisition of the real estate collateral. Subsequently, OREO is carried at the lower of carrying value or fair value. The estimated fair value for OREO included in Level 3 is determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial recognition, the Company records the OREO as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

Fair Value of Financial Instruments

The Company discloses fair value information, based on the exit price notion, of financial instruments that are not measured at fair value in the financial statements. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived

based on the amount and timing of future cash flows and estimated discount rates based on observable inputs (“Level 2”) or unobservable inputs (“Level 3”).

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company. Management utilizes internal models used in asset liability management to determine the fair values disclosed below. Other investments include FRB and FHLB stock, whose carrying amounts approximate fair values based on the redemption provisions of each entity.

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented in the following tables:


					Fair Value Measurements
	September 30, 2022				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	258,808	$	258,808	$	258,808	$	—	$	—
Residential mortgage loans held for sale	11,469		11,469		—		11,469		—
Available-for-sale debt securities	1,244,335		1,244,335		—		1,244,335		—
Held-to-maturity debt securities	265,648		226,030		—		226,030		—
Other investments	77,296		77,296		—		77,296		—
Loans, net of allowance	11,090,545		10,765,365		—		—		10,765,365
Interest rate swap agreements	19,546		19,546		—		19,546		—
Accrued interest receivable	37,074		37,074		37,074		—		—
Bank owned life insurance	152,065		152,065		—		152,065		—

Financial liabilities:
Time deposits	$	1,682,790	$	1,646,655	$	—	$	1,646,655	$	—
Other deposits	9,066,696		9,066,696		9,066,696		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	206,287		206,287		—		206,287		—
Advances from FHLB	840,000		839,859		—		839,859		—
Subordinated debt	370,056		328,855		—		—		328,855
Interest rate swap agreements	19,546		19,546		—		19,546		—
Accrued interest payable	6,957		6,957		6,957		—		—


					Fair Value Measurements
	December 31, 2021				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	420,020	$	420,020	$	420,020	$	—	$	—
Residential mortgage loans held for sale	39,409		39,409		—		39,409		—
Investments available-for-sale	1,465,896		1,465,896		—		1,465,896		—
Other investments	41,166		41,166		—		41,166		—
Loans, net of allowance	9,857,946		9,964,924		—		—		9,964,924
Interest rate swap agreements	5,880		5,880		—		5,880		—
Accrued interest receivable	34,349		34,349		34,349		—		—
Bank owned life insurance	147,528		147,528		—		147,528		—

Financial liabilities:
Time deposits	$	1,290,862	$	1,292,598	$	—	$	1,292,598	$	—
Other deposits	9,333,869		9,333,869		9,333,869		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	141,086		141,086		—		141,086		—

Subordinated debt	172,712		175,780		—		—		175,780
Interest rate swap agreements	5,880		5,880		—		5,880		—
Accrued interest payable	1,516		1,516		1,516		—		—

NOTE 17 - SEGMENT REPORTING

Currently, the Company conducts business in two operating segments - Community Banking and Investment Management. Each of the operating segments is a strategic business unit that offers different products and services. The Investment Management segment was a business acquired in a separate transaction where management of the acquired business was retained. The accounting policies of the segments are the same as those of the Company. However, the segment data reflects inter-segment transactions and balances.

The Community Banking segment is conducted through the Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to both individuals and businesses. Parent company income and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income fees, and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment, and other expenses. Non-cash charges associated with amortization of intangibles were $1.0 million and $1.2 million for the three months ended September 30, 2022 and 2021, respectively, and were $3.1 million and $3.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Prior to June 2022, the Company operated the Insurance segment through Sandy Spring Insurance Corporation, a subsidiary of the Bank. Effective June 1, 2022, the Company sold substantially all of the assets of Sandy Spring Insurance Corporation to a leading global insurance brokerage and financial services firm. Results of operations of the Insurance segment for the three and nine months ended September 30, 2022 are presented in the table below.

The Investment Management segment is conducted through West Financial and RPJ, subsidiaries of the Bank. These asset management and financial planning firms, located in McLean, Virginia and Falls Church, Virginia, respectively, provide comprehensive investment management and financial planning to individuals, families, small businesses and associations, including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial and RPJ had approximately $3.3 billion in combined assets under management as of September 30, 2022. Major revenue sources include non-interest income earned on the above services. Expenses include personnel, occupancy, support charges, and other expenses. Non-cash charges associated with amortization of intangibles were $0.4 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively, and were $1.3 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively.

Information for the operating segments and reconciliation of the information to the Condensed Consolidated Financial Statements for the periods indicated are presented in the following tables:


	Three Months Ended September 30, 2022
(In thousands)	Community Banking		Insurance		Investment Management		Inter-Segment Elimination		Total
Interest income	$	130,422	$	23	$	3	$	(26)	$	130,422
Interest expense	17,488		—		—		(26)		17,462
Provision for credit losses	18,890		—		—		—		18,890
Non-interest income	11,956		(184)		5,415		(305)		16,882
Non-interest expense	61,135		(107)		4,891		(139)		65,780
Income before income taxes	44,865		(54)		527		(166)		45,172
Income tax expense	11,281		53		254		—		11,588
Net income	$	33,584	$	(107)	$	273	$	(166)	$	33,584

Assets	$	13,783,402	$	17,698	$	52,821	$	(88,324)	$	13,765,597


	Three Months Ended September 30, 2021
(In thousands)	Community Banking		Insurance		Investment Management		Inter-Segment Elimination		Total
Interest income	$	111,129	$	—	$	3	$	(3)	$	111,129
Interest expense	4,528		—		—		(3)		4,525
Provision/ (credit) for credit losses	(8,229)		—		—		—		(8,229)
Non-interest income	16,644		2,282		5,685		(217)		24,394
Non-interest expense	58,059		1,696		3,643		(217)		63,181
Income/ (loss) before income taxes	73,415		586		2,045		—		76,046
Income tax expense/ (benefit)	18,385		185		500		—		19,070
Net income/ (loss)	$	55,030	$	401	$	1,545	$	—	$	56,976

Assets	$	13,017,464	$	9,203	$	57,324	$	(66,527)	$	13,017,464


	Nine Months Ended September 30, 2022
(In thousands)	Community Banking		Insurance		Investment Management		Inter-Segment Elimination		Total
Interest income	$	350,367	$	24	$	8	$	(32)	$	350,367
Interest expense	30,038		—		—		(32)		30,006
Provision for credit losses	23,571		—		—		—		23,571
Non-interest income	51,669		19,449		16,699		(15,095)		72,722
Non-interest expense	177,637		3,756		12,104		(579)		192,918
Income before income taxes	170,790		15,717		4,603		(14,516)		176,594
Income tax expense	38,471		4,450		1,354		—		44,275
Net income	$	132,319	$	11,267	$	3,249	$	(14,516)	$	132,319

Assets	$	13,783,402	$	17,698	$	52,821	$	(88,324)	$	13,765,597


	Nine Months Ended September 30, 2021
(In thousands)	Community Banking		Insurance		Investment Management		Inter-Segment Elimination		Total
Interest income	$	340,213	$	2	$	7	$	(9)	$	340,213
Interest expense	20,972		—		—		(9)		20,963
Provision/ (credit) for credit losses	(47,141)		—		—		—		(47,141)
Non-interest income	62,083		5,679		16,408		(4,651)		79,519
Non-interest expense	179,803		4,507		10,670		(651)		194,329
Income before income taxes	248,662		1,174		5,745		(4,000)		251,581
Income tax expense	59,951		347		1,580		—		61,878
Net income	$	188,711	$	827	$	4,165	$	(4,000)	$	189,703

Assets	$	13,017,464	$	9,203	$	57,324	$	(66,527)	$	13,017,464

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report, as well as other periodic reports filed with the Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of Sandy Spring Bancorp, Inc. and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These principal risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2021 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

•risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues, the effectiveness and acceptance of vaccination programs, the imposition of restrictions on business operations and/or travel; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates;

•the impacts related to or resulting from Russia's military action in Ukraine, including the broader impacts to financial markets and the global macroeconomic and geopolitical environments;

•general business and economic conditions, including higher inflation and its impacts, nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, the ability of businesses to remain viable and consumer and business confidence, which could lead to decreases in the demand for loans, deposits and other financial services that we provide and increases in loan delinquencies and defaults;

•changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

•our liquidity requirements could be adversely affected by changes in our assets and liabilities;

•our investment securities portfolio is subject to credit risk, market risk, and liquidity risk, as well as changes in the estimates we use to value certain of the securities in our portfolio;

•the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

•acquisition risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits and costs savings from, and limit any unexpected liabilities associated with, any business combinations;

•competitive factors among financial services companies, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

•the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other regulatory agencies; and

•the effect of fiscal and governmental policies of the United States federal government.

Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

The Company

Sandy Spring Bancorp, Inc. is the bank holding company for Sandy Spring Bank (the “Bank”). The Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. At September 30, 2022, the Company had $13.8 billion in total assets, compared to $12.6 billion at December 31, 2021. Bancorp is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Bank is an independent and community-oriented bank that offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Virginia, and the greater Washington, D.C. market. Through its subsidiaries, West Financial Services, Inc. ("West") and SSB Wealth Management, Inc. (d/b/a Rembert Pendleton and Jackson, "RPJ”), the Bank also offers wealth management services. Prior to June 2022, the Company operated Sandy Spring Insurance Corporation, a subsidiary of the Bank. Effective June 1, 2022, the Company sold substantially all of the assets of Sandy Spring Insurance Corporation. The Bank is a state chartered bank subject to supervision and regulation by the Federal Reserve and the State of Maryland. Deposit accounts of the Bank are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.

Current Quarter Financial Overview

The Company recorded net income of $33.6 million ($0.75 per diluted common share) in the current quarter compared to net income of $57.0 million ($1.20 per diluted common share) for the third quarter of 2021 and net income of $54.8 million ($1.21 per diluted common share) for the second quarter of 2022. The decline in earnings was primarily the result of the current quarter's charge to provision for credit losses compared to the prior year's credit to provision for credit losses and the decrease in non-interest income, which were partially offset by the increase in net interest income. The provision for credit losses for the current quarter was a charge of $18.9 million compared to a credit of $8.2 million for the third quarter of 2021 and a charge of $3.0 million for the second quarter of 2022. The provision for credit losses was comprised of a provision for credit losses of $14.1 million directly attributable to funded loans and a provision of $4.8 million associated with an adjustment to the allowance for credit losses related to unfunded loan commitments. Non-interest income decreased as a result of the combination of lower mortgage banking income, the impact of the sale of the Company's insurance business, which reduced commission income, and lower bankcard fees resulting from the implementation of applicable regulations. Non-interest expense increased 4% primarily as a result of the rise in compensation costs and other expenses in the current quarter compared to the prior year quarter.

Current quarter core earnings were $35.7 million ($0.80 per diluted common share), compared to $58.2 million ($1.23 per diluted common share) for the quarter ended September 30, 2021 and $44.2 million ($0.98 per diluted common share) for the quarter ended June 30, 2022. Core earnings are determined by excluding the after-tax impact of merger, acquisition and disposal expense, the loss on FHLB redemptions, amortization of intangibles, gain or loss on disposal of assets, contingent payment expense and investment securities gains. Core earnings for the current period when compared to the prior year quarter were reduced primarily as a result of the activity associated with provisioning for credit losses, a decline in mortgage banking income, and declines in insurance commission and bankcard income.

The current quarter reflects the following:

•At September 30, 2022, total assets were $13.8 billion, a 6% increase compared to $13.0 billion at September 30, 2021. Excluding PPP loans, total assets increased 10% during the same period.

•Net interest income for the third quarter of 2022 grew $6.4 million or 6% compared to the third quarter of 2021. Excluding PPP interest and fees, net interest income increased $17.5 million or 18% for the current quarter compared to the prior year quarter driven by growth of the commercial loan portfolio.

•For the third quarter of 2022, the net interest margin was 3.53% compared to 3.52% for the third quarter of 2021, and 3.49% for the second quarter of 2022. Excluding the amortization of the fair value marks derived from previous acquisitions and interest and fees from PPP loans, the current quarter’s net interest margin was 3.50% compared to 3.32% for third quarter of 2021, and 3.45% for the second quarter of 2022.

•The provision for credit losses directly attributable to the funded loan portfolio was $14.1 million for the current quarter compared to the prior year quarter’s credit to the provision for credit losses of $8.2 million. In addition, to the current quarter's provision for credit losses, the quarterly provision expense contained an adjustment of $4.8 million associated with unfunded loan commitments. Excluding the provision for unfunded commitments, the provision for the current quarter is a reflection of the growth in the loan portfolio and an increase in the qualitative reserve to consider the potential impact of future recessionary pressures and other qualitative considerations.

•Non-interest income for the current quarter decreased by 31% or $7.5 million compared to the prior year quarter. The decrease represents the cumulative result of the impact of the economic environment on mortgage banking activities and wealth management income, the decline in insurance commission income as a result of the previous quarter's

disposition of the Company's insurance business and lower bankcard income due to regulatory restrictions on fee recognition.

•Non-interest expense for the current quarter increased $2.6 million or 4% compared to the prior year quarter driven by increases of $1.5 million in compensation expense and $1.4 million in other non-interest expense. The primary cause of the increase in other non-interest expense was the result of a $1.2 million accrual towards the contingent earn-out associated with the 2020 acquisition of Rembert Pendleton Jackson. Excluding this accrual, non-interest expense increased 2% in the current quarter compared to the prior year quarter.

•Return on average assets (“ROA”) for the quarter ended September 30, 2022 was 0.99% and return on average tangible common equity (“ROTCE”) was 12.10% compared to 1.75% and 19.56%, respectively, for the third quarter of 2021. On a non-GAAP basis, the current quarter's core ROA was 1.05% and core ROTCE was 12.86% compared to core ROA of 1.79% and core ROTCE of 19.96% for the third quarter of 2021.

•For the third quarter of 2022, the GAAP efficiency ratio was 50.66% compared to 48.23% for the third quarter of 2021, and 46.03% for the second quarter of 2022. The non-GAAP efficiency ratio for the third quarter of 2022 was 48.18% compared to 46.67% for the prior year quarter, and 49.79% for the second quarter of 2022.

Summary of Third Quarter Results

Balance Sheet and Credit Quality

Total assets grew 6% to $13.8 billion at September 30, 2022, as compared to $13.0 billion at September 30, 2021. During this period, total loans grew by 15% to $11.2 billion at September 30, 2022, compared to $9.7 billion at September 30, 2021. At September 30, 2022, excluding PPP loans, total assets grew 10% and total loans grew 21% compared to September 30, 2021. Total commercial loans, excluding PPP loans, grew by $1.6 billion or 21% during the past twelve months. During this period, the Company generated commercial gross loan production of $4.6 billion, of which $3.0 billion was funded, offsetting $1.4 billion in commercial loan payment activity. During the third quarter of 2022, funded commercial loan production was $762.3 million, an increase of 43% compared to $532.7 million for the same quarter of the prior year. The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios led by the $1.3 billion or 35% growth in the investor owned commercial portfolio. Year-over-year the total mortgage loan portfolio grew 32%, as a greater number of conventional 1-4 family mortgages were retained to grow the portfolio. During the past twelve months, deposits decreased 2%. Noninterest-bearing deposits remained stable, while interest-bearing deposits declined 3%. During the period, time deposits increased 12% and money market accounts decreased 12%, while savings deposits increased 9% and interest-bearing demand deposits declined 3%. Borrowings increased by $1.1 billion during the period to provide funding for the loan growth.

The tangible common equity ratio decreased to 7.98% of tangible assets at September 30, 2022, compared to 9.10% at September 30, 2021 as a result of the $132.3 million repurchase of common shares during the previous twelve months and the $141.9 million increase in the accumulated other comprehensive loss in the investment portfolio due to the impact of the rising rate environment on the value of securities, coupled with the increase in tangible assets during the past year. At September 30, 2022, the Company had a total risk-based capital ratio of 14.15%, a common equity tier 1 risk-based capital ratio of 10.18%, a tier 1 risk-based capital ratio of 10.18%, and a tier 1 leverage ratio of 9.33%. During the current quarter risk-based capital ratios declined from sequential quarters as a result of an adjustment to risk-weighted assets for unfunded commitments.

Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. Credit quality improved at September 30, 2022 compared to September 30, 2021, as the level of non-performing loans to total loans declined to 0.40% compared to 0.80%. These levels of non-performing loans compare to 0.40% for the prior quarter and indicate stable credit quality during a period of significant loan growth. At September 30, 2022, non-performing loans totaled $44.5 million, compared to $78.2 million at September 30, 2021, and $43.5 million at June 30, 2022. Loans placed on non-accrual during the current quarter amounted to $4.2 million compared to $5.7 million for the prior year quarter and $0.9 million for the second quarter of 2022. The Company realized net recoveries of $0.5 million for the third quarter of 2022, as compared to net charge-offs of $7.8 million for the third quarter of 2021 and insignificant recoveries for the second quarter of 2022.

At September 30, 2022, the allowance for credit losses was $128.3 million or 1.14% of outstanding loans and 289% of non-performing loans, compared to $113.7 million or 1.05% of outstanding loans and 261% of non-performing loans at the end of the previous quarter. The increase in the allowance during the current quarter compared to the previous quarter resulted from the growth in the loan portfolio, the impact of forecasted economic factors and, to a lesser degree, adjustments to certain other qualitative metrics.

Quarterly Results of Operations

For the third quarter of 2022, net interest income increased $6.4 million or 6% compared to the third quarter of 2021, as the $19.3 million growth in interest income was partially offset by interest expense growth of $12.9 million. The provision for credit losses was a charge of $18.9 million for the third quarter of 2022 compared to a credit of $8.2 million for the third quarter of 2021. The provision for credit losses for the second quarter of 2022 was a charge of $3.0 million. Non-interest income for the current quarter decreased by 31% or $7.5 million compared to the prior year quarter. This decline was the cumulative result of the decrease in income from mortgage banking activities reflecting the impact of the economic environment, lower wealth management income driven by market performance, the decline in insurance commission income as a result of the previous quarter's disposition of the Company's insurance business, and reduced bankcard income due to regulatory restrictions on fee recognition. Non-interest expense increased $2.6 million or 4% for the third quarter of 2022, compared to the prior year quarter as a result of the increase in compensation cost, primarily salaries and performance incentives, and other expenses. Other expenses increased $1.4 million mainly as a result of the accrual of contingent earn-out compensation based on the performance of the 2020 acquisition of Rembert Pendleton Jackson. Excluding this accrual, non-interest expense increases 2% in the current quarter compared to the prior year quarter.

Results of Operations

For the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

The Company recorded net income of $132.3 million for the nine months ended September 30, 2022 compared to net income of $189.7 million for the same period of the prior year. Year-to-date earnings declined as a result of the activity in the provision for credit losses, which shifted from the significant credit in the prior year to the charge for the current year, and the decline in non-interest income. Core earnings were $125.0 million for the nine months ended September 30, 2022 compared to $200.1 million for the prior year. Core earnings for the current period compared to the prior year period were reduced primarily as a result of the activity associated with the provision for credit losses in addition to the decline in mortgage banking income and lower other non-interest income. Core earnings for the current period exclude the gain from the disposal of the Company's insurance business and the associated transaction costs. Pre-tax, pre-provision net income, was $200.2 million for the nine months ended September 30, 2022 compared to $204.4 million for the prior year period. Net interest income for the current period included $4.7 million in PPP interest and fees compared to $35.6 million for the same period of 2021.

Net Interest Income

For the nine months ended September 30, 2022, net interest income increased $1.1 million to $320.4 million compared to $319.3 million for the nine months ended September 30, 2021. This increase is the result of the $10.2 million increase in interest income, achieved despite the $30.9 million reduction in PPP interest and fees, which was offset by the $9.0 million increase in interest expense. On a tax-equivalent basis, net interest income for the nine months ended September 30, 2022 was $323.2 million compared to $322.1 million for the nine months ended September 30, 2021. Excluding the impact of interest and fees on PPP loans, tax-equivalent interest and fees on loans, driven by commercial loans, increased 13% compared to the prior year period. The increase in interest expense was primarily the result of additional interest expense associated with subordinated debt issued in March 2022, and, to a lesser degree, increased interest expense on money market accounts and other borrowings.

The following tables provide an analysis of net interest income performance that reflects a net interest margin that has declined to 3.50% for the nine months ended September 30, 2022 compared to 3.57% for the nine months ended September 30, 2021. For the comparative period, the average yield on earning assets improved three basis points while the average rate paid on interest-bearing liabilities rose 17 basis points, resulting in the decreased margin.

Consolidated Average Balances, Yields and Rates


	Nine Months Ended September 30,
	2022						2021
(Dollars in thousands and tax-equivalent)	Average Balances		Interest (1)		Annualized Average Yield/Rate		Average Balances		Interest (1)		Annualized Average Yield/Rate
Assets:
Commercial investor real estate loans	$	4,546,440	$	138,245	4.07	%	$	3,662,890	$	114,525	4.18	%
Commercial owner-occupied real estate loans	1,722,522		58,126		4.51		1,658,076		57,224		4.61
Commercial AD&C loans	1,104,901		37,821		4.58		1,100,431		32,917		4.00
Commercial business loans	1,344,608		49,370		4.91		2,110,803		72,891		4.62
Total commercial loans	8,718,471		283,562		4.35		8,532,200		277,557		4.35
Residential mortgage loans	1,071,634		26,632		3.31		998,174		26,045		3.48
Residential construction loans	217,978		5,112		3.14		175,489		4,606		3.51
Consumer loans	422,941		13,112		4.14		472,356		12,761		3.61
Total residential and consumer loans	1,712,553		44,856		3.50		1,646,019		43,412		3.52
Total loans (2)	10,431,024		328,418		4.21		10,178,219		320,969		4.22
Loans held for sale	15,174		504		4.43		66,314		1,465		2.95
Taxable securities	1,204,240		14,472		1.60		984,354		12,230		1.66
Tax-advantaged securities	475,463		8,533		2.39		446,917		7,995		2.39
Total investment securities (3)	1,679,703		23,005		1.83		1,431,271		20,225		1.88
Interest-bearing deposits with banks	202,882		1,245		0.82		386,717		395		0.14
Federal funds sold	581		4		0.91		538		—		0.11
Total interest-earning assets	12,329,364		353,176		3.83		12,063,059		343,054		3.80

Less: allowance for credit losses - loans	(112,384)						(138,378)
Cash and due from banks	81,673						101,433
Premises and equipment, net	62,510						56,439
Other assets	672,093						744,642
Total assets	$	13,033,256					$	12,827,195

Liabilities and Stockholders' Equity:
Interest-bearing demand deposits	$	1,477,956	$	1,513	0.14	%	$	1,397,623	$	700	0.07	%
Regular savings deposits	553,982		62		0.02		472,059		189		0.05
Money market savings deposits	3,334,534		7,403		0.30		3,419,948		3,951		0.15
Time deposits	1,418,740		6,600		0.62		1,647,792		7,362		0.60
Total interest-bearing deposits	6,785,212		15,578		0.31		6,937,422		12,202		0.24
Federal funds purchased	85,983		1,128		1.75		20,257		13		0.09
Repurchase agreements	119,554		104		0.12		143,312		126		0.12
Advances from FHLB	174,493		3,066		2.35		148,823		2,649		2.38
Subordinated debentures	315,065		10,130		4.29		220,175		5,973		3.62
Total borrowings	695,095		14,428		2.78		532,567		8,761		2.20
Total interest-bearing liabilities	7,480,307		30,006		0.54		7,469,989		20,963		0.37

Noninterest-bearing demand deposits	3,919,600						3,677,254
Other liabilities	146,429						161,071
Stockholders' equity	1,486,920						1,518,881
Total liabilities and stockholders' equity	$	13,033,256					$	12,827,195

Tax-equivalent net interest income and spread			$	323,170	3.29	%			$	322,091	3.43	%
Less: tax-equivalent adjustment			2,809						2,841
Net interest income			$	320,361					$	319,250

Interest income/earning assets					3.83	%					3.80	%
Interest expense/earning assets					0.33						0.23
Net interest margin					3.50	%					3.57	%

(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.47% and 25.64% for 2022 and 2021, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $2.8 million and $2.8 million in 2022 and 2021, respectively.

(2)Non-accrual loans are included in the average balances.

(3)Investments available-for-sale are presented at amortized cost.

Effect of Volume and Rate Changes on Tax-Equivalent Net Interest Income

The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise tax-equivalent net interest income:


	2022 vs. 2021						2021 vs. 2020
	Increase Or (Decrease)		Due to Change In Average:*				Increase Or (Decrease)		Due to Change In Average:*
(Dollars in thousands and tax equivalent)			Volume		Rate				Volume		Rate
Interest income from earning assets:
Commercial investor real estate loans	$	23,720	$	26,821	$	(3,101)	$	11,287	$	18,547	$	(7,260)
Commercial owner-occupied real estate loans	902		2,171		(1,269)		3,009		4,401		(1,392)
Commercial AD&C loans	4,904		134		4,770		3,055		7,232		(4,177)
Commercial business loans	(23,521)		(27,860)		4,339		23,273		15,355		7,918
Residential mortgage loans	587		1,878		(1,291)		(6,854)		(4,826)		(2,028)
Residential construction loans	506		1,029		(523)		(379)		436		(815)
Consumer loans	351		(1,412)		1,763		(2,789)		(1,575)		(1,214)
Loans held for sale	(961)		(1,474)		513		371		408		(37)
Taxable securities	2,242		2,690		(448)		(5,327)		(1,658)		(3,669)
Tax-exempt securities	538		538		—		2,588		4,070		(1,482)
Interest-bearing deposits with banks	850		(275)		1,125		(24)		108		(132)
Federal funds sold	4		—		4		(1)		—		(1)
Total tax-equivalent interest income	10,122		4,240		5,882		28,209		42,498		(14,289)

Interest expense on funding of earning assets:
Interest-bearing demand deposits	813		44		769		(819)		423		(1,242)
Regular savings deposits	(127)		28		(155)		(23)		62		(85)
Money market savings deposits	3,452		(103)		3,555		(6,603)		2,616		(9,219)
Time deposits	(762)		(1,012)		250		(15,594)		(3,310)		(12,284)
Federal funds purchased	1,115		150		965		(1,325)		(714)		(611)
Repurchase agreements	(22)		(22)		—		(267)		7		(274)
Advances from FHLB	417		451		(34)		(1,214)		(4,365)		3,151
Subordinated debentures	4,157		2,908		1,249		(1,629)		(78)		(1,551)
Total interest expense	9,043		2,444		6,599		(27,474)		(5,359)		(22,115)
Tax-equivalent net interest income	$	1,079	$	1,796	$	(717)	$	55,683	$	47,857	$	7,826

*Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.

Interest Income

The Company's total tax-equivalent interest income increased 3% for the first nine months of 2022 compared to the prior year period. The previous table reflects that the majority of the increase in interest income was the result of the growth in interest income on commercial loans, predominantly investor real estate loans and, to a lesser degree, AD&C loans. Increases occurred in all the other loan categories, except for commercial business loans whose decline was the result of the $30.9 million in PPP interest and fees from the prior year. Excluding the impact of the decline in PPP income, interest income rose 12% period to period.

During the first nine months of 2022 average loans outstanding increased 2% compared to the first nine months of 2021. Excluding the impact of the reduction of PPP loans from the forgiveness program, average loans grew 10% period over period, driven entirely by commercial real estate loan growth. During the comparative period, total average commercial real estate loans grew 14%. Conversely, commercial business loans declined 36% due to the anticipated PPP loan run-off. Average consumer loans, predominantly home equity loans, decreased 10% and the residential mortgage portfolio increased 7% during the same time period, both the direct result of the increased refinancing activity spurred by the low rate environment. Compared to the prior year, the yield on average loans remained stable. The average yield on total investment securities decreased five basis points while the average balance of the investment portfolio increased 17% for the first nine months of 2022 compared to the first nine months of 2021. The larger average balance resulted in a 14% increase in interest income from investment securities during the period despite lower portfolio yields. Composition of the average investment portfolio shifted to 72% in taxable securities in the current period, as compared to 69% for the prior year period.

Interest Expense

For the first nine months of 2022 interest expense increased $9.0 million or 43% compared to the first nine months of 2021. The year over year increase was comprised of a $3.4 million or 28% increase in deposit interest expense and a $5.7 million or 65% decrease in borrowing cost. The rise in deposit interest expense was driven primarily by money market deposit accounts due to the average rate paid on the money market accounts increasing from 15 basis points in the prior year period to 30 basis points in the current year period as rates rose in the current year. Borrowing expense increased as the level of average borrowings rose coupled with the associated interest expense shifting away from FHLB borrowings to subordinated debt. During the comparative period, the rate paid on interest-bearing liabilities increased 17 basis points as rates paid on money market deposits and federal funds increased 15 basis points and 166 basis points, respectively. The increase in the rate paid on interest-bearing liabilities also increased as a result of the issuance of subordinated debt in the first quarter of 2022.

Non-interest Income

Non-interest income amounts and trends are presented in the following table for the periods indicated:


	Nine Months Ended September 30,				2022/2021		2022/2021
(Dollars in thousands)	2022		2021		$ Change		% Change
Securities gains	$	48	$	178	$	(130)	(73.0)	%
Gain on disposal of assets	16,516		—		16,516		N/M
Service charges on deposit accounts	7,384		5,936		1,448		24.4
Mortgage banking activities	5,347		20,887		(15,540)		(74.4)
Wealth management income	27,302		27,243		59		0.2
Insurance agency commissions	2,927		5,685		(2,758)		(48.5)
Income from bank owned life insurance	2,191		2,203		(12)		(0.5)
Bank card fees	3,916		5,078		(1,162)		(22.9)
Other income	7,091		12,309		(5,218)		(42.4)
Total non-interest income	$	72,722	$	79,519	$	(6,797)	(8.5)

For the nine months ended September 30, 2022, non-interest income decreased 9% to $72.7 million compared to $79.5 million for 2021. The current year-to-date results include a $16.7 million gain on the disposal of assets associated with the sale of insurance business. Excluding this gain, non-interest income declined 29% driven by the combination of a 74% decline in income from mortgage banking activities, the decline in insurance agency commissions, lower bank card fees of 23% and a 42% decline in other income. The decline in income from mortgage banking activities is the result of the rising interest rate environment, which has dampened new mortgage origination and refinancing activity. Other income in the prior year included the impact of the full payoff of a purchased credit deteriorated loan and activity-based vendor incentives, which did not recur in the current year. Insurance commission income declined due to the disposition of the Company's insurance business. Fees from bank cards diminished as a result of regulatory restrictions on fee recognition effective beginning in the third quarter of the current year. Wealth management income remained stable, despite the erosion of assets under management due to market volatility, as a result of increased asset management fees. Service charge income grew as a result of increased customer activity.

Further detail by type of non-interest income follows:

•Service charges on deposit accounts increased 24% in the first nine months of 2022, compared to the first nine months of 2021. The growth in service charge income reflects the impact of an increase in the current year's service charges on commercial demand deposit accounts and return check transaction volume.

•Income from mortgage banking activities decreased 74% in the first nine months of 2022, compared to the first nine months of 2021, as a result of reduced demand for new home mortgage origination and refinancing activity.

•Wealth management income, comprised of income from trust and estate services and investment management fees earned by the Company’s investment management subsidiaries, remained stable for the first nine months of 2022 compared to the same period of the prior year. Overall, total assets under management decreased to $5.0 billion at September 30, 2022 compared to $5.7 billion at September 30, 2021, as a result of volatility in the market.

•Insurance agency commissions decreased 49% for the first nine months of 2022 as compared to the first nine months of 2021, due to the sale of the Company's insurance business in June 2022.

•Bank-owned life insurance income decreased 1% for the first nine months of 2022 as compared to the first nine months of 2021 as a result of policy returns tied to deferred compensation plans.

•Bank card fee income declined 23% during the first nine months of 2022, compared to the first nine months of 2021, as a result of the impact regulatory restrictions on fee recognition for institutions that exceed $10 billion in assets which became effective during the third quarter of the current year.

•Other income decreased by 42% or $5.2 million during the first nine months of 2022, compared to the first nine months of 2021. The decrease for the current year was primarily the result of the prior year's inclusion of income realized on the payoff of a purchased credit deteriorated loan, in addition to activity-based contractual vendor incentives and credit related fees.

Non-interest Expense

Non-interest expense amounts and trends are presented in the following table for the periods indicated:


	Nine Months Ended September 30,				2022/2021		2022/2021
(Dollars in thousands)	2022		2021		$ Change		% Change
Salaries and employee benefits	$	119,049	$	114,295	$	4,754	4.2	%
Occupancy expense of premises	14,527		16,712		(2,185)		(13.1)
Equipment expense	10,920		9,456		1,464		15.5
Marketing	3,843		3,640		203		5.6
Outside data services	7,492		6,860		632		9.2
FDIC insurance	3,330		3,303		27		0.8
Amortization of intangible assets	4,406		4,991		(585)		(11.7)
Merger, acquisition and disposal expense	1,068		45		1,023		N/M
Professional fees and services	6,596		7,927		(1,331)		(16.8)
Other expenses	21,687		27,100		(5,413)		(20.0)
Total non-interest expense	$	192,918	$	194,329	$	(1,411)	(0.7)

Non-interest expense decreased 1% to $192.9 million for the nine months ended September 30, 2022, compared to $194.3 million for 2021. Excluding merger, acquisition and disposal expense from the current and prior year periods, the previously mentioned earn-out accrual and the $9.1 million in prepayment penalties on FHLB borrowings that occurred in the prior year, non-interest expense increased 3% year-over-year. The drivers of the increase in non-interest expense were a 4% increase in salaries and benefits and a 14% increase in other expense, excluding the FHLB prepayment penalties and the earn-out expense. The year-over-year increase in salaries and benefits was the result of staffing increases, salary adjustments and increased benefit costs. The rise in other expense was driven by increased costs in other various categories of operating expenses. Marketing and outside data services costs increased 6% and 9% as a result of specific initiatives and transaction volumes, respectively, while professional fee and service costs decreased 17% for the period due to a reduction in the utilization of consultant services.

Further detail by category of non-interest expense follows:

•Salaries and employee benefits, the largest component of non-interest expense, increased 4% or $4.8 million in the first nine months of 2022. Regular salaries represented $3.6 million of this increase, which was the result of staffing increases, merit increases and other adjustments. The remainder of the increase was driven by changes to the stock compensation plan which only affected the current period expense.

•Combined occupancy and equipment expenses decreased 3% compared to the prior year as a result of decreased rental costs associated with the reduction in branches and business offices partially offset by increased software costs.

•Marketing expense increased 6% for the first nine months of 2022 compared to the same period of the prior year, due to public relations initiatives.

•Outside data services expense increased 9% from the prior year period due to the increase in volume-based components of contractual-based services.

•FDIC insurance decreased 1% for 2022 as a result of the reduction in risk factors applied by the regulatory agency in the determination of the Company's premium.

•Amortization of intangible assets decreased as a result of the decline in the core deposit intangible amortization of the asset recognized in the Revere acquisition and, to a lesser degree, the amortization of intangibles acquired from the RPJ acquisition.

•Professional fees and services declined 17% from the prior year due to the decrease in utilization of consultant services.

•Other non-interest expenses decreased $5.4 million due primarily to the prepayment penalties of $9.1 million incurred in the prior year from the liquidation of FHLB advances. This decrease has been partially offset in the current year by

the $1.2 million contingent earn-out compensation associated with the performance of RPJ and other basic operating costs as compared to the prior year.

Income Taxes

The Company had income tax expense of $44.3 million in the first nine months of 2022, compared to income tax expense of $61.9 million in the first nine months of 2021, as a result of the decrease in current year-to-date pre-tax earnings compared to the prior year's pre-tax earnings. The effective tax rate for the nine months ended September 30, 2022 was 25.1%, compared to a tax rate of 24.6% for the same period in 2021. The increase in the current year's effective tax rate is the result of pre-tax income containing a greater proportion of taxable income compared to the prior year period.

Operating Expense Performance

Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest expense as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios indicate improved productivity.

Non-GAAP Financial Measures

The Company also uses a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations. Management believes that its traditional efficiency ratio better focuses attention on the operating performance of the Company over time than does a GAAP efficiency ratio, and is highly useful in comparing period-to-period operating performance of the Company’s core business operations. It is used by management as part of its assessment of its performance in managing non-interest expense. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the non-GAAP efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.

In general, the efficiency ratio is non-interest expense as a percentage of net interest income plus non-interest income. Non-interest expense used in the calculation of the non-GAAP efficiency ratio excludes merger, acquisition and disposal expense, the amortization of intangibles, and other non-core expenses, such as early prepayment penalties on FHLB advances or contingent payment expense. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income, and excludes gain on disposal of assets and securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains (if any). The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Condensed Consolidated Statements of Income. For the nine months ended September 30, 2022, the GAAP efficiency ratio was 49.08% compared to 48.73% for the same period in 2021. The current period's modest erosion in the GAAP efficiency ratio compared to the prior year period is directly related to the rate of decline in revenues that exceeded the rate of decline in non-interest expense during the period. The non-GAAP efficiency ratio for the current year was 49.09% compared to 44.88% for the prior year. The current year’s non-GAAP efficiency ratio compared to the prior year, indicates a decline in efficiency, the result of the 5% decrease in non-GAAP revenue combined with the 3% growth in non-GAAP non-interest expense.

In addition, the Company uses pre-tax, pre-provision net income, as a measure of the level of certain recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses that is readily comparable to other financial institutions. This measure is calculated by adding/ (subtracting) the provision (credit) for credit losses and the provision for income taxes back to/from net income. This metric declined for the first nine months of 2022 compared to the same period for 2021, due primarily to the decline in non-interest income that was partially mitigated by the slight increase in net interest income and a decline in non-interest expense.

The Company has presented core earnings, core earnings per share, core return on average assets and core return on average tangible common equity in order to present metrics that are more comparable to prior periods to provide an indication of the core performance of the Company year over year. Core earnings reflect net income exclusive of merger, acquisition and disposal expense, amortization of intangible assets, contingent payment expense, loss on FHLB redemptions, gain on disposal of assets and investment securities gains, in each case net of tax. Core earnings were $125.0 million ($2.77 per diluted common share) for the nine months ended September 30, 2022, compared to $200.1 million ($4.23 per diluted common share) for the nine months ended September 30, 2021. Average tangible assets and average tangible common equity represents average assets and average stockholders’ equity, respectively, adjusted for average goodwill and average intangible assets. The ROA for the first nine months of 2022 was 1.36% compared to 1.98% for the same period of the prior year. For the nine months ended September 30, 2022, the non-GAAP core ROA was 1.28% compared to 2.09% for the same period in the prior year. ROTCE was 16.14% for the first nine months of 2022 compared to 22.68% for the first nine months of 2021. The non-GAAP core ROTCE was 15.25% for the first nine months of 2022 compared to 23.92% for the first nine months of 2021.

GAAP and Non-GAAP Efficiency Ratios and Measures


	Nine Months Ended September 30,
(Dollars in thousands)	2022			2021
Pre-tax pre-provision net income:
Net income	$	132,319		$	189,703
Plus/ (less) non-GAAP adjustments:
Income tax expense	44,275			61,878
Provision/ (credit) for credit losses	23,571			(47,141)
Pre-tax pre-provision net income	$	200,165		$	204,440

Efficiency ratio (GAAP):
Non-interest expense	$	192,918		$	194,329

Net interest income plus non-interest income	$	393,083		$	398,769

Efficiency ratio (GAAP)	49.08		%	48.73		%

Efficiency ratio (non-GAAP):
Non-interest expense	$	192,918		$	194,329
Less non-GAAP adjustments:
Amortization of intangible assets	4,406			4,991
Loss on FHLB redemption	—			9,117
Merger, acquisition and disposal expense	1,068			45
Contingent payment expense	1,247			—
Non-interest expense - as adjusted	$	186,197		$	180,176

Net interest income plus non-interest income	$	393,083		$	398,769
Plus non-GAAP adjustment:
Tax-equivalent income	2,809			2,841
Less non-GAAP adjustment:
Securities gains	48			178
Gain on disposal of assets	16,516			—
Net interest income plus non-interest income - as adjusted	$	379,328		$	401,432

Efficiency ratio (non-GAAP)	49.09		%	44.88		%

GAAP and Non-GAAP Performance Ratios


	Nine Months Ended September 30,
(Dollars in thousands)	2022			2021
Core earnings (non-GAAP):
Net income	$	132,319		$	189,703
Plus/ (less) non-GAAP adjustments (net of tax):
Merger, acquisition and disposal expense	796			33
Amortization of intangible assets	3,284			3,711
Loss on FHLB redemption	—			6,779
Gain on disposal of assets	(12,309)			—
Investment securities gains	(36)			(132)
Contingent payment expense	929			—
Core earnings (non-GAAP)	$	124,983		$	200,094

Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)	45,098,073			47,315,725



Earnings per diluted common share (GAAP)	$	2.92		$	3.98
Core earnings per diluted common share (non-GAAP)	$	2.77		$	4.23

Core return on average assets (non-GAAP):
Average assets (GAAP)	$	13,033,256		$	12,827,195



Return on average assets (GAAP)	1.36		%	1.98		%
Core return on average assets (non-GAAP)	1.28		%	2.09		%

Core return on average tangible common equity (non-GAAP):





Average total stockholders' equity (GAAP)	$	1,486,920		$	1,518,881
Average goodwill	(367,190)			(370,223)
Average other intangible assets, net	(23,774)			(30,228)
Average tangible common equity (non-GAAP)	$	1,095,956		$	1,118,430

Return on average tangible common equity (non-GAAP)	16.14		%	22.68		%
Core return on average tangible common equity (non-GAAP)	15.25		%	23.92		%

Results of Operations

For the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Net income for the three months ended September 30, 2022 was $33.6 million compared to net income of $57.0 million for the prior year quarter. The decline in earnings was primarily the result of the current quarter's charge to provision for credit losses compared to the prior year's credit to provision for credit losses and the decrease in non-interest income, which were partially offset by the increase in net interest income. Non-interest income decreased as a result of the combination of lower mortgage banking income, the impact of the sale of the Company's insurance business, which reduced commission income, and lower bankcard fees resulting from the implementation of applicable regulations. Non-interest expense increased 4% primarily as a result of the rise in compensation costs and other expenses in the current quarter compared to the prior year quarter. Current quarter core earnings were $35.7 million ($0.80 per diluted common share), compared to $58.2 million ($1.23 per diluted common share) for the quarter ended September 30, 2021 and $44.2 million ($0.98 per diluted common share) for the quarter ended June 30, 2022.

Net Interest Income

Net interest income for the third quarter of 2022 increased $6.4 million or 6% compared to the third quarter of 2021 as a result of the $19.3 million growth in interest income, which was partially offset by growth of $12.9 million in interest expense. During the period, interest and fees on PPP loans declined by $11.2 million. Excluding this decline, net interest income grew 18% in the current year quarter compared to the prior year quarter, driven predominantly by interest income growth in all categories of commercial loans and, to a lesser degree, increases in residential mortgage loans and investment securities

income. The increase in interest expense was the result of the increased cost of interest-bearing deposits, primarily time and money market deposits, and the increased volume and cost of borrowings in the current year period compared to the same period of the prior year. The net interest margin for the third quarter of 2022 was 3.53% as compared to 3.52% for the same quarter of the prior year, as the yield on interest-earning assets, which rose 40 basis points, was offset by the 63 basis point rise in the rate paid on interest-bearing liabilities.

Average interest-earning assets increased by 6% and average interest-bearing liabilities grew by 8% in the third quarter of 2022 compared to the third quarter of 2021. At September 30, 2022 and 2021, average total loans comprised 85% and 82% of average interest-earning assets with an average yield of 4.42% and 4.21%, respectively. In addition, the average yield on investment securities increased to 1.99% for the current quarter compared to 1.87% for the prior year quarter. These portfolio yield movements resulted in the rise in the overall average yield on interest-earning assets to 4.07% at September 30, 2022 from 3.67% at September 30, 2021. Average interest-bearing deposits declined 3% for the current quarter compared to the same period for the prior year driven by an 8% decline in average money market accounts. The composition of total average interest-bearing deposits also shifted during the period to savings and demand deposits accounts, which increased 12% and 1%, respectively, as customers sought greater liquidity in anticipation of rising rates, compared to average time deposits, which declined 1%. The percentage of average noninterest-bearing deposits to total average deposits increased to 37% in the current quarter compared to 36% in the third quarter of 2021. The average rate paid on average interest-bearing liabilities grew by 63 basis points as the average rate paid increased from 0.25% for the third quarter of 2021 to 0.88% for the third quarter of 2022 driven by the 36 basis point increase in the average rate paid on interest-bearing deposits coupled with the 163 basis point increase in the average rate paid on borrowings. The increase in the average rate paid on interest-bearing deposits was driven by increases in rates paid on most deposit categories, while the rise in the average rate paid on borrowings reflects the impact of the issuance of subordinated debt that occurred in the first quarter of the current year.


Consolidated Average Balances, Yields and Rates
	Three Months Ended September 30,
	2022						2021
(Dollars in thousands and tax-equivalent)	Average Balances		Interest (1)		Annualized Average Yield/Rate		Average Balances		Interest (1)		Annualized Average Yield/Rate
Assets:
Commercial investor real estate loans	$	4,898,683	$	51,463	4.17	%	$	3,678,886	$	37,760	4.07	%
Commercial owner-occupied real estate loans	1,755,891		20,284		4.58		1,671,442		19,184		4.55
Commercial AD&C loans	1,115,531		15,501		5.51		1,161,183		11,702		4.00
Commercial business loans	1,327,218		17,196		5.14		1,820,598		22,849		4.98
Total commercial loans	9,097,323		104,444		4.55		8,332,109		91,495		4.36
Residential mortgage loans	1,177,664		9,980		3.39		934,365		7,867		3.37
Residential construction loans	235,123		1,845		3.11		170,511		1,438		3.35
Consumer loans	422,963		5,531		5.19		452,289		4,033		3.54
Total residential and consumer loans	1,835,750		17,356		3.77		1,557,165		13,338		3.41
Total loans (2)	10,933,073		121,800		4.42		9,889,274		104,833		4.21
Loans held for sale	15,211		161		4.24		50,075		379		3.03
Taxable securities	1,251,599		5,735		1.83		984,452		3,958		1.61
Tax-advantaged securities	482,437		2,900		2.40		419,044		2,588		2.47
Total investment securities (3)	1,734,036		8,635		1.99		1,403,496		6,546		1.87
Interest-bearing deposits with banks	150,992		774		2.03		777,763		302		0.15
Federal funds sold	446		3		2.30		440		—		0.16
Total interest-earning assets	12,833,758		131,373		4.07		12,121,048		112,060		3.67

Less: allowance for credit losses - loans	(114,512)						(121,630)
Cash and due from banks	93,327						100,292
Premises and equipment, net	64,039						57,220
Other assets	644,983						729,530
Total assets	$	13,521,595					$	12,886,460

Liabilities and Stockholders' Equity:
Interest-bearing demand deposits	$	1,444,801	$	941	0.26	%	$	1,425,893	$	238	0.07	%
Regular savings deposits	555,057		21		0.02		494,331		67		0.05
Money market savings deposits	3,202,507		5,281		0.65		3,484,101		1,234		0.14
Time deposits	1,542,932		3,247		0.83		1,558,497		1,982		0.50
Total interest-bearing deposits	6,745,297		9,490		0.56		6,962,822		3,521		0.20
Federal funds purchased	158,211		947		2.37		68		—		0.18
Repurchase agreements	104,742		30		0.11		145,483		43		0.12
Advances from FHLB	514,022		3,049		2.35		—		—		—
Subordinated debentures	369,958		3,946		4.27		206,648		961		1.86
Total borrowings	1,146,933		7,972		2.76		352,199		1,004		1.13
Total interest-bearing liabilities	7,892,230		17,462		0.88		7,315,021		4,525		0.25

Noninterest-bearing demand deposits	3,995,702						3,869,293
Other liabilities	147,236						147,381
Stockholders' equity	1,486,427						1,554,765
Total liabilities and stockholders' equity	$	13,521,595					$	12,886,460

Tax-equivalent net interest income and spread			$	113,911	3.19	%			$	107,535	3.42	%
Less: tax-equivalent adjustment			951						931
Net interest income			$	112,960					$	106,604

Interest income/earning assets					4.07	%					3.67	%
Interest expense/earning assets					0.54						0.15
Net interest margin					3.53	%					3.52	%

(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.47% and 25.64% for 2022 and 2021, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.0 million and $0.9 million in 2022 and 2021, respectively.

(2)Non-accrual loans are included in the average balances.

(3)Investments available-for-sale are presented at amortized cost.

Interest Income

Excluding interest and fees associated with the PPP loan program, the Company's total tax-equivalent interest income increased 30% for the third quarter of 2022 compared to the prior year quarter. Interest and fees from the PPP loan program amounted to $0.3 million in the current quarter compared to $11.4 million in the prior year quarter. Average interest-earning assets rose 6% over the prior year quarter as average total loans grew 11% and average investment securities grew 24%. Excluding average PPP loan balances, average total loans grew 19% over the previous twelve months. Average total mortgage loans increased 28% as a result of the growth of the conventional 1-4 family mortgage loan portfolio in addition to the residential construction portfolio over the past twelve months. Average consumer loans, principally home equity loans and lines, declined 6% as a result of refinancing activity during the year.

The average yield on interest-earning assets improved to 4.07% for the current quarter compared to 3.67% for the same period of the prior year. Average yields on loans and investment securities for the current quarter increased by 21 and 12 basis points, respectively, compared to the prior year quarter, reflecting general market interest rates during the majority of the previous twelve months. The increase in the yield on investments was driven primarily by the increase in yields on taxable investments during the period.

Interest Expense

Interest expense increased 286% in the third quarter of 2022 compared to the third quarter of 2021. The increase from period to period was driven by the combination of the rise in interest expense on the cost of interest-bearing deposits and the significant increase in borrowing costs as a result of the increase in FHLB advances, in addition to the issuance of $200 million of subordinated debt late in the first quarter of 2022. The impact of the rise in rates resulted in the average rate on interest-bearing liabilities for the current quarter rising to 0.88% from 0.25% as compared to the prior year quarter. During this period, the composition of total average interest-bearing deposits shifted from money market deposits and core time deposits to savings and demand deposits accounts as consumers seek greater liquidity and greater deposit mobility in anticipation of rising rates. For the comparative period, average money market deposits and time deposits declined 8% and 1%, respectively, while average savings deposits and average demand deposits increased 12% and 1%, respectively. Average noninterest-bearing deposits increased to 37% of average deposits in the current quarter compared to 36% in the prior year’s third quarter. The primary cause of the increase in average noninterest-bearing deposits was the growth in core deposit relationships.

Non-interest Income

Non-interest income amounts and trends are presented in the following table for the periods indicated:


	Three Months Ended September 30,				2022/2021		2022/2021
(Dollars in thousands)	2022		2021		$ Change		% Change
Securities gains	$	2	$	49	$	(47)	(95.9)	%
Gain/ (loss) on disposal of assets	(183)		—		(183)		N/M
Service charges on deposit accounts	2,591		2,108		483		22.9
Mortgage banking activities	1,566		4,942		(3,376)		(68.3)
Wealth management income	8,867		9,392		(525)		(5.6)
Insurance agency commissions	—		2,285		(2,285)		N/M
Income from bank owned life insurance	693		818		(125)		(15.3)
Bank card fees	438		1,775		(1,337)		(75.3)
Other income	2,908		3,025		(117)		(3.9)
Total non-interest income	$	16,882	$	24,394	$	(7,512)	(30.8)

Total non-interest income decreased $7.5 million or 31% for the third quarter of 2022, compared to the prior year quarter. This decline is the cumulative result of the decrease in income from mortgage banking activities reflecting the impact of the economic environment, lower wealth management income driven by market performance, the decline in insurance commission income as a result of the previous quarter's disposition of the Company's insurance business, and reduced bankcard income due to regulatory restrictions on fee recognition.

Further detail by type of non-interest income follows:

•Service charges on deposit accounts increased 23% in the third quarter of 2022, compared to the third quarter of 2021, reflecting the impact of an increase in the current year's service charges on commercial demand deposit accounts and returned check transaction volume.

•Income from mortgage banking activities decreased by $3.4 million or 68% in the third quarter of 2022 as compared to the third quarter of 2021, reflecting the impact of reduced origination and refinancing volume, the result of increasing mortgage lending rates during the comparative period.

•Wealth management income declined 6% in the third quarter of 2022 compared to the third quarter of 2021, due to market volatility during the current quarter compared to the prior year quarter. Overall total assets under management decreased to $5.0 billion at September 30, 2022 compared to $5.7 billion at September 30, 2021.

•Income from bank owned life insurance declined 15% in the third quarter of 2022, compared to the third quarter of 2021 as a result of policy returns tied to deferred compensation plans.

•Bank card income decreased 75% in the third quarter of 2022, compared to the third quarter of 2021, as a result of the impact of regulatory restrictions on fee recognition for institutions that exceed $10 billion in assets, which became effective in the after the second quarter of the current year.

•Other income remained stable in the third quarter of 2022 compared to the third quarter of 2021.

Non-interest Expense

Non-interest expense amounts and trends are presented in the following table for the periods indicated:


	Three Months Ended September 30,				2022/2021		2022/2021
(Dollars in thousands)	2022		2021		$ Change		% Change
Salaries and employee benefits	$	40,126	$	38,653	$	1,473	3.8	%
Occupancy expense of premises	4,759		5,728		(969)		(16.9)
Equipment expense	3,825		3,214		611		19.0
Marketing	1,370		1,376		(6)		(0.4)
Outside data services	2,509		2,317		192		8.3
FDIC insurance	1,268		361		907		N/M
Amortization of intangible assets	1,432		1,635		(203)		(12.4)
Merger, acquisition and disposal expense	1		—		1		N/M
Professional fees and services	2,207		3,031		(824)		(27.2)
Other expenses	8,283		6,866		1,417		20.6
Total non-interest expense	$	65,780	$	63,181	$	2,599	4.1

Total non-interest expense increased $2.6 million or 4% for the third quarter of 2022, compared to the prior year quarter, as a result of the rise in compensation costs and other expenses. The rise in compensation costs during the comparative period was the result of increases in salaries and incentive payments, partially mitigated by a decline in commission expense resulting from the disposition of the Company's insurance business. The primary cause of the increase in other non-interest expense was the accrual of $1.2 million for contingent earn-out compensation based on the performance of the 2020 acquisition of Rembert Pendleton Jackson. Excluding this accrual, non-interest expense increased 2% in the current quarter compared to the prior year quarter. The remaining categories of non-interest expense experienced modest increases or decreases with professional fees declining during the current quarter 27% compared to the prior year quarter as a result of lower consulting fees.

Further detail of significant changes in the levels of non-interest expense by category follows:

•Salaries and employee benefits, the largest component of non-interest expenses, increased 4% in the third quarter of 2022 compared to the same period of the prior year. The total compensation component increased $1.3 million or 4%, while benefit cost increased $0.1 million or 2%. Regular salaries represented $0.9 million of the increase in compensation, which was the result of staffing increases, merit increases and other adjustments, with the remainder driven by incentive cost.

•Occupancy and equipment expenses for the quarter decreased a combined 4% compared to the prior year quarter as a result of lower rental expense.

•FDIC insurance expense increased $0.9 million as a result of the Company becoming subject to different assessment guidelines that became effective beginning in mid-2021.

•Professional fees and services decreased 27% from the prior year quarter due to the decrease in utilization of consultant services.

•Amortization of intangible assets decreased primarily as a result of the decline in the amortization expense for the core deposit intangible asset recognized from previous acquisitions.

•Other non-interest expense increased 21% primarily as a result of the $1.2 million contingent earn-out compensation associated with the performance of RPJ and other basic operating costs as compared to the prior year. Excluding the earn-out compensation, other non-interest expense increased 2% during the comparative period.

Income Taxes

The Company had income tax expense of $11.6 million in the third quarter of 2022, compared to income tax expense of $19.1 million in the third quarter of 2021. The resulting effective tax rate was 25.7% for the third quarter of 2022 compared to an effective tax rate of 25.1% for the third quarter of 2021. The increase in the current year's effective tax rate is the result of pre-tax income containing a greater proportion of taxable income compared to the prior year period.

Non-GAAP Financial Measures

The GAAP efficiency ratio in the third quarter of 2022 increased to 50.66% compared to 48.23% for the third quarter of 2021. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio was 48.18% in the third quarter of 2022 compared to 46.67% in the third quarter of 2021. The change in the current year’s non-GAAP efficiency ratio compared to the prior year was the result of the decline in non-GAAP revenue coupled with the 3% growth in non-GAAP non-interest expense.

Pre-tax pre-provision net income decreased 6% for the current quarter compared to the prior year quarter due primarily to the decline in non-interest income and an increase in non-interest expense that was partially mitigated by the increase in net interest income.

For the quarter ended September 30, 2022, core earnings were $35.7 million ($0.80 per diluted common share), compared to $58.2 million ($1.23 per diluted common share) for the quarter ended September 30, 2021. ROA was 0.99% for the three months ended September 30, 2022 compared to 1.75% for the prior year quarter. For the three months ended September 30, 2022, the non-GAAP core ROA was 1.05% compared to 1.79% for the prior year quarter. ROTCE was 12.10% for the quarter ended September 30, 2022 compared to 19.56% for the third quarter of 2021. The non-GAAP core ROTCE was 12.86% for the quarter ended September 30, 2022 compared to 19.96% for the prior year quarter.

GAAP and Non-GAAP Efficiency Ratios and Measures


	Three Months Ended September 30,
(Dollars in thousands)	2022			2021
Pre-tax pre-provision net income:
Net income	$	33,584		$	56,976
Plus/ (less) non-GAAP adjustments:
Income tax expense	11,588			19,070
Provision/ (credit) for credit losses	18,890			(8,229)
Pre-tax pre-provision net income	$	64,062		$	67,817

Efficiency ratio (GAAP):
Non-interest expense	$	65,780		$	63,181

Net interest income plus non-interest income	$	129,842		$	130,998

Efficiency ratio (GAAP)	50.66		%	48.23		%

Efficiency ratio (non-GAAP):
Non-interest expense	$	65,780		$	63,181
Less/ (plus) non-GAAP adjustments:
Amortization of intangible assets	1,432			1,635

Merger, acquisition and disposal expense	1			—
Contingent payment expense	1,247			—
Non-interest expense - as adjusted	$	63,100		$	61,546

Net interest income plus non-interest income	$	129,842		$	130,998
Plus non-GAAP adjustment:
Tax-equivalent income	951			931
Less non-GAAP adjustment:
Securities gains	2			49
Loss on disposal of assets	(183)			—
Net interest income plus non-interest income - as adjusted	$	130,974		$	131,880

Efficiency ratio (non-GAAP)	48.18		%	46.67		%

GAAP and Non-GAAP Performance Ratios


	Three Months Ended September 30,
(Dollars in thousands)	2022			2021
Core earnings (non-GAAP):
Net income (GAAP)	$	33,584		$	56,976
Plus/ (less) non-GAAP adjustments (net of tax):

Amortization of intangible assets	1,076			1,211

Loss on disposal of assets	108			—
Investment securities gains	(2)			(36)
Contingent payment expense	929			—
Core earnings (non-GAAP)	$	35,695		$	58,151

Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)	44,780,560			47,086,824



Earnings per diluted common share (GAAP)	$	0.75		$	1.20
Core earnings per diluted common share (non-GAAP)	$	0.80		$	1.23

Core return on average assets (non-GAAP):
Average assets (GAAP)	$	13,521,595		$	12,886,460



Return on average assets (GAAP)	0.99		%	1.75		%
Core return on average assets (non-GAAP)	1.05		%	1.79		%

Core return on average tangible common equity (non-GAAP):





Average total stockholders' equity (GAAP)	$	1,486,427		$	1,554,765
Average goodwill	(363,436)			(370,223)
Average other intangible assets, net	(22,187)			(28,600)
Average tangible common equity (non-GAAP)	$	1,100,804		$	1,155,942

Return on average tangible common equity (non-GAAP)	12.10		%	19.56		%
Core return on average tangible common equity (non-GAAP)	12.86		%	19.96		%

FINANCIAL CONDITION

Total assets grew 9% to $13.8 billion at September 30, 2022, as compared to $12.6 billion at December 31, 2021. During this period, total loans increased by 13% to $11.2 billion at September 30, 2022, compared to $10.0 billion at December 31, 2021. Excluding PPP loans, total loans at September 30, 2022 increased $1.4 billion or 15%, as compared to December 31, 2021. Deposit increased 1% during 2022, as 6% growth in noninterest-bearing deposits was partially offset by the 1% decline in interest-bearing deposits. The growth in loans resulted in the loan to deposit ratio increasing to 104.4% at September 30, 2022 from 93.8% at December 31, 2021.

Analysis of Loans

A comparison of the loan portfolio at the dates indicated is presented in the following table:


	September 30, 2022				December 31, 2021				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Commercial real estate:
Commercial investor real estate	$	5,066,843	45.2	%	$	4,141,346	41.5	%	$	925,497	22.3	%
Commercial owner-occupied real estate	1,743,724		15.5		1,690,881		17.0		52,843		3.1
Commercial AD&C	1,143,783		10.2		1,088,094		10.9		55,689		5.1
Commercial business	1,393,634		12.4		1,481,834		14.9		(88,200)		(6.0)
Total commercial loans	9,347,984		83.3		8,402,155		84.3		945,829		11.3
Residential real estate:
Residential mortgage	1,218,552		10.9		937,570		9.4		280,982		30.0
Residential construction	229,243		2.0		197,652		2.0		31,591		16.0
Consumer	423,034		3.8		429,714		4.3		(6,680)		(1.6)
Total residential and consumer loans	1,870,829		16.7		1,564,936		15.7		305,893		19.5
Total loans	$	11,218,813	100.0	%	$	9,967,091	100.0	%	$	1,251,722	12.6

Total commercial loans, excluding PPP loans, grew by $1.1 billion or 14% since December 31, 2021. During this period, the Company generated commercial gross loan production of $3.2 billion, of which $2.1 billion was funded, offsetting $1.0 million in commercial loan run-off. During the first nine months of 2022, the funded commercial loan production increased 60% compared to $1.3 billion for the same period of the prior year. The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios led by the $925 million or 22% growth in the investor owned commercial portfolio. Excluding PPP loans, commercial business loans increased 6%. The residential mortgage loan portfolio grew 30% as a greater number of conventional 1-4 family mortgages were retained to offset the run-off that occurred in the prior year. Consumer loans remained relatively unchanged from year-end 2021.

Analysis of Investment Securities

The composition of investment securities at the periods indicated is presented in the following table:


	September 30, 2022				December 31, 2021				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Available-for-sale debt securities:
U.S. treasuries and government agencies	$	92,805	5.9	%	$	68,539	4.5	%	$	24,266	35.4	%
State and municipal	276,939		17.4		326,402		21.7		(49,463)		(15.2)
Mortgage-backed and asset-backed	874,591		55.1		1,070,955		71.1		(196,364)		(18.3)



Total available-for-sale debt securities	1,244,335		78.4		1,465,896		97.3		(221,561)		(15.1)

Held-to-maturity debt securities:


Mortgage-backed and asset-backed	265,648		16.7		—		—		265,648		N/M
Total held-to-maturity debt securities	265,648		16.7		—		—		265,648		N/M

Other investments:
Federal Reserve Bank stock	38,826		2.5		34,097		2.3		4,729		13.9
Federal Home Loan Bank of Atlanta stock	37,793		2.4		6,392		0.4		31,401		N/M
Other	677		—		677		—		—		—
Total other investments	77,296		4.9		41,166		2.7		36,130		87.8
Total securities	$	1,587,279	100.0	%	$	1,507,062	100.0	%	$	80,217	5.3

The investment portfolio consists primarily of U.S. Treasuries, U.S. Agency securities, U.S. Agency mortgage-backed securities, U.S. Agency collateralized mortgage obligations, asset-backed securities and state and municipal securities. The portfolio is monitored on a continuing basis with consideration given to interest rate trends and the structure of the yield curve and with a frequent assessment of economic projections and analysis. During the quarter ended March 31, 2022, the Company transferred certain debt securities from available-for-sale to held-to-maturity. The total amortized cost of debt securities transferred was $305.6 million with the associated fair value of $289.4 million and unrealized losses of $16.2 million at the date of transfer. The transfer occurred to lessen the impact on the Company's tangible common equity in contemplation of anticipated future increases in general market interest rates. At September 30, 2022, 99% of the investment portfolio was invested in Aaa/AAA or Aa/AA-rated securities. The duration of the portfolio is monitored to ensure the adequacy and ability to meet liquidity demands. The duration of the portfolio increased to 4.9 years at September 30, 2022 compared to 4.3 years at December 31, 2021 as a result of the recent increase in market interest rates. The portfolio possesses low credit risk and provides a source of liquidity necessary to meet loan and operational demands.

Other Earning Assets

Residential mortgage loans held for sale decreased to $11.5 million at September 30, 2022, compared to $39.4 million at December 31, 2021, as a result of a decrease in origination volume during the period. The Company continues to sell a portion of its mortgage loan production in the secondary market. The aggregate of interest-bearing deposits with banks and federal funds sold decreased by $184.4 million at September 30, 2022 compared to December 31, 2021, as a result of providing a source of funding for loan growth during the period.

Deposits

The composition of deposits for the periods indicated is presented in the following table:


	September 30, 2022				December 31, 2021				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Noninterest-bearing deposits	$	3,993,480	37.2	%	$	3,779,630	35.6	%	$	213,850	5.7	%
Interest-bearing deposits:
Demand	1,362,809		12.7		1,604,714		15.1		(241,905)		(15.1)
Money market savings	3,169,832		29.4		3,415,663		32.1		(245,831)		(7.2)
Regular savings	540,575		5.0		533,862		5.0		6,713		1.3
Time deposits of less than $250,000	1,289,642		12.0		910,464		8.6		379,178		41.6
Time deposits of $250,000 or more	393,148		3.7		380,398		3.6		12,750		3.4
Total interest-bearing deposits	6,756,006		62.8		6,845,101		64.4		(89,095)		(1.3)
Total deposits	$	10,749,486	100.0	%	$	10,624,731	100.0	%	$	124,755	1.2

Deposits and Borrowings

Total deposits increased by 1% to $10.7 billion at September 30, 2022 from $10.6 billion at December 31, 2021. This growth was essentially the result of non-interest-bearing deposits, which grew 6% while interest-bearing deposits declined 1%. At September 30, 2022, interest-bearing deposits represented 63% of deposits with the remaining 37% in noninterest-bearing balances, compared to 64% and 36%, respectively, at December 31, 2021. The mix in interest-bearing deposits shifted during the period as the decline in money market deposits and demand deposits was offset by growth in the savings and time deposit categories. Growth of time deposits from December 31, 2021 through September 30, 2022 was driven by a $438.1 million increase in brokered time deposits while core time deposits declined $34.7 million, a result of rate sensitive attrition precipitated by customers seeking liquidity in anticipation of rising interest rates on deposit accounts.

Capital Management

Management monitors historical and projected earnings, dividends, and asset growth, as well as risks associated with the various types of on and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. Total stockholders' equity remained at $1.5 billion at September 30, 2022 compared to at December 31, 2021. During this period, the growth in retained earnings from net income was more than offset by the combination of the quarterly dividend distribution, the $134.5 million increase in the accumulated other comprehensive loss during the period as increased market interest rates reduced the value of the available-for-sale securities portfolio at September 30, 2022, and the $25.0 million in repurchased common stock. The ratio of average equity to average assets was 11.41% for the nine months ended September 30, 2022, as compared to 11.84% for the nine months ended September 30, 2021.

Risk-Based Capital Ratios

Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as risk-based capital guidelines. The actual regulatory ratios and required ratios for capital adequacy are summarized for the Company in the following table.


	Ratios at		Minimum Regulatory Requirements
	September 30, 2022	December 31, 2021
Tier 1 leverage	9.33%	9.26%	4.00%

Common equity tier 1 capital to risk-weighted assets	10.18%	11.91%	4.50%

Tier 1 capital to risk-weighted assets	10.18%	11.91%	6.00%

Total capital to risk-weighted assets	14.15%	14.59%	8.00%

As of September 30, 2022, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.

The minimum capital level requirements applicable to the Company and the Bank are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The Company's total capital ratio declined at September 30, 2022 from December 31, 2021 as a result of commercial loan growth and an adjustment to risk weighted assets for unfunded commitments which occurred during the period. The impact of these events were partially offset by the issuance of $200 million in Tier 2 qualifying subordinated notes during March 2022. This debt issuance provided increased capacity for greater real estate lending and participation in the Company's stock repurchase program. The Tier 1 ratios decreased during the period as a result of loan growth, an adjustment for unfunded commitments and the stock repurchase program that was initiated in the second quarter of the current year. The increase in the leverage ratio was the result of Tier 1 capital growing at a faster rate than the average assets applied in the calculation. During 2020, the Company elected to apply the provisions of the CECL deferral transition in the determination of its risk-based capital ratios. At September 30, 2022, the impact of the application of this deferral transition provided an additional $12.5 million in Tier 1 capital and resulted in raising the common equity Tier 1 ratio by 10 basis points.

Tangible Common Equity

Tangible common equity, tangible assets, and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

Tangible common equity declined $56.4 million from December 31, 2021 to September 30, 2022. At September 30, 2022, the ratio of tangible common equity to tangible assets has decreased to 7.98% compared to 9.21% at December 31, 2021. The decrease in the tangible common equity ratio was caused by a combination of the 5% decline in tangible common equity during the first nine months of 2022, the result of the $134.5 million increase in the accumulated other comprehensive loss, and the 10% growth in tangible assets.

A reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets along with tangible book value per share, book value per share and related non-GAAP tangible common equity ratio are provided in the following table:

Tangible Common Equity Ratio – Non-GAAP


(Dollars in thousands, except per share data)	September 30, 2022			December 31, 2021
Tangible common equity ratio:
Total stockholders' equity	$	1,451,862		$	1,519,679
Goodwill	(363,436)			(370,223)
Other intangible assets, net	(21,262)			(25,920)
Tangible common equity	$	1,067,164		$	1,123,536

Total assets	$	13,765,597		$	12,590,726
Goodwill	(363,436)			(370,223)
Other intangible assets, net	(21,262)			(25,920)
Tangible assets	$	13,380,899		$	12,194,583

Outstanding common shares	44,644,269			45,118,930

Tangible common equity ratio	7.98		%	9.21		%
Tangible book value per common share	$	23.90		$	24.90
Book value per common share	$	32.52		$	33.68

Credit Risk

The fundamental lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and, for that reason, the Company has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration, accompanied by various oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include monitoring the credit quality of the portfolio, providing early identification of potential problem credits and proactive management of problem credits.

The Company recognizes a lending relationship as non-performing when either the loan becomes 90 days delinquent or as a result of factors, such as bankruptcy, interruption of cash flows, etc., considered at the monthly credit committee meeting. Classification as a non-accrual loan is based on a determination that the Company may not collect all principal and/or interest payments according to contractual terms. When a loan is placed on non-accrual status all accrued but unpaid interest is reversed from interest income. Payments received on non-accrual loans are first applied to the remaining principal balance of the loans. Additional recoveries are credited to the allowance up to the amount of all previous charge-offs.

The level of non-performing loans to total loans decreased to 0.40% at September 30, 2022 compared to 0.49% at December 31, 2021. Non-performing loans were $44.5 million at September 30, 2022 compared to $48.8 million at December 31, 2021. Loans placed on non-accrual during the current quarter amounted to $4.2 million compared to $5.7 million for the prior year quarter and $0.9 million for the second quarter of 2022. Loans greater than 90 days or more were $2.2 million at September 30, 2022 compared to $0.6 million at December 31, 2021.

While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs, Northern Virginia and Baltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the conditions being experienced in various business sectors of the economy on both a regional and national level.

The Company’s methodology for evaluating whether a loan shall be placed on non-accrual status begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring a specific allowance, the Company looks primarily to the value of the collateral (adjusted for estimated costs to sell) or projected cash flows generated by the operation of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as non-accrual.

Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:

•An internal evaluation is updated periodically to include borrower financial statements and/or cash flow projections.

•The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.

•Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.

•At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal.

•Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraised value (adjusted for estimated costs to sell) and the loan balance.

•Evaluation of whether adverse changes in the value of the collateral are expected over the remainder of the loan’s expected life.

•The Company will individually assess the allowance for credit losses based on the fair value of the collateral for any collateral dependent loans where the borrower is experiencing financial difficulty or when the Company determines that the foreclosure is probable. The Company will charge-off the excess of the loan amount over the fair value of the collateral adjusted for the estimated selling costs.

Loans considered to be troubled debt restructurings (“TDRs”) are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured collateral-dependent loans are individually assessed for allowance for credit losses and may either be in accruing or non-accruing status. Non-accruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category if the borrower is no longer experiencing financial difficulty, a re-underwriting event took place and the revised loan terms of the subsequent restructuring agreement are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk.

The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and/or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view the extension of a loan to be a satisfactory approach to resolving non-performing credits. On an exception basis, certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which are not affecting the performance of the credit or other identified weakness may be extended.

The Company typically sells the majority of its fixed-rate residential mortgage originations in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of six to twelve months after the sale of the loan although the time frame for repurchase requests can extend for an indefinite period. Such transactions could be due to a number of causes including borrower fraud or early payment default. The Company has seen a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of $0.5 million for probable losses due to repurchases.

The Company periodically engages in whole loan sale transactions of its residential mortgage loans as a part its interest rate risk management strategy. There were no whole loan sales of mortgage loans from the portfolio during the current year.

Mortgage loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The amortized cost of the Company's mortgage loan servicing rights was $0.3 million at September 30, 2022 compared to $0.4 million at December 31, 2021.

Analysis of Credit Risk

The following table presents information with respect to non-performing assets and 90-day delinquencies as of the periods indicated:


(Dollars in thousands)	September 30, 2022			December 31, 2021
Non-accrual loans:
Commercial real estate:
Commercial investor real estate	$	14,038		$	12,489
Commercial owner-occupied real estate	6,294			9,306
Commercial AD&C	—			650
Commercial business	7,198			8,420
Residential real estate:
Residential mortgage	7,514			8,441
Residential construction	—			55
Consumer	5,173			6,725
Total non-accrual loans	40,217			46,086

Loans 90 days past due:
Commercial real estate:
Commercial investor real estate	—			—
Commercial owner-occupied real estate	—			—
Commercial AD&C	—			—
Commercial business	1,966			—
Residential real estate:
Residential mortgage	167			557
Residential construction	—			—
Consumer	34			—
Total 90 days past due loans	2,167			557

Restructured loans (accruing)	2,077			2,167
Total non-performing loans	44,461			48,810
Other real estate owned, net	739			1,034
Total non-performing assets	$	45,200		$	49,844

Non-accrual loans to total loans	0.36		%	0.46		%
Non-performing loans to total loans	0.40		%	0.49		%
Non-performing assets to total assets	0.33		%	0.40		%
Allowance for credit losses to non-accrual loans	318.94		%	236.83		%
Allowance for credit losses to non-performing loans	288.50		%	223.61		%

Allowance for Credit Losses - Loans

The allowance for credit losses represents management’s estimate of the portion of the Company’s loans’ amortized cost basis not expected to be collected over the loans’ contractual life. As a part of the credit oversight and review process, the Company maintains an allowance for credit losses (the “allowance”). The following allowance section should be read in conjunction with “Allowance for Credit Losses” section in Note 1 – Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements. The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income when loans are placed on non-accrual status.

The appropriateness of the allowance is determined through ongoing evaluation of the credit portfolio, and involves consideration of a number of factors. Determination of the allowance is inherently subjective and requires significant estimates, including consideration of current conditions and future economic forecasts, which may be susceptible to significant volatility. The forecasted economic metrics with the greatest impact were the expected future unemployment rate, the expected level of business bankruptcies and, to a lesser degree, the house price index. In addition to these metrics, management has included the potential impact of recent recessionary pressures among the qualitative factors applied in the determination of the allowance. Expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged off against

the allowance, while recoveries are credited to the allowance when received. Management adjusts the level of the allowance through the provision for credit losses in the Condensed Consolidated Statement of Income.

The provision for credit losses for the nine months ended September 30, 2022 was a charge of $23.6 million as compared to a credit of $47.1 million for the same period in 2021. The charge for credit losses for the current period that is directly attributable to the loan portfolio was $18.8 million. The current period provision expense also contains an adjustment of $4.8 million associated with unfunded loan commitments. For the nine months ended September 30, 2022, the provision for credit losses, compared to the prior year's credit to the provision, reflects the impact of the growth of the loan portfolio and the consideration of specific qualitative metrics, in addition to the probability and expected degree of severity of a recession. The credit to the provision for credit losses for the same period in 2021 predominantly reflected the results of the impact of the improved economic forecasts during the period.

At September 30, 2022, the allowance for credit losses was $128.3 million as compared to $109.1 million at December 31, 2021. The allowance for credit losses as a percent of total loans was 1.14% and 1.10% at September 30, 2022 and December 31, 2021, respectively. The allowance for credit losses represented 289% of non-performing loans at September 30, 2022 as compared to 224% at December 31, 2021. The allowance attributable to the commercial portfolio represented 1.25% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.61%. With respect to the total commercial portion of the allowance, 21% of this portion is allocated to the commercial business loan portfolio, resulting in the ratio of the allowance for commercial business loans to total commercial business loans of 1.78%. The allowance coverage ratio for the investor real estate portfolio increased to 1.27% at September 30, 2022 compared to 1.09% at December 31, 2021 as a result of portfolio growth. The ratio of the allowance attributable to AD&C loans was 1.47% at the end of the current quarter, compared to 1.87% at December 31, 2021. This decline in the allowance ratio was predominantly the result of shorter weighted average remaining life of loans in this portfolio.

The current methodology for assessing the appropriate allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions over a reasonable and supportable forecast period and the Company’s prepayment and curtailment rates, (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large lending relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations, and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or where the Company determined that foreclosure is probable. Under the current methodology, the impact of the utilization of the historical default and loss experience results in 43% of the total allowance being attributable to the historical performance of the portfolio while 57% of the allowance is attributable to the collective qualitative factors applied to determine the allowance.

The quantified collective portion of the allowance is determined by pooling loans into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. The Company selected two collective methodologies, the discounted cash flows and weighted average remaining life methodologies. Segments utilizing the discounted cash flow method are further sub-segmented based on the risk level (determined either by risk ratings or Beacon Scores). Collective calculation methodologies use the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a two year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis.

Economic variables which have the most significant impact on the allowance include:

•unemployment rate;

•number of business bankruptcies; and

•house price index.

The collective quantified component of the allowance is supplemented by a qualitative component to address various risk characteristics of the Company’s loan portfolio including:

•trends in early delinquencies;

•changes in the risk profile related to large loans in the portfolio;

•concentrations of loans to specific industry segments;

•expected changes in economic conditions;

•changes in the Company’s credit administration and loan portfolio management processes; and

•the quality of the Company’s credit risk identification processes.

The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determined that foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the appraised value less estimated cost to sell. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s life. The balance of collateral-dependent loans individually assessed for the allowance was $29.9 million, with individual allowances of $6.5 million against those loans at September 30, 2022.

If an updated appraisal is received subsequent to the preliminary determination of an individual allowance or partial charge-off, and it is less than the initial appraisal used in the initial assessment, an additional individual allowance or charge-off is taken on the related credit. Partially charged-off loans are not written back up based on updated appraisals and always remain on non-accrual with any and all subsequent payments first applied to the remaining balance of the loan as principal reductions. No interest income is recognized on loans that have been partially charged-off.

A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the adequacy of the collateral based on an internal evaluation. The Company’s policy is to strictly adhere to regulatory appraisal standards. If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether an individual allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve an individual allowance or charge-off between monthly credit committee meetings to ensure that there are no significant time lapses during this process. The Company's borrowers are concentrated in nine counties in Maryland, three counties in Virginia and in Washington D.C. Excluding the PPP loans, commercial and residential mortgages, including home equity loans and lines, represented 87% of total loans at both September 30, 2022 and at December 31, 2021, respectively. Certain loan terms may create concentrations of credit risk and increase the Company’s exposure to loss. These include terms that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans. The Company does not make loans that provide for negative amortization or option adjustable-rate mortgages.

The following table presents an allocation of the allowance for credit losses by portfolio as of each period end. The allowance is allocated in the following table to various loan categories based on the methodology used to estimate credit losses; however, the allocation does not restrict the usage of the allowance for any specific loan category.


(In thousands)	September 30, 2022				December 31, 2021
Commercial real estate:	Amount		% of loans to total loans		Amount		% of loans to total loans
Commercial investor real estate	$	64,169	45.2	%	$	45,289	41.5	%
Commercial owner-occupied real estate	11,099		15.5		11,687		17.0
Commercial AD&C	16,847		10.2		20,322		10.9
Commercial business	24,826		12.4		23,170		14.9
Total commercial	116,941		83.3		100,468		84.3
Residential real estate:
Residential mortgage	8,063		10.9		5,384		9.4
Residential construction	1,226		2.0		1,048		2.0
Consumer	2,038		3.8		2,245		4.3
Total residential and consumer	11,327		16.7		8,677		15.7
Total allowance for credit losses - loans	$	128,268	100.0	%	$	109,145	100.0	%

Summary of Loan Credit Loss Experience

The following table presents the activity in the allowance for credit losses on loans for the periods indicated:


	Nine Months Ended			Year Ended
(Dollars in thousands)	September 30, 2022			December 31, 2021
Balance, January 1	$	109,145		$	165,367



Provision/ (credit) for credit losses - loans	18,773			(45,556)
Loan charge-offs:
Commercial real estate:
Commercial investor real estate	—			(5,802)
Commercial owner-occupied real estate	—			(136)
Commercial AD&C	—			(2,007)
Commercial business	(716)			(4,069)
Residential real estate:
Residential mortgage	(130)			—
Residential construction	—			—
Consumer	(183)			(299)
Total charge-offs	(1,029)			(12,313)
Loan recoveries:
Commercial real estate:
Commercial investor real estate	319			285
Commercial owner-occupied real estate	22			—
Commercial AD&C	—			—
Commercial business	786			565
Residential real estate:
Residential mortgage	27			410
Residential construction	8			5
Consumer	217			382
Total recoveries	1,379			1,647
Net charge-offs	350			(10,666)
Balance, period end	$	128,268		$	109,145

Annualized net charge-offs to average loans	0.00		%	0.11		%
Allowance for credit losses on loans to loans	1.14		%	1.10		%

Market Risk Management

The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity.

The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest income as a percentage of interest-earning assets. Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.

The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income or “NII” at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts

that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. As an example, certain types of money market deposit accounts are assumed to reprice at 40 to 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Company's net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

The Company prepares a current base case and multiple alternative simulations at least once per quarter and reports the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the statement of condition so that net interest income at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

The Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists. If a measure of risk produced by the alternative simulations of the entire statement of condition violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a level that complies with policy limits within two quarters.

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.


Estimated Changes in Net Interest Income
Change in Interest Rates:	+ 400 bp	+ 300 bp	+ 200 bp	+ 100 bp	- 100 bp	- 200 bp	-300 bp	-400 bp
Policy Limit	23.50%	17.50%	15.00%	10.00%	10.00%	15.00%	17.50%	23.50%
September 30, 2022	1.53%	1.28%	1.03%	0.53%	(0.94%)	(2.29%)	(4.52%)	N/A
December 31, 2021	8.61%	6.53%	4.80%	2.16%	N/A	N/A	N/A	N/A

As reflected in the table above, the measures of net interest income at risk at September 30, 2022 declined in every rising interest rate change scenario compared to December 31, 2021. As the table indicates, in each interest rate environment, net interest income sensitivity decreased compared to December 31, 2021. The change in the net interest income at risk is the result of a decrease in asset sensitivity due to fixed rate loan growth as market rates rose, the increase in borrowed funds, a decrease in interest-bearing deposits with banks and the increase in non-interest bearing deposits. At September 30, 2022, all measures remained well within prescribed policy limits. The table also indicates that should the interest rate environment decline, net interest income would be reduced. This potential reduction in net interest income could occur because of the current low level of deposit rates and those rates being unable to reprice lower as current asset yields decline.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.


Estimated Changes in Economic Value of Equity
Change in Interest Rates:	+ 400 bp	+ 300 bp	+ 200 bp	+ 100 bp	- 100 bp	- 200 bp	-300 bp	-400 bp
Policy Limit	35.00%	25.00%	20.00%	10.00%	10.00%	20.00%	25.00%	35.00%
September 30, 2022	(19.33%)	(14.69%)	(9.80%)	(4.87%)	5.02%	9.89%	14.05%	N/A
December 31, 2021	(10.29%)	(6.18%)	(2.16%)	0.05%	N/A	N/A	N/A	N/A

Overall, the measure of the economic value of equity ("EVE") at risk shifted significantly in all scenarios from December 31, 2021 to September 30, 2022. The increase in the risk associated with EVE during the period was primarily the result of reduced asset market values of loans and investments driven by the increase in the interest rate environment during period coupled with a reduced level of lower rate deposits.

Liquidity Management

Liquidity is measured by a financial institution's ability to raise funds through loan repayments, maturing investments, deposit growth, borrowed funds, capital and the sale of highly marketable assets such as investment securities and residential mortgage loans. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities and calls, expected funding of loans and deposit withdrawals, and the market values of available-for-sale investments, so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the Company is able to pursue new business opportunities. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs at September 30, 2022.

Liquidity is measured using an approach designed to take into account core deposits, in addition to factors already discussed above. Management considers core deposits, defined to include all deposits other than brokered and outsourced deposits, to be a relatively stable funding source. Core deposits equaled 79% of total interest-earning assets at September 30, 2022. The Company’s growth and mortgage banking activities are also additional considerations when evaluating liquidity requirements. Also considered are changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the Funding and Liquidity Subcommittee of ALCO under formal policy guidelines, the Company’s liquidity position is measured weekly, looking forward at thirty day intervals from thirty (30) to three hundred sixty (360) days. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. At September 30, 2022, the Company’s liquidity and funds availability provides it with flexibility in funding loan demand and other liquidity demands.

The Company also has external sources of funds available that can be drawn upon when required. The main sources of external liquidity are available lines of credit with the FHLB and the Federal Reserve Bank. At September 30, 2022, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.3 billion. FHLB availability based on pledged collateral at September 30, 2022 amounted to $2.5 billion, with $840.0 million outstanding against it. The secured lines of credit at the Federal Reserve Bank and correspondent banks totaled $734.7 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of September 30, 2022. In addition, the Company had unsecured lines of credit with correspondent banks of $1.4 billion with $115.0 million outstanding at September 30, 2022. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at September 30, 2022.

The parent company (“Bancorp”) is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve Bank, cannot exceed net income for that year to date period plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of September 30, 2022, the Bank could have declared a dividend of up to $140.9 million to Bancorp. At September 30, 2022, Bancorp had liquid assets of $83.0 million.

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and risk assessment are considered when determining the amount and structure of credit arrangements.

Commitments to extend credit in the form of consumer, commercial real estate and business at the dates indicated were as follows:


(In thousands)	September 30, 2022		December 31, 2021
Commercial real estate development and construction	$	773,004	$	621,725
Residential real estate-development and construction	837,892		885,806
Real estate-residential mortgage	40,505		54,072
Lines of credit, principally home equity and business lines	2,382,441		2,096,874
Standby letters of credit	75,391		70,642
Total commitments to extend credit and available credit lines	$	4,109,233	$	3,729,119

Commitments to extend credit are agreements to provide financing to a customer with the provision that there are no violations of any condition established in the agreement. Commitments generally have interest rates determined by current market rates, expiration dates or other termination clauses and may require payment of a fee. Lines of credit typically represent unused portions of lines of credit that were provided and remain available as long as customers comply with the requisite contractual conditions. Commitments to extend credit are evaluated, processed and/or renewed regularly on a case by case basis, as part of the credit management process. The total commitment amount or line of credit amounts do not necessarily represent future cash requirements, as it is highly unlikely that all customers would draw on their lines of credit in full at one time.

As of September 30, 2022, the total reserve for unfunded commitments was $5.1 million and is accounted for in other liabilities in the Condensed Consolidated Statements of Financial Condition. See Note 1 – Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for more information on the accounting policy for the allowance for unfunded commitments.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Financial Condition - Market Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

Item 1A. Risk Factors

There have been no material changes in the risk factors as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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

On March 30, 2022, the Company's board of directors authorized a stock repurchase plan that permits the repurchase of up to $50.0 million of the Company's common stock. The Company repurchased no shares of its common stock during the quarter ended September 30, 2022. Under the current authorization common stock with a total value of up to $25.0 million remains available to be repurchased.

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not applicable

Item 5. Other Information - None

Item 6. Exhibits


Exhibit 31(a)						Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 31(b)						Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 32(a)						Certification of Chief Executive Officer pursuant to 18 U.S. Section 1350
Exhibit 32(b)						Certification of Chief Financial Officer pursuant to 18 U.S. Section 1350
Exhibit 101.SCH						XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB						XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

SANDY SPRING BANCORP, INC.

(Registrant)

By: /s/ Daniel J. Schrider

Daniel J. Schrider

President and Chief Executive Officer

Date: November 4, 2022

By: /s/ Philip J. Mantua

Philip J. Mantua

Executive Vice President and Chief Financial Officer

Date: November 4, 2022