SANDY SPRING BANCORP INC - Quarter Report: 2023 March (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 March 31, 2023

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

For the transition period from to ____________

Commission File Number: 0-19065

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 May 3, 2023

Common stock, $1.00 par value – 44,835,496 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 March 3 1 , 202 3 and December 31, 20 2 2			3

Condensed Consolidated Statements of Income - Unaudited for the Three Months Ended March 3 1 , 202 3 and 202 2			4

Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three Months Ended March 31 , 202 3 and 202 2			5

Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three Months Ended March 31 , 202 3 and 20 2 2			6

Condensed Consolidated Statements of Cash Flows – Unaudited for the Three Months Ended March 3 1 , 202 3 and 20 2 2			7

Notes to the Condensed Consolidated Financial Statements			8

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			34

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			58

Item 4. CONTROLS AND PROCEDURES			58

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS			59

Item 1A. RISK FACTORS			59

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			59

Item 3. DEFAULTS UPON SENIOR SECURITIES			59

Item 4. MINE SAFETY DISCLOSURES			60

Item 5. OTHER INFORMATION			60

Item 6. EXHIBITS			60

SIGNATURES			61

Part I

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED


	March 31,		December 31,
(Dollars in thousands)	2023		2022
Assets:
Cash and due from banks	$	92,771	$	88,152
Federal funds sold	240		193
Interest-bearing deposits with banks	402,704		103,887
Cash and cash equivalents	495,715		192,232
Residential mortgage loans held for sale (at fair value)	16,262		11,706
Investments held-to-maturity, at cost (fair value of $219,417 and $220,123, respectively)	254,219		259,452
Investments available-for-sale (at fair value)	1,195,728		1,214,538
Other investments, at cost	78,389		69,218
Total loans	11,395,241		11,396,706
Less: allowance for credit losses - loans	(117,613)		(136,242)
Net loans	11,277,628		11,260,464
Premises and equipment, net	69,227		67,070
Other real estate owned	645		645
Accrued interest receivable	42,232		41,172
Goodwill	363,436		363,436
Other intangible assets, net	18,549		19,855
Other assets	316,977		333,331
Total assets	$	14,129,007	$	13,833,119

Liabilities:
Noninterest-bearing deposits	$	3,228,678	$	3,673,300
Interest-bearing deposits	7,847,313		7,280,121
Total deposits	11,075,991		10,953,421
Securities sold under retail repurchase agreements and federal funds purchased	252,627		321,967
Advances from FHLB	750,000		550,000
Subordinated debt	370,354		370,205
Total borrowings	1,372,981		1,242,172
Accrued interest payable and other liabilities	143,170		153,758
Total liabilities	12,592,142		12,349,351

Stockholders' equity:
Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding
44,712,497 and 44,657,054 at March 31, 2023 and December 31, 2022, respectively	44,712		44,657
Additional paid in capital	735,509		734,273
Retained earnings	872,635		836,789
Accumulated other comprehensive loss	(115,991)		(131,951)
Total stockholders' equity	1,536,865		1,483,768
Total liabilities and stockholders' equity	$	14,129,007	$	13,833,119

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
	March 31,
(Dollars in thousands, except per share data)	2023		2022
Interest income:
Interest and fees on loans	$	139,727	$	99,494
Interest on loans held for sale	152		198
Interest on deposits with banks	2,686		113
Interest and dividend income on investment securities:
Taxable	7,008		4,107
Tax-advantaged	1,770		2,124
Interest on federal funds sold	4		—
Total interest income	151,347		106,036
Interest expense:
Interest on deposits	40,788		2,293
Interest on retail repurchase agreements and federal funds purchased	2,104		54
Interest on advances from FHLB	7,207		—
Interest on subordinated debt	3,946		2,238
Total interest expense	54,045		4,585
Net interest income	97,302		101,451
Provision/ (credit) for credit losses	(21,536)		1,635
Net interest income after provision/ (credit) for credit losses	118,838		99,816
Non-interest income:
Investment securities gains	—		8

Service charges on deposit accounts	2,388		2,326
Mortgage banking activities	1,245		2,298
Wealth management income	8,992		9,337
Insurance agency commissions	—		2,115
Income from bank owned life insurance	907		795
Bank card fees	418		1,668
Other income	2,001		2,048
Total non-interest income	15,951		20,595
Non-interest expense:
Salaries and employee benefits	38,926		39,373
Occupancy expense of premises	4,847		5,034
Equipment expense	4,117		3,536
Marketing	1,543		1,193
Outside data services	2,514		2,419
FDIC insurance	2,138		984
Amortization of intangible assets	1,306		1,508

Professional fees and services	3,684		2,017
Other expenses	7,230		6,083
Total non-interest expense	66,305		62,147
Income before income tax expense	68,484		58,264
Income tax expense	17,231		14,329
Net income	$	51,253	$	43,935

Per share information:
Basic net income per common share	$	1.14	$	0.97
Diluted net income per common share	$	1.14	$	0.96
Dividends declared per share	$	0.34	$	0.34

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

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


	Three Months Ended
	March 31,
(In thousands)	2023		2022
Net income	$	51,253	$	43,935
Other comprehensive income/ (loss):
Investments available-for-sale:
Net change in unrealized gains/ (losses) on investments available-for-sale	20,784		(65,923)
Related income tax (expense)/ benefit	(5,294)		16,897
Net investment gains reclassified into earnings	—		(8)
Related income tax expense	—		2
Net effect on other comprehensive income/ (loss)	15,490		(49,032)

Investments held-to-maturity:
Net change in unrealized gains/ (losses)	405		(15,929)
Related income tax (expense)/ benefit	(103)		4,083
Net effect on other comprehensive income/ (loss)	302		(11,846)

Defined benefit pension plan:
Amortization of net loss	225		196
Related income tax benefit	(57)		(50)
Net effect on other comprehensive income/ (loss)	168		146
Total other comprehensive income/ (loss)	15,960		(60,732)
Comprehensive income/ (loss)	$	67,213	$	(16,797)

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, 2023	$	44,657	$	734,273	$	836,789	$	(131,951)	$	1,483,768
Net income	—		—		51,253		—		51,253
Other comprehensive income, net of tax	—		—		—		15,960		15,960
Total comprehensive income									67,213
Common stock dividends - $0.34 per share	—		—		(15,407)		—		(15,407)
Stock compensation expense	—		1,241		—		—		1,241
Common stock issued pursuant to:

Stock option plan - 7,530 shares	7		144		—		—		151


Employee stock purchase plan - 11,821 shares	12		399		—		—		411
Restricted stock vesting, net of tax withholding - 36,092 shares	36		(548)		—		—		(512)


Balances at March 31, 2023	$	44,712	$	735,509	$	872,635	$	(115,991)	$	1,536,865

Balances at January 1, 2022	$	45,119	$	751,072	$	732,027	$	(8,539)	$	1,519,679
Net income	—		—		43,935		—		43,935
Other comprehensive loss, net of tax	—		—		—		(60,732)		(60,732)
Total comprehensive loss									(16,797)
Common stock dividends - $0.34 per share	—		—		(15,615)		—		(15,615)
Stock compensation expense	—		1,472		—		—		1,472
Common stock issued pursuant to:


Stock option plan - 8,897 shares	9		186		—		—		195

Employee stock purchase plan - 9,581 shares	10		426		—		—		436
Restricted stock vesting, net of tax withholding- 25,500 shares	25		(485)		—		—		(460)


Balances at March 31, 2022	$	45,163	$	752,671	$	760,347	$	(69,271)	$	1,488,910

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED


	Three Months Ended March 31,
(Dollars in thousands)	2023		2022
Operating activities:
Net income	$	51,253	$	43,935
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,689		3,025
Provision/ (credit) for credit losses	(21,536)		1,635
Share based compensation expense	1,241		1,472

Deferred income tax expense	8,498		4,177
Originations of loans held for sale	(67,837)		(104,823)
Proceeds from sales of loans held for sale	64,025		129,389
Gains on sales of loans held for sale	(744)		(2,694)

Investment securities gains	—		(8)

Tax benefit associated with share based compensation	(78)		(245)
Net (increase)/ decrease in accrued interest receivable	(1,060)		821
Net decrease in other assets	6,236		7,054
Net decrease in accrued expenses and other liabilities	(14,345)		(16,433)
Other, net	80		(2,201)
Net cash provided by operating activities	31,422		65,104
Investing activities:
Sales/ (purchases) of other investments	(9,171)		9
Purchases of investments available-for-sale	—		(232,295)
Proceeds from sales of investment available-for-sale	—		1,261
Proceeds from maturities, calls and principal payments of investments available-for-sale	38,760		68,818

Proceeds from maturities, calls and principal payments of investments held-to-maturity	5,558		4,318
Net (increase)/ decrease in loans	2,330		(174,046)






Expenditures for premises and equipment	(3,833)		(3,440)
Net cash provided by/ (used in) investing activities	33,644		(335,375)
Financing activities:
Net increase in deposits	122,956		228,654
Net decrease in in retail repurchase agreements and federal funds purchased	(69,340)		(10,302)
Proceeds from FHLB advances	1,480,000		—
Repayment of FHLB advances	(1,280,000)		—
Proceeds from issuance of subordinated debt	—		200,000

Proceeds from issuance of common stock	720		800
Stock tendered for payment of withholding taxes	(670)		(629)
Repurchase of common stock	—		—
Cash dividends paid	(15,249)		(15,446)
Net cash provided by financing activities	238,417		403,077
Net increase in cash and cash equivalents	303,483		132,806
Cash and cash equivalents at beginning of period	192,232		420,020
Cash and cash equivalents at end of period	$	495,715	$	552,826

Supplemental disclosures:
Interest payments	$	52,919	$	5,784

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 three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2023. 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 2022 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 2022 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.

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.

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.

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 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.

On January 1, 2023, the Company adopted provisions of ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)", which eliminated accounting guidance for TDRs by creditors. Prior to the effective adoption date, the Company considered loans to be TDRs if their terms were restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provided a payment concession to a borrower experiencing financial difficulty. Loans could be removed from a TDR category if the borrower no longer experienced financial difficulty, a re-underwriting event took place, and the revised loan terms of the subsequent restructuring agreement were considered to be consistent with terms that could be obtained in the market for loans with comparable credit risk. Subsequent to the effective adoption date, the Company continues to offer modifications to certain borrowers experiencing financial difficulty, mainly in the form of interest rate concessions or term extensions, without classifying and accounting for them as TDRs.

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 4 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 reserve for unfunded commitments and that it has established the existing reserves 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.

Adopted Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)", which eliminated the accounting guidance on troubled debt restructurings (“TDR”) and amended the guidance on “vintage disclosures” to require disclosure of current period gross charge-offs by year of origination. The ASU also added enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The objective of the disclosures was to provide information about the type and magnitude of modifications and the degree of their success in mitigating potential credit losses. The Company fully adopted this update effective January 1, 2023 on a prospective basis. The adoption of this pronouncement did not have a material impact on the Consolidated Financial Statements.

Pending Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”. This ASU provided temporary, optional

guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate ("LIBOR") or other reference rate expected to be discontinued on financial reporting. The standard was elective and provided 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 were effective for all entities between March 12, 2020 and December 31, 2022. In January 2021, the FASB issued ASU 2021-01,

“Reference Rate Reform (Topic 848): Scope”. This ASU refines the scope of Topic 848 and addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued, but that use an interest rate for margining, discounting or contract price alignment that is expected to be modified as a result of reference rate reform. ASU 2021-01 is effective upon issuance through December 31, 2024, and can be adopted at any time during this period. The Company has not offered LIBOR for any new contracts since 2021. The Company has identified all known LIBOR exposures, created a plan to address the exposures, and continues to communicate with all stakeholders in order to facilitate the transition to an alternative reference rate. The Company adopted ASU 2020-04 on January 1, 2022. The adoption did not have a material impact on the Company’s Consolidated Financial Statements. The Company continues to evaluate the adoption of ASU 2021-01 and does not expect it to have a material impact on the Company's Consolidated Financial Statements.

NOTE 2 – INVESTMENTS

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

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:


	March 31, 2023								December 31, 2022
(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	$	101,112	$	—	$	(6,022)	$	95,090	$	100,926	$	—	$	(7,304)	$	93,622
State and municipal	320,799		5		(47,876)		272,928		322,519		4		(56,526)		265,997
Mortgage-backed and asset-backed	905,338		65		(77,693)		827,710		943,398		73		(88,552)		854,919




Total available-for-sale debt securities	$	1,327,249	$	70	$	(131,591)	$	1,195,728	$	1,366,843	$	77	$	(152,382)	$	1,214,538
Held-to-maturity debt securities:


Mortgage-backed and asset-backed	254,219		—		(34,802)		219,417		259,452		—		(39,329)		220,123
Total held-to-maturity debt securities	$	254,219	$	—	$	(34,802)	$	219,417	$	259,452	$	—	$	(39,329)	$	220,123
Total debt securities	$	1,581,468	$	70	$	(166,393)	$	1,415,145	$	1,626,295	$	77	$	(191,711)	$	1,434,661

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 March 31, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at March 31, 2023. 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.

All held-to-maturity 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 available-for-sale and held-to-maturity mortgage-backed securities portfolio at March 31, 2023 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($483.1 million), GNMA, FNMA or FHLMC mortgage-backed securities ($636.5 million) or SBA asset-backed securities ($40.0 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:


	March 31, 2023
	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	$	12,638	$	318	$	82,452	$	5,704	$	95,090	$	6,022
State and municipal	125	35,791		719		233,683		47,157		269,474		47,876
Mortgage-backed and asset-backed	323	194,940		5,603		616,616		72,090		811,556		77,693

Total	458	$	243,369	$	6,640	$	932,751	$	124,951	$	1,176,120	$	131,591


	December 31, 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	$	53,139	$	3,653	$	40,483	$	3,651	$	93,622	$	7,304
State and municipal	130	200,439		30,803		62,482		25,723		262,921		56,526
Mortgage-backed and asset-backed	324	526,387		44,952		297,216		43,600		823,603		88,552

Total	464	$	779,965	$	79,408	$	400,181	$	72,974	$	1,180,146	$	152,382

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.


	March 31, 2023				December 31, 2022
(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	$	4,805	$	4,992	$	—	$	—
One to five years	90,285		96,120		93,622		100,926
Five to ten years	—		—		—		—
After ten years	—		—		—		—
State and municipal:
One year or less	8,333		8,400		8,694		8,783
One to five years	52,746		54,641		51,576		53,948
Five to ten years	30,415		35,453		28,806		34,042
After ten years	181,434		222,305		176,921		225,746
Mortgage-backed and asset-backed:
One year or less	4,746		4,806		7,622		7,704
One to five years	45,281		46,495		45,366		46,802
Five to ten years	293,295		320,654		303,697		335,285
After ten years	484,388		533,383		498,234		553,607










Total available-for-sale debt securities	$	1,195,728	$	1,327,249	$	1,214,538	$	1,366,843


	March 31, 2023				December 31, 2022
(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	34,752		37,994		35,304		39,213
After ten years	184,665		216,225		184,819		220,239
Total held-to-maturity debt securities	$	219,417	$	254,219	$	220,123	$	259,452

At March 31, 2023 and December 31, 2022, available-for-sale and held-to-maturity debt securities with a book value of $455.6 million and $533.9 million, respectively, were pledged and designated as collateral for certain government deposits, public and trust funds, securities sold under repurchase agreements and 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 March 31, 2023 and December 31, 2022.

Other investments

Other investments are presented in the following table:


(In thousands)	March 31, 2023		December 31, 2022
Federal Reserve Bank stock, at cost	$	38,923	$	38,873
Federal Home Loan Bank of Atlanta stock, at cost	38,789		29,668
Other	677		677
Total other investments, at cost	$	78,389	$	69,218

NOTE 3 – LOANS

Outstanding loan balances at March 31, 2023 and December 31, 2022 are net of unearned income, including net deferred loan fees of $10.5 million at the end of each period.

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


(In thousands)	March 31, 2023		December 31, 2022
Commercial real estate:
Commercial investor real estate	$	5,167,456	$	5,130,094
Commercial owner-occupied real estate	1,769,928		1,775,037
Commercial AD&C	1,046,665		1,090,028
Commercial business	1,437,478		1,455,885
Total commercial loans	9,421,527		9,451,044
Residential real estate:
Residential mortgage	1,328,524		1,287,933
Residential construction	223,456		224,772
Consumer	421,734		432,957
Total residential and consumer loans	1,973,714		1,945,662
Total loans	$	11,395,241	$	11,396,706

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:


	Three Months Ended March 31,
(In thousands)	2023		2022
Balance at beginning of period	$	136,242	$	109,145



Provision/ (credit) for credit losses - loans (1)	(18,945)		1,635
Loan charge-offs	(171)		(306)
Loan recoveries	487		114
Net charge-offs	316		(192)
Balance at period end	$	117,613	$	110,588

(1) Excludes the total credit to the provision on unfunded loan commitments for three months ended March 31, 2023 of $2.6 million.

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


(In thousands)	March 31, 2023		December 31, 2022
Collateral dependent loans individually evaluated for credit loss with an allowance	$	18,596	$	9,743
Collateral dependent loans individually evaluated for credit loss without an allowance	11,246		16,454
Total individually evaluated collateral dependent loans	$	29,842	$	26,197

Allowance for credit losses related to loans evaluated individually	$	9,870	$	6,902
Allowance for credit losses related to loans evaluated collectively	107,743		129,340
Total allowance for credit losses - loans	$	117,613	$	136,242

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 Three Months Ended March 31, 2023
	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	$	64,737		$	11,646		$	18,646		$	28,027		$	9,424		$	1,337		$	2,425		$	136,242
Provision/ (credit) for credit losses - loans	(7,780)			(1,796)			(6,693)			(2,254)			350			(233)			(539)			(18,945)
Charge-offs	—			—			—			(54)			(23)			—			(94)			(171)
Recoveries	5			26			—			181			2			—			273			487
Net recoveries (charge-offs)	5			26			—			127			(21)			—			179			316
Balance at end of period	$	56,962		$	9,876		$	11,953		$	25,900		$	9,753		$	1,104		$	2,065		$	117,613

Total loans	$	5,167,456		$	1,769,928		$	1,046,665		$	1,437,478		$	1,328,524		$	223,456		$	421,734		$	11,395,241
Allowance for credit losses on loans to total loans ratio	1.10		%	0.56		%	1.14		%	1.80		%	0.73		%	0.49		%	0.49		%	1.03		%

Average loans	$	5,136,204		$	1,769,680		$	1,082,791		$	1,444,588		$	1,307,761		$	223,313		$	424,122		$	11,388,459
Annualized net charge-offs/ (recoveries) to average loans	—		%	(0.01)		%	—		%	(0.04)		%	0.01		%	—		%	(0.17)		%	(0.01)		%

Balance of loans individually evaluated for credit loss	$	15,451		$	4,949		$	—		$	9,442		$	—		$	—		$	—		$	29,842
Allowance related to loans evaluated individually	$	1,935		$	1,259		$	—		$	6,676		$	—		$	—		$	—		$	9,870
Individual allowance to loans evaluated individually ratio	12.52		%	25.44		%	—		%	70.71		%	—		%	—		%	—		%	33.07		%
Contractual balance of individually evaluated loans	$	15,526		$	5,694		$	—		$	10,717		$	—		$	—		$	—		$	31,937

Balance of loans collectively evaluated for credit loss	$	5,152,005		$	1,764,979		$	1,046,665		$	1,428,036		$	1,328,524		$	223,456		$	421,734		$	11,365,399
Allowance related to loans evaluated collectively	$	55,027		$	8,617		$	11,953		$	19,224		$	9,753		$	1,104		$	2,065		$	107,743
Collective allowance to loans evaluated collectively ratio	1.07		%	0.49		%	1.14		%	1.35		%	0.73		%	0.49		%	0.49		%	0.95		%


	For the Year Ended December 31, 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 for credit losses - loans	19,128			(90)			(1,676)			4,774			4,093			281			170			26,680
Charge-offs	—			—			—			(716)			(155)			—			(234)			(1,105)
Recoveries	320			49			—			799			102			8			244			1,522
Net recoveries (charge-offs)	320			49			—			83			(53)			8			10			417
Balance at end of period	$	64,737		$	11,646		$	18,646		$	28,027		$	9,424		$	1,337		$	2,425		$	136,242

Total loans	$	5,130,094		$	1,775,037		$	1,090,028		$	1,455,885		$	1,287,933		$	224,772		$	432,957		$	11,396,706
Allowance for credit losses on loans to total loans ratio	1.26		%	0.66		%	1.71		%	1.93		%	0.73		%	0.59		%	0.56		%	1.20		%

Average loans	$	4,681,607		$	1,730,293		$	1,112,936		$	1,351,906		$	1,117,053		$	221,341		$	423,746		$	10,638,882
Net charge-offs/ (recoveries) to average loans	(0.01)		%	—		%	—		%	(0.01)		%	—		%	—		%	—		%	—		%

Balance of loans individually evaluated for credit loss	$	9,943		$	6,155		$	—		$	8,274		$	1,487		$	—		$	338		$	26,197
Allowance related to loans evaluated individually	$	134		$	1,261		$	—		$	5,507		$	—		$	—		$	—		$	6,902
Individual allowance to loans evaluated individually ratio	1.35		%	20.49		%	—		%	66.56		%	—		%	—		%	—		%	26.35		%
Contractual balance of individually evaluated loans	$	10,882		$	6,849		$	—		$	9,893		$	1,487		$	—		$	364		$	29,475

Balance of loans collectively evaluated for credit loss	$	5,120,151		$	1,768,882		$	1,090,028		$	1,447,611		$	1,286,446		$	224,772		$	432,619		$	11,370,509
Allowance related to loans evaluated collectively	$	64,603		$	10,385		$	18,646		$	22,520		$	9,424		$	1,337		$	2,425		$	129,340
Collective allowance to loans evaluated collectively ratio	1.26		%	0.59		%	1.71		%	1.56		%	0.73		%	0.59		%	0.56		%	1.14		%

Credit Quality

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


	For the Three Months Ended March 31, 2023
	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	$	9,943	$	5,019	$	—	$	7,322	$	7,439	$	—	$	5,059	$	34,782
Loans placed on non-accrual	14,601		—		—		2,621		2,045		—		447		19,714
Non-accrual balances transferred to OREO	—		—		—		—		—		—		—		—
Non-accrual balances charged-off	—		—		—		(54)		(23)		—		(49)		(126)
Net payments or draws	(9,093)		(70)		—		(446)		(169)		—		(434)		(10,212)
Non-accrual loans brought current	—		—		—		—		(357)		—		(123)		(480)
Balance at end of period	$	15,451	$	4,949	$	—	$	9,443	$	8,935	$	—	$	4,900	$	43,678


	For the Year Ended December 31, 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	4,761		2,370		—		1,591		2,593		—		815		12,130
Non-accrual balances transferred to OREO	—		—		—		—		—		—		—		—
Non-accrual balances charged-off	—		—		—		(677)		(151)		—		(32)		(860)
Net payments or draws	(7,307)		(4,366)		(650)		(2,012)		(2,615)		(55)		(2,060)		(19,065)
Non-accrual loans brought current	—		(2,291)		—		—		(829)		—		(389)		(3,509)
Balance at end of period	$	9,943	$	5,019	$	—	$	7,322	$	7,439	$	—	$	5,059	$	34,782


	March 31, 2023
	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	$	5,150,572	$	1,761,671	$	1,043,979	$	1,424,758	$	1,304,124	$	222,387	$	413,306	$	11,320,797
30-59 days	945		—		2,240		154		13,402		739		2,528		20,008
60-89 days	273		3,308		446		121		1,711		330		1,000		7,189
Total performing loans	5,151,790		1,764,979		1,046,665		1,425,033		1,319,237		223,456		416,834		11,347,994
Non-performing loans:
Non-accrual loans	15,451		4,949		—		9,443		8,935		—		4,900		43,678
Loans greater than 90 days past due	215		—		—		3,002		352		—		—		3,569
Restructured loans (1)	—		—		—		—		—		—		—		—
Total non-performing loans	15,666		4,949		—		12,445		9,287		—		4,900		47,247
Total loans	$	5,167,456	$	1,769,928	$	1,046,665	$	1,437,478	$	1,328,524	$	223,456	$	421,734	$	11,395,241

(1) Effective January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting and recognition of troubled debt restructurings ("TDRs").


	December 31, 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	$	5,104,204	$	1,767,875	$	1,090,028	$	1,443,012	$	1,261,878	$	222,144	$	422,989	$	11,312,130
30-59 days	9,735		1,007		—		3,556		11,307		2,628		4,343		32,576
60-89 days	6,212		—		—		41		5,822		—		566		12,641
Total performing loans	5,120,151		1,768,882		1,090,028		1,446,609		1,279,007		224,772		427,898		11,357,347
Non-performing loans:
Non-accrual loans	9,943		5,019		—		7,322		7,439		—		5,059		34,782
Loans greater than 90 days past due	—		—		—		1,002		—		—		—		1,002
Restructured loans	—		1,136		—		952		1,487		—		—		3,575
Total non-performing loans	9,943		6,155		—		9,276		8,926		—		5,059		39,359
Total loans	$	5,130,094	$	1,775,037	$	1,090,028	$	1,455,885	$	1,287,933	$	224,772	$	432,957	$	11,396,706

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 Three Months Ended March 31, 2023
	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	$	12,697	$	4,984	$	—	$	8,383	$	8,187	$	—	$	4,980	$	39,231
Contractual interest income due on non- accrual loans during the period	$	140	$	73	$	—	$	140	$	90	$	—	$	106	$	549


	For the Year Ended December 31, 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	$	11,892	$	7,314	$	617	$	7,768	$	7,769	$	21	$	5,811	$	41,192
Contractual interest income due on non- accrual loans during the period	$	713	$	106	$	30	$	491	$	319	$	1	$	349	$	2,009

There was no interest income recognized on non-accrual loans during the three months ended March 31, 2023. 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 three months ended March 31, 2023 new loans placed on non-accrual status totaled $19.7 million and the related amount of reversed uncollected accrued interest was $0.3 million.

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 March 31, 2023:


	March 31, 2023
	Term Loans by Origination Year												Revolving
(In thousands)	2023		2022		2021		2020		2019		Prior		Loans		Total
Commercial Investor R/E:
Pass	$	173,232	$	1,412,186	$	1,239,661	$	689,500	$	558,229	$	1,024,028	$	28,344	$	5,125,180
Special Mention	4,619		10,349		4,587		—		93		3,253		—		22,901
Substandard	273		550		13,505		—		1,405		3,642		—		19,375
Doubtful	—		—		—		—		—		—		—		—
Total	$	178,124	$	1,423,085	$	1,257,753	$	689,500	$	559,727	$	1,030,923	$	28,344	$	5,167,456
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Owner-Occupied R/E:
Pass	$	49,900	$	373,223	$	324,299	$	236,977	$	253,818	$	498,559	$	1,038	$	1,737,814
Special Mention	731		1,530		—		1,277		1,716		8,682		—		13,936
Substandard	1,338		6,527		71		355		6,056		3,831		—		18,178
Doubtful	—		—		—		—		—		—		—		—
Total	$	51,969	$	381,280	$	324,370	$	238,609	$	261,590	$	511,072	$	1,038	$	1,769,928
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial AD&C:
Pass	$	126,933	$	334,502	$	325,527	$	94,337	$	32,053	$	14,932	$	116,512	$	1,044,796
Special Mention	—		1,073		—		—		—		—		—		1,073
Substandard	—		796		—		—		—		—		—		796
Doubtful	—		—		—		—		—		—		—		—
Total	$	126,933	$	336,371	$	325,527	$	94,337	$	32,053	$	14,932	$	116,512	$	1,046,665
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Business:
Pass	$	43,548	$	337,157	$	219,980	$	85,098	$	99,564	$	147,806	$	467,480	$	1,400,633
Special Mention	—		330		650		1,024		6,818		564		12,977		22,363
Substandard	—		3,371		2,079		956		1,995		2,243		3,838		14,482
Doubtful	—		—		—		—		—		—		—		—
Total	$	43,548	$	340,858	$	222,709	$	87,078	$	108,377	$	150,613	$	484,295	$	1,437,478
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	29	$	25	$	54

Residential Mortgage:
Beacon score:
660-850	$	15,508	$	336,165	$	369,442	$	170,124	$	41,488	$	293,891	$	—	$	1,226,618
600-659	—		6,648		13,800		4,119		3,885		30,112		—		58,564
540-599	305		2,929		3,361		526		1,517		8,986		—		17,624
less than 540	—		365		3,025		3,479		3,047		15,802		—		25,718
Total	$	15,813	$	346,107	$	389,628	$	178,248	$	49,937	$	348,791	$	—	$	1,328,524
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	23	$	—	$	23

Residential Construction:
Beacon score:
660-850	$	4,482	$	152,343	$	50,886	$	8,596	$	150	$	2,877	$	—	$	219,334
600-659	—		2,163		739		—		—		—		—		2,902
540-599	—		—		401		—		—		—		—		401
less than 540	—		—		819		—		—		—		—		819
Total	$	4,482	$	154,506	$	52,845	$	8,596	$	150	$	2,877	$	—	$	223,456
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Beacon score:
660-850	$	2,976	$	6,559	$	2,608	$	1,133	$	2,084	$	23,941	$	343,677	$	382,978
600-659	47		554		31		34		112		5,949		12,384		19,111
540-599	12		396		84		39		129		2,299		5,519		8,478
less than 540	40		228		71		30		459		3,319		7,020		11,167
Total	$	3,075	$	7,737	$	2,794	$	1,236	$	2,784	$	35,508	$	368,600	$	421,734
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	49	$	45	$	94

Total loans	$	423,944	$	2,989,944	$	2,575,626	$	1,297,604	$	1,014,618	$	2,094,716	$	998,789	$	11,395,241

The following table provides information about credit quality indicators by the year of origination as of December 31, 2022:


	December 31, 2022
	Term Loans by Origination Year												Revolving
(In thousands)	2022		2021		2020		2019		2018		Prior		Loans		Total
Commercial Investor R/E:
Pass	$	1,510,446	$	1,197,504	$	694,756	$	567,247	$	335,103	$	742,405	$	15,242	$	5,062,703
Special Mention	32,661		17,146		468		94		473		4,814		—		55,656
Substandard	557		1,896		—		—		8,239		1,043		—		11,735
Doubtful	—		—		—		—		—		—		—		—
Total	$	1,543,664	$	1,216,546	$	695,224	$	567,341	$	343,815	$	748,262	$	15,242	$	5,130,094
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Owner-Occupied R/E:
Pass	$	391,340	$	328,657	$	240,738	$	260,114	$	140,841	$	381,386	$	1,167	$	1,744,243
Special Mention	4,567		—		1,301		1,740		2,066		7,323		—		16,997
Substandard	3,219		160		133		6,110		2,010		2,165		—		13,797
Doubtful	—		—		—		—		—		—		—		—
Total	$	399,126	$	328,817	$	242,172	$	267,964	$	144,917	$	390,874	$	1,167	$	1,775,037
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial AD&C:
Pass	$	366,096	$	439,468	$	113,713	$	34,340	$	14,816	$	—	$	119,727	$	1,088,160
Special Mention	1,073		—		—		—		—		—		795		1,868
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	$	367,169	$	439,468	$	113,713	$	34,340	$	14,816	$	—	$	120,522	$	1,090,028
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Business:
Pass	$	330,598	$	223,245	$	95,787	$	105,922	$	77,891	$	78,009	$	508,839	$	1,420,291
Special Mention	127		458		1,107		7,787		498		322		13,225		23,524
Substandard	2,902		1,611		1,094		2,030		449		2,121		1,863		12,070
Doubtful	—		—		—		—		—		—		—		—
Total	$	333,627	$	225,314	$	97,988	$	115,739	$	78,838	$	80,452	$	523,927	$	1,455,885
Current period gross charge-offs	$	174	$	—	$	—	$	—	$	138	$	404	$	—	$	716

Residential Mortgage:
Beacon score:
660-850	$	330,109	$	344,062	$	171,330	$	41,883	$	51,651	$	262,570	$	—	$	1,201,605
600-659	4,571		6,196		1,173		3,925		6,041		24,006		—		45,912
540-599	369		4,013		1,439		1,256		1,931		6,945		—		15,953
less than 540	1,860		3,036		2,892		3,822		2,347		10,506		—		24,463
Total	$	336,909	$	357,307	$	176,834	$	50,886	$	61,970	$	304,027	$	—	$	1,287,933
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	24	$	131	$	—	$	155

Residential Construction:
Beacon score:
660-850	$	131,259	$	75,844	$	12,133	$	150	$	1,432	$	1,245	$	—	$	222,063
600-659	908		373		—		—		—		—		—		1,281
540-599	609		—		—		—		—		—		—		609
less than 540	—		819		—		—		—		—		—		819
Total	$	132,776	$	77,036	$	12,133	$	150	$	1,432	$	1,245	$	—	$	224,772
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Beacon score:
660-850	$	6,689	$	2,346	$	1,201	$	2,147	$	2,047	$	23,170	$	359,468	$	397,068
600-659	658		467		59		198		664		5,459		11,269		18,774
540-599	123		56		—		465		316		2,802		3,824		7,586
less than 540	156		57		40		133		209		2,918		6,016		9,529
Total	$	7,626	$	2,926	$	1,300	$	2,943	$	3,236	$	34,349	$	380,577	$	432,957
Current period gross charge-offs	$	—	$	5	$	15	$	—	$	13	$	20	$	181	$	234

Total loans	$	3,120,897	$	2,647,414	$	1,339,364	$	1,039,363	$	649,024	$	1,559,209	$	1,041,435	$	11,396,706

Effective January 1, 2023, the Company fully adopted provision of ASU 2022-02 that eliminated accounting, classification and disclosures of loans modified into troubled debt restructurings.

As a part of our risk management practices, we may consider modifying a loan for a borrower experiencing a financial difficulty that provides a certain degree of a payment relief. Modification types primarily include a reduction in the interest rate or an extension of the existing term. We do not provide modifications that result in the reduction of the outstanding principal balance. During the three months ended March 31, 2023, we modified two commercial loans to borrowers experiencing financial difficulty with a total outstanding balance of $0.2 million. Both of the modified loans were provided term extensions ranging from six to 12 months and were performing in line with their contractual loan agreements at March 31, 2023.

Other Real Estate Owned

Other real estate owned ("OREO") totaled $0.6 million at both March 31, 2023 and December 31, 2022, respectively. There were no consumer mortgage loans secured by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2023.

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

The amount of goodwill by reporting units is presented in the following table:


(In thousands)	Community Banking		Investment Management		Total
Balances at December 31, 2022	$	331,689	$	31,747	$	363,436

No activity	—		—		—
Balances at March 31, 2023	$	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:


	March 31, 2023						Weighted Average Remaining Life	December 31, 2022						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	$	(17,602)	$	11,436	6.2 years	$	29,038	$	(16,694)	$	12,344	6.5 years
Other identifiable intangibles	13,906		(6,793)		7,113		8.0 years	13,906		(6,395)		7,511		8.8 years
Total amortizing intangible assets	$	42,944	$	(24,395)	$	18,549		$	42,944	$	(23,089)	$	19,855

Goodwill	$	363,436			$	363,436		$	363,436			$	363,436

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


(In thousands)	Amount
Remaining 2023	$	3,734
2024	4,291
2025	3,530
2026	2,702
2027	1,945
Thereafter	2,347
Total amortizing intangible assets	$	18,549

NOTE 6 – DEPOSITS

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


(In thousands)	March 31, 2023		December 31, 2022
Noninterest-bearing deposits	$	3,228,678	$	3,673,300
Interest-bearing deposits:
Demand	1,472,234		1,435,454
Money market savings	3,210,637		3,213,045
Regular savings	517,751		513,360


Time deposits of less than $250,000	2,143,718		1,644,645
Time deposits of $250,000 or more	502,973		473,617
Total interest-bearing deposits	7,847,313		7,280,121
Total deposits	$	11,075,991	$	10,953,421

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.

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


(In thousands)	March 31, 2023		December 31, 2022
Fixed to floating rate subordinated debt, 3.875%	$	200,000	$	200,000
Fixed to floating rate subordinated debt, 4.25%	175,000		175,000


Total subordinated debt	375,000		375,000


Less: Debt issuance costs	(4,646)		(4,795)




Long-term borrowings	$	370,354	$	370,205

Other Borrowings

At March 31, 2023 and December 31, 2022, the Company had $47.6 million and $62.0 million, respectively, of outstanding retail repurchase agreements.

The Company had $205.0 million of outstanding federal funds purchased at March 31, 2023 and $260.0 million at December 31, 2022. The available borrowing federal funds capacity under unsecured lines of credit with the correspondent banks was $1.4 billion and $1.6 billion at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.2 billion. FHLB availability based on pledged collateral at March 31, 2023, amounted to $2.4 billion, with $750.0 million outstanding. At December 31, 2022, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.2 billion. The availability of FHLB borrowings based on the collateral pledged at December 31, 2022 was $2.6 billion with $550.0 million outstanding.

Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $1.2 billion, commercial real estate loans amounting to $3.7 billion, home equity lines of credit (“HELOC”) amounting to $213.4 million, and multifamily loans amounting to $532.4 million at March 31, 2023, as collateral under the borrowing agreement with the FHLB. At December 31, 2022, the Company had pledged collateral of qualifying mortgage loans of $1.2 billion, commercial real estate loans of $3.6 billion, HELOC loans of $214.3 million, and multifamily loans of $514.8 million under the FHLB borrowing agreement.

The Company had secured lines of credit available from the Federal Reserve Bank and correspondent banks of $749.4 million and $718.6 million at March 31, 2023 and December 31, 2022, respectively, collateralized by loans, with no borrowings outstanding at the end of either period.

At March 31, 2023, the Company also had $303.4 million available through Federal Reserve's Bank Term Funding Program, which provides available funding collateralized by designated investment securities. There were no borrowings outstanding at the end of the current 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 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. The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2023. Under the current authorization, common stock with a total value of up to $25.0 million remains available to be repurchased.

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 388,640 are available for issuance at March 31, 2023, has a term of 10 years, and is administered by a committee of at least three directors appointed by the Board of Directors. 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.

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 $1.2 million and $1.5 million for the three months ended March 31, 2023 and 2022, 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 March 31, 2023. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $12.5 million as of March 31, 2023. That cost is expected to be recognized over a weighted average period of approximately 2.37 years.

During the three months ended March 31, 2023, the Company granted 253,712 restricted stock units and performance share units, of which 62,124 units are subject to achievement of certain performance conditions measured over a three-year performance period and 191,588 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 three months ended March 31, 2023.

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, 2023	389,475	$	37.44
Granted	253,712	$	27.51
Vested	(60,080)	$	27.10
Forfeited/ cancelled	—	$	—
Non-vested at March 31, 2023	583,107	$	34.17

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, 2023	144,047	$	16.61	1.6 years	$	2,633
Granted	—	$	—

Exercised	(7,530)	$	20.12		$	106
Forfeited	—	$	—
Expired	(3,338)	$	27.46
Balance at March 31, 2023	133,179	$	16.14	1.4 years	$	2,374

Exercisable at March 31, 2023	133,179	$	16.14	1.4 years	$	2,374

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. The Company has also filed appropriate notices and documents related to the Plan’s termination and wind-down with the Pension Benefit Guaranty Corporation (“PBGC”).

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 Company anticipates distributing assets from the Plan in the third quarter of 2023.

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


	Three Months Ended March 31,
(In thousands)	2023		2022
Interest cost on projected benefit obligation	$	438	$	325
Expected return on plan assets	(373)		(353)
Recognized net actuarial loss	225		196

Net periodic benefit cost	$	290	$	168

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 three months ended March 31, 2023. Management continues to monitor the funding level of the Plan and may make additional contributions as necessary during 2023.

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 March 31,
(Dollars and amounts in thousands, except per share data)	2023		2022
Net income	$	51,253	$	43,935
Distributed and undistributed earnings allocated to participating securities	(169)		(268)
Net income attributable to common shareholders	$	51,084	$	43,667

Total weighted average outstanding shares	44,825		45,424
Less: Weighted average participating securities	(148)		(282)
Basic weighted average common shares	44,677		45,142
Dilutive weighted average common stock equivalents	195		191
Diluted weighted average common shares	44,872		45,333

Basic net income per common share	$	1.14	$	0.97
Diluted net income per common share	$	1.14	$	0.96

Anti-dilutive shares	15		—

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.

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, 2023	$	(113,513)	$	(8,002)	$	(10,436)	$	(131,951)
Other comprehensive loss before reclassification from accumulated other comprehensive loss, net of tax	15,490		—		—		15,490
Reclassifications from accumulated other comprehensive loss to earnings, net of tax	—		168		302		470
Current period change in other comprehensive loss, net of tax	15,490		168		302		15,960
Balance at March 31, 2023	$	(98,023)	$	(7,834)	$	(10,134)	$	(115,991)


(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 income before reclassification, net of tax	(49,026)		—		(12,083)		(61,109)
Reclassifications from accumulated other comprehensive income, net of tax	(6)		146		237		377
Current period change in other comprehensive income, net of tax	(49,032)		146		(11,846)		(60,732)
Balance at March 31, 2022	$	(49,368)	$	(8,057)	$	(11,846)	$	(69,271)

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


	Three Months Ended March 31,
(In thousands)	2023		2022
Unrealized gains on available-for-sale debt securities:
Affected line item in the Statements of Income:
Investment securities gains/ (losses)	$	—	$	8
Income before taxes	—		8
Tax (expense)/ benefit	—		(2)
Net income/ (loss)	$	—	$	6

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)	$	(405)	$	(319)
Income before taxes	(405)		(319)
Tax benefit	103		82
Net loss	$	(302)	$	(237)

Amortization of defined benefit pension plan items:
Affected line item in the Statements of Income:
Recognized actuarial loss (2)	$	(225)	$	(196)

Loss before taxes	(225)		(196)
Tax benefit	57		50
Net loss	$	(168)	$	(146)

(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 March 31,
		2023		2022
Components of lease expense:
Operating lease cost (resulting from lease payments)		$	2,715	$	2,765




Supplemental cash flow information related to leases:
Operating cash flows from operating leases		$	2,889	$	2,939
ROU assets obtained in the exchange for lease liabilities due to:
New leases		$	703	$	—
Acquisitions		$	—	$	—

		March 31, 2023		December 31, 2022
Supplemental balance sheet information related to leases:
Operating lease ROU assets		$	52,749	$	48,910
Operating lease liabilities		$	61,067	$	57,402

Other information related to leases:
Weighted average remaining lease term of operating leases	8.5 years	8.6 years
Weighted average discount rate of operating leases		3.06%		3.02%

At March 31, 2023, the maturities of the Company’s operating lease liabilities were as follows:


(In thousands)	Amount
Maturity:
Remaining 2023	$	8,604
2024	10,765
2025	9,086
2026	8,341
2027	6,945
Thereafter	26,845
Total undiscounted lease payments	70,586
Less: Present value discount	(9,519)
Lease liability	$	61,067

At March 31, 2023, the Company had one operating lease that has not yet commenced operations and is expected to commence operations during the second half of 2023. The total amount of ROU asset and lease liability at March 31, 2023 was $0.7 million. The Company does not have any lease arrangements with any of its related parties as of March 31, 2023.

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 $336.9 million as of March 31, 2023 compared to $339.1 million as of December 31, 2022. 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:


	March 31, 2023
	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)	$	—	$	16,262	$	—	$	16,262
Available-for-sale debt securities:
U.S. treasuries and government agencies	—		95,090		—		95,090
State and municipal	—		272,928		—		272,928
Mortgage-backed and asset-backed	—		827,710		—		827,710

Total available-for-sale debt securities	—		1,195,728		—		1,195,728
Interest rate swap agreements	—		14,980		—		14,980
Total assets	$	—	$	1,226,970	$	—	$	1,226,970

Liabilities:
Interest rate swap agreements	$	—	$	(14,980)	$	—	$	(14,980)
Total liabilities	$	—	$	(14,980)	$	—	$	(14,980)

(1) The outstanding principal balance for residential loans held for sale as of March 31, 2023 was $15.9 million.


	December 31, 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)	$	—	$	11,706	$	—	$	11,706
Investments available-for-sale:
U.S. treasuries and government agencies	—		93,622		—		93,622
State and municipal	—		265,997		—		265,997
Mortgage-backed and asset-backed	—		854,919		—		854,919




Total investments available-for-sale	—		1,214,538		—		1,214,538
Interest rate swap agreements	—		18,596		—		18,596
Total assets	$	—	$	1,244,840	$	—	$	1,244,840

Liabilities:
Interest rate swap agreements	$	—	$	(18,596)	$	—	$	(18,596)
Total liabilities	$	—	$	(18,596)	$	—	$	(18,596)

(1) The outstanding principal balance for residential loans held for sale as of December 31, 2022 was $11.3 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:


	March 31, 2023
(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	$	—	$	—	$	—	$	—	$	—
Other real estate owned	—		—		645		645		(105)
Total	$	—	$	—	$	645	$	645	$	(105)


	December 31, 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)	$	—	$	—	$	190	$	190	$	(384)
Other real estate owned	—		—		645		645		(105)
Total	$	—	$	—	$	835	$	835	$	(489)

(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).

At March 31, 2023, non-accrual loans totaling $29.8 million had estimated fair value of $20.0 million as a result of individual credit loss allowances of $9.8 million based on the most recent value of the collateral. Collateral dependent loans totaling $26.2 million had an estimated fair value of $19.3 million at December 31, 2022 as a result of individual credit loss allowances of $6.9 million.

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
	March 31, 2023				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	$	495,715	$	495,715	$	495,715	$	—	$	—
Residential mortgage loans held for sale	16,262		16,262		—		16,262		—
Available-for-sale debt securities	1,195,728		1,195,728		—		1,195,728		—
Held-to-maturity debt securities	254,219		219,417		—		219,417		—
Other investments	78,389		78,389		—		78,389		—
Loans, net of allowance	11,277,628		11,250,848		—		—		11,250,848
Interest rate swap agreements	14,980		14,980		—		14,980		—
Accrued interest receivable	42,232		42,232		42,232		—		—
Bank owned life insurance	153,813		153,813		—		153,813		—

Financial liabilities:
Time deposits	$	2,646,691	$	2,623,078	$	—	$	2,623,078	$	—
Other deposits	8,429,300		8,429,300		8,429,300		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	252,627		252,627		—		252,627		—
Advances from FHLB	750,000		750,088		—		750,088		—
Subordinated debt	370,354		336,767		—		—		336,767
Interest rate swap agreements	14,980		14,980		—		14,980		—
Accrued interest payable	18,018		18,018		18,018		—		—


					Fair Value Measurements
	December 31, 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	$	192,232	$	192,232	$	192,232	$	—	$	—
Residential mortgage loans held for sale	11,706		11,706		—		11,706		—
Investments available-for-sale	1,214,538		1,214,538		—		1,214,538		—
Held-to-maturity debt securities	259,452		220,123		—		220,123		—
Other investments	69,218		69,218		—		69,218		—
Loans, net of allowance	11,260,464		11,020,992		—		—		11,020,992
Interest rate swap agreements	18,596		18,596		—		18,596		—
Accrued interest receivable	41,172		41,172		41,172		—		—
Bank owned life insurance	153,016		153,016		—		153,016		—

Financial liabilities:
Time deposits	$	2,118,262	$	2,082,319	$	—	$	2,082,319	$	—
Other deposits	8,835,159		8,835,159		8,835,159		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	321,967		321,967		—		321,967		—

Advances from FHLB	550,000		549,530		—		549,530		—
Subordinated debt	370,205		332,470		—		—		332,470
Interest rate swap agreements	18,596		18,596		—		18,596		—
Accrued interest payable	10,867		10,867		10,867		—		—

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 2022 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

•changes in general business and economic conditions nationally or in the markets that we serve;

•changes in consumer and business confidence, investor sentiment, or consumer spending or savings behavior;

•changes in the level of inflation;

•changes in the demand for loans, deposits and other financial services that we provide;

•the possibility that future credit losses may be higher than currently expected;

•the impact of the interest rate environment on our business, financial condition and results of operations;

•the impact of compliance with changes in laws, regulations and regulatory interpretations, including changes in income taxes;

•changes in credit ratings assigned to us or our subsidiaries;

•the ability to realize benefits and cost savings from, and limit any unexpected liabilities associated with, any business combinations;

•competitive pressures among financial services companies;

•the ability to attract, develop and retain qualified employees;

•our ability to maintain the security of our data processing and information technology systems;

•the impact of changes in accounting policies, including the introduction of new accounting standards;

•the impact of judicial or regulatory proceedings;

•the impact of fiscal and governmental policies of the United States federal government;

•the impact of health emergencies, epidemics or pandemics;

•the effects of climate change; and

•the impact of natural disasters, extreme weather events, military conflict, terrorism or other geopolitical events.

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. Throughout this report, references to the

“Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Sandy Spring Bancorp, Inc. and its subsidiaries. “Bancorp” refers solely to the parent holding company, and the “Bank” refers solely to Bancorp’s subsidiary bank, Sandy Spring Bank. Bancorp is the bank holding company for the Bank, which is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. At March 31, 2023, the Company had $14.1 billion in total assets, compared to $13.8 billion at December 31, 2022. 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 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 reported net income of $51.3 million ($1.14 per diluted common share) for the quarter ended March 31, 2023, compared to net income of $43.9 million ($0.96 per diluted common share) for the first quarter of 2022 and $34.0 million ($0.76 per diluted common share) for the fourth quarter of 2022. The rise in the current quarter's earnings compared to the prior year quarter was the result of the current quarter's credit to the provision for credit losses compared to the prior year's charge to the provision. The impact of the credit to the provision more than offset the effects of lower net interest income and non-interest income and the rise in non-interest expense compared to the prior year quarter. During the comparative period, the positive impact on interest income from loan growth coupled with rising interest rates was more than offset by the increase in interest expense, the result of the increase in rates paid on deposits and higher borrowing costs. The decline in non-interest income was the result of a combination of lower mortgage banking income, a decline in wealth management income, reduced insurance commission income due to the impact of the sale of the Company's insurance business and lower bank card fees resulting from the implementation of applicable regulations in the second half of 2022. Compared to the prior year quarter, non-interest expense increased 7%, mainly due to increases in the FDIC insurance assessment, professional fees and services and other expenses.

Current quarter core earnings were $52.3 million ($1.16 per diluted common share), compared to $45.1 million ($0.99 per diluted common share) for the quarter ended March 31, 2022 and $35.3 million ($0.79 per diluted common share) for the quarter ended December 31, 2022. Core earnings exclude the after-tax impact of amortization of intangibles, investment securities gains or losses and non-recurring or extraordinary items. The current period driver in the growth of GAAP earnings and core earnings compared to the linked quarter and the prior year quarter was the $21.5 million credit to provision for credit losses compared to a charge of $1.6 million for the first quarter of 2022 and a charge of $10.8 million for the fourth quarter of 2022. The current quarter's credit to the provision was primarily the result of the improvement in the forecasted regional unemployment rate combined with the stable credit quality in the loan portfolio.

The current quarter reflects the following:

•Total assets at March 31, 2023 of $14.1 billion compared to $13.8 billion at December 31, 2022.

•As a result of reduced loan demand and lower payoff activity during the current quarter, total loans have remained relatively stable at $11.4 billion at March 31, 2023 compared to December 31, 2022.

•Deposits increased 1% to $11.1 billion at March 31, 2023 compared to $11.0 billion at December 31, 2022. During the current quarter attrition in noninterest-bearing deposits was 12%, primarily commercial checking accounts, while interest-bearing deposits grew 8% driven by the addition of brokered time deposits. Excluding the increase in brokered time deposits during the current quarter, total deposits declined 3%.

•Total borrowings increased in the current quarter by $130.8 million over amounts at December 31, 2022 as management bolstered on-balance sheet liquidity following the closures of Silicon Valley Bank and Signature Bank.

•Net interest income for the first quarter of 2023 declined $4.1 million or 4% compared to the first quarter of 2022. The growth in interest income of $45.3 million provided by loan growth and higher interest rates was more than offset by the $49.5 million increase in interest expense that resulted from the increase in rates paid on deposits and higher borrowing costs.

•For the first quarter of 2023, the net interest margin was 2.99% compared to 3.49% for the first quarter of 2022, and 3.26% for the fourth quarter of 2022. The erosion in net interest margin for the current quarter was caused by higher rates paid on interest-bearing liabilities, which outpaced the increase in the yield on interest-earning assets. The overall rate and yield increases were driven by the multiple federal funds rate increases that occurred over the preceding twelve months coupled with competition for deposits in the market. During this period, the rate paid on

interest-bearing liabilities rose 223 basis points, while the yield on interest-earning assets increased 98 basis points, resulting in the aforementioned margin compression of 50 basis points.

•The current quarter's provision for credit losses directly attributable to the funded loan portfolio was a credit of $18.9 million compared to the prior year quarter’s provision for credit losses of $1.6 million. In addition, the quarterly credit to the provision contained a credit of $2.6 million associated with the provision for unfunded loan commitments. The credit to the provision in the current quarter reflects the impact of the improvement in forecasted regional unemployment rate, management's consideration of existing economic versus historical conditions and the continued strong credit performance of our loan portfolio segments.

•The current quarter's non-interest income decreased by 23% or $4.6 million compared to the prior year quarter. The decrease represents the cumulative result of the impact of the interest rate and market environment on mortgage banking activities and wealth management income, the decline in insurance commission income as a result of the disposition of the Company's insurance business during the second quarter of 2022 and lower bank card income due to regulatory restrictions on transaction fees that became effective for the Company in the second quarter of 2022 .

•Non-interest expense for the current quarter increased $4.2 million or 7% compared to the prior year quarter, driven primarily by increases in the FDIC insurance assessment, professional fees and services and other expenses.

•Return on average assets (“ROA”) for the quarter ended March 31, 2023 was 1.49% and return on average tangible common equity (“ROTCE”) was 19.10% compared to 1.42% and 16.45%, respectively, for the first quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 1.52% and core ROTCE was 19.11% compared to core ROA of 1.45% and core ROTCE of 16.45% for the first quarter of 2022.

•The GAAP efficiency ratio was 58.55% for the first quarter of 2023, compared to 50.92% for the first quarter of 2022, and 53.23% for the fourth quarter of 2022. The non-GAAP efficiency ratio was 56.87% for the first quarter of 2023 compared to 49.34% for the prior year quarter, and 51.46% for the fourth quarter of 2022. The increase in both the GAAP and non-GAAP efficiency ratios (reflecting a decrease in efficiency) in the current quarter compared to the previous quarter and the first quarter of the prior year was the result of declines in net revenue from the prior periods coupled with the growth in non-interest expense.

Customer Deposit Focus During the Current Quarter

At March 31, 2023 total deposits amounted to $11.1 billion. Core deposits, which exclude brokered relationships, represented 88% of total deposits at the end of the current quarter as compared to 92% for the previous quarter, indicating the stability of the core deposit base. Total insured deposits, including pass-through insured deposits, represented approximately 66% of total deposits at March 31, 2023. Depositors rotated into higher yielding deposit products during the current quarter, resulting in the 12% attrition in noninterest-bearing deposits, primarily commercial checking accounts, and an 8% increase in interest-bearing deposits. The Company mitigated deposit outflows by providing reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits.

At March 31, 2023, contingent liquidity amounted to $3.8 billion or 101% of the amount of uninsured deposits. This amount of contingent liquidity does not include any consideration of the held-to-maturity or the available-for-sale investment portfolios. With the inclusion of the total unpledged investment securities portfolio, in addition to $1.5 billion in available federal funds, the total coverage of uninsured deposits was 158%.

Summary of Comparative First Quarter Results

Balance Sheet and Credit Quality

Total assets grew 9% to $14.1 billion at March 31, 2023, as compared to $13.0 billion at March 31, 2022. During this period, total loans grew by 12% to $11.4 billion at March 31, 2023, compared to $10.1 billion at March 31, 2022. Total commercial loans, grew by $902.1 million or 12% during the past twelve months. The growth in the commercial portfolio occurred in most portfolio segments led by the $779.2 million or 18% growth in the investor owned commercial real estate portfolio. Year-over-year the total residential mortgage loan portfolio grew 33%, as a greater number of conventional 1-4 family mortgage and one-year ARM loans were retained to grow the portfolio. Reduced loan demand coupled with lower payoff activity during the current quarter resulted in minimal loan growth compared to the prior quarter.

Deposits increased 2% to $11.1 billion at March 31, 2023 compared to $10.9 billion at March 31, 2022. During the period, the availability of high yields in savings products and short-term debt securities coupled with a degree of expected run-off led to

noninterest-bearing deposits declining 20%. The rotation into higher yielding accounts along with growth in brokered time deposits drove a 15% increase in interest-bearing deposits. Excluding the impact of the increase in brokered time deposits, total deposits declined 7%. Borrowings, primarily advances from the FHLB, have increased by $872.2 million in reaction to the loan growth over the previous year and, more recently, to provide greater on-balance sheet liquidity following the closures of Silicon Valley Bank and Signature Bank.

The tangible common equity ratio decreased to 8.40% of tangible assets at March 31, 2023, compared to 8.70% at March 31, 2022. This decrease reflects the impact of the $46.7 million increase in the accumulated other comprehensive loss on common equity as a result of the rising interest rate environment negatively affecting the fair values in the available-for-sale investment portfolio coupled with the 9% increase in total assets over the preceding twelve months. At March 31, 2023, the Company had a total risk-based capital ratio of 14.43%, a common equity tier 1 risk-based capital ratio of 10.53%, a tier 1 risk-based capital ratio of 10.53%, and a tier 1 leverage ratio of 9.44%. All of these ratios remain well in excess of the mandated minimum regulatory requirements.

Non-performing loans include non-accrual loans and accruing loans 90 days or more past due. Credit quality improved at March 31, 2023 compared to March 31, 2022, as the level of non-performing loans to total loans declined to 0.41% compared to 0.46%. These levels of non-performing loans compare to 0.35% for the prior quarter and continue to indicate stable credit quality during a period of significant loan growth and a degree of economic uncertainty. At March 31, 2023, non-performing loans totaled $47.2 million, compared to $46.3 million at March 31, 2022, and $39.4 million at December 31, 2022. Loans placed on non-accrual during the current quarter amounted to $19.7 million compared to $1.5 million for the prior year quarter and $5.5 million for the fourth quarter of 2022. During the current quarter, the Company successfully resolved several large non-accrual relationships for a total pay-off of $10.2 million without incurring any charge-offs. The growth in non-performing loans from the previous quarter reflects a large borrowing relationship within the custodial care sector with an aggregate balance of $14.6 million. This large relationship is collateral dependent and required minimal individual reserves due to sufficient values of the underlying collateral. The Company realized net recoveries of $0.3 million for the first quarter of 2023, as compared to net charge-offs of $0.2 million for the first quarter of 2022 and $0.1 million in recoveries for the fourth quarter of 2022.

At March 31, 2023, the allowance for credit losses was $117.6 million or 1.03% of outstanding loans and 249% of non-performing loans, compared to $136.2 million or 1.20% of outstanding loans and 346% of non-performing loans at the end of the previous quarter and $110.6 million or 1.09% of outstanding loans and 239% of non-performing loans at the end of the first quarter of 2022. The decrease in the allowance for the current quarter compared to the previous quarter reflects the impact of the improvement in forecasted regional unemployment rate, management's consideration of existing economic versus historical conditions and the continued strong credit performance of our loan portfolio segments.

Quarterly Results of Operations

Net income for the three months ended March 31, 2023 rose to $51.3 million compared to net income of $43.9 million for the prior year quarter as a result of the current quarter's significant credit to the provision for credit losses compared to the prior year's charge to the provision. The current quarter's credit to the provision more than offset the consolidated effect of lower net interest income, lower non-interest income and the rise in non-interest expense compared to the prior year quarter.

Net interest income decreased $4.1 million or 4% for the first quarter of 2023, compared to the first quarter of 2022, as the $45.3 million growth in interest income was more than offset by interest expense growth of $49.5 million. The provision for credit losses was a credit of $21.5 million for the first quarter of 2023 compared to a charge of $1.6 million for the first quarter of 2022. The provision for credit losses for the fourth quarter of 2022 was a charge of $10.8 million. Non-interest income for the current quarter decreased by 23% or $4.6 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 year's second quarter disposition of our insurance business, and reduced bankcard income mandated by regulatory restrictions on interchange fees. Non-interest expense increased $4.2 million or 7% for the first quarter of 2023, compared to the prior year quarter driven primarily by increases in the FDIC insurance assessment, professional fees and other expenses.

Results of Operations

For the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Net income for the three months ended March 31, 2023 was $51.3 million compared to net income of $43.9 million for the prior year quarter. Current quarter earnings were positively affected as a result of the current quarter's credit to provision for credit losses compared to the prior year's charge to provision for credit losses. The credit to the provision exceeded the

combined impact of decline in net revenue and an increase in non-interest expense. Net interest income was adversely affected by rising interest rates over the previous twelve months as interest income growth from loan production was more than offset by increased funding costs. Non-interest income decreased as a result of the combination of lower mortgage banking income, reduced wealth management income, the impact of the sale of our insurance business in the prior year which reduced commission income, and lower bankcard fees resulting from the implementation of applicable regulations. Non-interest expense increased 7% primarily as a result of the rise in operating costs other than compensation costs, which declined in the current quarter compared to the prior year quarter. Current quarter core earnings were $52.3 million ($1.16 per diluted common share), compared to $45.1 million ($0.99 per diluted common share) for the quarter ended March 31, 2022 and $35.3 million ($0.79 per diluted common share) for the quarter ended December 31, 2022.

Net Interest Income

Net interest income for the first quarter of 2023 declined $4.1 million or 4% compared to the first quarter of 2022, the net result of interest income growth of $45.3 million provided by loan growth and higher interest rates that was more than offset by the $49.5 million increase in interest expense, a result of the increase in rates paid on deposits and higher borrowing costs.

The net interest margin for the first quarter of 2023 declined to 2.99% as compared to 3.49% for the same quarter of the prior year, as a result of the rate paid on interest-bearing liabilities rising by 223 basis points, while the yield on interest-earning assets rose 98 basis points resulting in the indicated margin compression of 50 basis points. The overall rate and yield increases were driven by the multiple federal funds rate increases that occurred over the preceding twelve months coupled with competition for deposits in the market. During the comparative period, average interest-earning assets increased by 12% and average interest-bearing liabilities grew by 23%. At March 31, 2023 and 2022, average total loans comprised 86% and 84% of average interest-earning assets with an average yield of 4.99% and 4.06%, respectively. In addition, the average yield on investment securities increased to 2.20% for the current quarter compared to 1.65% for the prior year quarter. These portfolio yield movements resulted in the rise in the overall average yield on interest-earning assets to 4.63% at March 31, 2023 from 3.65% at March 31, 2022. Average interest-bearing deposits increased 12% for the current quarter compared to the same period for the prior year driven by an 82% increase in average time deposits, predominantly brokered time deposits. The percentage of average noninterest-bearing deposits to total average deposits decreased to 31% in the current quarter compared to 36% in the first quarter of 2022 due to the decline in commercial checking deposit balances. The average rate paid on average interest-bearing liabilities grew by 223 basis points as the average rate paid increased from 0.26% for the first quarter of 2022 to 2.49% for the first quarter of 2023 driven by the 205 basis point increase in the average rate paid on interest-bearing deposits coupled with the 191 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 in all deposit categories, while the rise in the average rate paid on borrowings reflects the impact of the use of advances from the FHLB, which funded loan growth and provided liquidity over the previous twelve months.


Consolidated Average Balances, Yields and Rates
	Three Months Ended March 31,
	2023						2022
(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	$	5,136,204	$	57,801	4.56	%	$	4,220,246	$	41,634	4.00	%
Commercial owner-occupied real estate loans	1,769,680		19,598		4.49		1,683,557		18,432		4.44
Commercial AD&C loans	1,082,791		19,839		7.43		1,102,660		10,593		3.90
Commercial business loans	1,444,588		22,200		6.23		1,372,755		16,354		4.83
Total commercial loans	9,433,263		119,438		5.13		8,379,218		87,013		4.21
Residential mortgage loans	1,307,761		11,418		3.49		964,056		7,774		3.23
Residential construction loans	223,313		1,814		3.29		197,366		1,557		3.20
Consumer loans	424,122		7,587		7.25		424,859		3,589		3.43
Total residential and consumer loans	1,955,196		20,819		4.29		1,586,281		12,920		3.28
Total loans (2)	11,388,459		140,257		4.99		9,965,499		99,933		4.06
Loans held for sale	8,324		152		7.29		17,594		198		4.50
Taxable securities	1,297,769		7,008		2.16		1,165,041		4,107		1.41
Tax-advantaged securities	381,824		2,210		2.32		452,574		2,551		2.26
Total investment securities (3)	1,679,593		9,218		2.20		1,617,615		6,658		1.65
Interest-bearing deposits with banks	239,459		2,686		4.55		258,273		113		0.18
Federal funds sold	330		4		4.69		822		—		0.21
Total interest-earning assets	13,316,165		152,317		4.63		11,859,803		106,902		3.65

Less: allowance for credit losses - loans	(136,899)						(109,933)
Cash and due from banks	95,057						66,466
Premises and equipment, net	67,696						61,036
Other assets	607,257						698,717
Total assets	$	13,949,276					$	12,576,089

Liabilities and Stockholders' Equity:
Interest-bearing demand deposits	$	1,381,858	$	2,630	0.77	%	$	1,501,658	$	158	0.04	%
Regular savings deposits	505,364		363		0.29		546,893		19		0.01
Money market savings deposits	3,299,794		21,338		2.62		3,426,817		625		0.07
Time deposits	2,382,542		16,457		2.80		1,307,929		1,491		0.46
Total interest-bearing deposits	7,569,558		40,788		2.19		6,783,297		2,293		0.14
Federal funds purchased	171,222		2,083		4.93		45,444		15		0.13
Repurchase agreements	60,626		21		0.14		131,487		39		0.12
Advances from FHLB	635,056		7,207		4.60		—		—		—
Subordinated debentures	370,258		3,946		4.26		203,413		2,238		4.40
Total borrowings	1,237,162		13,257		4.35		380,344		2,292		2.44
Total interest-bearing liabilities	8,806,720		54,045		2.49		7,163,641		4,585		0.26

Noninterest-bearing demand deposits	3,480,433						3,758,732
Other liabilities	170,194						147,200
Stockholders' equity	1,491,929						1,506,516
Total liabilities and stockholders' equity	$	13,949,276					$	12,576,089

Tax-equivalent net interest income and spread			$	98,272	2.14	%			$	102,317	3.39	%
Less: tax-equivalent adjustment			970						866
Net interest income			$	97,302					$	101,451

Interest income/earning assets					4.63	%					3.65	%
Interest expense/earning assets					1.64						0.16
Net interest margin					2.99	%					3.49	%

(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.47% and 25.64% for 2023 and 2022, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.0 million and $0.9 million in 2023 and 2022, 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:


	2023 vs. 2022						2022 vs. 2021
	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	$	16,167	$	9,828	$	6,339	$	3,280	$	5,903	$	(2,623)
Commercial owner-occupied real estate loans	1,166		956		210		(248)		497		(745)
Commercial AD&C loans	9,246		(194)		9,440		197		514		(317)
Commercial business loans	5,846		894		4,952		(8,440)		(10,729)		2,289
Residential mortgage loans	3,644		2,973		671		(1,770)		(878)		(892)
Residential construction loans	257		212		45		(49)		147		(196)
Consumer loans	3,998		(6)		4,004		(956)		(628)		(328)
Loans held for sale	(46)		(132)		86		(339)		(576)		237
Taxable securities	2,901		512		2,389		208		933		(725)
Tax-advantaged securities	(341)		(406)		65		(289)		(227)		(62)
Interest-bearing deposits with banks	2,573		(9)		2,582		67		23		44
Federal funds sold	4		—		4		—		—		—
Total tax-equivalent interest income	45,415		14,628		30,787		(8,339)		(5,021)		(3,318)

Interest expense on funding of earning assets:
Interest-bearing demand deposits	2,472		(13)		2,485		(78)		23		(101)
Regular savings deposits	344		(1)		345		(37)		11		(48)
Money market savings deposits	20,713		(23)		20,736		(838)		7		(845)
Time deposits	14,966		2,081		12,885		(1,584)		(638)		(946)
Federal funds purchased	2,068		144		1,924		5		1		4
Repurchase agreements	(18)		(24)		6		(4)		(4)		—
Advances from FHLB	7,207		7,207		—		(2,276)		(1,138)		(1,138)
Subordinated debentures	1,708		1,779		(71)		(264)		(258)		(6)
Total interest expense	49,460		11,150		38,310		(5,076)		(1,996)		(3,080)
Tax-equivalent net interest income	$	(4,045)	$	3,478	$	(7,523)	$	(3,263)	$	(3,025)	$	(238)

*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

Total tax-equivalent interest income increased $45.4 million for the first quarter of 2023 compared to the prior year quarter as interest income increased in every earning asset category led by the increase in commercial loan income growth of $32.4 million. Average interest-earning assets rose 12% over the prior year quarter as average total loans grew 14% and average investment securities grew 4%. Average total mortgage loans increased 32% as a result of the growth of the conventional 1-4 family mortgage loan portfolio as well as in the residential construction portfolio over the past twelve months. Average consumer loans, principally home equity loans and lines, remained stable during the year.

The average yield on interest-earning assets improved to 4.63% for the current quarter compared to 3.65% for the same period of the prior year. Average yields on loans and investment securities for the current quarter increased by 93 and 55 basis points, respectively, compared to the prior year quarter, reflecting general market interest rates during 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 $49.5 million in the first quarter of 2023 compared to the first quarter of 2022. The increase from period to period was driven by the increase in market interest rates coupled with the increase in average balances in deposits and borrowings. The impact of the rise in rates resulted in the average rate on interest-bearing liabilities for the current quarter rising to 2.49% from 0.26% as compared to the prior year quarter. During this period, the composition of total average interest-bearing deposits shifted to time deposits from other deposit categories due to the increase in brokered time deposits to provide funding for loan growth and liquidity and, to a lesser degree, core time deposits in anticipation of rising rates. Average

noninterest-bearing deposits decreased to 31% of average deposits in the current quarter compared to 36% in the prior year’s first quarter.

Non-interest Income

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


	Three Months Ended March 31,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Securities gains	$	—	$	8	$	(8)	(100.0)	%

Service charges on deposit accounts	2,388		2,326		62		2.7
Mortgage banking activities	1,245		2,298		(1,053)		(45.8)
Wealth management income	8,992		9,337		(345)		(3.7)
Insurance agency commissions	—		2,115		(2,115)		(100.0)
Income from bank owned life insurance	907		795		112		14.1
Bank card fees	418		1,668		(1,250)		(74.9)
Other income	2,001		2,048		(47)		(2.3)
Total non-interest income	$	15,951	$	20,595	$	(4,644)	(22.5)

Total non-interest income decreased $4.6 million or 23% for the first quarter of 2023, 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 year's disposition of the Company's insurance business, and reduced bankcard income due to regulatory limitations on interchange fees.

Further detail by type of non-interest income follows:

•Service charges on deposit accounts increased 3% in the first quarter of 2023, compared to the first quarter of 2022. During the comparative period, while commercial service charges increased 19%, this was partially offset by a decline in ATM and return check charges.

•Income from mortgage banking activities decreased by $1.1 million or 46% in the first quarter of 2023 as compared to the first quarter of 2022, reflecting the impact of reduced origination and refinancing volume, the continued result of increasing mortgage lending rates during the comparative period.

•Wealth management income declined 4% in the first quarter of 2023 compared to the first quarter of 2022, due to the impact of market volatility on asset management fee income coupled with trust fees during the current quarter compared to the prior year quarter. Overall total assets under management decreased to $5.5 billion at March 31, 2023 compared to $5.8 billion at March 31, 2022.

•Income from bank owned life insurance grew 14% in the first quarter of 2023, compared to the first quarter of 2022 as a result of policy returns tied to deferred compensation plans.

•Bank card income decreased 75% in the first quarter of 2023, compared to the first quarter of 2022, as a result of the impact of 2022 regulatory restrictions on interchange fees.

•Other income remained stable in the first quarter of 2023 compared to the first quarter of 2022.

Non-interest Expense

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


	Three Months Ended March 31,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Salaries and employee benefits	$	38,926	$	39,373	$	(447)	(1.1)	%
Occupancy expense of premises	4,847		5,034		(187)		(3.7)
Equipment expense	4,117		3,536		581		16.4
Marketing	1,543		1,193		350		29.3
Outside data services	2,514		2,419		95		3.9
FDIC insurance	2,138		984		1,154		117.3
Amortization of intangible assets	1,306		1,508		(202)		(13.4)

Professional fees and services	3,684		2,017		1,667		82.6
Other expenses	7,230		6,083		1,147		18.9
Total non-interest expense	$	66,305	$	62,147	$	4,158	6.7

Total non-interest expense increased $4.2 million or 7% for the first quarter of 2023, compared to the prior year quarter, driven by increases in the FDIC insurance assessment, professional fees and services and other expenses. Compensation and benefits costs during the comparative period were $0.4 million lower driven by decreases in commission and incentive payments. Combined occupancy and equipment expense rose $0.4 million compared to the prior year quarter as a result of increased software amortization. Marketing and outside data services also increased during the comparative period.

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, decreased $0.4 million or 1% in the first quarter of 2023 compared to the same period of the prior year as a result of the decline in commissions and incentives that more than offset the increase in salaries during the period.

•Occupancy and equipment expenses for the quarter increased a combined 5% compared to the prior year quarter as a result of increased software amortization.

•FDIC insurance expense increased $1.2 million as a result of a higher assessment rate imposed by the FDIC on all banks effective beginning the first quarter of 2023.

•Professional fees and services increased 83% from the prior year quarter primarily due to the increase in utilization of IT consulting 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 19% primarily as a result of a variety of operating costs as compared to the prior year.

Income Taxes

Income tax expense was $17.2 million in the first quarter of 2023 compared to income tax expense of $14.3 million in the first quarter of 2022. The resulting effective tax rate was 25.2% for the first quarter of 2023 compared to an effective tax rate of 24.6% for the first quarter of 2022. 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

We use 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 our operating performance over time than does a GAAP efficiency ratio, and is highly useful in comparing period-to-period operating performance of our core business operations. It is used by management as a part of its assessment of its performance in managing non-interest expenses. 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 us 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 amortization of intangibles and contingent payment expense. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income and realized investment securities gains and losses, which vary widely from period to period without appreciably affecting operating

expenses. The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using net revenue and non-interest expense amounts as shown on the face of the Condensed Consolidated Statements of Income.

The GAAP efficiency ratio in the first quarter of 2023 was 58.55% compared to 50.92% for the first quarter of 2022. The non-GAAP efficiency ratio was 56.87% in the first quarter of 2023 compared to 49.34% in the first quarter of 2022. The increase in both the GAAP and non-GAAP efficiency ratios (reflecting a decrease in efficiency) in the current quarter compared to the first quarter of the prior year were the result of declines in net revenue from the prior periods coupled with the growth in non-interest expense. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table.

Pre-tax pre-provision net income decreased 22% for the current quarter compared to the prior year quarter due to the combined impact of the declines in net revenues coupled with the increase in non-interest expense.

Current quarter core earnings were $52.3 million ($1.16 per diluted common share), compared to $45.1 million ($0.99 per diluted common share) for the quarter ended March 31, 2022. Return on average assets (“ROA”) for the quarter ended March 31, 2023 was 1.49% and return on average tangible common equity (“ROTCE”) was 19.10% compared to 1.42% and 16.45%, respectively, for the first quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 1.52% and core ROTCE was 19.11% compared to core ROA of 1.45% and core ROTCE of 16.45% for the first quarter of 2022.

GAAP and Non-GAAP Efficiency Ratios and Measures


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Pre-tax pre-provision net income:
Net income	$	51,253		$	43,935
Plus/ (less) non-GAAP adjustments:
Income tax expense	17,231			14,329
Provision/ (credit) for credit losses	(21,536)			1,635
Pre-tax pre-provision net income	$	46,948		$	59,899

Efficiency ratio (GAAP):
Non-interest expense	$	66,305		$	62,147

Net interest income plus non-interest income	$	113,253		$	122,046

Efficiency ratio (GAAP)	58.55		%	50.92		%

Efficiency ratio (non-GAAP):
Non-interest expense	$	66,305		$	62,147
Less/ (plus) non-GAAP adjustments:
Amortization of intangible assets	1,306			1,508


Contingent payment expense	36			—
Non-interest expense - as adjusted	$	64,963		$	60,639

Net interest income plus non-interest income	$	113,253		$	122,046
Plus non-GAAP adjustment:
Tax-equivalent income	970			866
Less non-GAAP adjustment:
Securities gains	—			8

Net interest income plus non-interest income - as adjusted	$	114,223		$	122,904

Efficiency ratio (non-GAAP)	56.87		%	49.34		%

GAAP and Non-GAAP Performance Ratios


	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Core earnings (non-GAAP):
Net income (GAAP)	$	51,253		$	43,935
Plus/ (less) non-GAAP adjustments (net of tax):

Amortization of intangible assets	973			1,121


Investment securities gains	—			(6)
Contingent payment expense	27			—
Core earnings (non-GAAP)	$	52,253		$	45,050

Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)	44,872,582			45,333,292



Earnings per diluted common share (GAAP)	$	1.14		$	0.96
Core earnings per diluted common share (non-GAAP)	$	1.16		$	0.99

Core return on average assets (non-GAAP):
Average assets (GAAP)	$	13,949,276		$	12,576,089



Return on average assets (GAAP)	1.49		%	1.42		%
Core return on average assets (non-GAAP)	1.52		%	1.45		%

Return/ Core return on average tangible common equity (non-GAAP):
Net Income (GAAP)	$	51,253		$	43,935
Plus: Amortization of intangible assets (net of tax)	973			1,121
Net income before amortization of intangible assets	$	52,226		$	45,056

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





Average total stockholders' equity (GAAP)	$	1,491,929		$	1,506,516
Average goodwill	(363,436)			(370,223)
Average other intangible assets, net	(19,380)			(25,368)
Average tangible common equity (non-GAAP)	$	1,109,113		$	1,110,925

Return on average tangible common equity (non-GAAP)	19.10		%	16.45		%
Core return on average tangible common equity (non-GAAP)	19.11		%	16.45		%

FINANCIAL CONDITION

Total assets at March 31, 2023 increased 2% to $14.1 billion compared to $13.8 billion at December 31, 2022. Total loan and deposit balances remained relatively flat compared to the prior quarter end. At March 31, 2023 total loans have remained relatively stable at $11.4 billion compared to December 31, 2022 as a result of reduced loan demand and lower payoff activity during the current quarter. Deposits increased 1% to $11.1 billion at March 31, 2023 compared to $11.0 billion at December 31, 2022. During the quarter, the availability of high yields in savings products and short-term debt securities coupled with expected seasonal run-off led to noninterest-bearing deposits declining 12%. The rotation into higher yielding accounts along with growth in brokered time deposits drove an 8% increase in interest-bearing deposits. The Company mitigated deposit outflows by providing reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits. The loan to deposit ratio declined to 102.9% at March 31, 2023 from 104.0% at December 31, 2022.

Analysis of Loans

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


	March 31, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Commercial real estate:
Commercial investor real estate	$	5,167,456	45.3	%	$	5,130,094	45.0	%	$	37,362	0.7	%
Commercial owner-occupied real estate	1,769,928		15.6		1,775,037		15.5		(5,109)		(0.3)
Commercial AD&C	1,046,665		9.2		1,090,028		9.6		(43,363)		(4.0)
Commercial business	1,437,478		12.6		1,455,885		12.8		(18,407)		(1.3)
Total commercial loans	9,421,527		82.7		9,451,044		82.9		(29,517)		(0.3)
Residential real estate:
Residential mortgage	1,328,524		11.6		1,287,933		11.3		40,591		3.2
Residential construction	223,456		2.0		224,772		2.0		(1,316)		(0.6)
Consumer	421,734		3.7		432,957		3.8		(11,223)		(2.6)
Total residential and consumer loans	1,973,714		17.3		1,945,662		17.1		28,052		1.4
Total loans	$	11,395,241	100.0	%	$	11,396,706	100.0	%	$	(1,465)	—

Compared to the prior year end, total loans remained flat at March 31, 2023. The amounts of the respective distribution of the individual loan portfolios remained relatively stable during the period with most of the portfolios reflecting modest declines while the commercial investor real estate and residential mortgage portfolios experienced growth. Overall, the lack of loan demand combined with lower payoff activity during the current quarter as a result of the interest rate environment resulted in the reduction of loan growth compared to the prior quarter.

Analysis of Investment Securities

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


	March 31, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Available-for-sale debt securities:
U.S. treasuries and government agencies	$	95,090	6.2	%	$	93,622	6.1	%	$	1,468	1.6	%
State and municipal	272,928		17.9		265,997		17.2		6,931		2.6
Mortgage-backed and asset-backed	827,710		54.2		854,919		55.4		(27,209)		(3.2)



Total available-for-sale debt securities	1,195,728		78.3		1,214,538		78.7		(18,810)		(1.5)

Held-to-maturity debt securities:


Mortgage-backed and asset-backed	254,219		16.6		259,452		16.8		(5,233)		(2.0)
Total held-to-maturity debt securities	254,219		16.6		259,452		16.8		(5,233)		(2.0)

Other investments:
Federal Reserve Bank stock	38,923		2.6		38,873		2.6		50		0.1
Federal Home Loan Bank of Atlanta stock	38,789		2.5		29,668		1.9		9,121		30.7
Other	677		—		677		—		—		—
Total other investments	78,389		5.1		69,218		4.5		9,171		13.2
Total securities	$	1,528,336	100.0	%	$	1,543,208	100.0	%	$	(14,872)	(1.0)

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. At March 31, 2023, 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 remained at 4.8 years at March 31, 2023 compared to December 31, 2022. The portfolio possesses low credit risk and provides a source of liquidity necessary to meet loan and operational demands. 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 March 31, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at March 31, 2023. 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.

Other Earning Assets

Residential mortgage loans held for sale increased to $16.3 million at March 31, 2023, compared to $11.7 million at December 31, 2022, as a result of the associated timing of origination and sales volume that has occurred during the period. We continue to sell a portion of our mortgage loan production in the secondary market. The aggregate of interest-bearing deposits with banks and federal funds sold increased by $298.9 million at March 31, 2023 compared to December 31, 2022, as management bolstered on-balance sheet liquidity following the closures of Silicon Valley Bank and Signature Bank.

Deposits

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


	March 31, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Noninterest-bearing deposits	$	3,228,678	29.2	%	$	3,673,300	33.5	%	$	(444,622)	(12.1)	%
Interest-bearing deposits:
Demand	1,472,234		13.2		1,435,454		13.1		36,780		2.6
Money market savings	3,210,637		29.0		3,213,045		29.4		(2,408)		(0.1)
Regular savings	517,751		4.7		513,360		4.7		4,391		0.9
Time deposits of less than $250,000	2,143,718		19.4		1,644,645		15.0		499,073		30.3
Time deposits of $250,000 or more	502,973		4.5		473,617		4.3		29,356		6.2
Total interest-bearing deposits	7,847,313		70.8		7,280,121		66.5		567,192		7.8
Total deposits	$	11,075,991	100.0	%	$	10,953,421	100.0	%	$	122,570	1.1

Deposits and Borrowings

Deposits increased 1% to $11.1 billion at March 31, 2023 compared to $11.0 billion at December 31, 2022. Core deposits, which exclude brokered relationships, represented 88% of total deposits at the end of the current quarter as compared to 92% for the previous quarter, reflecting the stability of the core deposit base. Total insured deposits, including pass-through insured deposits, represented approximately 66% of total deposits at March 31, 2023. The availability of high yields in savings products and short-term debt securities during the current quarter combined with forecasted seasonal run-off resulted in noninterest-bearing deposits declining 12%. The client deployment of noninterest-bearing deposits into higher yielding accounts, along with growth in brokered time deposit, drove an 8% increase in interest-bearing deposits. The Company mitigated outflows of uninsured deposits by providing reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits. Excluding the increase in brokered time deposits during the current quarter, total deposits declined 3%. Total borrowings in the current quarter increased by $130.8 million over amounts at December 31, 2022 as management bolstered on-balance sheet liquidity following the closures of Silicon Valley Bank and Signature Bank. At March 31, 2023, contingent liquidity amounted to $3.8 billion or 101% of the amount of uninsured deposits and does not include any consideration of the held-to-maturity or the available-for-sale investment portfolios. With the inclusion of the total unpledged investment securities portfolio, in addition to $1.5 billion in available federal funds, this results in total coverage of 158% of uninsured deposits.

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 March 31, 2023 compared to at December 31, 2022. During this period, stockholders' equity increased $35.8 million from net income net of dividends paid, coupled with a decline in the accumulated other comprehensive loss during the period of $16.0 million.

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
	March 31, 2023	December 31, 2022
Tier 1 leverage	9.44%	9.33%	4.00%

Common equity tier 1 capital to risk-weighted assets	10.53%	10.23%	4.50%

Tier 1 capital to risk-weighted assets	10.53%	10.23%	6.00%

Total capital to risk-weighted assets	14.43%	14.20%	8.00%

As of March 31, 2023, the most recent notification from our 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.

Our total capital ratio increased at March 31, 2023 from December 31, 2022 as a result of an increase in Tier 1 capital from first quarter 2023 earnings while risk weighted assets remained relatively stable as loan balances remained flat from December 31, 2022. The Tier 1 ratios and the leverage ratio also improved due to the growth of Tier 1 capital. During 2020, the Company elected to apply the provisions of the CECL deferral transition in the determination of its risk-based capital ratios. At March 31, 2023, the impact of the application of this deferral transition provided an additional $7.2 million in Tier 1 capital and resulted in raising the common equity Tier 1 ratio by six 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 ratio increased to 8.40% of tangible assets at March 31, 2023, compared to 8.18% at December 31, 2022. This increase reflects the increase in retained earnings from net income net of dividends coupled with the impact of the $16.0 million decrease in the accumulated other comprehensive loss on common equity associated with the fair values in the available-for-sale investment portfolio partially reduced by an increase in total assets since December 31, 2022.

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)	March 31, 2023			December 31, 2022
Tangible common equity ratio:
Total stockholders' equity	$	1,536,865		$	1,483,768
Goodwill	(363,436)			(363,436)
Other intangible assets, net	(18,549)			(19,855)
Tangible common equity	$	1,154,880		$	1,100,477

Total assets	$	14,129,007		$	13,833,119
Goodwill	(363,436)			(363,436)
Other intangible assets, net	(18,549)			(19,855)
Tangible assets	$	13,747,022		$	13,449,828

Outstanding common shares	44,712,497			44,657,054

Tangible common equity ratio	8.40		%	8.18		%
Book value per common share	$	34.37		$	33.23
Tangible book value per common share	$	25.83		$	24.64

Credit Risk

Our fundamental lending business is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. Accordingly, our 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, we have 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.

We recognize 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 we 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 increased to 0.41% at March 31, 2023 compared to 0.35% at December 31, 2022. Non-performing loans were $47.2 million at March 31, 2023 compared to $39.4 million at December 31, 2022. Loans placed on non-accrual during the current quarter amounted to $19.7 million compared to $5.5 million for the fourth quarter of 2022. During the current period compared to the prior year-end, the Company successfully resolved several large non-accrual relationships for a total pay-off of $10.2 million, including a significant recovery of delinquent interest, without incurring any charge-offs. The growth in non-performing loans from the previous quarter reflects a large borrowing relationship within the custodial care sector with an aggregate balance of $14.6 million. This large relationship is collateral dependent and required a minimal individual reserve due to sufficient values of the underlying collateral. Loans greater than 90 days or more were $3.6 million at March 31, 2023 compared to $1.0 million at December 31, 2022.

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.

Our 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, we look 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. Consideration is given to 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 our 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.

•We 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 we determine that the foreclosure is probable. As necessary, we will charge-off the excess of the loan amount over the fair value of the collateral adjusted for the estimated selling costs.

We 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 us 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, we do 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.

We typically sell the majority of its fixed-rate residential mortgage originations in the secondary mortgage market. Concurrent with such sales, we are 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 us, which could require us 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. We have received a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. We maintain a liability of $0.5 million for probable losses due to repurchases.

Mortgage loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The amortized cost of our mortgage loan servicing rights was $0.3 million at March 31, 2023 compared to $0.4 million at December 31, 2022.

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)	March 31, 2023			December 31, 2022
Non-accrual loans:
Commercial real estate:
Commercial investor real estate	$	15,451		$	9,943
Commercial owner-occupied real estate	4,949			5,019
Commercial AD&C	—			—
Commercial business	9,443			7,322
Residential real estate:
Residential mortgage	8,935			7,439
Residential construction	—			—
Consumer	4,900			5,059
Total non-accrual loans	43,678			34,782

Loans 90 days past due:
Commercial real estate:
Commercial investor real estate	215			—
Commercial owner-occupied real estate	—			—
Commercial AD&C	—			—
Commercial business	3,002			1,002
Residential real estate:
Residential mortgage	352			—
Residential construction	—			—
Consumer	—			—
Total 90 days past due loans	3,569			1,002

Restructured loans (accruing) (1)	—			3,575
Total non-performing loans	47,247			39,359
Other real estate owned, net	645			645
Total non-performing assets	$	47,892		$	40,004

Non-accrual loans to total loans	0.38		%	0.31		%
Non-performing loans to total loans	0.41		%	0.35		%
Non-performing assets to total assets	0.34		%	0.29		%
Allowance for credit losses to non-accrual loans	269.27		%	391.70		%
Allowance for credit losses to non-performing loans	248.93		%	346.15		%

(1) Effective January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting and recognition of troubled debt restructurings ("TDRs").

Allowance for Credit Losses - Loans

The allowance for credit losses represents management’s estimate of the portion of our 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. We exclude 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.

For the three months ended March 31, 2023 our provision for credit losses was a credit of $21.5 million as compared to a charge of $1.6 million for the same period in 2022. The current quarter's credit to the provision reflects the impact of the improvement in forecasted regional unemployment rate, management's consideration of existing economic versus historical conditions and the continued strong credit performance of our loan portfolio segments.

At March 31, 2023, the allowance for credit losses was $117.6 million as compared to $136.2 million at December 31, 2022. The allowance for credit losses as a percent of total loans was 1.03% and 1.20% at March 31, 2023 and December 31, 2022, respectively. The allowance for credit losses represented 249% of non-performing loans at March 31, 2023 as compared to 346% at December 31, 2022. The allowance attributable to the commercial portfolio represented 1.11% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.65%. With respect to the total commercial portion of the allowance, 25% 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 1.80%. The allowance coverage ratio for the investor real estate portfolio decreased to 1.10% at March 31, 2023 compared to 1.26% at December 31, 2022 as a result of the improved forecasted regional unemployment rate. The ratio of the allowance attributable to AD&C loans was 1.14% at the end of the current quarter, compared to 1.71% 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 our historical default and loss experience adjusted for expected economic conditions over a reasonable and supportable forecast period and our 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 we determined that foreclosure is probable. Under the current methodology, the impact of the utilization of the historical default and loss experience results in 47% of the total allowance being attributable to the historical performance of the portfolio while 53% 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. We 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 our 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;

•consideration of existing economic versus historical conditions.

The collective quantified component of the allowance is supplemented by a qualitative component to address various risk characteristics of our 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;

•

•changes in our credit administration and loan portfolio management processes; and

•the quality of our credit risk identification processes.

The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when we 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, we use 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 $29.8 million, with individual allowances of $9.9 million against those loans at March 31, 2023.

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. Our 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. Commercial and residential mortgages, including home equity loans and lines, represented 87% of total loans at both March 31, 2023 and at December 31, 2022, respectively. Certain loan terms may create concentrations of credit risk and increase our 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. We do 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)	March 31, 2023				December 31, 2022
Commercial real estate:	Amount		% of loans to total loans		Amount		% of loans to total loans
Commercial investor real estate	$	56,962	45.3	%	$	64,737	45.0	%
Commercial owner-occupied real estate	9,876		15.6		11,646		15.5
Commercial AD&C	11,953		9.2		18,646		9.6
Commercial business	25,900		12.6		28,027		12.8
Total commercial	104,691		82.7		123,056		82.9
Residential real estate:
Residential mortgage	9,753		11.6		9,424		11.3
Residential construction	1,104		2.0		1,337		2.0
Consumer	2,065		3.7		2,425		3.8
Total residential and consumer	12,922		17.3		13,186		17.1
Total allowance for credit losses - loans	$	117,613	100.0	%	$	136,242	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:


	Three Months Ended			Year Ended
(Dollars in thousands)	March 31, 2023			December 31, 2022
Balance, January 1	$	136,242		$	109,145



Provision/ (credit) for credit losses - loans	(18,945)			26,680
Loan charge-offs:
Commercial real estate:
Commercial investor real estate	—			—
Commercial owner-occupied real estate	—			—
Commercial AD&C	—			—
Commercial business	(54)			(716)
Residential real estate:
Residential mortgage	(23)			(155)
Residential construction	—			—
Consumer	(94)			(234)
Total charge-offs	(171)			(1,105)
Loan recoveries:
Commercial real estate:
Commercial investor real estate	5			320
Commercial owner-occupied real estate	26			49
Commercial AD&C	—			—
Commercial business	181			799
Residential real estate:
Residential mortgage	2			102
Residential construction	—			8
Consumer	273			244
Total recoveries	487			1,522
Net (charge-offs)/ recoveries	316			417
Balance, period end	$	117,613		$	136,242

Annualized net charge-offs/ (recoveries) to average loans	(0.01)		%	—		%
Allowance for credit losses on loans to loans	1.03		%	1.20		%

Market Risk Management

Our 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.

Our 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.

Our 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 us. 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 our 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.

We prepare 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 we 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.

We augment our 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%
March 31, 2023	1.96%	1.48%	1.00%	0.48%	(1.07%)	(2.00%)	(2.98%)	(2.44%)
December 31, 2022	1.87%	1.58%	1.29%	0.75%	(0.89%)	(1.75%)	(2.66%)	(4.17%)

As reflected in the table above, the measures of net interest income at risk at March 31, 2023 decreased in all rising interest and decreased in every declining rate change scenarios except the respective +/-400 rate change scenarios compared to December 31, 2022. The decreases indicated in the net interest income at risk are the result of reduced asset sensitivity in due to increased amounts of core and brokered time deposits and FHLB balances that mature within one year significantly reduced by the increase in interest-bearing deposits banks with compared to the prior quarter.

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our 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 our 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%
March 31, 2023	(27.50%)	(21.20%)	(14.52%)	(7.13%)	6.72%	13.29%	19.13%	11.24%
December 31, 2022	(20.78%)	(15.84%)	(10.62%)	(5.32%)	5.13%	10.48%	15.71%	18.74%

Overall, the measure of the economic value of equity ("EVE") at risk increased in all rising rate scenarios from December 31, 2022 to March 31, 2023. This increase in risk is the result of rising market rates resulting in lower market values in the loan

portfolio, coupled with the impact of lower demand deposits and an increase in deposit costs. The impact of these was partially mitigated by the increase in fixed rate core and brokered time 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. During the current quarter, management took steps to bolster the on-balance sheet liquidity following the closures of Silicon Valley Bank and Signature Bank by increasing borrowings. At March 31, 2023, the Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs.

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 88% of total deposits at March 31, 2023. At March 31, 2023, contingent liquidity amounted to $3.8 billion or 101% of the amount of uninsured deposits, with an additional $1.5 billion in available federal funds which provides total coverage of 138% of uninsured deposits. Although this amount of contingent liquidity does not include any consideration of the held-to-maturity or the available-for-sale investment portfolios, management also considers changes in the liquidity of the investment portfolio due to fluctuations in interest rates when considering total liquidity of the Company. 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 30 to 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 March 31, 2023, the Company's liquidity and funds availability provides it with the requisite flexibility in funding and other liquidity demands.

Our external sources of funds available that can be drawn upon when required are available lines of credit with the FHLB and the Federal Reserve Bank, in addition to the recently announced Bank Term Financing Program ("BTF Program"). At March 31, 2023, we had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.2 billion. FHLB availability based on pledged collateral at March 31, 2023 amounted to $2.4 billion, with $750.0 million outstanding against it. The secured lines of credit at the Federal Reserve Bank and correspondent banks totaled $749.4 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of March 31, 2023. In addition, we have federal funds borrowing capacity under unsecured lines of credit with correspondent banks of $1.4 billion with $205.0 million outstanding at March 31, 2023. The Company has provided $303.4 million in collateral under the BTF Program as a contingent funding source, with no outstanding borrowings at March 31, 2023. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at March 31, 2023.

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 March 31, 2023, the Bank could have declared a dividend of up to $165.3 million to Bancorp. At March 31, 2023, Bancorp had liquid assets of $83.9 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)	March 31, 2023		December 31, 2022
Commercial real estate development and construction	$	805,316	$	887,154
Residential real estate-development and construction	738,556		798,607
Real estate-residential mortgage	37,794		21,118
Lines of credit, principally home equity and business lines	2,482,946		2,397,533
Standby letters of credit	75,664		77,424
Total commitments to extend credit and available credit lines	$	4,140,276	$	4,181,836

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 March 31, 2023, the total reserve for unfunded commitments was $5.4 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 March 31, 2023 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, we become 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 our financial condition, operating results or liquidity.

Item 1A. Risk Factors

The most significant risk factors affecting our business include the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 under the Item 1A, “Risk Factors” and the following additional factors:

Financial challenges at other banking institutions could lead to depositor concerns that spread within the banking industry causing disruptive and destabilizing deposit outflows.

In March 2023, Silicon Valley Bank and Signature Bank experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there has been substantial market disruption and concerns that diminished depositor confidence could spread across the banking industry, leading to deposit outflows that could destabilize other institutions. To strengthen public confidence in the banking system, the FDIC took action to protect funds held in uninsured deposit accounts at Silicon Valley Bank and Signature Bank. However, the FDIC has not committed to protecting uninsured deposits in other institutions that experience outsized withdrawal demands. To further bolster the banking system, the Federal Reserve Board created a new Bank Term Funding Program to provide an additional source of liquidity. At March 31, 2023, we had $6.0 billion in available liquidity, including $403 million in excess cash, which was sufficient to cover 158% of our uninsured deposits. Notwithstanding our significant liquidity, large deposit outflows could adversely affect our financial condition and results of operations and could result in the closure of the Bank. Furthermore, the recent bank failures may result in strengthening of capital and liquidity rules which, if the revised rules apply to us, could adversely affect our financial condition and results of operations.

Our FDIC deposit insurance premiums and assessments may increase, which would reduce our profitability.

On March 12, 2023, the Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement relating to the resolution of Silicon Valley Bank and Signature Bank that stated that losses to support uninsured deposits of those banks would be recovered via a special assessment on banks. The terms of that special assessment have not been announced. The announced special assessment, as well as any future increases in assessment rates or required prepayments in FDIC insurance premiums, to the extent that they result in increased deposit insurance costs, would reduce our profitability.

Insufficient liquidity could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

We require sufficient liquidity to fund loan commitments, satisfy depositor withdrawal requests, make payments on our debt obligations as they become due, and meet other cash commitments. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. Our sources of liquidity consist primarily of cash, assets readily convertible to cash (such as investment securities), increases in deposits, advances, as needed, from the FHLB, borrowings, as needed, from the Federal Reserve Bank of Richmond and other borrowings. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair our ability to fund operations and meet our obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations.

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 625,710 shares of its common stock at an average price of $39.93 per share during 2022. The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2023. 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: May 5, 2023

By: /s/ Philip J. Mantua

Philip J. Mantua

Executive Vice President and Chief Financial Officer

Date: May 5, 2023