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SANDY SPRING BANCORP INC - Quarter Report: 2023 June (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 June 30, 2023
 
OR
 
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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareSASRThe 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 August 2, 2023
 
Common stock, $1.00 par value – 44,862,369 shares



SANDY SPRING BANCORP, INC.
TABLE OF CONTENTS
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Part I
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED
 
 June 30,December 31,
(Dollars in thousands)20232022
Assets:  
Cash and due from banks$96,482 $88,152 
Federal funds sold240 193 
Interest-bearing deposits with banks333,405 103,887 
Cash and cash equivalents430,127 192,232 
Residential mortgage loans held for sale (at fair value)21,476 11,706 
Investments held-to-maturity, at cost (fair value of $208,662 and $220,123, respectively)
247,814 259,452 
Investments available-for-sale (at fair value)1,143,688 1,214,538 
Other investments, at cost72,052 69,218 
Total loans11,369,639 11,396,706 
Less: allowance for credit losses - loans(120,287)(136,242)
Net loans11,249,352 11,260,464 
Premises and equipment, net71,203 67,070 
Other real estate owned611 645 
Accrued interest receivable42,388 41,172 
Goodwill363,436 363,436 
Other intangible assets, net17,280 19,855 
Other assets335,118 333,331 
Total assets$13,994,545 $13,833,119 
Liabilities:
Noninterest-bearing deposits$3,079,896 $3,673,300 
Interest-bearing deposits7,879,026 7,280,121 
Total deposits10,958,922 10,953,421 
Securities sold under retail repurchase agreements 74,510 61,967 
Federal funds purchased 260,000 
Federal Reserve Bank borrowings300,000 — 
Advances from FHLB600,000 550,000 
Subordinated debt370,504 370,205 
Total borrowings1,345,014 1,242,172 
Accrued interest payable and other liabilities151,577 153,758 
Total liabilities12,455,513 12,349,351 
Stockholders' equity:
Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding
44,862,369 and 44,657,054 at June 30, 2023 and December 31, 2022, respectively
44,862 44,657 
Additional paid in capital737,740 734,273 
Retained earnings882,055 836,789 
Accumulated other comprehensive loss(125,625)(131,951)
Total stockholders' equity1,539,032 1,483,768 
Total liabilities and stockholders' equity$13,994,545 $13,833,119 

The accompanying notes are an integral part of these statements

3


SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED
 Three Months EndedSix Months Ended
 June 30,June 30,
(Dollars in thousands, except per share data)2023202220232022
Interest income:    
Interest and fees on loans$144,274 $106,221 $284,001 $205,715 
Interest on loans held for sale307 145 459 343 
Interest on deposits with banks4,922 358 7,608 471 
Interest and dividend income on investment securities:
Taxable6,848 4,630 13,856 8,737 
Tax-advantaged1,795 2,554 3,565 4,678 
Interest on federal funds sold4 8 
Total interest income158,150 113,909 309,497 219,945 
Interest expense:
Interest on deposits51,325 3,795 92,113 6,088 
Interest on retail repurchase agreements and federal funds purchased4,191 201 6,295 255 
Interest on advances from FHLB8,216 17 15,423 17 
Interest on subordinated debt3,947 3,946 7,893 6,184 
Total interest expense67,679 7,959 121,724 12,544 
Net interest income90,471 105,950 187,773 207,401 
Provision/ (credit) for credit losses5,055 3,046 (16,481)4,681 
Net interest income after provision/ (credit) for credit losses85,416 102,904 204,254 202,720 
Non-interest income:
Investment securities gains 38  46 
Gain on disposal of assets 16,699  16,699 
Service charges on deposit accounts2,606 2,467 4,994 4,793 
Mortgage banking activities1,817 1,483 3,062 3,781 
Wealth management income9,031 9,098 18,023 18,435 
Insurance agency commissions 812  2,927 
Income from bank owned life insurance1,251 703 2,158 1,498 
Bank card fees447 1,810 865 3,478 
Other income2,024 2,135 4,025 4,183 
Total non-interest income17,176 35,245 33,127 55,840 
Non-interest expense:
Salaries and employee benefits40,931 39,550 79,857 78,923 
Occupancy expense of premises4,764 4,734 9,611 9,768 
Equipment expense3,760 3,559 7,877 7,095 
Marketing1,589 1,280 3,132 2,473 
Outside data services2,853 2,564 5,367 4,983 
FDIC insurance2,375 1,078 4,513 2,062 
Amortization of intangible assets1,269 1,466 2,575 2,974 
Merger, acquisition and disposal expense 1,067  1,067 
Professional fees and services4,161 2,372 7,845 4,389 
Other expenses7,434 7,321 14,664 13,404 
Total non-interest expense69,136 64,991 135,441 127,138 
Income before income tax expense33,456 73,158 101,940 131,422 
Income tax expense8,711 18,358 25,942 32,687 
Net income$24,745 $54,800 $75,998 $98,735 
Per share information:
Basic net income per common share$0.55 $1.21 $1.69 $2.18 
Diluted net income per common share$0.55 $1.21 $1.69 $2.17 
Dividends declared per share$0.34 $0.34 $0.68 $0.68 

The accompanying notes are an integral part of these statements

4


SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED
 
 Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2023202220232022
Net income$24,745 $54,800 $75,998 $98,735 
Other comprehensive income/ (loss):
Investments available-for-sale:
Net change in unrealized gains/ (losses) on investments available-for-sale(13,609)(38,857)7,175 (104,780)
Related income tax (expense)/ benefit3,466 9,961 (1,828)26,858 
Net investment gains reclassified into earnings (38) (46)
Related income tax expense 10  12 
Net effect on other comprehensive income/ (loss)(10,143)(28,924)5,347 (77,956)
Investments held-to-maturity:
Net change in unrealized gains/ (losses)458 802 863 (15,127)
Related income tax (expense)/ benefit(117)(205)(220)3,878 
Net effect on other comprehensive income/ (loss)341 597 643 (11,249)
Defined benefit pension plan:
Amortization of net loss226 195 451 391 
Related income tax benefit(58)(50)(115)(100)
Net effect on other comprehensive income/ (loss)168 145 336 291 
Total other comprehensive income/ (loss)(9,634)(28,182)6,326 (88,914)
Comprehensive income$15,111 $26,618 $82,324 $9,821 

The accompanying notes are an integral part of these statements

5


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 April 1, 2023$44,712 $735,509 $872,635 $(115,991)$1,536,865 
Net income  24,745  24,745 
Other comprehensive loss, net of tax   (9,634)(9,634)
Total comprehensive income15,111 
Common stock dividends - $0.34 per share
  (15,325) (15,325)
Stock compensation expense 2,731   2,731 
Common stock issued pursuant to:
Stock option plan - 33,391 shares
34 332   366 
Employee stock purchase plan - 19,718 shares
19 414   433 
Restricted stock vesting, net of tax withholding - 96,763 shares
97 (1,246)  (1,149)
Balances at June 30, 2023$44,862 $737,740 $882,055 $(125,625)$1,539,032 
Balances at April 1, 2022$45,163 $752,671 $760,347 $(69,271)$1,488,910 
Net income— — 54,800 — 54,800 
Other comprehensive loss, net of tax— — — (28,182)(28,182)
Total comprehensive income26,618 
Common stock dividends - $0.34 per share
— — (15,440)— (15,440)
Stock compensation expense— 3,178 — — 3,178 
Common stock issued pursuant to:
Stock option plan - 1,464 shares
44 — — 45 
Employee stock purchase plan - 12,624 shares
12 482 — — 494 
Restricted stock vesting, net of tax withholding- 78,411 shares
79 (1,728)— — (1,649)
Repurchase of common stock - 625,710 shares
(625)(24,362)— — (24,987)
Balances at June 30, 2022$44,630 $730,285 $799,707 $(97,453)$1,477,169 

The accompanying notes are an integral part of these statements

6


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  75,998  75,998 
Other comprehensive loss, net of tax   6,326 6,326 
Total comprehensive income82,324 
Common stock dividends - $0.68 per share
  (30,732) (30,732)
Stock compensation expense 3,972   3,972 
Common stock issued pursuant to:
Stock option plan - 40,921 shares
41 476   517 
Employee stock purchase plan - 31,539 shares
31 813   844 
Restricted stock vesting, net of tax withholding - 132,855
shares
133 (1,794)  (1,661)
Balances at June 30, 2023$44,862 $737,740 $882,055 $(125,625)$1,539,032 
Balances at January 1, 2022$45,119 $751,072 $732,027 $(8,539)$1,519,679 
Net income— — 98,735 — 98,735 
Other comprehensive loss, net of tax— — — (88,914)(88,914)
Total comprehensive income9,821 
Common stock dividends - $0.68 per share
— — (31,055)— (31,055)
Stock compensation expense— 4,650 — — 4,650 
Common stock issued pursuant to:
Stock option plan - 10,361 shares
10 230 — — 240 
Employee stock purchase plan - 22,205 shares
22 908 — — 930 
Restricted stock vesting, net of tax withholding - 103,911 shares
104 (2,213)— — (2,109)
Repurchase of common stock - 625,710 shares
(625)(24,362)— — (24,987)
Balances at June 30, 2022$44,630 $730,285 $799,707 $(97,453)$1,477,169 

The accompanying notes are an integral part of these statements

7


SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
 Six Months Ended June 30,
(Dollars in thousands)20232022
Operating activities:  
Net income$75,998 $98,735 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,948 6,007 
Provision/ (credit) for credit losses(16,481)4,681 
Share based compensation expense3,972 4,650 
Gain on disposal of assets (16,699)
Deferred income tax expense7,806 972 
Originations of loans held for sale(194,320)(200,986)
Proceeds from sales of loans held for sale186,995 221,492 
Gains on sales of loans held for sale(2,445)(4,707)
Losses on sale of other real estate owned 24 
Investment securities gains (46)
Tax (benefit)/ deficiency associated with share based compensation305 (592)
Net (increase)/ decrease in accrued interest receivable(1,216)890 
Net increase in other assets(10,424)(989)
Net decrease in accrued expenses and other liabilities(6,656)(9,425)
Other, net(191)(2,487)
Net cash provided by operating activities54,291 101,520 
Investing activities:
Purchases of other investments(2,833)(11,098)
Purchases of investments available-for-sale (356,033)
Proceeds from sales of investment available-for-sale 1,261 
Proceeds from maturities, calls and principal payments of investments available-for-sale76,412 138,473 
Proceeds from maturities, calls and principal payments of investments held-to-maturity12,337 15,961 
Net (increase)/ decrease in loans27,075 (814,098)
Proceeds from the sales of other real estate owned35 271 
Proceeds from sale of business activity, net 23,936 
Expenditures for premises and equipment(7,334)(7,612)
Net cash provided by/ (used in) investing activities105,692 (1,008,939)
Financing activities:
Net increase in deposits6,243 345,832 
Net increase in retail repurchase agreements, federal funds purchased and Federal Reserve Bank borrowings52,543 44,658 
Proceeds from FHLB advances2,030,000 346,625 
Repayment of FHLB advances(1,980,000)(171,625)
Proceeds from issuance of subordinated debt 200,000 
Proceeds from issuance of common stock1,521 1,339 
Stock tendered for payment of withholding taxes(1,821)(2,278)
Repurchase of common stock (24,987)
Cash dividends paid(30,574)(30,886)
Net cash provided by financing activities77,912 708,678 
Net increase/ (decrease) in cash and cash equivalents237,895 (198,741)
Cash and cash equivalents at beginning of period192,232 420,020 
Cash and cash equivalents at end of period$430,127 $221,279 
Supplemental disclosures:
Interest payments$120,491 $13,859 
Income tax payments, net of refunds of $0 and $966 in 2023 and 2022, respectively
22,750 25,059 

The accompanying notes are an integral part of these statements

8


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 SSB Wealth Management, Inc. (d/b/a 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 six months ended June 30, 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 21, 2023. 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. 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
9


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
10


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
11


(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
12


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:
 June 30, 2023December 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$101,299 $ $(6,954)$94,345 $100,926 $— $(7,304)$93,622 
State and municipal318,815 1 (50,565)268,251 322,519 (56,526)265,997 
Mortgage-backed and asset-backed868,704 40 (87,652)781,092 943,398 73 (88,552)854,919 
Total available-for-sale debt securities$1,288,818 $41 $(145,171)$1,143,688 $1,366,843 $77 $(152,382)$1,214,538 
Held-to-maturity debt securities:
Mortgage-backed and asset-backed247,814  (39,152)208,662 259,452 — (39,329)220,123 
Total held-to-maturity debt securities$247,814 $ $(39,152)$208,662 $259,452 $— $(39,329)$220,123 
Total debt securities$1,536,632 $41 $(184,323)$1,352,350 $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 June 30, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at June 30, 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 June 30, 2023 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($466.7 million), GNMA, FNMA or FHLMC mortgage-backed securities ($611.3 million) or SBA asset-backed securities ($38.5 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:
 June 30, 2023
 Number
of
Securities
Less Than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. treasuries and government agencies10 $ $ $94,345 $6,954 $94,345 $6,954 
State and municipal127 17,222 488 249,495 50,077 266,717 50,565 
Mortgage-backed and asset-backed327 158,418 6,042 613,216 81,610 771,634 87,652 
Total464 $175,640 $6,530 $957,056 $138,641 $1,132,696 $145,171 

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 December 31, 2022
 Number
of
Securities
Less Than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. treasuries and government agencies10 $53,139 $3,653 $40,483 $3,651 $93,622 $7,304 
State and municipal130 200,439 30,803 62,482 25,723 262,921 56,526 
Mortgage-backed and asset-backed324 526,387 44,952 297,216 43,600 823,603 88,552 
Total464 $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.

June 30, 2023December 31, 2022
(In thousands)Fair ValueAmortized CostFair ValueAmortized Cost
Available-for-sale debt securities
U.S. treasuries and government agencies:
One year or less$14,580 $14,984 $— $— 
One to five years79,765 86,315 93,622 100,926 
Five to ten years  — — 
After ten years  — — 
State and municipal:
One year or less6,799 6,842 8,694 8,783 
One to five years53,557 55,926 51,576 53,948 
Five to ten years36,343 43,156 28,806 34,042 
After ten years171,552 212,891 176,921 225,746 
Mortgage-backed and asset-backed:
One year or less4,692 4,744 7,622 7,704 
One to five years47,004 48,742 45,366 46,802 
Five to ten years274,805 305,295 303,697 335,285 
After ten years454,591 509,923 498,234 553,607 
Total available-for-sale debt securities$1,143,688 $1,288,818 $1,214,538 $1,366,843 

June 30, 2023December 31, 2022
(In thousands)Fair ValueAmortized CostFair ValueAmortized Cost
Held-to-maturity debt securities
Mortgage-backed and asset-backed:
One year or less$ $ $— $— 
One to five years    
Five to ten years32,997 36,828 35,304 39,213 
After ten years175,665 210,986 184,819 220,239 
Total held-to-maturity debt securities$208,662 $247,814 $220,123 $259,452 

At June 30, 2023 and December 31, 2022, available-for-sale and held-to-maturity debt securities with a book value of $776.8 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 June 30, 2023 and December 31, 2022.
 

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Other investments
Other investments are presented in the following table:
(In thousands)June 30, 2023December 31, 2022
Federal Reserve Bank stock, at cost$38,961 $38,873 
Federal Home Loan Bank of Atlanta stock, at cost32,414 29,668 
Other677 677 
Total other investments, at cost$72,052 $69,218 
 
NOTE 3 – LOANS
Outstanding loan balances at June 30, 2023 and December 31, 2022 are net of unearned income, including net deferred loan fees of $9.3 million and $10.5 million, respectively, at the end of each period.

The loan portfolio segment balances at the dates indicated are presented in the following table:
(In thousands)June 30, 2023December 31, 2022
Commercial real estate:
Commercial investor real estate$5,131,210 $5,130,094 
Commercial owner-occupied real estate1,770,135 1,775,037 
Commercial AD&C1,045,742 1,090,028 
Commercial business1,423,614 1,455,885 
Total commercial loans9,370,701 9,451,044 
Residential real estate:
Residential mortgage1,385,743 1,287,933 
Residential construction190,690 224,772 
Consumer422,505 432,957 
Total residential and consumer loans1,998,938 1,945,662 
    Total loans$11,369,639 $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.
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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:
 Six Months Ended June 30,
(In thousands)20232022
Balance at beginning of period$136,242 $109,145 
Provision/ (credit) for credit losses - loans (1)
(14,491)4,681 
Loan charge-offs(2,265)(762)
Loan recoveries801 606 
Net charge-offs(1,464)(156)
Balance at period end$120,287 $113,670 
 (1) Excludes the total credit to the provision on unfunded loan commitments for six months ended June 30, 2023 of $2.0 million.

The following table provides summary information regarding collateral dependent loans individually evaluated for credit loss at the dates indicated:
(In thousands)June 30, 2023December 31, 2022
Collateral dependent loans individually evaluated for credit loss with an allowance$48,878 $9,743 
Collateral dependent loans individually evaluated for credit loss without an allowance14,652 16,454 
Total individually evaluated collateral dependent loans$63,530 $26,197 
Allowance for credit losses related to loans evaluated individually$16,224 $6,902 
Allowance for credit losses related to loans evaluated collectively104,063 129,340 
Total allowance for credit losses - loans$120,287 $136,242 
 
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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 Six Months Ended June 30, 2023
 Commercial Real EstateResidential Real Estate 
(Dollars in thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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(3,669)(2,469)(8,446)123 (207)(487)664 (14,491)
Charge-offs   (423)(160) (1,682)(2,265)
Recoveries19 53  187 104  438 801 
Net (charge-offs)/ recoveries19 53  (236)(56) (1,244)(1,464)
Balance at end of period$61,087 $9,230 $10,200 $27,914 $9,161 $850 $1,845 $120,287 
Total loans$5,131,210 $1,770,135 $1,045,742 $1,423,614 $1,385,743 $190,690 $422,505 $11,369,639 
Allowance for credit losses on loans to total loans ratio1.19 %0.52 %0.98 %1.96 %0.66 %0.45 %0.44 %1.06 %
Average loans$5,141,447 $1,771,369 $1,069,927 $1,443,030 $1,330,912 $217,419 $423,711 $11,397,815 
Annualized net charge-offs/ (recoveries) to average loans %(0.01)% %0.03 %0.01 % %0.59 %0.03 %
Balance of loans individually evaluated for credit loss$48,721 $4,846 $570 $9,393 $ $ $ $63,530 
Allowance related to loans evaluated individually$7,908 $1,226 $102 $6,988 $ $ $ $16,224 
Individual allowance to loans evaluated individually ratio16.23 %25.30 %17.89 %74.40 % % % %25.54 %
Contractual balance of individually evaluated loans$48,886 $5,675 $581 $10,545 $ $ $ $65,687 
Balance of loans collectively evaluated for credit loss$5,082,489 $1,765,289 $1,045,172 $1,414,221 $1,385,743 $190,690 $422,505 $11,306,109 
Allowance related to loans evaluated collectively$53,179 $8,004 $10,098 $20,926 $9,161 $850 $1,845 $104,063 
Collective allowance to loans evaluated collectively ratio1.05 %0.45 %0.97 %1.48 %0.66 %0.45 %0.44 %0.92 %

 For the Year Ended December 31, 2022
 Commercial Real EstateResidential Real Estate 
(Dollars in thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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 - loans19,128 (90)(1,676)4,774 4,093 281 170 26,680 
Charge-offs— — — (716)(155)— (234)(1,105)
Recoveries320 49 — 799 102 244 1,522 
Net (charge-offs)/ recoveries320 49 — 83 (53)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 ratio1.26 %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 ratio1.35 %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 ratio1.26 %0.59 %1.71 %1.56 %0.73 %0.59 %0.56 %1.14 %




 
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Credit Quality
The following section provides information on the credit quality of the loan portfolio for the periods indicated below:
 For the Six Months Ended June 30, 2023
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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-accrual19,622  569 4,362 3,540  897 28,990 
Non-accrual balances transferred to OREO        
Non-accrual balances charged-off   (424)(160) (1,591)(2,175)
Net payments or draws(9,184)(173) (1,354)(309) (846)(11,866)
Non-accrual loans brought current   (513)(357) (123)(993)
Balance at end of period$20,381 $4,846 $569 $9,393 $10,153 $ $3,396 $48,738 


 For the Year Ended December 31, 2022
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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-accrual4,761 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 


 June 30, 2023
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
Performing loans:        
Current$5,108,614 $1,763,223 $1,044,320 $1,413,058 $1,366,644 $190,690 $416,799 $11,303,348 
30-59 days2,215 2,066  747 5,464  1,849 12,341 
60-89 days  853 387 2,790  461 4,491 
Total performing loans5,110,829 1,765,289 1,045,173 1,414,192 1,374,898 190,690 419,109 11,320,180 
Non-performing loans:
Non-accrual loans20,381 4,846 569 9,393 10,153  3,396 48,738 
Loans greater than 90 days past due   29 692   721 
Restructured loans (1)
        
Total non-performing loans20,381 4,846 569 9,422 10,845  3,396 49,459 
Total loans$5,131,210 $1,770,135 $1,045,742 $1,423,614 $1,385,743 $190,690 $422,505 $11,369,639 
(1) Effective January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting and recognition of troubled debt restructurings ("TDRs").
18


 December 31, 2022
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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 days9,735 1,007 — 3,556 11,307 2,628 4,343 32,576 
60-89 days6,212 — — 41 5,822 — 566 12,641 
Total performing loans5,120,151 1,768,882 1,090,028 1,446,609 1,279,007 224,772 427,898 11,357,347 
Non-performing loans:
Non-accrual loans9,943 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 loans9,943 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 Six Months Ended June 30, 2023
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
Average non-accrual loans for the period$15,258 $4,938 $190 $8,719 $8,842 $ $4,452 $42,399 
Contractual interest income due on non-
accrual loans during the period
$559 $146 $24 $350 $232 $ $243 $1,554 

 For the Year Ended December 31, 2022
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E
Commercial
Owner-
Occupied R/E
Commercial
AD&C
Commercial
Business
Residential
Mortgage
Residential
Construction
ConsumerTotal
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 $$349 $2,009 
 
There was no interest income recognized on non-accrual loans during the six months ended June 30, 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 six months ended June 30, 2023 new loans placed on non-accrual status totaled $29.0 million and the related amount of reversed uncollected accrued interest was $0.4 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.

19


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.
20


The following table provides information about credit quality indicators by the year of origination as of June 30, 2023:
 June 30, 2023
 Term Loans by Origination YearRevolving 
(In thousands)20232022202120202019PriorLoansTotal
Commercial Investor R/E:        
Pass$221,130 $1,401,988 $1,210,529 $689,275 $552,876 $958,510 $24,855 $5,059,163 
Special Mention6,297 10,298 30,536  93 2,880  50,104 
Substandard14,799 544 3,663  1,377 1,560  21,943 
Doubtful        
Total$242,226 $1,412,830 $1,244,728 $689,275 $554,346 $962,950 $24,855 $5,131,210 
Current period gross charge-offs$ $ $ $ $ $ $ $ 
Commercial Owner-Occupied R/E:
Pass$87,454 $366,576 $325,147 $238,899 $246,174 $474,408 $2,184 $1,740,842 
Special Mention731 739  889 323 7,538  10,220 
Substandard3,296 3,753 815 351 5,988 4,870  19,073 
Doubtful        
Total$91,481 $371,068 $325,962 $240,139 $252,485 $486,816 $2,184 $1,770,135 
Current period gross charge-offs$ $ $ $ $ $ $ $ 
Commercial AD&C:
Pass$189,426 $318,888 $284,974 $78,362 $1,867 $15,079 $154,566 $1,043,162 
Special Mention1,661       1,661 
Substandard350 569      919 
Doubtful        
Total$191,437 $319,457 $284,974 $78,362 $1,867 $15,079 $154,566 $1,045,742 
Current period gross charge-offs$ $ $ $ $ $ $ $ 
Commercial Business:
Pass$81,897 $342,575 $212,680 $108,084 $75,222 $129,998 $441,542 $1,391,998 
Special Mention 95 204 942 2,172 338 13,398 17,149 
Substandard1,255 2,231 1,766 994 2,581 1,818 3,822 14,467 
Doubtful        
Total$83,152 $344,901 $214,650 $110,020 $79,975 $132,154 $458,762 $1,423,614 
Current period gross charge-offs$ $ $324 $ $ $99 $423 
Residential Mortgage:
Beacon score:
660-850$18,644 $377,467 $387,642 $168,643 $41,092 $290,758 $ $1,284,246 
600-659 8,016 13,725 4,075 3,858 29,123  58,797 
540-599304 2,915 3,291 523 1,511 8,894  17,438 
less than 540 363 3,006 3,448 3,008 15,437  25,262 
Total$18,948 $388,761 $407,664 $176,689 $49,469 $344,212 $ $1,385,743 
Current period gross charge-offs$ $ $43 $ $10 $107 $ $160 
Residential Construction:
Beacon score:
660-850$9,189 $135,471 $36,186 $5,837 $150 $1,244 $ $188,077 
600-659 973 739     1,712 
540-599  401     401 
less than 540500       500 
Total$9,689 $136,444 $37,326 $5,837 $150 $1,244 $ $190,690 
Current period gross charge-offs$ $ $ $ $ $ $ $ 
Consumer:
Beacon score:
660-850$4,743 $6,164 $2,515 $764 $2,048 $24,430 $344,560 $385,224 
600-659325 543 21 163 113 5,299 12,686 19,150 
540-599309 79 83 38 127 2,293 4,456 7,385 
less than 540224 178 248 291 486 2,750 6,569 10,746 
Total$5,601 $6,964 $2,867 $1,256 $2,774 $34,772 $368,271 $422,505 
Current period gross charge-offs$ $1 $ $ $ $1,594 $87 $1,682 
Total loans$642,534 $2,980,425 $2,518,171 $1,301,578 $941,066 $1,977,227 $1,008,638 $11,369,639 

21



 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 YearRevolving 
(In thousands)20222021202020192018PriorLoansTotal
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 Mention32,661 17,146 468 94 473 4,814 — 55,656 
Substandard557 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 Mention4,567 — 1,301 1,740 2,066 7,323 — 16,997 
Substandard3,219 160 133 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 Mention1,073 — — — — — 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 Mention127 458 1,107 7,787 498 322 13,225 23,524 
Substandard2,902 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 
600-6594,571 6,196 1,173 3,925 6,041 24,006 — 45,912 
540-599369 4,013 1,439 1,256 1,931 6,945 — 15,953 
less than 5401,860 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 
600-659908 373 — — — — — 1,281 
540-599609 — — — — — — 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 
600-659658 467 59 198 664 5,459 11,269 18,774 
540-599123 56 — 465 316 2,802 3,824 7,586 
less than 540156 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 $432,957 
Current period gross charge-offs$— $$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 

22




Other Real Estate Owned
Other real estate owned ("OREO") totaled $0.6 million at both June 30, 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 June 30, 2023.

Modifications to Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, the Company fully adopted provisions 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.

The following table presents the amounts at the end of the reporting period of the loans modified during the period to borrowers experiencing financial difficulty, disaggregated by the loan portfolio segment and type of modification granted:

For the six months ended June 30, 2023
Interest rate reductionTerm extensionTotal
(in thousands)Amount% of total loan segmentAmount% of total loan segmentAmount% of total loan segment
Commercial Investor R/E$28,340 0.6 %$553 — %$28,893 0.6 %
Commercial Owner-Occupied R/E— — %2,000 0.1 %2,000 0.1 %
Commercial AD&C— — %350 — %350 — %
Commercial Business— — %950 0.1 %950 0.1 %
All Other loans— — %— — %— — %
Total$28,340 0.2 %$3,853  %$32,193 0.3 %

Unfunded loan commitments on modifications for borrowers experiencing financial difficulty totaled $1.2 million at June 30, 2023. These commitments are not included in the table above.

The following table describes the financial effect of the modifications granted to borrowers experiencing financial difficulty during the six months ended June 30, 2023:

Interest rate reductionTerm extension
Commercial Investor R/E
Reduced weighted average contractual interest rate from 8% to 5%
Added a weighted average of 5 months to the life of loans
Commercial Owner-Occupied R/E
Added a weighted average of 8 months to the life of loans
Commercial AD&C
Added a weighted average of 9 months to the life of loans
Commercial Business
Added a weighted average of 8 months to the life of loans

No loan modifications completed on or after January 1, 2023 for borrowers experiencing financial difficulty had a payment default during the six months ended June 30, 2023

23


The following table presents the performance of loans that have been modified during the six months ended June 30, 2023:

For the six months ended June 30, 2023
(in thousands)Current30-89 days past due90+ days past dueNon-accrualTotal
Commercial Investor R/E$28,680 $213 $— $— $28,893 
Commercial Owner-Occupied R/E2,000 — — — 2,000 
Commercial AD&C350 — — — 350 
Commercial Business950 — — — 950 
All Other loans— — — — — 
Total$31,980 $213 $ $ $32,193 


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 June 30, 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:
 June 30, 2023Weighted
Average
Remaining
Life
December 31, 2022Weighted
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 $(18,486)$10,552 6.0 years$29,038 $(16,694)$12,344 6.5 years
Other identifiable intangibles13,906 (7,178)6,728 8.2 years13,906 (6,395)7,511 8.8 years
Total amortizing intangible assets$42,944 $(25,664)$17,280 $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$2,465 
20244,291 
20253,530 
20262,702 
20271,945 
Thereafter2,347 
Total amortizing intangible assets$17,280 
 
24


NOTE 6 – DEPOSITS
The following table presents the composition of deposits at the dates indicated:
 
(In thousands)June 30, 2023December 31, 2022
Noninterest-bearing deposits$3,079,896 $3,673,300 
Interest-bearing deposits:
Demand1,413,027 1,435,454 
Money market savings2,918,253 3,213,045 
Regular savings731,985 513,360 
Time deposits of less than $250,0002,293,858 1,644,645 
Time deposits of $250,000 or more521,903 473,617 
Total interest-bearing deposits7,879,026 7,280,121 
Total deposits$10,958,922 $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 SOFR plus 262 basis points plus a spread adjustment of 0.26261 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)June 30, 2023December 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 debt375,000 375,000 
Less: Debt issuance costs(4,496)(4,795)
Long-term borrowings$370,504 $370,205 
 
Other Borrowings
At June 30, 2023 and December 31, 2022, the Company had $74.5 million and $62.0 million, respectively, of outstanding retail repurchase agreements.

The Company had no outstanding federal funds purchased at June 30, 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 $1.0 billion and $1.6 billion at June 30, 2023 and December 31, 2022, respectively. At June 30, 2023, the Company also had $300.0 million outstanding borrowings through Federal Reserve's Bank Term Funding Program with additional available funds of $16.6 million.
 
At June 30, 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 June 30, 2023, amounted to $2.6 billion, with $600.0 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.
25



Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $1.3 billion, commercial real estate loans amounting to $4.0 billion, home equity lines of credit (“HELOC”) amounting to $214.0 million, and multifamily loans amounting to $571.2 million at June 30, 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 $760.8 million and $718.6 million at June 30, 2023 and December 31, 2022, respectively, collateralized by loans, with no borrowings outstanding at the end of either period.

NOTE 8 – STOCKHOLDERS' EQUITY
On March 30, 2022, the Company's board of directors authorized a stock repurchase plan that permits the repurchase of up to $50.0 million of the Company's common stock. During 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 June 30, 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 367,726 are available for issuance at June 30, 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 $2.7 million and $3.2 million for the three months ended June 30, 2023 and 2022, respectively, and of $4.0 million and $4.7 million, for the six months ended June 30, 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 June 30, 2023. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $9.5 million as of June 30, 2023. That cost is expected to be recognized over a weighted average period of approximately 2.04 years.

During the six months ended June 30, 2023, the Company granted 276,252 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 214,128 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 six months ended June 30, 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, 2023389,475 $37.44 
Granted276,252 $27.06 
Vested(201,244)$33.40 
Forfeited/ cancelled(6,134)$33.97 
Non-vested at June 30, 2023458,349 $32.99 
26



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, 2023144,047 $16.61 1.6 years$2,633 
Granted— $— 
Exercised(40,921)$12.65 $474 
Forfeited— $— 
Expired(3,338)$27.46 
Balance at June 30, 202399,788 $17.87 1.4 years$804 
Exercisable at June 30, 202399,788 $17.87 1.4 years$804 

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 has received a determination letter from the Internal Revenue Service (“IRS”) 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 have been 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 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 June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Interest cost on projected benefit obligation$437 $326 $875 $651 
Expected return on plan assets(373)(352)(746)(705)
Recognized net actuarial loss226 195 451 391 
Net periodic benefit cost$290 $169 $580 $337 

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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 six months ended June 30, 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 June 30,Six Months Ended June 30,
(Dollars and amounts in thousands, except per share data)2023202220232022
Net income$24,745 $54,800 $75,998 $98,735 
    Distributed and undistributed earnings allocated to participating securities(33)(194)(177)(476)
Net income attributable to common shareholders$24,712 $54,606 $75,821 $98,259 
Total weighted average outstanding shares44,894 45,184 44,860 45,303 
    Less: Weighted average participating securities(61)(160)(104)(221)
Basic weighted average common shares44,833 45,024 44,756 45,082 
    Dilutive weighted average common stock equivalents56 87 121 140 
Diluted weighted average common shares44,889 45,111 44,877 45,222 
Basic net income per common share$0.55 $1.21 $1.69 $2.18 
Diluted net income per common share$0.55 $1.21 $1.69 $2.17 
Anti-dilutive shares93 — 30 — 

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 tax5,347   5,347 
Reclassifications from accumulated other comprehensive loss to earnings, net of tax 336 643 979 
Current period change in other comprehensive loss, net of tax5,347 336 643 6,326 
Balance at June 30, 2023$(108,166)$(7,666)$(9,793)$(125,625)
 
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(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)$— $(8,539)
Other comprehensive income before reclassification, net of tax(77,922)— (12,083)(90,005)
Reclassifications from accumulated other comprehensive income, net of tax(34)291 834 1,091 
Current period change in other comprehensive income, net of tax(77,956)291 (11,249)(88,914)
Balance at June 30, 2022$(78,292)$(7,912)$(11,249)$(97,453)

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income/ (loss) for the periods indicated:
 Six Months Ended June 30,
(In thousands)20232022
Unrealized gains on available-for-sale debt securities:
Affected line item in the Statements of Income:
Investment securities gains$ $46 
Income before taxes 46 
Tax expense (12)
Net income$ $34 
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)
$(863)$(1,122)
Income before taxes(863)(1,122)
Tax benefit220 288 
Net loss$(643)$(834)
Amortization of defined benefit pension plan items:
Affected line item in the Statements of Income:
Recognized actuarial loss (2)
$(451)$(391)
Income before taxes(451)(391)
Tax benefit115 100 
Net loss$(336)$(291)
(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.
 
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The following table provides information regarding the Company's leases as of the dates indicated:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Components of lease expense:
  Operating lease cost (resulting from lease payments)$2,712 $2,738 $5,427 $5,504 
Supplemental cash flow information related to leases:
  Operating cash flows from operating leases$2,861 $2,893 $5,749 $5,832 
  ROU assets obtained in the exchange for lease liabilities due to:
      New leases$ $— $703 $— 
      Acquisitions$ $— $ $— 
June 30, 2023December 31, 2022
Supplemental balance sheet information related to leases:
  Operating lease ROU assets$50,397 $48,910 
  Operating lease liabilities$58,568 $57,402 
Other information related to leases:
  Weighted average remaining lease term of operating leases8.3 years8.6 years
  Weighted average discount rate of operating leases3.22%3.02%
 
ROU assets and lease liabilities are recorded in other assets and other liabilities, respectively, in the Condensed Consolidated Statements of Condition.

At June 30, 2023, the maturities of the Company’s operating lease liabilities were as follows:
 
(In thousands)Amount
Maturity: 
Remaining 2023$5,740 
202410,751 
20259,068 
20268,320 
20276,922 
Thereafter26,824 
Total undiscounted lease payments67,625 
Less: Present value discount(9,057)
Lease liability$58,568 
 
At June 30, 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 June 30, 2023 was $0.7 million. The Company does not have any lease arrangements with any of its related parties as of June 30, 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 $334.5 million as of June 30, 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
30


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,
31


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:
 June 30, 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)
$ $21,476 $ $21,476 
Available-for-sale debt securities:
U.S. treasuries and government agencies 94,345  94,345 
State and municipal 268,251  268,251 
Mortgage-backed and asset-backed 781,092  781,092 
Total available-for-sale debt securities 1,143,688  1,143,688 
Interest rate swap agreements 18,286  18,286 
Total assets$ $1,183,450 $ $1,183,450 
Liabilities:
Interest rate swap agreements$ $(18,286)$ $(18,286)
Total liabilities$ $(18,286)$ $(18,286)
 (1) The outstanding principal balance for residential loans held for sale as of June 30, 2023 was $21.7 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.
32



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:
 June 30, 2023
(In thousands)Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
TotalTotal Losses
Loans$ $ $ $ $ 
Other real estate owned  611 611 (104)
Total$ $ $611 $611 $(104)


 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)
TotalTotal 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 June 30, 2023, non-accrual loans totaling $63.5 million had estimated fair value of $47.3 million as a result of individual credit loss allowances of $16.2 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”).

33


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
 June 30, 2023Quoted 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$430,127 $430,127 $430,127 $ $ 
Residential mortgage loans held for sale21,476 21,476  21,476  
Available-for-sale debt securities1,143,688 1,143,688  1,143,688  
Held-to-maturity debt securities247,814 208,662  208,662  
Other investments72,052 72,052  72,052  
Loans, net of allowance11,249,352 10,467,917   10,467,917 
Interest rate swap agreements18,286 18,286  18,286  
Accrued interest receivable42,388 42,388 42,388   
Bank owned life insurance156,874 156,874  156,874  
Financial liabilities:
Time deposits$2,815,761 $2,786,157 $ $2,786,157 $ 
Other deposits8,143,161 8,143,161 8,143,161   
Securities sold under retail repurchase agreements and
federal funds purchased374,510 374,510  374,510  
Advances from FHLB600,000 591,850  591,850  
Subordinated debt370,504 336,107   336,107 
Interest rate swap agreements18,286 18,286  18,286  
Accrued interest payable24,436 24,436 24,436   

34


   Fair Value Measurements
 December 31, 2022Quoted 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 sale11,706 11,706 — 11,706 — 
Investments available-for-sale1,214,538 1,214,538 — 1,214,538 — 
Held-to-maturity debt securities259,452 220,123 — 220,123 — 
Other investments69,218 69,218 — 69,218 — 
Loans, net of allowance11,260,464 11,020,992 — — 11,020,992 
Interest rate swap agreements18,596 18,596 — 18,596 — 
Accrued interest receivable41,172 41,172 41,172 — — 
Bank owned life insurance153,016 153,016 — 153,016 — 
Financial liabilities:
Time deposits$2,118,262 $2,082,319 $— $2,082,319 $— 
Other deposits8,835,159 8,835,159 8,835,159 — — 
Securities sold under retail repurchase agreements and
federal funds purchased321,967 321,967 — 321,967 — 
Advances from FHLB550,000 549,530 — 549,530 — 
Subordinated debt370,205 332,470 — — 332,470 
Interest rate swap agreements18,596 18,596 — 18,596 — 
Accrued interest payable10,867 10,867 10,867 — — 

35


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 June 30, 2023, the Company had $14.0 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
36


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
For the quarter ended June 30, 2023 we reported net income of $24.7 million ($0.55 per diluted common share), compared to net income of $54.8 million ($1.21 per diluted common share) for the second quarter of 2022 and $51.3 million ($1.14 per diluted common share) for the first quarter of 2023. The year-over-year decline in quarterly net income was mainly attributable to a $16.7 million gain earned during the prior year quarter associated with the sale of the Company's insurance segment. Excluding this one-time gain, the decrease in net income was due to lower net interest income and non-interest income along with higher non-interest expense. The decline in the current quarter's net income and core earnings compared to the previous quarter was the result of lower net interest income coupled with higher provision for credit losses and the rise in non-interest expense.

Current quarter core earnings were $27.1 million ($0.60 per diluted common share), compared to $52.3 million ($1.16 per diluted common share) for the quarter ended March 31, 2023 and $44.2 million ($0.98 per diluted common share) for the quarter ended June 30, 2022. Core earnings exclude the after-tax impact of amortization of intangibles, investment securities gains or losses and other non-recurring or extraordinary items. The causes of current quarter's decline of core earnings compared to the linked quarter were the same drivers that caused the decrease in net income.

The current quarter reflects the following:
 
Total assets at June 30, 2023 remained stable at $14.0 billion compared to $14.1 billion at March 31, 2023.

Total loans remained at $11.4 billion at June 30, 2023 compared to March 31, 2023. Total commercial real estate and business loans were level quarter-over-quarter, while residential mortgage loans grew 4% due to the migration of construction loans into the residential mortgage portfolio.

Deposits decreased 1% to $11.0 billion at June 30, 2023 compared to $11.1 billion at March 31, 2023, as noninterest-bearing deposits declined 5%, primarily in commercial checking accounts, while interest-bearing deposits were relatively unchanged, as the 41% and 6% respective growth in savings accounts and time deposits was offset by the 9% decline in money market accounts.

Total borrowings in the current quarter declined by $28.0 million or 2% over amounts at March 31, 2023. Fed funds purchased and FHLB advances decreased by $205.0 million and $150.0 million, respectively, which was partially offset by $300.0 million of borrowings through the Federal Reserve Bank's Bank Term Funding Program.

Credit quality metrics remained at low levels during the current quarter compared to the previous quarter. The ratio of non-performing loans to total loans was 0.44% at June 30, 2023 compared to 0.41% at the previous quarter end and 0.40% at June 30, 2022.

Net interest income for the second quarter of 2023 declined $6.8 million or 7% compared to the previous quarter and $15.5 million or 15% compared to the second quarter of 2022.

The net interest margin was 2.73% for the second quarter of 2023 compared to 2.99% for the first quarter of 2023 and 3.49% for the second quarter of 2022. Rates paid on interest-bearing liabilities, driven by higher market rates, competition for deposits, and customer movement of excess funds out of noninterest-bearing accounts, outpaced the increase in the yields on interest-earning assets. Compared to the linked quarter, the rate paid on interest-bearing liabilities rose 44 basis points, while the yield on interest-earning assets increased 12 basis points, resulting in the quarterly margin compression of 26 basis points.

Provision for credit losses directly attributable to the funded loan portfolio was a charge of $4.5 million for the current quarter compared to a credit to provision of $18.9 million in the previous quarter and a charge of $3.0 million in the prior year quarter. During the current quarter, the provision charge was mainly associated with an individual reserve
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established on one large commercial real estate relationship along with several charge-offs of non-accrual consumer loans. In addition, during the current quarter the Company recorded a provision charge of $0.6 million associated with unfunded loan commitments.

Non-interest income for the second quarter of 2023 increased by 8% or $1.2 million compared to the linked quarter and declined by 51% or $18.1 million compared to the prior year quarter. Quarter-over-quarter increase was mainly driven by higher income from mortgage banking activities, BOLI income and service charges on deposit accounts. Year-over-year decrease was primarily a result of the sale of the Company's insurance segment during the second quarter of 2022 and the associated $16.7 million gain. Excluding this one-time gain, non-interest income declined by 7% or $1.4 million year-over-year due to lower insurance commission income as a result of the aforementioned sale of the Company's insurance segment and lower bank card fee income due to regulatory restrictions on transaction fees that became effective for the Company in the second half of 2022.

Non-interest expense for the second quarter of 2023 increased $2.8 million or 4% compared to the first quarter of 2023 and $4.1 million or 6% compared to the prior year quarter. The current quarter's increase was mainly due to a higher compensation expense driven by $1.9 million of severance related expenses associated with staffing adjustments as a part of the broader cost control initiatives implemented by management during the current year.

Return on average assets (“ROA”) for the quarter ended June 30, 2023 was 0.70% and return on average tangible common equity (“ROTCE”) was 8.93% compared to 1.49% and 19.10%, respectively, for the first quarter of 2023 and 1.69% and 20.83%, respectively, for the second quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.77% and core ROTCE was 9.43% compared to 1.52% and 19.11%, respectively, for the previous quarter and 1.37% and 16.49%, respectively, for the second quarter of 2022.

The GAAP efficiency ratio was 64.22% for the second quarter of 2023, compared to 58.55% for the first quarter of 2023 and 46.03% for the second quarter of 2022. The non-GAAP efficiency ratio was 60.68% for the second quarter of 2023 compared to 56.87% for the first quarter of 2023 and 49.79% for the prior year quarter. 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 second 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.

Summary of Comparative Second Quarter Results
 
Balance Sheet and Credit Quality
Total assets increased 5% to $14.0 billion at June 30, 2023, as compared to $13.3 billion at June 30, 2022. At June 30, 2023, total loans were $11.4 billion, a 5% increase compared to $10.8 billion at June 30, 2022. Total commercial loans grew by $393.8 million or 4% during the past twelve months, predominantly in the investor real estate and commercial business segments. Year-over-year the total residential mortgage loan portfolio grew 21%, 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 the loan portfolio remaining level compared to the prior quarter. A modest decline in the commercial loan portfolio was offset by growth in the residential mortgage portfolio.

Deposits remained level from June 30, 2023 compared to June 30, 2022 at $11.0 billion. During the period, run-off of $1.0 billion in noninterest-bearing deposits, in combination with run-off of interest-bearing checking and money market deposits was offset by growth in savings and time deposits. 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 and borrowings through Federal Reserve Bank's Bank Term Funding Program, have increased by $614.4 million in reaction to the loan growth over the previous year and, more recently, to provide greater on-balance sheet liquidity.

The tangible common equity ratio increased to 8.51% of tangible assets at June 30, 2023, compared to 8.45% at June 30, 2022. This increase reflects the 6% growth in tangible common equity which exceeded the 5% growth in tangible common assets. During the period, the positive impact on tangible common equity was driven by the $82.3 million growth in retained earnings, partially offset by the $28.2 million increase in unrealized losses on available-for-sale securities. The increase in total assets over the preceding twelve months was predominantly due to loan growth. At June 30, 2023, our total risk-based capital ratio was 14.60%, with a common equity tier 1 risk-based capital ratio of 10.65%, a tier 1 risk-based capital ratio of 10.65%, and a tier 1 leverage ratio of 9.42%. All of these ratios remain in excess of the mandated minimum regulatory requirements.

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Non-performing loans include non-accrual loans and accruing loans 90 days or more past due. Credit quality at June 30, 2023 compared to June 30, 2022 remained relatively stable, as the level of non-performing loans to total loans was 0.44% compared to 0.40%. These levels of non-performing loans compare to 0.41% for the prior quarter and continue to be indicative of continued stable credit quality during a period of significant loan growth and economic uncertainty. At June 30, 2023, non-performing loans totaled $49.5 million, compared to $43.5 million at June 30, 2022, and $47.2 million at March 31, 2023. Loans placed on non-accrual during the current quarter amounted to $9.3 million compared to $0.9 million for the prior year quarter and $19.7 million for the first quarter of 2023. We realized net charge-offs of $1.8 million for the second quarter of 2023, as compared to minimal recoveries for the second quarter of 2022 and $0.3 million in recoveries for the first quarter of 2023.

At June 30, 2023, the allowance for credit losses was $120.3 million or 1.06% of outstanding loans and 243% of non-performing loans, compared to $117.6 million or 1.03% of outstanding loans and 249% of non-performing loans at the end of the previous quarter and $113.7 million or 1.05% of outstanding loans and 261% of non-performing loans at the end of the second quarter of 2022. The increase in the allowance for the current quarter compared to the previous quarter mainly reflects an individual reserve recorded on a single commercial real estate relationship. A majority of the other assumptions within the allowance for credit losses were relatively unchanged at June 30, 2023 compared to March 31, 2023.

Quarterly Results of Operations
Net income was $24.7 million ($0.55 per diluted common share) for the three months ended June 30, 2023 compared to $54.8 million ($1.21 per diluted common share) for the prior year quarter. The year-over-year decline in quarterly net income was primarily attributable to a $16.7 million gain earned during the prior year quarter associated with the sale of the our insurance segment. Excluding this one-time gain, the decrease in net income was due to lower net interest income and non-interest income along with higher non-interest expense.

Net interest income decreased $15.5 million or 15% for the second quarter of 2023, compared to the second quarter of 2022, as the $44.2 million growth in interest income was more than offset by interest expense growth of $59.7 million. The provision for credit losses was $5.1 million for the second quarter of 2023 compared to $3.0 million for the second quarter of 2022. Non-interest income for the current quarter decreased by 51% or $18.1 million compared to the prior year quarter. Excluding the gain earned for the sale of the insurance segment, the comparative quarter 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 disposition of our insurance business, and reduced bankcard income. Non-interest expense increased $4.1 million or 6% for the second quarter of 2023, compared to the prior year quarter driven primarily by increases in compensation and benefits, the FDIC insurance assessment and professional fees.

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Results of Operations
For the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

We recorded net income of $76.0 million for the six months ended June 30, 2023 compared to $98.7 million for the prior year. Core earnings were $79.4 million for the six months ended June 30, 2023 compared to $89.3 million for the prior year. Year-to-date net income and core earnings declined as a result of lower net interest income, as the growth in interest expense exceeded the increase in interest income, coupled with the decline in non-interest income and higher non-interest expense. The provision for credit losses for the current year-to-date was a credit of $16.5 million as compared to a charge to the provision of $4.7 million for the same period of 2022. Core earnings exclude the after-tax impact of amortization of intangibles, investment securities gains or losses and other non-recurring or extraordinary items. The prior year period's core earnings also exclude the gain from the disposal of our insurance business and the associated transaction costs. Pre-tax, pre-provision net income was $85.5 million for the six months ended June 30, 2023 compared to $136.1 million for the prior year period.

Net Interest Income
For the six months ended June 30, 2023, net interest income decreased $19.6 million compared to the prior year as a result of the $109.2 million increase in interest expense, partially offset by the $89.6 million increase in interest income. Interest expense growth was primarily due to the additional interest expense associated with money market and time deposit accounts and, to a lesser degree, FHLB and Federal Reserve Bank borrowings. Our net interest margin declined to 2.86% for the six months ended June 30, 2023, compared to 3.49% for the prior year, primarily as a result of higher funding cost due to the rising interest rate environment and market competition for deposits over the period. On a tax-equivalent basis, net interest income for the six months ended June 30, 2023 declined to $189.7 million compared to $209.3 million for the six months ended June 30, 2022 as a result of the aforementioned increase in interest expense. During the period, tax-equivalent interest and fees on loans increased $89.7 million or 40%, driven predominantly by commercial loans, offset by the $109.2 million increase in interest expense compared to the prior year period.

The following tables provide an analysis of net interest income performance that, for the comparative period, the average yield on earning assets improved 99 basis points while the average rate paid on interest-bearing liabilities rose 237 basis points, resulting in margin compression of 63 basis points.
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Consolidated Average Balances, Yields and Rates
 Six Months Ended June 30,
 20232022
(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$5,141,447 $116,585 4.57 %$4,367,400 $86,782 4.01 %
Commercial owner-occupied real estate loans1,771,369 40,173 4.57 1,705,562 37,842 4.47 
Commercial AD&C loans1,069,927 40,502 7.63 1,099,498 22,320 4.09 
Commercial business loans1,443,030 44,915 6.28 1,353,446 32,174 4.79 
Total commercial loans9,425,773 242,175 5.18 8,525,906 179,118 4.24 
Residential mortgage loans1,330,912 23,375 3.51 1,017,741 16,652 3.27 
Residential construction loans217,419 3,622 3.36 209,264 3,267 3.15 
Consumer loans423,711 15,912 7.57 422,929 7,581 3.61 
Total residential and consumer loans1,972,042 42,909 4.37 1,649,934 27,500 3.34 
Total loans (2)
11,397,815 285,084 5.04 10,175,840 206,618 4.09 
Loans held for sale12,927 459 7.10 15,155 343 4.53 
Taxable securities1,293,626 13,856 2.14 1,180,168 8,737 1.48 
Tax-advantaged securities365,721 4,458 2.44 471,919 5,633 2.39 
Total investment securities (3)
1,659,347 18,314 2.21 1,652,087 14,370 1.74 
Interest-bearing deposits with banks299,606 7,608 5.12 229,257 471 0.41 
Federal funds sold477 8 3.50 650 0.43 
Total interest-earning assets13,370,172 311,473 4.69 12,072,989 221,803 3.70 
Less: allowance for credit losses - loans(127,189)(111,302) 
Cash and due from banks95,776 75,750  
Premises and equipment, net69,202 61,733  
Other assets614,403 685,870  
Total assets$14,022,364 $12,785,040  
Liabilities and Stockholders' Equity:    
Interest-bearing demand deposits$1,410,797 $6,236 0.89 %$1,494,809 $572 0.08 %
Regular savings deposits557,830 2,260 0.82 553,435 41 0.01 
Money market savings deposits3,170,010 43,854 2.79 3,401,641 2,122 0.13 
Time deposits2,541,784 39,763 3.15 1,355,615 3,353 0.50 
Total interest-bearing deposits7,680,421 92,113 2.42 6,805,500 6,088 0.18 
Federal funds purchased and Federal Reserve Bank borrowings246,354 6,090 4.99 49,271 181 0.74 
Repurchase agreements59,498 205 0.69 127,083 74 0.12 
Advances from FHLB676,823 15,423 4.60 1,915 17 1.74 
Subordinated debentures370,334 7,893 4.26 287,164 6,184 4.31 
Total borrowings1,353,009 29,611 4.41 465,433 6,456 2.80 
Total interest-bearing liabilities9,033,430 121,724 2.72 7,270,933 12,544 0.35 
Noninterest-bearing demand deposits3,308,256 3,880,919 
Other liabilities166,861 146,018 
Stockholders' equity1,513,817 1,487,170 
Total liabilities and stockholders' equity$14,022,364 $12,785,040 
Tax-equivalent net interest income and spread$189,749 1.97 %$209,259 3.35 %
Less: tax-equivalent adjustment1,976 1,858 
Net interest income$187,773 $207,401 
Interest income/earning assets4.69 %3.70 %
Interest expense/earning assets1.83 0.21 
Net interest margin2.86 %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 $2.0 million and $1.9 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.
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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)VolumeRateVolumeRate
Interest income from earning assets:      
  Commercial investor real estate loans$29,803 $16,669 $13,134 $10,017 $14,359 $(4,342)
  Commercial owner-occupied real estate loans2,331 1,475 856 (198)1,263 (1,461)
  Commercial AD&C loans18,182 (615)18,797 1,105 613 492 
  Commercial business loans12,741 2,235 10,506 (17,868)(21,240)3,372 
  Residential mortgage loans6,723 5,428 1,295 (1,526)(221)(1,305)
  Residential construction loans355 131 224 99 516 (417)
  Consumer loans8,331 14 8,317 (1,147)(1,054)(93)
  Loans held for sale116 (56)172 (743)(1,143)400 
  Taxable securities5,119 908 4,211 465 1,513 (1,048)
  Tax-exempt securities(1,175)(1,289)114 226 131 95 
  Interest-bearing deposits with banks7,137 186 6,951 378 25 353 
  Federal funds sold7  7 — 
Total tax-equivalent interest income89,670 25,086 64,584 (9,191)(5,238)(3,953)
Interest expense on funding of earning assets:
  Interest-bearing demand deposits5,664 (35)5,699 110 40 70 
  Regular savings deposits2,219  2,219 (81)20 (101)
  Money market savings deposits41,732 (159)41,891 (595)(604)
  Time deposits36,410 5,159 31,251 (2,027)(967)(1,060)
Federal funds purchased and Federal Reserve Bank borrowings5,909 2,426 3,483 168 12 156 
  Repurchase agreements131 (59)190 (9)(9)— 
  Advances from FHLB15,406 15,333 73 (2,632)(2,057)(575)
  Subordinated debentures1,709 1,780 (71)1,172 1,287 (115)
Total interest expense109,180 24,445 84,735 (3,894)(1,665)(2,229)
Tax-equivalent net interest income$(19,510)$641 $(20,151)$(5,297)$(3,573)$(1,724)
*Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.
 
Interest Income
The Company's total tax-equivalent interest income increased 40% to $311.5 million for the first six months of 2023 compared to $221.8 million the prior year period as interest income increased in each of the earning asset categories led by the $63.1 million income growth on commercial loans and, to a lesser extent, the $15.4 million growth interest income from residential and consumer loans. Income from commercial loans was predominantly from investor real estate loans and, to a lesser degree, AD&C loans. Increases in interest income also occurred in interest-bearing deposits with banks and investment securities.
 
Average interest-earning assets rose 11% for the first half of 2023 compared to the first half of 2022 as average loans outstanding increased 12%. During the comparative period, total average commercial real estate loans grew 14% and commercial business loans rose 6%. Average residential mortgage loans increased 31% during the same time period as a greater number of one-year ARM loans were retained to grow the portfolio. Compared to the prior year, the yield on average loans increased 95 basis points. The average balance of the investment portfolio remained stable for the first six months of 2023 compared to the first six months of 2022, resulting in interest income from the investment securities portfolio increasing 27%, as a result of a 47 basis point increase in the yield. Composition of the average investment portfolio shifted to 78% in taxable securities in the current period, as compared to 71% for the prior year period.

The average yield on interest-earning assets grew to 4.69% for the first six month of 2023 compared to 3.70% for the prior year period. Average yields on loans and investment securities, driven by taxable investment yields, increased by 95 and 47 basis
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points, respectively, compared to the same period of the prior year, reflecting general market interest rates during the previous twelve months.

Interest Expense
For the first six months of 2023 interest expense increased $109.2 million compared to the first six months of 2022. The year-over-year increase was comprised of an $86.0 million increase in deposit interest expense and a $23.2 million increase in borrowing cost. These increases from period to period were 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 year-to-date rising to 2.72% from 0.35% as compared to the prior year period. During this period, the average balance of time deposits grew significantly, a result of the increase in brokered time deposits to provide funding for loan growth and liquidity and, to a lesser degree, core time deposits, a result of the increase in rates offered on these products. Average noninterest-bearing deposits decreased to 30% of average deposits in the current period compared to 36% in the prior year’s first six months.

Non-interest Income
Non-interest income amounts and trends are presented in the following table for the periods indicated:
 
 Six Months Ended June 30,
2023/2022
2023/2022
(Dollars in thousands)20232022$ Change% Change
Securities gains$ $46 $(46)N/M
Gain on disposal of assets 16,699 (16,699)N/M
Service charges on deposit accounts4,994 4,793 201 4.2
Mortgage banking activities3,062 3,781 (719)(19.0)
Wealth management income18,023 18,435 (412)(2.2)
Insurance agency commissions 2,927 (2,927)N/M
Income from bank owned life insurance2,158 1,498 660 44.1
Bank card fees865 3,478 (2,613)(75.1)
Other income4,025 4,183 (158)(3.8)
Total non-interest income$33,127 $55,840 $(22,713)(40.7)
 N/M - Not meaningful

For the six months ended June 30, 2023, non-interest income decreased 41% to $33.1 million compared to $55.8 million for 2022. During the prior year, Company realized a $16.7 million gain on the sale of its insurance segment. Excluding the gain, non-interest income decreased 15% or $6.0 million, driven by a $2.9 million decrease in insurance commissions, a $2.6 million decrease in bank card fees and a $0.7 million decrease in income from mortgage banking activities. The decline in income from mortgage banking activities is the result of the rising interest rate environment, which continues to limit home sales and refinancing activity. Insurance commission income declined as a result of the disposition of our insurance business during the second quarter of the prior year. Fees from bank cards diminished as a result of regulatory restrictions on transaction fees effective in the second half of the prior year. These decreases in non-interest income year-over-year were partially offset by a $0.7 million increase in BOLI mortality-related income.

Further detail of non-interest income activity for the first six months of 2023 versus 2022 is provided as follows:
 
Service charges on deposit accounts increased 4% as the growth in service charge income on commercial demand deposit accounts increased 22% partially offset by the decline in ATM and returned check charges.
Income from mortgage banking activities decreased 19% as a result of reduced origination and refinancing volume, the continued result of the increase in mortgage lending rates during the comparative period.
Wealth management income, comprised of income from trust and estate services and investment management fees earned by the Company’s investment management subsidiaries decreased 2%. Overall, total assets under management increased to $5.7 billion at June 30, 2023 compared to $5.2 billion at June 30, 2022.
Insurance agency commissions decreased 100% due to the sale of the Company's insurance business in June 2022.
Bank-owned life insurance income increased 44% as a result of mortality related income in the second quarter of the current year.
Bank card fee income declined 75% as a result of the impact of 2022 regulatory limitations on interchange fees effective for the Company at June 30, 2022.
Other income decreased by 4% or $0.2 million, the result of the decline in credit-related fees.
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Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the periods indicated:
 
 Six Months Ended June 30,
2023/2022
2023/2022
(Dollars in thousands)20232022$ Change% Change
Salaries and employee benefits$79,857 $78,923 $934 1.2 %
Occupancy expense of premises9,611 9,768 (157)(1.6)
Equipment expense7,877 7,095 782 11.0 
Marketing3,132 2,473 659 26.6 
Outside data services5,367 4,983 384 7.7 
FDIC insurance4,513 2,062 2,451 118.9 
Amortization of intangible assets2,575 2,974 (399)(13.4)
Merger, acquisition and disposal expense 1,067 (1,067)N/M
Professional fees and services7,845 4,389 3,456 78.7 
Other expenses14,664 13,404 1,260 9.4 
Total non-interest expense$135,441 $127,138 $8,303 6.5 
 N/M - not meaningful

Non-interest expense increased 7% to $135.4 million for the six months ended June 30, 2023, compared to $127.1 million for 2022. The drivers of the increase in non-interest expense were a $3.5 million increase in professional fees, a $2.5 million increase in FDIC insurance, a $1.2 million increase in software expenses, a $0.9 million increase in compensation and benefits, and a $0.7 million increase in marketing expense. Year-over-year increases in both professional fees and software expenses were mainly associated with the Company's investments in technology.

Further detail by category of non-interest expense activity for the first six months of 2023 versus 2022 is provided as follows:

Salaries and employee benefits, the largest component of non-interest expense, increased 1% or $0.9 million. This increase was driven by the impact of severance related expenses associated with staffing adjustments in the second quarter of the current year.
Combined occupancy and equipment expenses increased 4% due to higher software costs.
Marketing expense increased 27% as a result of advertising costs focused on deposit gathering efforts.
Outside data services expense increased 8% due to the increase in volume-based components of contractual-based services.
FDIC insurance increased 119% for 2023 as a result of the increase in the assessment rate imposed by the FDIC on all banks beginning in the first quarter of 2023.
Amortization of intangible assets decreased as a result of the decline in the core deposit intangible amortization of the asset recognized on previous acquisitions.
Professional fees and services grew 79% as a result of an increase in utilization of IT consulting services to assist in the implementation of enhanced data capabilities and various other software platforms.
Other non-interest expenses increased $1.3 million due a variety of miscellaneous operating costs.

Income Taxes
The Company had income tax expense of $25.9 million in the first six months of 2023, compared to income tax expense of $32.7 million in the first six months of 2022, as a result of the decrease in current year-to-date pre-tax earnings compared to the prior year's pre-tax earnings. The effective tax rate for the first half of 2023 was 25.4%, compared to a tax rate of 24.9% for the same period in 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.
 
Operating Expense Performance
Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest expense as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios indicate improved productivity.
 
Non-GAAP Financial Measures
In addition, we also 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 the operating
44


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 part of its assessment of its performance in managing non-interest expense. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the non-GAAP efficiency ratio used by 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 merger, acquisition and disposal expense, the amortization of intangibles, and other non-core expenses, such as severance expense or contingent payment expense. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income, and excludes gain on disposal of assets and securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains (if any). For the six months ended June 30, 2023, the GAAP efficiency ratio was 61.31% compared to 48.30% for the same period in 2022. The current period's erosion in the GAAP efficiency ratio compared to the prior year period is directly related to the decline in revenues and the rise in non-interest expense during the period. The non-GAAP efficiency ratio for the current year was 58.73% compared to 49.57% for the prior year. The current year’s non-GAAP efficiency ratio compared to the prior year indicates a decline in efficiency and is the result of the 10% decrease in non-GAAP revenue combined with the 6% growth in non-GAAP non-interest expense.
 
In addition, we use pre-tax, pre-provision net income, as a measure of the level of certain recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses that is readily comparable to other financial institutions. This measure is calculated by adding/ (subtracting) the provision (credit) for credit losses and the provision for income taxes back to/from net income. This metric declined for the first six months of 2023 compared to the same period for 2022, due primarily to the decline in net interest income and non-interest income coupled with the increase in non-interest expense.

We have presented core earnings, core earnings per share, core return on average assets ("core ROA") and core return on average tangible common equity ("core ROTCE") in order to present metrics that are more comparable to prior periods to provide an indication of the core performance of the Company year over year. Core earnings reflect net income exclusive of merger, acquisition and disposal expense, amortization of intangible assets, severance expense, contingent payment expense, gain on disposal of assets and investment securities gains, in each case net of tax. Core earnings were $79.4 million ($1.77 per diluted common share) for the six months ended June 30, 2023, compared to $89.3 million ($1.97 per diluted common share) for the six months ended June 30, 2022. Average tangible assets and average tangible common equity represents average assets and average stockholders’ equity, respectively, adjusted for average goodwill and average intangible assets. The ROA for the first six months of 2023 was 1.09% compared to 1.56% for the same period of the prior year. For the six months ended June 30, 2023, the non-GAAP core ROA was 1.14% compared to 1.41% for the same period in the prior year. ROTCE was 13.88% for the first six months of 2023 compared to 18.62% for the first six months of 2022. The non-GAAP core ROTCE was 14.15% for the first six months of 2023 compared to 16.47% for the first six months of 2022.

45


GAAP and Non-GAAP Efficiency Ratios and Measures
 Six Months Ended June 30,
(Dollars in thousands)20232022
Pre-tax pre-provision net income:
Net income$75,998$98,735
Plus/ (less) non-GAAP adjustments:
Income tax expense25,94232,687
Provision/ (credit) for credit losses(16,481)4,681
Pre-tax pre-provision net income$85,459$136,103
Efficiency ratio (GAAP):
Non-interest expense$135,441$127,138
Net interest income plus non-interest income$220,900$263,241
Efficiency ratio (GAAP)61.31 %48.30 %
Efficiency ratio (non-GAAP):
Non-interest expense$135,441$127,138
Less non-GAAP adjustments:
Amortization of intangible assets2,5752,974
Merger, acquisition and disposal expense1,067
Severance expense1,939
Contingent payment expense36
Non-interest expense - as adjusted$130,891$123,097
Net interest income plus non-interest income$220,900$263,241
Plus non-GAAP adjustment:
Tax-equivalent income1,9761,858
Less non-GAAP adjustment:
Securities gains46
Gain on disposal of assets16,699
Net interest income plus non-interest income - as adjusted$222,876$248,354
Efficiency ratio (non-GAAP)58.73 %49.57 %
 
46


GAAP and Non-GAAP Performance Ratios
 Six Months Ended June 30,
(Dollars in thousands)20232022
Core earnings (non-GAAP):
Net income$75,998$98,735
Plus/ (less) non-GAAP adjustments (net of tax):
Merger, acquisition and disposal expense793
Amortization of intangible assets1,9192,211
Severance expense1,445
Gain on disposal of assets(12,417)
Investment securities gains(34)
Contingent payment expense27
Core earnings (non-GAAP)$79,389$89,288
Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)44,876,87345,223,086
Earnings per diluted common share (GAAP)$1.69$2.17
Core earnings per diluted common share (non-GAAP)$1.77$1.97
Core return on average assets (non-GAAP):
Average assets (GAAP)$14,022,364$12,785,040
Return on average assets (GAAP)1.09 %1.56 %
Core return on average assets (non-GAAP)1.14 %1.41 %
Return/ Core return on average tangible common equity (non-GAAP):
Net Income (GAAP)$75,998$98,735
Plus: Amortization of intangible assets (net of tax)1,9192,211
Net income before amortization of intangible assets$77,917$100,946
Core return on average tangible common equity (non-GAAP):
Average assets (GAAP)$14,022,364$12,785,040
Average goodwill(363,436)(369,098)
Average other intangible assets, net(18,724)(24,580)
Average tangible assets (non-GAAP)$13,640,204$12,391,362
Average total stockholders' equity (GAAP)$1,513,817$1,487,170
Average goodwill(363,436)(369,098)
Average other intangible assets, net(18,724)(24,580)
Average tangible common equity (non-GAAP)$1,131,657$1,093,492
Return on average tangible common equity (non-GAAP)13.88 %18.62 %
Core return on average tangible common equity (non-GAAP)14.15 %16.47 %
Average tangible common equity to average tangible assets (non-GAAP)8.30 %8.82 %

47


Results of Operations
For the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022


Net income was $24.7 million ($0.55 per diluted common share) for the three months ended June 30, 2023 compared to $54.8 million ($1.21 per diluted common share) for the prior year quarter. Current quarter's core earnings were $27.1 million ($0.60 per diluted common share), compared to $44.2 million ($0.98 per diluted common share) for the quarter ended June 30, 2022. The year-over-year decline in quarterly net income was mainly attributable to a $16.7 million gain earned during the prior year quarter associated with the sale of the Company's insurance segment. Excluding this gain, the decrease in net income was due to lower net interest income and non-interest income along with higher 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 rising interest expense. 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 6% driven by compensation costs, FDIC insurance and professional fees in the current quarter compared to the prior year quarter.

Net Interest Income
Net interest income for the second quarter of 2023 decreased $15.5 million or 15% compared to the second quarter of 2022, driven by higher interest expense, a result of higher funding costs, which outpaced growth in interest income. During the past twelve months, loan growth coupled with the rising interest rate environment was primarily responsible for a $44.3 million increase in interest income. This growth in interest income was more than offset by the $59.7 million growth in interest expense as funding costs have also risen in response to the rising rate environment and significant competition for deposits. Interest income growth occurred in all categories of commercial loans and, to a lesser degree, in residential mortgage loans, consumer loans and investment securities. Interest expense grew primarily due to time and money market deposits, as well as the higher cost of borrowings in the current year period compared to the same period of the prior year.

The net interest margin was 2.73% for the second quarter of 2023 compared to 3.49% for the second quarter of 2022. The contraction of the net interest margin for the current quarter was due to the higher rate 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 the competition for deposits in the market, and customer movement of excess funds out of noninterest-bearing accounts into higher yielding products. As compared to the prior year quarter, the yield on interest-earning assets increased 100 basis points, while the rate paid on interest-bearing liabilities rose 250 basis points resulting in the margin compression of 76 basis points. During the comparative period, average interest-earning assets increased by 9% and average interest-bearing liabilities grew by 25%.

At June 30, 2023 and 2022, average total loans comprised 85% of average interest-earning assets for each of the comparative quarters of with an average yield of 5.09% and 4.12%, respectively. In addition, the average yield on investment securities increased to 2.22% for the current quarter compared to 1.83% for the prior year quarter. These portfolio yield movements resulted in the rise in the overall average yield on interest-earning assets to 4.75% at June 30, 2023 from 3.75% at June 30, 2022.

The average rate paid on average interest-bearing liabilities grew by 250 basis points as the average rate paid increased from 0.43% for the second quarter of 2022 to 2.93% for the second quarter of 2023 driven by the 242 basis point increase in the average rate paid on interest-bearing deposits coupled with the 143 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 and borrowings from the Federal Reserve Bank through the Bank Term Funding Program, which funded loan growth and provided liquidity over the previous twelve months. Average interest-bearing deposits increased 14% for the current quarter compared to the same period for the prior year, driven by a 92% increase in average time deposits, predominantly brokered time deposits. The percentage of average noninterest-bearing deposits to total average deposits decreased to 29% in the current quarter compared to 37% in the second quarter of 2022 due to the decline in commercial checking deposit balances.
48


Consolidated Average Balances, Yields and Rates
 Three Months Ended June 30,
 20232022
(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$5,146,632 $58,784 4.58 %$4,512,937 $45,148 4.01 %
Commercial owner-occupied real estate loans1,773,039 20,575 4.65 1,727,325 19,410 4.51 
Commercial AD&C loans1,057,205 20,663 7.84 1,096,369 11,727 4.29 
Commercial business loans1,441,489 22,715 6.32 1,334,350 15,820 4.76 
Total commercial loans9,418,365 122,737 5.23 8,670,981 92,105 4.26 
Residential mortgage loans1,353,809 11,957 3.53 1,070,836 8,878 3.32 
Residential construction loans211,590 1,808 3.43 221,031 1,710 3.10 
Consumer loans423,306 8,325 7.89 421,022 3,992 3.80 
Total residential and consumer loans1,988,705 22,090 4.45 1,712,889 14,580 3.41 
Total loans (2)
11,407,070 144,827 5.09 10,383,870 106,685 4.12 
Loans held for sale17,480 307 7.04 12,744 145 4.56 
Taxable securities1,289,529 6,848 2.12 1,195,129 4,630 1.55 
Tax-advantaged securities349,795 2,248 2.57 491,052 3,082 2.51 
Total investment securities (3)
1,639,324 9,096 2.22 1,686,181 7,712 1.83 
Interest-bearing deposits with banks359,093 4,922 5.50 200,560 358 0.72 
Federal funds sold622 4 2.87 479 0.81 
Total interest-earning assets13,423,589 159,156 4.75 12,283,834 114,901 3.75 
Less: allowance for credit losses - loans(117,587)(112,656)
Cash and due from banks96,487 84,931 
Premises and equipment, net70,691 62,422 
Other assets621,473 673,161 
Total assets$14,094,653 $12,991,692 
Liabilities and Stockholders' Equity:
Interest-bearing demand deposits$1,439,418 $3,606 1.00 %$1,488,034 $414 0.11 %
Regular savings deposits609,721 1,897 1.25 559,906 22 0.02 
Money market savings deposits3,041,652 22,516 2.97 3,376,742 1,497 0.18 
Time deposits2,699,276 23,306 3.46 1,402,777 1,862 0.53 
Total interest-bearing deposits7,790,067 51,325 2.64 6,827,459 3,795 0.22 
Federal funds purchased and Federal Reserve Bank borrowings320,661 4,007 5.01 53,055 166 1.26 
Repurchase agreements58,382 184 1.26 122,728 35 0.11 
Advances from FHLB718,132 8,216 4.59 3,809 17 1.74 
Subordinated debentures370,410 3,947 4.26 369,994 3,946 4.27 
Total borrowings1,467,585 16,354 4.47 549,586 4,164 3.04 
Total interest-bearing liabilities9,257,652 67,679 2.93 7,377,045 7,959 0.43 
Noninterest-bearing demand deposits3,137,971 4,001,762 
Other liabilities163,565 144,849 
Stockholders' equity1,535,465 1,468,036 
Total liabilities and stockholders' equity$14,094,653 $12,991,692 
Tax-equivalent net interest income and spread$91,477 1.82 %$106,942 3.32 %
Less: tax-equivalent adjustment1,006 992 
Net interest income$90,471 $105,950 
Interest income/earning assets4.75 %3.75 %
Interest expense/earning assets2.02 0.26 
Net interest margin2.73 %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 $1.0 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.
49


Interest Income
Total tax-equivalent interest income increased $44.3 million for the second quarter of 2023 compared to the prior year quarter as interest income increased in every major earning asset category led by the increase in commercial loan income growth of $30.6 million. During the comparative period, average interest-earning assets rose 9% over the prior year quarter as average total loans grew 10% and average investment securities declined 3%. Over the past twelve months, average total mortgage loans increased 21%, while average consumer loans stayed relatively unchanged.
 
The average yield on interest-earning assets improved to 4.75% for the current quarter compared to 3.75% for the same period of the prior year. Average yields on loans and investment securities for the current quarter increased by 97 and 39 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 $59.7 million in the second quarter of 2023 compared to the second 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 interest-bearing 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 2.93% from 0.43% for the prior year quarter. During this period, total average balance of time deposits grew significantly, a result of the increase in brokered time deposits to provide funding for loan growth and liquidity and, to a lesser degree, core time deposits, a result of the increase in rates offered on these products.
 
Non-interest Income
Non-interest income amounts and trends are presented in the following table for the periods indicated:
 
 Three Months Ended June 30,
2023/2022
2023/2022
(Dollars in thousands)20232022$ Change% Change
Securities gains$ $38 $(38)N/M
Gain on disposal of assets 16,699 (16,699)N/M
Service charges on deposit accounts2,606 2,467 139 5.6
Mortgage banking activities1,817 1,483 334 22.5
Wealth management income9,031 9,098 (67)(0.7)
Insurance agency commissions 812 (812)N/M
Income from bank owned life insurance1,251 703 548 78.0
Bank card fees447 1,810 (1,363)(75.3)
Other income2,024 2,135 (111)(5.2)
Total non-interest income$17,176 $35,245 $(18,069)(51.3)
N/M - Not meaningful
 
Total non-interest income for the second quarter of 2023 declined by 51% or $18.1 million compared to the prior year quarter. The year-over-year decrease was primarily a result of a sale of the Company's insurance segment during the second quarter of 2022 and the associated $16.7 million gain on sale. Excluding this one-time gain on sale, non-interest income declined by 7% or $1.4 million from the prior year quarter due to the absence of insurance commissions income as a result of the aforementioned sale and lower bank card income due to regulatory restrictions on transaction fees. Those declines were partially offset by the increases in mortgage banking and BOLI income.

Further detail by category of non-interest income activity for the second quarter of 2023 versus the second quarter of 2022 is provided as follows:

Service charges on deposit accounts increased 6% as commercial service charges increased 25%, partially offset by a decline in ATM and return check charges.
Income from mortgage banking activities increased by $0.3 million or 23% reflecting increased gains realized on greater sales volumes in the current period.
Wealth management income declined 1% in the second quarter of 2023 compared to the second quarter of 2022. Overall total assets under management increased to $5.7 billion at June 30, 2023 compared to $5.2 billion at June 30, 2022.
Income from bank owned life insurance grew 78% as a result of mortality related income during the current quarter.
Bank card income decreased 75% as a result of the impact of 2022 regulatory limitations on interchange fees effective for the Company at June 30, 2022.
50



Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the periods indicated:
 
 Three Months Ended June 30,
2023/2022
2023/2022
(Dollars in thousands)20232022$ Change% Change
Salaries and employee benefits$40,931 $39,550 $1,381 3.5 %
Occupancy expense of premises4,764 4,734 30 0.6 
Equipment expense3,760 3,559 201 5.6 
Marketing1,589 1,280 309 24.1 
Outside data services2,853 2,564 289 11.3 
FDIC insurance2,375 1,078 1,297 120.3 
Amortization of intangible assets1,269 1,466 (197)(13.4)
Merger, acquisition and disposal expense 1,067 (1,067)N/M
Professional fees and services4,161 2,372 1,789 75.4 
Other expenses7,434 7,321 113 1.5 
Total non-interest expense$69,136 $64,991 $4,145 6.4 
N/M - Not meaningful

Total non-interest expense for the second quarter of 2023 increased $4.1 million or 6% compared to the second quarter of 2022. The quarterly increase in non-interest expense is mainly attributable to higher compensation and benefits costs associated with $1.9 million of severance expenses related to staffing adjustments made during the current quarter as a part of the broader cost control initiatives implemented by management during the current year. Higher non-interest expense for the current quarter, as compared to the prior year quarter, was also due to higher FDIC insurance expense, higher professional and service fees related to the Company's investments in technology projects, and higher marketing expense associated with targeted advertising campaigns aimed at growing deposit relationships.

Further detail by category of non-expense income activity for the second quarter of 2023 versus the second quarter of 2022 is provided as follows:
 
Salaries and employee benefits, the largest component of non-interest expenses, increased $1.4 million or 3% as a result of severance expenses related to staffing adjustments made during the current quarter.
Occupancy and equipment expenses for the quarter increased a combined 3% as a result of increased software amortization and related expenses.
FDIC insurance expense increased $1.3 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 75% 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 2% primarily as a result of a variety of operating costs.

Income Taxes
Income tax expense was $8.7 million in the second quarter of 2023 compared to income tax expense of $18.4 million in the second quarter of 2022. The resulting effective tax rate was 26.0% for the second quarter of 2023 compared to an effective tax rate of 25.1% for the second 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

The GAAP efficiency ratio in the second quarter of 2023 was 64.22% compared to 46.03% for the second quarter of 2022. The non-GAAP efficiency ratio was 60.68% in the second quarter of 2023 compared to 49.79% in the second 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 49% 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. A major contributor to the prior year
51


quarter's net revenues was the $16.7 million gain associated with the sale of our insurance segment. Excluding the gain, pre-tax pre-provision declined 35% in the current quarter compared to the prior year quarter.

Current quarter core earnings were $27.1 million ($0.60 per diluted common share), compared to $44.2 million ($0.98 per diluted common share) for the quarter ended June 30, 2022. Return on average assets for the quarter ended June 30, 2023 was 0.70% and return on average tangible common equity was 8.93% compared to 1.69% and 20.83%, respectively, for the second quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.77% and core ROTCE was 9.43% compared to core ROA of 1.37% and core ROTCE of 16.49% for the second quarter of 2022.

GAAP and Non-GAAP Efficiency Ratios and Measures
 Three Months Ended June 30,
(Dollars in thousands)20232022
Pre-tax pre-provision net income:  
Net income$24,745$54,800
Plus/ (less) non-GAAP adjustments:
Income tax expense8,71118,358
Provision/ (credit) for credit losses5,0553,046
Pre-tax pre-provision net income$38,511$76,204
Efficiency ratio (GAAP):
Non-interest expense$69,136$64,991
Net interest income plus non-interest income$107,647$141,195
Efficiency ratio (GAAP)64.22 %46.03 %
Efficiency ratio (non-GAAP):
Non-interest expense$69,136$64,991
Less/ (plus) non-GAAP adjustments:
Amortization of intangible assets1,2691,466
Merger, acquisition and disposal expense1,067
Severance expense1,939
Non-interest expense - as adjusted$65,928$62,458
Net interest income plus non-interest income$107,647$141,195
Plus non-GAAP adjustment:
Tax-equivalent income1,006992
Less non-GAAP adjustment:
Securities gains38
Gain on disposal of assets16,699
Net interest income plus non-interest income - as adjusted$108,653$125,450
Efficiency ratio (non-GAAP)60.68 %49.79 %
 







52


GAAP and Non-GAAP Performance Ratios
 Three Months Ended June 30,
(Dollars in thousands)20232022
Core earnings (non-GAAP):
Net income (GAAP)$24,745$54,800
Plus/ (less) non-GAAP adjustments (net of tax):
Merger, acquisition and disposal expense793
Amortization of intangible assets9461,090
Severance expense1,445
Gain on disposal of assets(12,417)
Investment securities gains(28)
Core earnings (non-GAAP)$27,136$44,238
Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)44,888,75945,111,693
Earnings per diluted common share (GAAP)$0.55$1.21
Core earnings per diluted common share (non-GAAP)$0.60$0.98
Core return on average assets (non-GAAP):
Average assets (GAAP)$14,094,653$12,991,692
Return on average assets (GAAP)0.70 %1.69 %
Core return on average assets (non-GAAP)0.77 %1.37 %
Return/ Core return on average tangible common equity (non-GAAP):
Net Income (GAAP)$24,745$54,800
Plus: Amortization of intangible assets (net of tax)9461,090
Net income before amortization of intangible assets$25,691$55,890
Core return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP)$1,535,465$1,468,036
Average goodwill(363,436)(367,986)
Average other intangible assets, net(18,074)(23,801)
Average tangible common equity (non-GAAP)$1,153,955$1,076,249
Return on average tangible common equity (non-GAAP)8.93 %20.83 %
Core return on average tangible common equity (non-GAAP)9.43 %16.49 %
Average tangible common equity to average tangible assets (non-GAAP)8.41 %8.54 %
53


FINANCIAL CONDITION
Total assets at June 30, 2023 increased 1% to $14.0 billion compared to $13.8 billion at December 31, 2022. Total loan and deposit balances remained relatively flat compared to year-end 2022. During the first six months of 2023, total loans remained relatively stable at $11.4 billion compared to December 31, 2022 as a result of reduced loan demand and lower payoff activity. Deposits remained level at $11.0 billion at June 30, 2023 compared to December 31, 2022. The availability of competitive high yields in savings and time products, in addition to short-term debt securities, led to noninterest-bearing deposits declining 16%. This run-off was compensated by offering higher yielding accounts along with growth in brokered time deposits resulting in an 8% increase in interest-bearing deposits. As part of the strategy for mitigating deposit outflows we provided access to reciprocal deposit arrangements, which provides FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits. These deposits increased $386.0 million or 82% during the first six months of 2023. The loan to deposit ratio declined to 103.7% at June 30, 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:

 June 30, 2023December 31, 2022Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Commercial real estate:      
Commercial investor real estate$5,131,210 45.1 %$5,130,094 45.0 %$1,116 N/M
Commercial owner-occupied real estate1,770,135 15.6 1,775,037 15.5 (4,902)(0.3)
Commercial AD&C1,045,742 9.2 1,090,028 9.6 (44,286)(4.1)
Commercial business1,423,614 12.5 1,455,885 12.8 (32,271)(2.2)
Total commercial loans9,370,701 82.4 9,451,044 82.9 (80,343)(0.9)
Residential real estate:
Residential mortgage1,385,743 12.2 1,287,933 11.3 97,810 7.6
Residential construction190,690 1.7 224,772 2.0 (34,082)(15.2)
Consumer422,505 3.7 432,957 3.8 (10,452)(2.4)
Total residential and consumer loans1,998,938 17.6 1,945,662 17.1 53,276 2.7
Total loans$11,369,639 100.0 %$11,396,706 100.0 %$(27,067)(0.2)
N/M - Not meaningful

Total loans remained flat at June 30, 2023 compared to December 31, 2022. The individual loan portfolios remained relatively stable during the period with most of the portfolios reflecting modest declines while residential mortgage portfolios experienced growth. Overall, the lack of loan demand combined with lower payoff activity during the first six months of 2023, as a result of the interest rate environment, resulted in the reduction of loan growth compared to the prior quarter.
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Analysis of Investment Securities
The composition of investment securities at the periods indicated is presented in the following table:

 June 30, 2023December 31, 2022Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Available-for-sale debt securities:      
U.S. treasuries and government agencies$94,345 6.5 %$93,622 6.1 %$723 0.8 %
State and municipal268,251 18.3 265,997 17.2 2,254 0.8 
Mortgage-backed and asset-backed781,092 53.4 854,919 55.4 (73,827)(8.6)
Total available-for-sale debt securities1,143,688 78.2 1,214,538 78.7 (70,850)(5.8)
Held-to-maturity debt securities:
Mortgage-backed and asset-backed247,814 16.9 259,452 16.8 (11,638)(4.5)
Total held-to-maturity debt securities247,814 16.9 259,452 16.8 (11,638)(4.5)
Other investments:     
Federal Reserve Bank stock38,961 2.7 38,873 2.6 88 0.2 
Federal Home Loan Bank of Atlanta stock32,414 2.2 29,668 1.9 2,746 9.3 
Other677  677 — — — 
Total other investments72,052 4.9 69,218 4.5 2,834 4.1 
Total securities$1,463,554 100.0 %$1,543,208 100.0 %$(79,654)(5.2)
 
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 June 30, 2023, 96% 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 decreased to 4.6 years at June 30, 2023 compared to 4.8 years at 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 June 30, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at June 30, 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 $21.5 million at June 30, 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 $229.6 million at June 30, 2023 compared to December 31, 2022, as management increased on-balance sheet liquidity.
 
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Deposits
The composition of deposits for the periods indicated is presented in the following table:
 
 June 30, 2023December 31, 2022Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Noninterest-bearing deposits$3,079,896 28.1 %$3,673,300 33.5 %$(593,404)(16.2)%
Interest-bearing deposits:  
Demand1,413,027 12.9 1,435,454 13.1 (22,427)(1.6)
Money market savings2,918,253 26.6 3,213,045 29.4 (294,792)(9.2)
Regular savings731,985 6.7 513,360 4.7 218,625 42.6 
Time deposits of less than $250,0002,293,858 20.9 1,644,645 15.0 649,213 39.5 
Time deposits of $250,000 or more521,903 4.8 473,617 4.3 48,286 10.2 
Total interest-bearing deposits7,879,026 71.9 7,280,121 66.5 598,905 8.2 
Total deposits$10,958,922 100.0 %$10,953,421 100.0 %$5,501 0.1 
 
Deposits and Borrowings
Deposits remained at $11.0 billion at June 30, 2023 compared to 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% at December 31, 2022, reflecting the stability of the core deposit base. At June 30, 2023, retail accounts represented 41% of core deposits while business accounts accounted for 59% of core deposits. No single commercial or retail client represented more than two percent of total deposits at the end of the current period. Total uninsured deposits, including pass-through insured deposits, represented approximately 30% of total deposits at June 30, 2023. Commercial accounts represented 77% of uninsured deposits, while retail accounts accounted for 23% of the uninsured deposit total. The commercial deposit mix continues to be well diversified with no significant concentration in one particular industry or single client.

The availability of high yields in savings products and short-term debt securities during the current quarter resulted in noninterest-bearing deposits declining 16%. Client deployment of noninterest-bearing deposits into higher yielding accounts, along with growth in brokered time deposits, drove an 8% increase in interest-bearing deposits. The Company established strategies to mitigate 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 4%.

Total borrowings in the current quarter increased by $102.8 million over amounts at December 31, 2022 as management bolstered on-balance sheet liquidity. During the period, the $260.0 million reduction in federal funds purchased was replaced by $300.0 million of borrowings through the Federal Reserve Bank's Bank Term Funding Program.

At June 30, 2023, contingent liquidity, which consists of available FHLB borrowings, available funds through the Federal Reserve Bank's discount window and the Bank Term Funding Program, as well as excess cash and unpledged investment securities totaled $4.4 billion or 132% of uninsured deposits. In addition, the Company also had $1.0 billion in available fed funds, which provided total coverage of 163% 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 June 30, 2023 compared to at December 31, 2022. During this period, stockholders' equity increased $55.3 million from net income net of dividends paid, coupled with a decline in the accumulated other comprehensive loss during the period of $6.3 million.

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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 atMinimum
Regulatory
Requirements
 June 30, 2023December 31, 2022
Tier 1 leverage9.42%9.33%4.00%
Common equity tier 1 capital to risk-weighted assets10.65%10.23%4.50%
Tier 1 capital to risk-weighted assets10.65%10.23%6.00%
Total capital to risk-weighted assets14.60%14.20%8.00%
 
As of June 30, 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 June 30, 2023 from December 31, 2022 as a result of an increase in Tier 1 capital from earnings while risk weighted assets decreased 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 June 30, 2023, the impact of the application of this deferral transition provided an additional $5.8 million in Tier 1 capital and resulted in raising the common equity Tier 1 ratio by five 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 increased to 8.51% of tangible assets at June 30, 2023, compared to 8.18% at December 31, 2022. This increase reflects the increase in retained earnings from net income net of dividends, and to a lesser degree, the impact from the $6.3 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 due to the 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:
 
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Tangible Common Equity Ratio – Non-GAAP
(Dollars in thousands, except per share data)June 30, 2023December 31, 2022
Tangible common equity ratio:  
Total stockholders' equity$1,539,032 $1,483,768 
Goodwill(363,436)(363,436)
Other intangible assets, net(17,280)(19,855)
Tangible common equity$1,158,316 $1,100,477 
Total assets$13,994,545 $13,833,119 
Goodwill(363,436)(363,436)
Other intangible assets, net(17,280)(19,855)
Tangible assets$13,613,829 $13,449,828 
Outstanding common shares44,862,369 44,657,054 
Tangible common equity ratio8.51 %8.18 %
Book value per common share$34.31 $33.23 
Tangible book value per common share$25.82 $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. Our 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 0.44% at June 30, 2023 compared to 0.35% at December 31, 2022. Non-performing loans were $49.5 million at June 30, 2023 compared to $39.4 million at December 31, 2022. Loans placed on non-accrual during the current quarter amounted to $9.3 million compared to $19.7 million for the first quarter of 2023. Loans greater than 90 days or more were $0.7 million at June 30, 2023 compared to $1.0 million at December 31, 2022.

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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, we 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 June 30, 2023 compared to $0.4 million at December 31, 2022.

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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)June 30, 2023December 31, 2022
Non-accrual loans:  
Commercial real estate:  
Commercial investor real estate$20,381 $9,943 
Commercial owner-occupied real estate4,846 5,019 
Commercial AD&C569 — 
Commercial business9,393 7,322 
Residential real estate:
Residential mortgage10,153 7,439 
Residential construction — 
Consumer3,396 5,059 
Total non-accrual loans48,738 34,782 
Loans 90 days past due:
Commercial real estate:
Commercial investor real estate — 
Commercial owner-occupied real estate — 
Commercial AD&C — 
Commercial business29 1,002 
Residential real estate:
Residential mortgage692 — 
Residential construction — 
Consumer — 
Total 90 days past due loans721 1,002 
Restructured loans (accruing) (1)
 3,575 
Total non-performing loans49,459 39,359 
Other real estate owned, net611 645 
Total non-performing assets$50,070 $40,004 
Non-accrual loans to total loans0.43 %0.31 %
Non-performing loans to total loans0.44 %0.35 %
Non-performing assets to total assets0.36 %0.29 %
Allowance for credit losses to non-accrual loans246.80 %391.70 %
Allowance for credit losses to non-performing loans243.21 %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, we maintain 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.
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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 six months ended June 30, 2023 our provision for credit losses was a credit of $16.5 million as compared to a charge of $4.7 million for the same period in 2022. The significant credit to the provision for the six months ended June 30, 2023 was a reflection of the improving regional forecast observed during the early part of the current year, coupled with the continued strong credit performance of the loan portfolio.

At June 30, 2023, the allowance for credit losses was $120.3 million as compared to $136.2 million at December 31, 2022. The allowance for credit losses as a percent of total loans was 1.06% and 1.20% at June 30, 2023 and December 31, 2022, respectively. The allowance for credit losses represented 243% of non-performing loans at June 30, 2023 as compared to 346% at December 31, 2022. The allowance attributable to the commercial portfolio represented 1.16% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.59%. With respect to the total commercial portion of the allowance, 26% 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 1.96%. The allowance coverage ratio for the investor real estate portfolio decreased to 1.19% at June 30, 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 0.98% at the end of the current quarter, compared to 1.71% at December 31, 2022. 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 48% of the total allowance being attributable to the historical performance of the portfolio while 52% 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;
house price index; and
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
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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 $63.5 million, with individual allowances of $16.2 million against those loans at June 30, 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 June 30, 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)June 30, 2023December 31, 2022
Commercial real estate:Amount% of loans to total loansAmount% of loans to total loans
Commercial investor real estate$61,087 45.1 %$64,737 45.0 %
Commercial owner-occupied real estate9,230 15.6 11,646 15.5 
Commercial AD&C10,200 9.2 18,646 9.6 
Commercial business27,914 12.5 28,027 12.8 
Total commercial108,431 82.4 123,056 82.9 
Residential real estate:
Residential mortgage9,161 12.2 9,424 11.3 
Residential construction850 1.7 1,337 2.0 
Consumer1,845 3.7 2,425 3.8 
Total residential and consumer11,856 17.6 13,186 17.1 
Total allowance for credit losses - loans$120,287 100.0 %$136,242 100.0 %

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Summary of Loan Credit Loss Experience
The following table presents the activity in the allowance for credit losses on loans for the periods indicated:
 Six Months EndedYear Ended
(Dollars in thousands)June 30, 2023December 31, 2022
Balance, January 1$136,242 $109,145 
Provision/ (credit) for credit losses - loans(14,491)26,680 
Loan charge-offs:
Commercial real estate:
Commercial investor real estate — 
Commercial owner-occupied real estate — 
Commercial AD&C — 
Commercial business(423)(716)
Residential real estate:
Residential mortgage(160)(155)
Residential construction — 
Consumer(1,682)(234)
Total charge-offs(2,265)(1,105)
Loan recoveries:
Commercial real estate:
Commercial investor real estate19 320 
Commercial owner-occupied real estate53 49 
Commercial AD&C — 
Commercial business187 799 
Residential real estate:
Residential mortgage104 102 
Residential construction 
Consumer438 244 
Total recoveries801 1,522 
Net (charge-offs)/ recoveries(1,464)417 
Balance, period end$120,287 $136,242 
Annualized net charge-offs/ (recoveries) to average loans0.03 %— %
Allowance for credit losses on loans to loans1.06 %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
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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, such as periods of economic uncertainty or market liquidity concerns, so dictate.
 
Our 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 Limit23.50%17.50%15.00%10.00%10.00%15.00%17.50%23.50%
June 30, 20237.37%5.56%3.77%1.89%(1.47%)(3.04%)(4.89%)(6.35%)
December 31, 20221.87%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 June 30, 2023 increased in all interest scenarios compared to December 31, 2022. The increases in net interest income at risk during the current year are the result of the lengthened maturities of FHLB Advances, brokered time deposits and the $300 million in borrowings under the fixed rate Bank Term Funding Program, coupled with the increase in loan interest income due to higher interest rates. The overall positive impact of these increases were partially offset by a large increase in deposit expense as rates rise.

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 Limit35.00%25.00%20.00%10.00%10.00%20.00%25.00%35.00%
June 30, 2023(17.59%)(12.97%)(8.42%)(4.07%)3.76%6.32%7.49%6.03%
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 decreased in all rising rate and declining rate change scenarios from December 31, 2022 to June 30, 2023. This decrease in EVE in rising rate scenarios is a result of higher loan market values from the increase in the portfolio rates and shorter durations, combined with longer weighted average lives on
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deposits, a premium on longer term fixed rate FHLB Advances, and the addition of the fixed rate Bank Term Funding Program. The decrease of the risk in the rising rate scenarios was partially offset by the decline in DDA balances and higher deposit rates. While EVE at risk decreases in declining rate scenarios, its occurs to a lower extent compared to rising rate scenarios, as the causes noted in those scenarios result in an opposite effect on EVE.
 
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 a short notice to meet obligations as they arise and to ensure that the we are able to pursue new business opportunities. Accordingly, management evaluates these metrics on a monthly basis to ensure that policy parameters are adequately addressed. The Company performs liquidity stress testing at least quarterly which includes systemic and idiosyncratic scenarios. Testing at the end of the second quarter of 2023 indicated that the Company demonstrates sufficient liquidity in most severe scenarios. As a result of current year trends in the banking industry, management instituted a process to provide greater on-balance sheet liquidity by increasing its available borrowings. At June 30, 2023, our 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 June 30, 2023. At March 31, 2023, contingent liquidity amounted to $4.4 billion or 132% of the amount of uninsured deposits, with an additional $1.0 billion in available federal funds which provides total coverage of 163% 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, our 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 June 30, 2023, our 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 Bank Term Financing Program ("BTF Program"). At June 30, 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 June 30, 2023 amounted to $2.6 billion, with $600.0 million outstanding against it. The secured lines of credit at the Federal Reserve Bank and correspondent banks totaled $760.8 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of June 30, 2023. In addition, we have federal funds borrowing capacity under unsecured lines of credit with correspondent banks of $1.0 billion with no amount outstanding at June 30, 2023. The Company has provided $316.5 million in collateral under the BTF Program as a contingent funding source, with $300.0 million in borrowings against it at June 30, 2023. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at June 30, 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. Quarterly, management evaluates the capacity to pay dividends under various stress scenarios and provides that recommendation to the board of directors. Based on this requirement, as of June 30, 2023, the Bank could have declared a dividend of up to $117.5 million to Bancorp. At June 30, 2023, Bancorp had liquid assets of $83.6 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.
 
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Commitments to extend credit in the form of consumer, commercial real estate and business at the dates indicated were as follows:
(In thousands)June 30, 2023December 31, 2022
Commercial real estate development and construction$728,839 $887,154 
Residential real estate-development and construction687,972 798,607 
Real estate-residential mortgage32,090 21,118 
Lines of credit, principally home equity and business lines2,486,317 2,397,533 
Standby letters of credit74,333 77,424 
Total commitments to extend credit and available credit lines$4,009,551 $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 June 30, 2023, the total reserve for unfunded commitments was $6.0 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.
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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 June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 and the Form 10-Q for the quarter ended March 31, 2023 under Item 1A, “Risk Factors” and the following additional risk factor:

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. On May 22, 2023, a proposal for comment was issued that outlines the terms of that special assessment where banks with a total of uninsured deposits in excess of $5.0 billion reported as of December 31, 2022 would be subject to that special assessment. At December 31, 2022 the Company's total reported uninsured deposits were $4.4 billion. The effective date of the terms of the proposal would be January 1, 2024. The comment period with respect to this proposal ended July 17, 2023. 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On March 30, 2022, our 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 625,710 shares of its common stock at an average price of $39.93 per share. The Company did not repurchase any shares of its common stock during the quarter ended June 30, 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
During the fiscal quarter ended June 30, 2023, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K.



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Item 6. Exhibits
  
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)
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)

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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: August 4, 2023
By: /s/ Philip J. Mantua
Philip J. Mantua
Executive Vice President and Chief Financial Officer
Date: August 4, 2023

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