SANDY SPRING BANCORP INC - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2023

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

For the transition period from to ____________

Commission File Number: 0-19065

SANDY SPRING BANCORP, INC.

(Exact name of registrant as specified in its charter)


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


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

301-774-6400

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

SASR

The NASDAQ Stock Market, LLC

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

Yes ☐ No ☒

The number of outstanding shares of common stock as of November 1, 2023

Common stock, $1.00 par value – 44,895,158 shares

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statements of Condition - Unaudited as of September 30, 2023 and December 31, 2022			3

Condensed Consolidated Statements of Income - Unaudited for the Three and Nine Months Ended September 30, 2023 and 2022			4

Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three and Nine Months Ended September 30, 2023 and 2022			5

Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three and Nine Months Ended September 30, 2023 and 2022			6

Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine Months Ended September 30, 2023 and 2022			8

Notes to the Condensed Consolidated Financial Statements			9

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			36

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			67

Item 4. CONTROLS AND PROCEDURES			67

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS			68

Item 1A. RISK FACTORS			68

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			68

Item 3. DEFAULTS UPON SENIOR SECURITIES			68

Item 4. MINE SAFETY DISCLOSURES			68

Item 5. OTHER INFORMATION			68

Item 6. EXHIBITS			69

SIGNATURES			70

Part I

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED


	September 30,		December 31,
(Dollars in thousands)	2023		2022
Assets:
Cash and due from banks	$	80,314	$	88,152
Federal funds sold	251		193
Interest-bearing deposits with banks	637,026		103,887
Cash and cash equivalents	717,591		192,232
Residential mortgage loans held for sale (at fair value)	19,235		11,706
Investments held-to-maturity, at cost (fair value of $194,411 and $220,123, respectively)	241,464		259,452
Investments available-for-sale (at fair value)	1,075,089		1,214,538
Other investments, at cost	75,525		69,218
Total loans	11,300,292		11,396,706
Less: allowance for credit losses - loans	(123,360)		(136,242)
Net loans	11,176,932		11,260,464
Premises and equipment, net	72,312		67,070
Other real estate owned	261		645
Accrued interest receivable	45,100		41,172
Goodwill	363,436		363,436
Other intangible assets, net	16,035		19,855
Other assets	332,105		333,331
Total assets	$	14,135,085	$	13,833,119

Liabilities:
Noninterest-bearing deposits	$	3,013,905	$	3,673,300
Interest-bearing deposits	8,137,107		7,280,121
Total deposits	11,151,012		10,953,421
Securities sold under retail repurchase agreements	66,581		61,967
Federal funds purchased	—		260,000
Federal Reserve Bank borrowings	300,000		—
Advances from FHLB	550,000		550,000
Subordinated debt	370,653		370,205
Total borrowings	1,287,234		1,242,172
Accrued interest payable and other liabilities	158,925		153,758
Total liabilities	12,597,171		12,349,351

Stockholders' equity:
Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding
44,895,158 and 44,657,054 at September 30, 2023 and December 31, 2022, respectively	44,895		44,657
Additional paid in capital	740,999		734,273
Retained earnings	887,512		836,789
Accumulated other comprehensive loss	(135,492)		(131,951)
Total stockholders' equity	1,537,914		1,483,768
Total liabilities and stockholders' equity	$	14,135,085	$	13,833,119

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2023		2022		2023		2022
Interest income:
Interest and fees on loans	$	147,304	$	121,327	$	431,305	$	327,042
Interest on loans held for sale	238		161		697		504
Interest on deposits with banks	6,371		774		13,979		1,245
Interest and dividend income on investment securities:
Taxable	6,682		5,735		20,538		14,472
Tax-advantaged	1,811		2,422		5,376		7,100
Interest on federal funds sold	5		3		13		4
Total interest income	162,411		130,422		471,908		350,367
Interest expense:
Interest on deposits	63,102		9,490		155,215		15,578
Interest on retail repurchase agreements and federal funds purchased	4,082		977		10,377		1,232
Interest on advances from FHLB	6,200		3,049		21,623		3,066
Interest on subordinated debt	3,946		3,946		11,839		10,130
Total interest expense	77,330		17,462		199,054		30,006
Net interest income	85,081		112,960		272,854		320,361
Provision/ (credit) for credit losses	2,365		18,890		(14,116)		23,571
Net interest income after provision/ (credit) for credit losses	82,716		94,070		286,970		296,790
Non-interest income:
Investment securities gains	—		2		—		48
Gain on disposal of assets	—		(183)		—		16,516
Service charges on deposit accounts	2,704		2,591		7,698		7,384
Mortgage banking activities	1,682		1,566		4,744		5,347
Wealth management income	9,391		8,867		27,414		27,302
Insurance agency commissions	—		—		—		2,927
Income from bank owned life insurance	845		693		3,003		2,191
Bank card fees	450		438		1,315		3,916
Other income	2,319		2,908		6,344		7,091
Total non-interest income	17,391		16,882		50,518		72,722
Non-interest expense:
Salaries and employee benefits	44,853		40,126		124,710		119,049
Occupancy expense of premises	4,609		4,759		14,220		14,527
Equipment expense	3,811		3,825		11,688		10,920
Marketing	729		1,370		3,861		3,843
Outside data services	2,819		2,509		8,186		7,492
FDIC insurance	2,333		1,268		6,846		3,330
Amortization of intangible assets	1,245		1,432		3,820		4,406
Merger, acquisition and disposal expense	—		1		—		1,068
Professional fees and services	4,509		2,207		12,354		6,596
Other expenses	7,563		8,283		22,227		21,687
Total non-interest expense	72,471		65,780		207,912		192,918
Income before income tax expense	27,636		45,172		129,576		176,594
Income tax expense	6,890		11,588		32,832		44,275
Net income	$	20,746	$	33,584	$	96,744	$	132,319

Per share information:
Basic net income per common share	$	0.46	$	0.75	$	2.16	$	2.93
Diluted net income per common share	$	0.46	$	0.75	$	2.15	$	2.92
Dividends declared per share	$	0.34	$	0.34	$	1.02	$	1.02

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2023		2022		2023		2022
Net income	$	20,746	$	33,584	$	96,744	$	132,319
Other comprehensive loss:
Investments available-for-sale:
Net change in unrealized losses on investments available-for-sale	(23,730)		(61,726)		(16,555)		(166,506)
Related income tax (expense)/ benefit	5,873		15,551		4,045		42,409
Net investment gains reclassified into earnings	—		(2)		—		(48)
Related income tax expense	—		—		—		12
Net effect on other comprehensive loss	(17,857)		(46,177)		(12,510)		(124,133)

Investments held-to-maturity:
Net change in unrealized gains/ (losses)	451		613		1,314		(14,514)
Related income tax (expense)/ benefit	(127)		(181)		(347)		3,697
Net effect on other comprehensive loss	324		432		967		(10,817)

Defined benefit pension plan:
Net change in unrealized gains/ (losses)	10,286		196		10,737		587
Related income tax benefit	(2,620)		(68)		(2,735)		(168)
Net effect on other comprehensive loss	7,666		128		8,002		419
Total other comprehensive loss	(9,867)		(45,617)		(3,541)		(134,531)
Comprehensive income/ (loss)	$	10,879	$	(12,033)	$	93,203	$	(2,212)

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED


(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/ (Loss)		Total Stockholders' Equity
Balances at July 1, 2023	$	44,862	$	737,740	$	882,055	$	(125,625)	$	1,539,032
Net income	—		—		20,746		—		20,746
Other comprehensive loss, net of tax	—		—		—		(9,867)		(9,867)
Total comprehensive income									10,879
Common stock dividends - $0.34 per share	—		—		(15,289)		—		(15,289)
Stock compensation expense	—		2,762		—		—		2,762
Common stock issued pursuant to:

Stock option plan - 17,179 shares	17		171		—		—		188


Employee stock purchase plan - 15,610 shares	16		326		—		—		342



Balances at September 30, 2023	$	44,895	$	740,999	$	887,512	$	(135,492)	$	1,537,914

Balances at July 1, 2022	$	44,630	$	730,285	$	799,707	$	(97,453)	$	1,477,169
Net income	—		—		33,584		—		33,584
Other comprehensive loss, net of tax	—		—		—		(45,617)		(45,617)
Total comprehensive loss									(12,033)
Common stock dividends - $0.34 per share	—		—		(15,242)		—		(15,242)
Stock compensation expense	—		1,561		—		—		1,561
Common stock issued pursuant to:


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

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


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

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED


(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/ (Loss)		Total Stockholders' Equity
Balances at January 1, 2023	$	44,657	$	734,273	$	836,789	$	(131,951)	$	1,483,768
Net income	—		—		96,744		—		96,744
Other comprehensive loss, net of tax	—		—		—		(3,541)		(3,541)
Total comprehensive income									93,203
Common stock dividends - $1.02 per share	—		—		(46,021)		—		(46,021)
Stock compensation expense	—		6,734		—		—		6,734
Common stock issued pursuant to:

Stock option plan - 58,100 shares	58		647		—		—		705


Employee stock purchase plan - 47,149 shares	47		1,139		—		—		1,186
Restricted stock vesting, net of tax withholding - 132,855 shares	133		(1,794)		—		—		(1,661)


Balances at September 30, 2023	$	44,895	$	740,999	$	887,512	$	(135,492)	$	1,537,914

Balances at January 1, 2022	$	45,119	$	751,072	$	732,027	$	(8,539)	$	1,519,679
Net income	—		—		132,319		—		132,319
Other comprehensive loss, net of tax	—		—		—		(134,531)		(134,531)
Total comprehensive income									(2,212)
Common stock dividends - $1.02 per share	—		—		(46,297)		—		(46,297)
Stock compensation expense	—		6,211		—		—		6,211
Common stock issued pursuant to:


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

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

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

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED


	Nine Months Ended September 30,
(Dollars in thousands)	2023		2022
Operating activities:
Net income	$	96,744	$	132,319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,316		8,926
Provision/ (credit) for credit losses	(14,116)		23,571
Share based compensation expense	6,734		6,211
Gain on disposal of assets	—		(16,516)
Deferred income tax/ (benefit)	4,744		(6,493)
Originations of loans held for sale	(296,913)		(296,464)
Proceeds from sales of loans held for sale	293,750		330,643
Gains on sales of loans held for sale	(4,366)		(6,239)
(Gains)/ losses on sale of other real estate owned	(96)		24
Investment securities gains	—		(48)

Tax (benefit)/ deficiency associated with share based compensation	296		(632)
Net increase in accrued interest receivable	(3,928)		(2,725)
Net increase in other assets	(10,062)		(1,221)
Net increase in accrued expenses and other liabilities	17,979		2,377
Other, net	66		(3,301)
Net cash provided by operating activities	107,148		170,432
Investing activities:
Purchases of other investments	(6,305)		(36,131)
Purchases of investments available-for-sale	—		(447,070)
Proceeds from sales of investment available-for-sale	—		1,261
Proceeds from maturities, calls and principal payments of investments available-for-sale	120,520		196,121

Proceeds from maturities, calls and principal payments of investments held-to-maturity	19,052		25,149
Net (increase)/ decrease in loans	96,764		(1,244,402)
Proceeds from the sales of other real estate owned	481		271




Proceeds from sale of business activity, net	—		23,821
Expenditures for premises and equipment	(9,914)		(10,566)
Net cash provided by/ (used in) investing activities	220,598		(1,491,546)
Financing activities:
Net increase in deposits	198,632		126,348
Net increase in retail repurchase agreements, federal funds purchased and Federal Reserve Bank borrowings	44,614		65,201
Proceeds from FHLB advances	2,030,000		1,716,625
Repayment of FHLB advances	(2,030,000)		(876,625)
Proceeds from issuance of subordinated debt	—		200,000

Proceeds from issuance of common stock	2,051		1,783
Stock tendered for payment of withholding taxes	(1,821)		(2,315)
Repurchase of common stock	—		(24,987)
Cash dividends paid	(45,863)		(46,128)
Net cash provided by financing activities	197,613		1,159,902
Net increase/ (decrease) in cash and cash equivalents	525,359		(161,212)
Cash and cash equivalents at beginning of period	192,232		420,020
Cash and cash equivalents at end of period	$	717,591	$	258,808

Supplemental disclosures:
Interest payments	$	170,336	$	27,631
Income tax payments, net of refunds of $0 and $966 in 2023 and 2022, respectively	27,345		42,414

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

a trustee for corporate or personal trusts. Investment management services include investment management, record-keeping and reporting of security portfolios. Fees for these services are recognized based on a contractually-agreed fixed percentage applied to net assets under management at the end of each reporting period. The Company does not charge/recognize any performance-based fees.

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

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

Loan Financing Receivables

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

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

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

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

Allowance for Credit Losses

The allowance for credit losses (“allowance” or “ACL”) represents an amount which, in management's judgment, reflects the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance is measured and recorded upon the initial recognition of

a financial asset. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision or credit for credit losses, which is recorded as a current period expense.

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

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

Loans are pooled into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. Portfolio segments used to estimate the allowance are the same as portfolio segments used for general credit risk management purposes. Refer to Note 4 for more details on the Company’s portfolio segments.

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

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

(less costs to sell) and the amortized cost basis of the loan. Once a loss has been confirmed, the loan is charged-down to its estimated fair value.

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

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

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

Held-to-maturity debt securities

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

Leases

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

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

Segment Reporting

Operating segments are components of a business about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance. While the Company’s chief operating decision maker has some limited financial information about its various financial products and services, that information is not complete since it does not include a full allocation of revenue, costs, and capital from key corporate functions; therefore, the Company evaluates financial performance on the Company-wide basis. Management continues to evaluate these business units for separate reporting as facts and circumstances change.

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.

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

guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate ("LIBOR") or other reference rate expected to be discontinued on financial reporting. The standard was elective and provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update were effective for all entities between March 12, 2020 and December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”. This ASU refines the scope of Topic 848 and addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued, but that use an interest rate for margining, discounting or contract price alignment that is expected to be modified as a result of reference rate reform. ASU 2021-01 is effective upon issuance through December 31, 2024, and can be adopted at any time during this period. The Company has not offered LIBOR for any new contracts since 2021. The Company has identified all known LIBOR exposures, created a plan to address the exposures, and continues to communicate with all stakeholders in order to facilitate the transition to an alternative reference rate. The adoption did not 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:


	September 30, 2023								December 31, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale debt securities:
U.S. treasuries and government agencies	$	101,488	$	—	$	(6,643)	$	94,845	$	100,926	$	—	$	(7,304)	$	93,622
State and municipal	317,580		—		(65,701)		251,879		322,519		4		(56,526)		265,997
Mortgage-backed and asset-backed	824,881		34		(96,550)		728,365		943,398		73		(88,552)		854,919




Total available-for-sale debt securities	$	1,243,949	$	34	$	(168,894)	$	1,075,089	$	1,366,843	$	77	$	(152,382)	$	1,214,538
Held-to-maturity debt securities:


Mortgage-backed and asset-backed	241,464		—		(47,053)		194,411		259,452		—		(39,329)		220,123
Total held-to-maturity debt securities	$	241,464	$	—	$	(47,053)	$	194,411	$	259,452	$	—	$	(39,329)	$	220,123
Total debt securities	$	1,485,413	$	34	$	(215,947)	$	1,269,500	$	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 September 30, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at September 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 September 30, 2023 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($448.4 million), GNMA, FNMA or FHLMC mortgage-backed securities ($581.4 million) or SBA asset-backed securities ($36.5 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:


	September 30, 2023
	Number of Securities	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasuries and government agencies	10	$	—	$	—	$	94,845	$	6,643	$	94,845	$	6,643
State and municipal	127	5,682		210		240,478		65,491		246,160		65,701
Mortgage-backed and asset-backed	329	25,462		785		694,703		95,765		720,165		96,550

Total	466	$	31,144	$	995	$	1,030,026	$	167,899	$	1,061,170	$	168,894


	December 31, 2022
	Number of Securities	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. treasuries and government agencies	10	$	53,139	$	3,653	$	40,483	$	3,651	$	93,622	$	7,304
State and municipal	130	200,439		30,803		62,482		25,723		262,921		56,526
Mortgage-backed and asset-backed	324	526,387		44,952		297,216		43,600		823,603		88,552

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

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

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


	September 30, 2023				December 31, 2022
(In thousands)	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Available-for-sale debt securities
U.S. treasuries and government agencies:
One year or less	$	14,719	$	14,989	$	—	$	—
One to five years	80,126		86,499		93,622		100,926
Five to ten years	—		—		—		—
After ten years	—		—		—		—
State and municipal:
One year or less	11,379		11,508		8,694		8,783
One to five years	48,462		50,794		51,576		53,948
Five to ten years	40,146		50,682		28,806		34,042
After ten years	151,892		204,596		176,921		225,746
Mortgage-backed and asset-backed:
One year or less	5,873		5,977		7,622		7,704
One to five years	44,271		45,783		45,366		46,802
Five to ten years	259,942		292,406		303,697		335,285
After ten years	418,279		480,715		498,234		553,607










Total available-for-sale debt securities	$	1,075,089	$	1,243,949	$	1,214,538	$	1,366,843


	September 30, 2023				December 31, 2022
(In thousands)	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Held-to-maturity debt securities










Mortgage-backed and asset-backed:
One year or less	$	—	$	—	$	—	$	—
One to five years	—		—		—		—
Five to ten years	31,422		35,627		35,304		39,213
After ten years	162,989		205,837		184,819		220,239
Total held-to-maturity debt securities	$	194,411	$	241,464	$	220,123	$	259,452

At September 30, 2023 and December 31, 2022, available-for-sale and held-to-maturity debt securities with a book value of $724.8 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 September 30, 2023 and December 31, 2022.

Other investments

Other investments are presented in the following table:


(In thousands)	September 30, 2023		December 31, 2022
Federal Reserve Bank stock, at cost	$	39,043	$	38,873
Federal Home Loan Bank of Atlanta stock, at cost	35,805		29,668
Other	677		677
Total other investments, at cost	$	75,525	$	69,218

NOTE 3 – LOANS

Outstanding loan balances at September 30, 2023 and December 31, 2022 are net of unearned income, including net deferred loan fees of $8.6 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)	September 30, 2023		December 31, 2022
Commercial real estate:
Commercial investor real estate	$	5,137,694	$	5,130,094
Commercial owner-occupied real estate	1,760,384		1,775,037
Commercial AD&C	938,673		1,090,028
Commercial business	1,454,709		1,455,885
Total commercial loans	9,291,460		9,451,044
Residential real estate:
Residential mortgage	1,432,051		1,287,933
Residential construction	160,345		224,772
Consumer	416,436		432,957
Total residential and consumer loans	2,008,832		1,945,662
Total loans	$	11,300,292	$	11,396,706

Portfolio Segments

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

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

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

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

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

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

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

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

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

NOTE 4 – CREDIT QUALITY ASSESSMENT

Allowance for Credit Losses

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


	Nine Months Ended September 30,
(In thousands)	2023		2022
Balance at beginning of period	$	136,242	$	109,145



Provision/ (credit) for credit losses - loans (1)	(11,320)		18,773
Loan charge-offs	(2,518)		(1,029)
Loan recoveries	956		1,379
Net charge-offs	(1,562)		350
Balance at period end	$	123,360	$	128,268

(1) Excludes the total credit to the provision on unfunded loan commitments for nine months ended September 30, 2023 of $2.8 million.

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


(In thousands)	September 30, 2023		December 31, 2022
Collateral dependent loans individually evaluated for credit loss with an allowance	$	63,481	$	9,743
Collateral dependent loans individually evaluated for credit loss without an allowance	14,500		16,454
Total individually evaluated collateral dependent loans	$	77,981	$	26,197

Allowance for credit losses related to loans evaluated individually	$	19,931	$	6,902
Allowance for credit losses related to loans evaluated collectively	103,429		129,340
Total allowance for credit losses - loans	$	123,360	$	136,242

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


	For the Nine Months Ended September 30, 2023
	Commercial Real Estate												Residential Real Estate
(Dollars in thousands)	Commercial Investor R/E			Commercial Owner- Occupied R/E			Commercial AD&C			Commercial Business			Residential Mortgage			Residential Construction			Consumer			Total
Balance at beginning of period	$	64,737		$	11,646		$	18,646		$	28,027		$	9,424		$	1,337		$	2,425		$	136,242
Provision/ (credit) for credit losses - loans	(1,567)			(2,763)			(9,546)			2,944			(873)			(665)			1,150			(11,320)
Charge-offs	—			—			—			(441)			(160)			—			(1,917)			(2,518)
Recoveries	22			78			—			190			108			—			558			956
Net (charge-offs)/ recoveries	22			78			—			(251)			(52)			—			(1,359)			(1,562)
Balance at end of period	$	63,192		$	8,961		$	9,100		$	30,720		$	8,499		$	672		$	2,216		$	123,360

Total loans	$	5,137,694		$	1,760,384		$	938,673		$	1,454,709		$	1,432,051		$	160,345		$	416,436		$	11,300,292
Allowance for credit losses on loans to total loans ratio	1.23		%	0.51		%	0.97		%	2.11		%	0.59		%	0.42		%	0.53		%	1.09		%

Average loans	$	5,136,059		$	1,770,812		$	1,044,907		$	1,442,858		$	1,356,530		$	202,856		$	422,861		$	11,376,883
Annualized net charge-offs/ (recoveries) to average loans	—		%	(0.01)		%	—		%	0.02		%	0.01		%	—		%	0.43		%	0.02		%

Balance of loans individually evaluated for credit loss	$	62,144		$	4,744		$	1,422		$	9,671		$	—		$	—		$	—		$	77,981
Allowance related to loans evaluated individually	$	11,454		$	1,193		$	186		$	7,098		$	—		$	—		$	—		$	19,931
Individual allowance to loans evaluated individually ratio	18.43		%	25.15		%	13.08		%	73.39		%	—		%	—		%	—		%	25.56		%
Contractual balance of individually evaluated loans	$	62,494		$	5,654		$	1,434		$	10,988		$	—		$	—		$	—		$	80,570

Balance of loans collectively evaluated for credit loss	$	5,075,550		$	1,755,640		$	937,251		$	1,445,038		$	1,432,051		$	160,345		$	416,436		$	11,222,311
Allowance related to loans evaluated collectively	$	51,738		$	7,768		$	8,914		$	23,622		$	8,499		$	672		$	2,216		$	103,429
Collective allowance to loans evaluated collectively ratio	1.02		%	0.44		%	0.95		%	1.63		%	0.59		%	0.42		%	0.53		%	0.92		%


	For the Year Ended December 31, 2022
	Commercial Real Estate												Residential Real Estate
(Dollars in thousands)	Commercial Investor R/E			Commercial Owner- Occupied R/E			Commercial AD&C			Commercial Business			Residential Mortgage			Residential Construction			Consumer			Total
Balance at beginning of period	$	45,289		$	11,687		$	20,322		$	23,170		$	5,384		$	1,048		$	2,245		$	109,145



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

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

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

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

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

Credit Quality

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


	For the Nine Months Ended September 30, 2023
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Analysis of non-accrual loan activity:
Balance at beginning of period	$	9,943	$	5,019	$	—	$	7,322	$	7,439	$	—	$	5,059	$	34,782
Loans placed on non-accrual	19,622		—		1,422		5,041		5,486		449		1,937		33,957
Non-accrual balances transferred to OREO	—		—		—		—		—		—		—		—
Non-accrual balances charged-off	—		—		—		(441)		(160)		—		(1,757)		(2,358)
Net payments or draws	(9,457)		(275)		—		(1,738)		(1,012)		—		(929)		(13,411)
Non-accrual loans brought current	—		—		—		(513)		(987)		—		(123)		(1,623)
Balance at end of period	$	20,108	$	4,744	$	1,422	$	9,671	$	10,766	$	449	$	4,187	$	51,347


	For the Year Ended December 31, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Analysis of non-accrual loan activity:
Balance at beginning of period	$	12,489	$	9,306	$	650	$	8,420	$	8,441	$	55	$	6,725	$	46,086

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


	September 30, 2023
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Performing loans:
Current	$	5,113,313	$	1,752,351	$	936,562	$	1,444,093	$	1,408,387	$	159,783	$	408,800	$	11,223,289
30-59 days	4,273		2,647		689		491		8,597		113		3,059		19,869
60-89 days	—		642		—		39		4,301		—		390		5,372
Total performing loans	5,117,586		1,755,640		937,251		1,444,623		1,421,285		159,896		412,249		11,248,530
Non-performing loans:
Non-accrual loans	20,108		4,744		1,422		9,671		10,766		449		4,187		51,347
Loans greater than 90 days past due	—		—		—		415		—		—		—		415
Restructured loans (1)	—		—		—		—		—		—		—		—
Total non-performing loans	20,108		4,744		1,422		10,086		10,766		449		4,187		51,762
Total loans	$	5,137,694	$	1,760,384	$	938,673	$	1,454,709	$	1,432,051	$	160,345	$	416,436	$	11,300,292

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


	December 31, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Performing loans:
Current	$	5,104,204	$	1,767,875	$	1,090,028	$	1,443,012	$	1,261,878	$	222,144	$	422,989	$	11,312,130
30-59 days	9,735		1,007		—		3,556		11,307		2,628		4,343		32,576
60-89 days	6,212		—		—		41		5,822		—		566		12,641
Total performing loans	5,120,151		1,768,882		1,090,028		1,446,609		1,279,007		224,772		427,898		11,357,347
Non-performing loans:
Non-accrual loans	9,943		5,019		—		7,322		7,439		—		5,059		34,782
Loans greater than 90 days past due	—		—		—		1,002		—		—		—		1,002
Restructured loans	—		1,136		—		952		1,487		—		—		3,575
Total non-performing loans	9,943		6,155		—		9,276		8,926		—		5,059		39,359
Total loans	$	5,130,094	$	1,775,037	$	1,090,028	$	1,455,885	$	1,287,933	$	224,772	$	432,957	$	11,396,706

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


	For the Nine Months Ended September 30, 2023
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Average non-accrual loans for the period	$	16,471	$	4,890	$	498	$	8,957	$	9,323	$	112	$	4,386	$	44,637
Contractual interest income due on non- accrual loans during the period	$	716	$	220	$	83	$	566	$	343	$	—	$	389	$	2,317


	For the Year Ended December 31, 2022
	Commercial Real Estate								Residential Real Estate
(In thousands)	Commercial Investor R/E		Commercial Owner- Occupied R/E		Commercial AD&C		Commercial Business		Residential Mortgage		Residential Construction		Consumer		Total
Average non-accrual loans for the period	$	11,892	$	7,314	$	617	$	7,768	$	7,769	$	21	$	5,811	$	41,192
Contractual interest income due on non- accrual loans during the period	$	713	$	106	$	30	$	491	$	319	$	1	$	349	$	2,009

There was no interest income recognized on non-accrual loans during the nine months ended September 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 nine months ended September 30, 2023 new loans placed on non-accrual status totaled $34.0 million and the related amount of reversed uncollected accrued interest was $0.6 million.

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

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

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

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

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

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

The following table provides information about credit quality indicators by the year of origination as of September 30, 2023:


	September 30, 2023
	Term Loans by Origination Year												Revolving
(In thousands)	2023		2022		2021		2020		2019		Prior		Loans		Total
Commercial Investor R/E:
Pass	$	346,573	$	1,422,492	$	1,200,673	$	633,505	$	515,955	$	896,442	$	32,683	$	5,048,323
Special Mention	20,483		10,247		2,183		—		92		2,005		748		35,758
Substandard	20,131		471		31,983		—		—		1,028		—		53,613
Doubtful	—		—		—		—		—		—		—		—
Total	$	387,187	$	1,433,210	$	1,234,839	$	633,505	$	516,047	$	899,475	$	33,431	$	5,137,694
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Owner-Occupied R/E:
Pass	$	107,553	$	361,927	$	319,367	$	244,118	$	240,932	$	447,955	$	9,360	$	1,731,212
Special Mention	1,070		—		—		880		311		8,803		—		11,064
Substandard	3,678		3,694		809		347		5,928		3,652		—		18,108
Doubtful	—		—		—		—		—		—		—		—
Total	$	112,301	$	365,621	$	320,176	$	245,345	$	247,171	$	460,410	$	9,360	$	1,760,384
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial AD&C:
Pass	$	242,046	$	284,959	$	210,276	$	53,916	$	1,404	$	—	$	143,612	$	936,213
Special Mention	689		—		—		—		—		—		—		689
Substandard	1,202		569		—		—		—		—		—		1,771
Doubtful	—		—		—		—		—		—		—		—
Total	$	243,937	$	285,528	$	210,276	$	53,916	$	1,404	$	—	$	143,612	$	938,673
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Business:
Pass	$	113,918	$	352,721	$	204,356	$	98,054	$	71,218	$	123,078	$	459,479	$	1,422,824
Special Mention	87		86		175		781		1,118		420		7,307		9,974
Substandard	2,233		2,184		2,366		942		2,242		1,617		10,327		21,911
Doubtful	—		—		—		—		—		—		—		—
Total	$	116,238	$	354,991	$	206,897	$	99,777	$	74,578	$	125,115	$	477,113	$	1,454,709
Current period gross charge-offs	$	—	$	—	$	325	$	—	$	—	$	116	$	—	$	441

Residential Mortgage:
Beacon score:
660-850	$	23,549	$	425,726	$	394,488	$	167,819	$	42,193	$	282,382	$	—	$	1,336,157
600-659	875		9,393		11,367		2,128		1,905		24,839		—		50,507
540-599	—		3,443		4,165		2,143		2,487		9,174		—		21,412
less than 540	359		1,139		3,382		2,642		1,785		14,668		—		23,975
Total	$	24,783	$	439,701	$	413,402	$	174,732	$	48,370	$	331,063	$	—	$	1,432,051
Current period gross charge-offs	$	—	$	—	$	43	$	—	$	10	$	107	$	—	$	160

Residential Construction:
Beacon score:
660-850	$	17,223	$	105,710	$	28,509	$	5,382	$	150	$	—	$	—	$	156,974
600-659	415		65		1,199		—		—		1,243		—		2,922
540-599	449		—		—		—		—		—		—		449
less than 540	—		—		—		—		—		—		—		—
Total	$	18,087	$	105,775	$	29,708	$	5,382	$	150	$	1,243	$	—	$	160,345
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Beacon score:
660-850	$	7,327	$	4,986	$	1,896	$	716	$	1,785	$	25,196	$	333,180	$	375,086
600-659	1,412		251		495		212		295		4,340		16,974		23,979
540-599	89		365		14		205		394		2,258		3,962		7,287
less than 540	35		218		132		50		252		2,945		6,452		10,084
Total	$	8,863	$	5,820	$	2,537	$	1,183	$	2,726	$	34,739	$	360,568	$	416,436
Current period gross charge-offs	$	—	$	8	$	29	$	—	$	15	$	1,733	$	132	$	1,917

Total loans	$	911,396	$	2,990,646	$	2,417,835	$	1,213,840	$	890,446	$	1,852,045	$	1,024,084	$	11,300,292

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


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

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

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

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

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

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

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

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

Other Real Estate Owned

Other real estate owned ("OREO") totaled $0.3 million at September 30, 2023 as compared to $0.6 million at December 31, 2022, respectively. There were $0.6 million in consumer mortgage loans secured by residential real estate property for which formal foreclosure proceedings were in process as of September 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 amount of the loans modified during the three and nine months ended September 30, 2023 to borrowers experiencing financial difficulty, disaggregated by the loan portfolio segment, type of modification granted and the financial effect of loans modified:


	For the Three Months Ended September 30, 2023
	Interest rate reduction		Term extension		Rate reduction & Term extension		Total				Interest rate reduction		Term extension
(in thousands)	Amount		Amount		Amount		Amount		% of total loan segment		Weighted Average		Weighted Average
Commercial Investor R/E	$	748	$	4,591	$	13,696	$	19,035	0.4	%	1.6	%	7 Months
Commercial Owner-Occupied R/E	—		859		—		859		—	%	—	%	5 Months
Commercial AD&C	—		—		—		—		—	%	—	%	—
Commercial Business	—		3,587		—		3,587		0.2	%	—	%	8 Months
All Other loans	—		—		—		—		—	%	—	%	—
Total	$	748	$	9,037	$	13,696	$	23,481	0.2	%


	For the Nine Months Ended September 30, 2023
	Interest rate reduction		Term extension		Rate reduction & Term extension		Total				Interest rate reduction		Term extension
(in thousands)	Amount		Amount		Amount		Amount		% of total loan segment		Weighted Average		Weighted Average
Commercial Investor R/E	$	29,088	$	6,998	$	13,696	$	49,782	1.0	%	1.5	%	12 Months
Commercial Owner-Occupied R/E	—		3,573		—		3,573		0.2	%	—	%	10 Months
Commercial AD&C	—		1,039		—		1,039		0.1	%	—	%	7 Months
Commercial Business	—		5,438		—		5,438		0.4	%	—	%	13 Months
All Other loans	—		—		—		—		—	%	—	%	—
Total	$	29,088	$	17,048	$	13,696	$	59,832	0.5	%

Unfunded loan commitments on modifications for borrowers experiencing financial difficulty totaled $2.1 million at September 30, 2023. These commitments are not included in the table above.

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

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


	For the nine months ended September 30, 2023
(in thousands)	Current		30-89 days past due		90+ days past due		Non-accrual		Total
Commercial Investor R/E	$	48,548	$	1,234	$	—	$	—	$	49,782
Commercial Owner-Occupied R/E	3,234		339		—		—		3,573
Commercial AD&C	350		689		—		—		1,039
Commercial Business	5,438		—		—		—		5,438
All Other loans	—		—		—		—		—
Total	$	57,570	$	2,262	$	—	$	—	$	59,832

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 September 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:


	September 30, 2023						Weighted Average Remaining Life	December 31, 2022						Weighted Average Remaining Life
(Dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	29,038	$	(19,346)	$	9,692	5.7 years	$	29,038	$	(16,694)	$	12,344	6.5 years
Other identifiable intangibles	13,906		(7,563)		6,343		8.0 years	13,906		(6,395)		7,511		8.8 years
Total amortizing intangible assets	$	42,944	$	(26,909)	$	16,035		$	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	$	1,220
2024	4,291
2025	3,530
2026	2,702
2027	1,945
Thereafter	2,347
Total amortizing intangible assets	$	16,035

NOTE 6 – DEPOSITS

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


(In thousands)	September 30, 2023		December 31, 2022
Noninterest-bearing deposits	$	3,013,905	$	3,673,300
Interest-bearing deposits:
Demand	1,456,386		1,435,454
Money market savings	2,740,795		3,213,045
Regular savings	1,009,371		513,360


Time deposits of less than $250,000	2,305,130		1,644,645
Time deposits of $250,000 or more	625,425		473,617
Total interest-bearing deposits	8,137,107		7,280,121
Total deposits	$	11,151,012	$	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)	September 30, 2023		December 31, 2022
Fixed to floating rate subordinated debt, 3.875%	$	200,000	$	200,000
Fixed to floating rate subordinated debt, 4.25%	175,000		175,000


Total subordinated debt	375,000		375,000


Less: Debt issuance costs	(4,347)		(4,795)




Long-term borrowings	$	370,653	$	370,205

Other Borrowings

At September 30, 2023 and December 31, 2022, the Company had $66.6 million and $62.0 million, respectively, of outstanding retail repurchase agreements.

The Company had no outstanding federal funds purchased at September 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 $1.2 billion and $1.6 billion at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the Company also had $300.0 million outstanding borrowings through Federal Reserve's Bank Term Funding Program with additional available funds of $9.8 million.

At September 30, 2023, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.5 billion. FHLB availability based on pledged collateral at September 30, 2023 amounted to $2.9 billion, with $550.0 million outstanding. At December 31, 2022, the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.2 billion. The availability of FHLB borrowings based on the collateral pledged at December 31, 2022 was $2.6 billion with $550.0 million outstanding.

Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $1.3 billion, commercial real estate loans amounting to $4.0 billion, home equity lines of credit (“HELOC”) amounting to $210.0 million, and multifamily loans amounting to $540.5 million at September 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 $710.6 million and $718.6 million at September 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 September 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 320,775 are available for issuance at September 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 $2.8 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively, and of $6.7 million and $6.2 million for the nine months ended September 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 September 30, 2023. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $7.4 million as of September 30, 2023. That cost is expected to be recognized over a weighted average period of approximately 1.84 years.

During the nine months ended September 30, 2023, the Company granted 282,503 restricted stock units and performance share units, of which 63,867 units are subject to achievement of certain performance conditions measured over a three-year performance period and 218,636 restricted stock units are subject to a three year vesting schedule. The Company did not grant any stock options under the Omnibus Incentive Plan during the nine months ended September 30, 2023.

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


	Number of Common Shares/Units	Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2023	389,475	$	37.44
Granted	282,503	$	26.96
Vested	(201,244)	$	33.40
Forfeited/ cancelled	(8,353)	$	32.70
Non-vested at September 30, 2023	462,381	$	32.87

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


	Number of Common Shares	Weighted Average Exercise Share Price		Weighted Average Contractual Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Balance at January 1, 2023	144,047	$	16.61	1.6 years	$	2,633
Granted	—	$	—

Exercised	(58,100)	$	12.15		$	686
Forfeited	—	$	—
Expired	(4,702)	$	31.14
Balance at September 30, 2023	81,245	$	18.96	1.4 years	$	470

Exercisable at September 30, 2023	81,245	$	18.96	1.4 years	$	470

NOTE 10 – PENSION PLAN

Defined Benefit Pension Plan

Prior to September 30, 2023, the Company has maintained a qualified noncontributory, defined benefit pension plan (the “Plan”).

On March 30, 2022, the Board of Directors approved the termination of the Plan to be effective as of June 30, 2022. The Company executed plan amendments regarding the Plan termination and 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 also filed appropriate notices and documents related to the Plan’s termination and wind-down with the Pension Benefit Guaranty Corporation (“PBGC”).

Plan participants made elections for lump-sum distributions or annuity benefits. Both lump-sum distributions and transfer of annuity benefits to a highly-rated insurance company were completed in August 2023. In order to fully fund the Plan, the Company made a $1.3 million cash contribution. As a result of the pension termination, the Company incurred a one-time settlement expense of $8.2 million, which was recognized in salaries and employee benefits expense.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Interest cost on projected benefit obligation	$	146	$	325	$	1,021	$	976
Expected return on plan assets	(124)		(353)		(870)		(1,058)
Recognized net actuarial loss	75		196		526		587
Pension settlement expense	8,157		—		8,157		—
Other	71		—		71		—
Net periodic benefit cost	$	8,325	$	168	$	8,905	$	505

NOTE 11 – NET INCOME PER COMMON SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars and amounts in thousands, except per share data)	2023		2022		2023		2022
Net income	$	20,746	$	33,584	$	96,744	$	132,319
Distributed and undistributed earnings allocated to participating securities	(27)		(114)		(192)		(575)
Net income attributable to common shareholders	$	20,719	$	33,470	$	96,552	$	131,744

Total weighted average outstanding shares	44,940		44,793		44,887		45,131
Less: Weighted average participating securities	(59)		(153)		(89)		(198)
Basic weighted average common shares	44,881		44,640		44,798		44,933
Dilutive weighted average common stock equivalents	79		141		115		165
Diluted weighted average common shares	44,960		44,781		44,913		45,098

Basic net income per common share	$	0.46	$	0.75	$	2.16	$	2.93
Diluted net income per common share	$	0.46	$	0.75	$	2.15	$	2.92

Anti-dilutive shares	23		8		38		20

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME/ (LOSS)

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

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


(In thousands)	Unrealized Gains/(Losses) on Debt Securities Available-for-Sale		Defined Benefit Pension Plan		Unrealized Losses on Debt Securities Transferred from Available-for-Sale to Held-to-Maturity		Total
Balance at January 1, 2023	$	(113,513)	$	(8,002)	$	(10,436)	$	(131,951)
Other comprehensive loss before reclassification from accumulated other comprehensive loss, net of tax	(12,510)		—		—		(12,510)
Pension termination - final valuation of plan assets	—		1,531		—		1,531
Reclassifications from accumulated other comprehensive loss to earnings, net of tax	—		6,471		967		7,438
Current period change in other comprehensive loss, net of tax	(12,510)		8,002		967		(3,541)
Balance at September 30, 2023	$	(126,023)	$	—	$	(9,469)	$	(135,492)


(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	(124,097)		—		(12,083)		(136,180)
Reclassifications from accumulated other comprehensive income, net of tax	(36)		419		1,266		1,649
Current period change in other comprehensive income, net of tax	(124,133)		419		(10,817)		(134,531)
Balance at September 30, 2022	$	(124,469)	$	(7,784)	$	(10,817)	$	(143,070)

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income/ (loss) for the periods indicated that had an impact on the Condensed Consolidated Statements of Income:


	Nine Months Ended September 30,
(In thousands)	2023		2022
Unrealized gains on available-for-sale debt securities:
Affected line item in the Statements of Income:
Investment securities gains	$	—	$	48
Income before taxes	—		48
Tax expense	—		(12)
Net income	$	—	$	36

Amortization of unrealized losses on debt securities transferred from available-for-sale to held-to-maturity:
Affected line item in the Statements of Income:
Interest and dividends on investment securities (1)	$	(1,314)	$	(1,735)
Income before taxes	(1,314)		(1,735)
Tax benefit	347		469
Net loss	$	(967)	$	(1,266)

Amortization of defined benefit pension plan items:
Affected line item in the Statements of Income:
Recognized actuarial loss (2)	$	(526)	$	(587)
Pension settlement expense (2)	(8,157)		—
Income before taxes	(8,683)		(587)
Tax benefit	2,212		168
Net loss	$	(6,471)	$	(419)

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

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

NOTE 13 – LEASES

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Components of lease expense:
Operating lease cost (resulting from lease payments)	$	2,668	$	2,707	$	8,095	$	8,211




Supplemental cash flow information related to leases:
Operating cash flows from operating leases	$	2,862	$	2,866	$	8,612	$	8,698
ROU assets obtained in the exchange for lease liabilities due to:
New leases	$	—	$	—	$	703	$	—
Acquisitions	$	—	$	—	$	—	$	—

					September 30, 2023		December 31, 2022
Supplemental balance sheet information related to leases:
Operating lease ROU assets					$	41,535	$	48,910
Operating lease liabilities					$	49,510	$	57,402

Other information related to leases:
Weighted average remaining lease term of operating leases					5.7 years		8.6 years
Weighted average discount rate of operating leases					3.54%		3.02%

ROU assets and lease liabilities are recorded in other assets and other liabilities, respectively, in the Condensed Consolidated Statements of Condition.

At September 30, 2023, the maturities of the Company’s operating lease liabilities were as follows:


(In thousands)	Amount
Maturity:
Remaining 2023	$	2,858
2024	10,831
2025	9,821
2026	9,088
2027	7,682
Thereafter	14,711
Total undiscounted lease payments	54,991
Less: Present value discount	(5,481)
Lease liability	$	49,510

At September 30, 2023, the Company had one operating lease that has not yet commenced operations and is expected to commence operations by the end of 2023. The total amount of ROU asset and lease liability at September 30, 2023 was $0.6 million. The Company does not have any lease arrangements with any of its related parties as of September 30, 2023.

NOTE 14 – DERIVATIVES

Customer Interest Rate Swaps

The Company has entered into interest rate swaps (“swaps”) with qualifying commercial banking customers to facilitate their risk management strategies and financing needs. These swaps provide customers with the ability to convert variable rates into fixed rates. They are economically hedged by offsetting interest rate swaps that the Company executes with derivative counterparties in order to offset its exposure on the fixed components of the customers' swaps. Swaps qualify as derivatives, but are not designated as hedging instruments. Fair values of the swaps are carried as both gross assets and gross liabilities in other assets and other liabilities, respectively, in the Condensed Consolidated Statements of Condition. The associated changes in fair values of gross assets and gross liabilities net to zero in the Condensed Consolidated Statements of Income.

Mortgage Banking Derivatives

The Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The loans are sold to the secondary market on either a mandatory or best efforts basis. Loans sold on a mandatory basis are not committed to an investor until the loan is closed with the borrower. The Company enters into forward to-be-announced (“TBA”) sales contracts to manage the interest rate risk between the interest rate lock commitment and the funding of those loans. Loans sold on a best efforts basis are committed to an investor simultaneous to the interest rate lock commitment with the borrower, and as a result, the Company does not enter into a separate forward TBA contract to offset the fair value risk as the investor accepts such risk. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives but are not designated as hedging instruments.

Fair Values of Derivative Instruments on the Balance Sheet

Derivatives are carried at fair value and are classified under other assets and other liabilities in the Condensed Consolidated Statements of Condition. Changes in fair value are recognized in earnings. None of the Company's derivatives are designated in a qualifying hedging relationship.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
(In thousands)	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives
Loan Swaps:
Interest Rate Swaps	$	436,044	$	22,423	$	22,423	$	339,088	$	18,596	$	18,596
Mortgage Banking Derivatives:
Interest Rate Lock Commitments	30,768		452		—		21,118		319		—
Forward TBA Contracts	26,250		200		—		11,500		91		—
Total Derivatives	$	493,062	$	23,075	$	22,423	$	371,706	$	19,006	$	18,596

Effect of Derivatives on the Income Statement

The table below presents the changes in the fair value of the Company’s derivative financial instruments reflected within non-interest income on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022, respectively.


		Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	Location of Gain/(Loss)	2023		2022		2023		2022
Interest rate lock commitments	Mortgage banking activities	$	(45)	$	137	$	133	$	(839)
Forward TBA contracts	Mortgage banking activities	(48)		77		(59)		643
Total		$	(93)	$	214	$	74	$	(196)

NOTE 15 – LITIGATION

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

NOTE 16 – FAIR VALUE

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

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

Basis of Fair Value Measurement:

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

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

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

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

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

Assets and Liabilities

Residential mortgage loans held for sale

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

Investment securities available-for-sale

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

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

State and municipal securities

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

Interest rate swap agreements

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

Assets Measured at Fair Value on a Recurring Basis

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


	September 30, 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)	$	—	$	19,235	$	—	$	19,235
Available-for-sale debt securities:
U.S. treasuries and government agencies	—		94,845		—		94,845
State and municipal	—		251,879		—		251,879
Mortgage-backed and asset-backed	—		728,365		—		728,365

Total available-for-sale debt securities	—		1,075,089		—		1,075,089
Interest rate swap agreements	—		22,423		—		22,423
Total assets	$	—	$	1,116,747	$	—	$	1,116,747

Liabilities:
Interest rate swap agreements	$	—	$	(22,423)	$	—	$	(22,423)
Total liabilities	$	—	$	(22,423)	$	—	$	(22,423)

(1) The outstanding principal balance for residential loans held for sale as of September 30, 2023 was $19.1 million.


	December 31, 2022
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Residential mortgage loans held for sale (1)	$	—	$	11,706	$	—	$	11,706
Investments available-for-sale:
U.S. treasuries and government agencies	—		93,622		—		93,622
State and municipal	—		265,997		—		265,997
Mortgage-backed and asset-backed	—		854,919		—		854,919




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

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

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

Assets Measured at Fair Value on a Nonrecurring Basis

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


	September 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)		Total		Total Losses
Loans(1)	$	—	$	—	$	—	$	—	$	—
Other real estate owned	—		—		261		261		(104)
Total	$	—	$	—	$	261	$	261	$	(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)		Total		Total Losses
Loans (1)	$	—	$	—	$	190	$	190	$	(384)
Other real estate owned	—		—		645		645		(105)
Total	$	—	$	—	$	835	$	835	$	(489)

(1) Represent outstanding collateral-dependent non-accrual loans that were written down to the fair value of the underlying collateral. Fair values are determined using actual market prices (Level 2), independent third-party valuations and borrower records, discounted as appropriate (Level 3).

At September 30, 2023, non-accrual loans totaling $78.0 million had an estimated fair value of $58.1 million as a result of individual credit loss allowances of $19.9 million based on the most recent value of the collateral. Collateral dependent loans totaling $26.2 million had an estimated fair value of $19.3 million at December 31, 2022 as a result of individual credit loss allowances of $6.9 million.

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

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

Fair Value of Financial Instruments

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

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates based on observable inputs (“Level 2”) or unobservable inputs (“Level 3”).

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company. Management utilizes internal models used in asset

liability management to determine the fair values disclosed below. Other investments include FRB and FHLB stock, whose carrying amounts approximate fair values based on the redemption provisions of each entity.

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


					Fair Value Measurements
	September 30, 2023				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	717,591	$	717,591	$	717,591	$	—	$	—
Residential mortgage loans held for sale	19,235		19,235		—		19,235		—
Available-for-sale debt securities	1,075,089		1,075,089		—		1,075,089		—
Held-to-maturity debt securities	241,464		194,411		—		194,411		—
Other investments	75,525		75,525		—		75,525		—
Loans, net of allowance	11,176,932		10,256,489		—		—		10,256,489
Interest rate swap agreements	22,423		22,423		—		22,423		—
Accrued interest receivable	45,100		45,100		45,100		—		—
Bank owned life insurance	157,714		157,714		—		157,714		—

Financial liabilities:
Time deposits	$	2,930,555	$	2,905,077	$	—	$	2,905,077	$	—
Other deposits	8,220,457		8,220,457		8,220,457		—		—
Securities sold under retail repurchase agreements and
federal funds purchased	366,581		366,581		—		366,581		—
Advances from FHLB	550,000		539,808		—		539,808		—
Subordinated debt	370,653		337,052		—		—		337,052
Interest rate swap agreements	22,423		22,423		—		22,423		—
Accrued interest payable	39,585		39,585		39,585		—		—


					Fair Value Measurements
	December 31, 2022				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	192,232	$	192,232	$	192,232	$	—	$	—
Residential mortgage loans held for sale	11,706		11,706		—		11,706		—
Investments available-for-sale	1,214,538		1,214,538		—		1,214,538		—
Held-to-maturity debt securities	259,452		220,123		—		220,123		—
Other investments	69,218		69,218		—		69,218		—
Loans, net of allowance	11,260,464		11,020,992		—		—		11,020,992
Interest rate swap agreements	18,596		18,596		—		18,596		—
Accrued interest receivable	41,172		41,172		41,172		—		—
Bank owned life insurance	153,016		153,016		—		153,016		—

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

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

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

Forward-Looking Statements

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

Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These principal risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2022 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

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

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

•changes in the level of inflation;

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

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

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

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

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

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

•competitive pressures among financial services companies;

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

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

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

•the impact of judicial or regulatory proceedings;

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

•the impact of health emergencies, epidemics or pandemics;

•the effects of climate change; and

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

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

The Company

Sandy Spring Bancorp, Inc. is the bank holding company for Sandy Spring Bank. Throughout this report, references to the

“Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Sandy Spring Bancorp, Inc. and its subsidiaries. “Bancorp” refers solely to the parent holding company, and the “Bank” refers solely to Bancorp’s subsidiary bank, Sandy Spring Bank. Bancorp is the bank holding company for the Bank, which is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. At September 30, 2023, the Company had $14.1 billion in total assets, compared to $13.8 billion at December 31, 2022. Bancorp is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Bank is an independent and community-oriented bank that offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Virginia, and the greater Washington, D.C. market. Through its subsidiaries, West Financial Services, Inc. ("West") and SSB Wealth Management, Inc. (d/b/a Rembert Pendleton Jackson, "RPJ”), the Bank also offers wealth management services. Prior to June 2022, the Company operated Sandy Spring Insurance

Corporation, a subsidiary of the Bank. Effective June 1, 2022, the Company sold substantially all of the assets of Sandy Spring Insurance Corporation.

The Bank is a state-chartered bank subject to supervision and regulation by the Federal Reserve and the State of Maryland. Deposit accounts of the Bank are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.

Current Quarter Financial Overview

For the quarter ended September 30, 2023 we reported net income of $20.7 million ($0.46 per diluted common share), compared to net income of $33.6 million ($0.75 per diluted common share) for the third quarter of 2022 and $24.7 million ($0.55 per diluted common share) for the second quarter of 2023. The year-over-year decline in quarterly net income, as well as the decline in net income from the previous quarter, was driven primarily by declines in net interest income from both periods and the pension settlement expense recognized in the current quarter.

Current quarter core earnings were $27.8 million ($0.62 per diluted common share), compared to $27.1 million ($0.60 per diluted common share) for the quarter ended June 30, 2023 and $35.7 million ($0.80 per diluted common share) for the quarter ended September 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 current quarter's core earnings increased compared to the linked quarter as a result of a lower provision for credit losses, lower salaries and employee benefits expense, and lower marketing expense, offset by reduced net interest income.

The current quarter reflects the following:

•Total assets at September 30, 2023 increased by 1% to $14.1 billion compared to $14.0 billion at June 30, 2023.

•Total loans declined by $69.3 million or 1% to $11.3 billion at September 30, 2023 compared to $11.4 billion at June 30, 2023. During the current quarter, the Company reduced its concentration in the commercial real estate segments by $110.3 million, while commercial business loans and lines increased $31.1 million. The total residential mortgage loan portfolio grew $16.0 million mainly due to the migration of construction loans into the portfolio.

•Deposits increased $192.1 million or 2% to $11.2 billion at September 30, 2023 compared to $11.0 billion at June 30, 2023, as interest-bearing deposits increased $258.1 million or 3%, while noninterest-bearing deposits declined $66.0 million or 2%. Growth within interest-bearing deposit categories was driven by savings accounts and core time deposits, which increased by $277.4 million and $263.7 million, respectively. These increases were partially offset by the $155.8 million decrease in brokered time deposits, as the Company reduced its reliance on wholesale funding sources, and the $177.5 million decrease in money market accounts.

•Credit quality metrics remained strong during the current quarter. The ratio of non-performing loans to total loans was 0.46% at September 30, 2023 compared to 0.44% at June 30, 2023 and 0.40% at September 30, 2022. Net charge-off activity during the current quarter was insignificant.

•Total borrowings declined in the current quarter by $57.8 million or 4% over the amounts at June 30, 2023, mainly as a result of a $50.0 million reduction in FHLB advances.

•Net interest income for the third quarter of 2023 declined $5.4 million or 6% compared to the previous quarter and $27.9 million or 25% compared to the third quarter of 2022. During the recent quarter, the $4.3 million growth in interest income was more than offset by the $9.7 million increase in interest expense, a result of the increased rates paid on deposits.

•The net interest margin was 2.55% for the third quarter of 2023 compared to 2.73% for the second quarter of 2023 and 3.53% for the third quarter of 2022. The decline in the net interest margin was the result of higher 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, outpacing the increase in the yield on interest-earning assets. Compared to the linked quarter, the rate paid on interest-bearing liabilities rose 36 basis points, while the yield on interest-earning assets increased eight basis points, resulting in the quarterly margin compression of 18 basis points.

•Provision for credit losses directly attributable to the funded loan portfolio was $3.2 million for the current quarter compared to $4.5 million in the previous quarter and $14.1 million in the prior year quarter. The provision for the current quarter was the product of increases in individual reserves on a few commercial lending relationships, which were partially offset by a qualitative adjustment related to reduced probability of an economic recession. In addition, during the current quarter the Company reduced its reserve for unfunded commitments by $0.8 million as a result of higher utilization of lines of credit.

•Non-interest income for the third quarter of 2023 increased by 1% or $0.2 million compared to the linked quarter and grew by 3% or $0.5 million compared to the prior year quarter. The quarter-over-quarter increase was mainly driven by higher wealth management income and higher lending-related fees, offset by lower BOLI income.

•Non-interest expense for the third quarter of 2023 increased $3.3 million or 5% compared to the second quarter of 2023 and $6.7 million or 10% compared to the prior year quarter. The current quarter included $8.2 million of pension settlement expense related to the termination of the Company's pension plan, while the previous quarter included $1.9 million of severance related expense associated with staffing adjustments. Excluding these items from the current and previous quarters, total non-interest expense declined by $2.9 million or 4% driven by lower salaries and employee benefits expense and lower marketing expense.

•Return on average assets (“ROA”) for the quarter ended September 30, 2023 was 0.58% and return on average tangible common equity (“ROTCE”) was 7.42% compared to 0.70% and 8.93%, respectively, for the second quarter of 2023 and 0.99% and 12.49%, respectively, for the third quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.78% and core ROTCE was 9.51% compared to 0.77% and 9.43%, respectively, for the previous quarter and 1.05% and 12.86%, respectively, for the third quarter of 2022.

•The GAAP efficiency ratio was 70.72% for the third quarter of 2023, compared to 64.22% for the second quarter of 2023 and 50.66% for the third quarter of 2022. The non-GAAP efficiency ratio was 60.91% for the third quarter of 2023 compared to 60.68% for the second quarter of 2023 and 48.18% 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 third 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 Third Quarter Results

Balance Sheet and Credit Quality

Total assets were $14.1 billion at September 30, 2023, as compared to $13.8 billion at September 30, 2022. Total loans increased by $81.5 million or 1% to $11.3 billion at September 30, 2023 compared to $11.2 billion at September 30, 2022. Total commercial real estate and business loans declined $56.5 million due to a $205.1 million or 18% decline in the AD&C loan portfolio, while investor and owner-occupied commercial real estate loan portfolios grew a combined $87.5 million. Commercial business loans and lines increased $61.1 million or 4%. Total residential mortgage loans grew $213.5 million or 18% due to the retention of organic loan production, in addition to the migration of construction loans into the residential mortgage portfolio.

Deposits increased $401.5 million or 4% to $11.2 billion at September 30, 2023 compared to $10.7 billion at September 30, 2022. During this period total interest-bearing deposits increased $1.4 billion or 20%, while noninterest-bearing deposits declined $979.6 million or 25%. Growth within interest-bearing deposit categories was driven by savings accounts and time deposits, which increased by $468.8 million and $1.2 billion, respectively. These increases were partially offset by the $429.0 million decrease in money market accounts. Core deposits, which exclude brokered deposits, remained flat year-over-year and represented 90% of total deposits as of September 30, 2023 compared to 93% at September 30, 2022, reflecting the continued stability of the core deposit base. The deposit growth experienced during the preceding twelve months resulted in the loan to deposit ratio declining to 101% at September 30, 2023 from 104% at September 30, 2022. Total uninsured deposits at September 30, 2023 were approximately 33% of total deposits. The Company offers its customers reciprocal deposit arrangements, which provide FDIC deposit insurance for accounts that would otherwise exceed deposit insurance limits. At September 30, 2023 balances in the Company's reciprocal deposit accounts increased by $629.5 million during the previous twelve months.

Total borrowings declined by $129.1 million or 9% at September 30, 2023 as compared to the previous year. During the previous twelve months FHLB advances and federal funds purchased declined $290.0 million and $115.0 million, respectively, partially offset by $300.0 million in borrowings through Federal Reserve Bank's Bank Term Funding Program. At September 30, 2023, contingent liquidity, which consists of available FHLB borrowings, fed funds, 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 $6.1 billion or 168% of uninsured deposits. At September 30, 2023, total cash and cash equivalents were $717.6 million, an increase of $458.8 million or 177% compared to September 30, 2022, primarily a result of strong deposit growth.

The tangible common equity ratio decreased to 8.42% of tangible assets at September 30, 2023, compared to 7.98% at September 30, 2022. This increase reflected the effect of tangible capital growth of 9%, exceeding tangible asset growth of 3% during the period.

At September 30, 2023, the Company had a total risk-based capital ratio of 14.85%, a common equity tier 1 risk-based capital ratio of 10.83%, a tier 1 risk-based capital ratio of 10.83%, and a tier 1 leverage ratio of 9.50%.

Non-performing loans include non-accrual loans and accruing loans 90 days or more past due. Overall credit quality remained stable at September 30, 2023 compared to June 30, 2023, as the ratio of non-performing loans to total loans was 0.46% compared to 0.44%. These levels of non-performing loans compare to 0.40% at September 30, 2022 and continue to indicate stable credit quality during a period of economic uncertainty. At September 30, 2023, non-performing loans totaled $51.8 million, compared to $49.5 million at June 30, 2023 and $44.5 million at September 30, 2022. Total net charge-offs for the current quarter amounted to $0.1 million compared to $1.8 million for the second quarter of 2023 and $0.5 million of net recoveries for the third quarter of 2022.

At September 30, 2023, the allowance for credit losses was $123.4 million or 1.09% of outstanding loans and 238% of non-performing loans, compared to $120.3 million or 1.06% of outstanding loans and 243% of non-performing loans at the end of the previous quarter and $128.3 million or 1.14% of outstanding loans and 289% of non-performing loans at the end of the third quarter of 2022. The increase in the allowance for the current quarter compared to the previous quarter mainly reflects increases in individual reserves recorded on a few commercial real estate relationships, partially offset by the reduction of the qualitative adjustment related to the probability of an economic recession.

Quarterly Results of Operations

Net income was $20.7 million ($0.46 per diluted common share) for the three months ended September 30, 2023 compared to $33.6 million ($0.75 per diluted common share) for the prior year quarter. The decline in quarterly net income was primarily attributable to the year-over-year decline in net interest income as a result of the significant increase in funding cost and higher non-interest expense driven by the recognition in the current quarter of the pension settlement expense.

Net interest income decreased $27.9 million or 25% for the third quarter of 2023 compared to the third quarter of 2022, as the $32.0 million growth in interest income was more than offset by interest expense growth of $59.9 million. The provision for credit losses was $2.4 million for the third quarter of 2023 compared to $18.9 million for the third quarter of 2022. Non-interest income for the current quarter increased by 3% or $0.5 million compared to the prior year quarter. Non-interest expense for the current quarter included $8.2 million of pension settlement expense. Excluding the pension settlement expense from the current quarter, non-interest expense declined $1.5 million or 2% for the third quarter of 2023, compared to the prior year quarter driven primarily by lower compensation and marketing expenses, offset by increases in FDIC insurance and professional fee expenses.

Results of Operations

For the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

We recorded net income of $96.7 million for the nine months ended September 30, 2023 compared to net income of $132.3 million for the same period in the prior year. Core earnings were $107.2 million for the nine months ended September 30, 2023 compared to $125.0 million for the same period in the prior year. Core earnings exclude the after-tax impact of amortization of intangibles, investment securities gains or losses and other non-recurring or extraordinary items. Year-to-date net income declined as a result of the gain recognized on the sale of the Company's insurance segment during the prior year in combination with lower net interest income and higher non-interest expense, partially offset by the lower provision for credit losses as a result of significant credit recorded during the first quarter of the current year. Pre-tax, pre-provision net income declined to $115.5 million for the nine months ended September 30, 2023 compared to $200.2 million for the prior year period as a result of the lower net interest income and non-interest income coupled with an increase in non-interest expense.

Net Interest Income

For the nine months ended September 30, 2023, net interest income decreased $47.5 million compared to the prior year as a result of the $169.0 million increase in interest expense, partially offset by the $121.5 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 2.75% for the nine months ended September 30, 2023, compared to 3.50% 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 nine months ended September 30, 2023 declined to $275.9 million compared to $323.2 million for the nine months ended September 30, 2022 as a result of the aforementioned increase in interest expense outpacing the growth in interest income.

The following tables provide an analysis of net interest income performance that shows that, for the comparative period, the average yield on earning assets improved 91 basis points while the average rate paid on interest-bearing liabilities rose 237 basis points, resulting in margin compression of 75 basis points.

Consolidated Average Balances, Yields and Rates


	Nine Months Ended September 30,
	2023						2022
(Dollars in thousands and tax-equivalent)	Average Balances		Interest (1)		Annualized Average Yield/Rate		Average Balances		Interest (1)		Annualized Average Yield/Rate
Assets:
Commercial investor real estate loans	$	5,136,059	$	177,067	4.61	%	$	4,546,440	$	138,245	4.07	%
Commercial owner-occupied real estate loans	1,770,812		61,038		4.61		1,722,522		58,126		4.51
Commercial AD&C loans	1,044,907		61,005		7.81		1,104,901		37,821		4.58
Commercial business loans	1,442,858		68,258		6.33		1,344,608		49,370		4.91
Total commercial loans	9,394,636		367,368		5.23		8,718,471		283,562		4.35
Residential mortgage loans	1,356,530		35,925		3.53		1,071,634		26,632		3.31
Residential construction loans	202,856		5,302		3.49		217,978		5,112		3.14
Consumer loans	422,861		24,403		7.72		422,941		13,112		4.14
Total residential and consumer loans	1,982,247		65,630		4.42		1,712,553		44,856		3.50
Total loans (2)	11,376,883		432,998		5.09		10,431,024		328,418		4.21
Loans held for sale	13,192		697		7.04		15,174		504		4.43
Taxable securities	1,275,407		20,538		2.15		1,204,240		14,472		1.60
Tax-advantaged securities	360,348		6,727		2.49		475,463		8,533		2.39
Total investment securities (3)	1,635,755		27,265		2.22		1,679,703		23,005		1.83
Interest-bearing deposits with banks	368,829		13,979		5.07		202,882		1,245		0.82
Federal funds sold	433		13		4.00		581		4		0.91
Total interest-earning assets	13,395,092		474,952		4.74		12,329,364		353,176		3.83

Less: allowance for credit losses - loans	(125,558)						(112,384)
Cash and due from banks	94,960						81,673
Premises and equipment, net	70,130						62,510
Other assets	609,301						672,093
Total assets	$	14,043,925					$	13,033,256

Liabilities and Stockholders' Equity:
Interest-bearing demand deposits	$	1,413,876	$	10,465	0.99	%	$	1,477,956	$	1,513	0.14	%
Regular savings deposits	660,211		7,831		1.59		553,982		62		0.02
Money market savings deposits	3,067,810		68,976		3.01		3,334,534		7,403		0.30
Time deposits	2,658,225		67,943		3.42		1,418,740		6,600		0.62
Total interest-bearing deposits	7,800,122		155,215		2.66		6,785,212		15,578		0.31
Federal funds purchased and Federal Reserve Bank borrowings	264,580		9,816		4.96		85,983		1,128		1.75
Repurchase agreements	62,126		561		1.21		119,554		104		0.12
Advances from FHLB	637,015		21,623		4.54		174,493		3,066		2.35
Subordinated debentures	370,412		11,839		4.26		315,065		10,130		4.29
Total borrowings	1,334,133		43,839		4.39		695,095		14,428		2.78
Total interest-bearing liabilities	9,134,255		199,054		2.91		7,480,307		30,006		0.54

Noninterest-bearing demand deposits	3,218,226						3,919,600
Other liabilities	169,291						146,429
Stockholders' equity	1,522,153						1,486,920
Total liabilities and stockholders' equity	$	14,043,925					$	13,033,256

Tax-equivalent net interest income and spread			$	275,898	1.83	%			$	323,170	3.29	%
Less: tax-equivalent adjustment			3,044						2,809
Net interest income			$	272,854					$	320,361

Interest income/earning assets					4.74	%					3.83	%
Interest expense/earning assets					1.99						0.33
Net interest margin					2.75	%					3.50	%

(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.37% and 25.47% for 2023 and 2022, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $3.0 million and $2.8 million in 2023 and 2022, respectively.

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

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

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

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


	2023 vs. 2022						2022 vs. 2021
	Increase Or (Decrease)		Due to Change In Average:*				Increase Or (Decrease)		Due to Change In Average:*
(Dollars in thousands and tax equivalent)			Volume		Rate				Volume		Rate
Interest income from earning assets:
Commercial investor real estate loans	$	38,822	$	19,190	$	19,632	$	23,720	$	26,821	$	(3,101)
Commercial owner-occupied real estate loans	2,912		1,626		1,286		902		2,171		(1,269)
Commercial AD&C loans	23,184		(2,159)		25,343		4,904		134		4,770
Commercial business loans	18,888		3,810		15,078		(23,521)		(27,860)		4,339
Residential mortgage loans	9,293		7,434		1,859		587		1,878		(1,291)
Residential construction loans	190		(365)		555		506		1,029		(523)
Consumer loans	11,291		(2)		11,293		351		(1,412)		1,763
Loans held for sale	193		(72)		265		(961)		(1,474)		513
Taxable securities	6,066		890		5,176		2,242		2,690		(448)
Tax-exempt securities	(1,806)		(2,146)		340		538		538		—
Interest-bearing deposits with banks	12,734		1,736		10,998		850		(275)		1,125
Federal funds sold	9		(1)		10		4		—		4
Total tax-equivalent interest income	121,776		29,941		91,835		10,122		4,240		5,882

Interest expense on funding of earning assets:
Interest-bearing demand deposits	8,952		(70)		9,022		813		44		769
Regular savings deposits	7,769		9		7,760		(127)		28		(155)
Money market savings deposits	61,573		(646)		62,219		3,452		(103)		3,555
Time deposits	61,343		9,943		51,400		(762)		(1,012)		250
Federal funds purchased and Federal Reserve Bank borrowings	8,688		4,614		4,074		1,115		150		965
Repurchase agreements	457		(75)		532		(22)		(22)		—
Advances from FHLB	18,557		13,730		4,827		417		451		(34)
Subordinated debentures	1,709		1,780		(71)		4,157		2,908		1,249
Total interest expense	169,048		29,285		139,763		9,043		2,444		6,599
Tax-equivalent net interest income	$	(47,272)	$	656	$	(47,928)	$	1,079	$	1,796	$	(717)

*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 34% to $475.0 million for the first nine months of 2023 compared to $353.2 million for the prior year period as interest income increased in each of the major earning asset categories led by the $83.8 million income growth in commercial loans and, to a lesser extent, the $20.8 million growth in interest income from residential and consumer loans. The increase in interest income was driven by commercial loans, predominantly from investor real estate loans and, to a lesser degrees, AD&C and commercial business loans. Interest income also increased in interest-bearing deposits with banks and investment securities.

Average interest-earning assets rose 9% for the nine months ended September 30, 2023 compared to the same period for 2022 as average loans outstanding increased 9%. During the comparative period, total average commercial real estate loans grew 8% and commercial business loans rose 7%. Average residential mortgage loans increased 27% during the same time period as a greater number of one-year ARM loans were retained in the portfolio. Compared to the prior year, the yield on average loans increased 88 basis points. The average balance of the investment portfolio decreased 3% for the first nine months of 2023 compared to the first nine months of 2022. Interest income from the investment securities portfolio increased 19%, as a result of a 39 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 72% for the prior year period.

Overall, the average yield on interest-earning assets grew to 4.74% for the first nine month of 2023 compared to 3.83% for the prior year period as average yields on loans and investment securities increased compared to the same period of the prior year, reflecting general market interest rates during the previous twelve months.

Interest Expense

For the first nine months of 2023 interest expense increased $169.0 million compared to the first nine months of 2022. The year-over-year increase was comprised of the $139.6 million increase in deposit interest expense and a $29.4 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 2.91% from 0.54% for 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 29% of average deposits in the current period compared to 37% in the prior year’s first nine months.

Non-interest Income

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


	Nine Months Ended September 30,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Securities gains	$	—	$	48	$	(48)	N/M
Gain on disposal of assets	—		16,516		(16,516)		N/M
Service charges on deposit accounts	7,698		7,384		314		4.3
Mortgage banking activities	4,744		5,347		(603)		(11.3)
Wealth management income	27,414		27,302		112		0.4
Insurance agency commissions	—		2,927		(2,927)		N/M
Income from bank owned life insurance	3,003		2,191		812		37.1
Bank card fees	1,315		3,916		(2,601)		(66.4)
Other income	6,344		7,091		(747)		(10.5)
Total non-interest income	$	50,518	$	72,722	$	(22,204)	(30.5)

N/M - Not meaningful

For the nine months ended September 30, 2023, non-interest income decreased 31% to $50.5 million compared to $72.7 million for 2022. Non-interest income for the prior year included a $16.5 million gain on the sale of our insurance segment. Excluding the gain, non-interest income decreased 10% or $5.7 million, driven by a $2.9 million decrease in insurance commissions, a $2.6 million decrease in bank card fees and a $0.6 million decrease in income from mortgage banking activities. The decline in income from mortgage banking activities resulted from 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 and an increase in service charge fee income.

Further detail of non-interest income activity for the first nine 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 23% partially offset by the decline in ATM and returned check charges.

•Income from mortgage banking activities decreased 11% 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 remained relatively flat compared to the prior year period. Overall, total assets under management increased to $5.5 billion at September 30, 2023 compared to $5.0 billion at September 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 37% as a result of mortality related income received in the second quarter of the current year.

•Bank card fee income declined 66% 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 11% or $0.7 million, the result of the decline in credit-related fees.

Non-interest Expense

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


	Nine Months Ended September 30,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Salaries and employee benefits	$	124,710	$	119,049	$	5,661	4.8	%
Occupancy expense of premises	14,220		14,527		(307)		(2.1)
Equipment expense	11,688		10,920		768		7.0
Marketing	3,861		3,843		18		0.5
Outside data services	8,186		7,492		694		9.3
FDIC insurance	6,846		3,330		3,516		105.6
Amortization of intangible assets	3,820		4,406		(586)		(13.3)
Merger, acquisition and disposal expense	—		1,068		(1,068)		N/M
Professional fees and services	12,354		6,596		5,758		87.3
Other expenses	22,227		21,687		540		2.5
Total non-interest expense	$	207,912	$	192,918	$	14,994	7.8

N/M - not meaningful

Non-interest expense increased 8% to $207.9 million for the nine months ended September 30, 2023, compared to $192.9 million for 2022. Current year expense included pension settlement expense of $8.2 million and severance expense of $1.9 million, while the prior year included contingent earn-out expense associated with the 2020 acquisition of Rembert Pendleton Jackson of $1.2 million and merger, acquisition and disposal expense of $1.1 million. Excluding these items, non-interest expense increased by $7.2 million or 4% in the current year over the prior year. The drivers of the increase in non-interest expense excluding the expenses noted above, were a $5.8 million increase in professional fees, a $3.5 million increase in FDIC expense, and a $1.4 million increase in software amortization and depreciation expense.

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

•Salaries and employee benefits, the largest component of non-interest expense, increased 5% or $5.7 million. Current year expense included pension settlement expense of $8.2 million and severance expense of $1.9 million. Excluding these expenses, salaries and benefit expense decreased by $4.4 million or 4%, driven by the reduction in incentive and commission based compensation.

•Combined occupancy and equipment expenses increased 2% due to higher software costs.

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

•FDIC insurance increased 106% 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 87% 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 $0.5 million due a variety of miscellaneous operating costs.

Income Taxes

The Company had income tax expense of $32.8 million in the first nine months of 2023, compared to income tax expense of $44.3 million in the first nine 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 nine months of 2023 was 25.3%, compared to a tax rate of 25.1% 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 higher 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 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, pension settlement 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 nine months ended September 30, 2023, the GAAP efficiency ratio was 64.29% compared to 49.08% 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 59.42% compared to 49.09% 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 14% decrease in non-GAAP revenue combined with the 4% 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 nine 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 amortization of intangible assets, investment securities gains or losses and non-recurring or extraordinary items, all net of tax. Core earnings were $107.2 million ($2.39 per diluted common share) for the nine months ended September 30, 2023, compared to $125.0 million ($2.77 per diluted common share) for the nine months ended September 30, 2022. Average tangible assets and average tangible common equity represent average assets and average stockholders’ equity adjusted for average goodwill and average intangible assets. The ROA for the first nine months of 2023 was 0.92% compared to 1.36% for the same period of the prior year. For the nine months ended September 30, 2023, the non-GAAP core ROA was 1.02% compared to 1.28% for the same period in the prior year. ROTCE was 11.67% for the first nine months of 2023 compared to 16.54% for the first nine months of 2022. The non-GAAP core ROTCE was 12.56% for the first nine months of 2023 compared to 15.25% for the first nine months of 2022.

GAAP and Non-GAAP Efficiency Ratios and Measures


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022
Pre-tax pre-provision net income:
Net income	$	96,744		$	132,319
Plus/ (less) non-GAAP adjustments:
Income tax expense	32,832			44,275
Provision/ (credit) for credit losses	(14,116)			23,571
Pre-tax pre-provision net income	$	115,460		$	200,165

Efficiency ratio (GAAP):
Non-interest expense	$	207,912		$	192,918

Net interest income plus non-interest income	$	323,372		$	393,083

Efficiency ratio (GAAP)	64.29		%	49.08		%

Efficiency ratio (non-GAAP):
Non-interest expense	$	207,912		$	192,918
Less non-GAAP adjustments:
Amortization of intangible assets	3,820			4,406

Merger, acquisition and disposal expense	—			1,068
Severance expense	1,939			—
Pension settlement expense	8,157			—
Contingent payment expense	36			1,247
Non-interest expense - as adjusted	$	193,960		$	186,197

Net interest income plus non-interest income	$	323,372		$	393,083
Plus non-GAAP adjustment:
Tax-equivalent income	3,044			2,809
Less non-GAAP adjustment:
Securities gains	—			48
Gain on disposal of assets	—			16,516
Net interest income plus non-interest income - as adjusted	$	326,416		$	379,328

Efficiency ratio (non-GAAP)	59.42		%	49.09		%

GAAP and Non-GAAP Performance Ratios


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022
Core earnings (non-GAAP):
Net income	$	96,744		$	132,319
Plus/ (less) non-GAAP adjustments (net of tax):
Merger, acquisition and disposal expense	—			796
Amortization of intangible assets	2,851			3,284

Severance expense	1,445			—
Pension settlement expense	6,088			—
Gain on disposal of assets	—			(12,309)
Investment securities gains	—			(36)
Contingent payment expense	27			929
Core earnings (non-GAAP)	$	107,155		$	124,983

Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)	44,912,803			45,098,073



Earnings per diluted common share (GAAP)	$	2.15		$	2.92
Core earnings per diluted common share (non-GAAP)	$	2.39		$	2.77

Core return on average assets (non-GAAP):
Average assets (GAAP)	$	14,043,925		$	13,033,256



Return on average assets (GAAP)	0.92		%	1.36		%
Core return on average assets (non-GAAP)	1.02		%	1.28		%

Return/ Core return on average tangible common equity (non-GAAP):
Net Income (GAAP)	$	96,744		$	132,319
Plus: Amortization of intangible assets (net of tax)	2,851			3,284
Net income before amortization of intangible assets	$	99,595		$	135,603

Core return on average tangible common equity (non-GAAP):
Average assets (GAAP)	$	14,043,925		$	13,033,256
Average goodwill	(363,436)			(367,190)
Average other intangible assets, net	(18,068)			(23,774)
Average tangible assets (non-GAAP)	$	13,662,421		$	12,642,292

Average total stockholders' equity (GAAP)	$	1,522,153		$	1,486,920
Average goodwill	(363,436)			(367,190)
Average other intangible assets, net	(18,068)			(23,774)
Average tangible common equity (non-GAAP)	$	1,140,649		$	1,095,956

Return on average tangible common equity (non-GAAP)	11.67		%	16.54		%
Core return on average tangible common equity (non-GAAP)	12.56		%	15.25		%

Average tangible common equity to average tangible assets (non-GAAP)	8.35		%	8.67		%

Results of Operations

For the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net income was $20.7 million ($0.46 per diluted common share) for the three months ended September 30, 2023 compared to $33.6 million ($0.75 per diluted common share) for the prior year quarter. The current quarter's core earnings were $27.8 million ($0.62 per diluted common share) and $35.7 million ($0.80 per diluted common share) for the quarter ended September 30, 2022. The decline in the current quarter's net income compared to the prior year quarter was the result of one-time pension settlement expense of $8.2 million, as the Company completed the termination of its pension plan, coupled with lower net interest income, increases in FDIC insurance and professional fees, partially offset by a lower provision for credit losses and lower salaries expense. Core earnings decreased during the current quarter as compared to the prior year quarter due to reduced net interest income that more than offset the impact of a lower provision for credit losses.

Net Interest Income

Net interest income for the third quarter of 2023 decreased $27.9 million or 25% compared to the third 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, the rising interest rate environment was primarily responsible for a $32.0 million increase in interest income. This growth in interest income was more than offset by the $59.9 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 the growth in and higher rates paid on 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 2.55% for the third quarter of 2023 compared to 3.53% for the third 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 76 basis points, while the rate paid on interest-bearing liabilities rose 241 basis points resulting in the margin compression of 98 basis points. During the comparative period, average interest-earning assets increased by 5% and average interest-bearing liabilities grew by 18%.

At September 30, 2023 and 2022, average total loans comprised 84% and 85% of average interest-earning assets for each of the comparative quarters, respectively, with an average yield of 5.18% and 4.42%, respectively. In addition, the average yield on investment securities increased to 2.25% for the current quarter compared to 1.99% for the prior year quarter. These portfolio yield movements resulted in the rise in the overall average yield on interest-earning assets to 4.83% at September 30, 2023 from 4.07% at September 30, 2022.

The average rate paid on average interest-bearing liabilities grew by 241 basis points as the average rate paid increased from 0.88% for the third quarter of 2022 to 3.29% for the third quarter of 2023 driven by the 256 basis point increase in the average rate paid on interest-bearing deposits coupled with the 159 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 19% for the current quarter compared to the same period for the prior year, driven by a 87% increase in average time deposits. The percentage of average noninterest-bearing deposits to total average deposits decreased to 27% in the current quarter compared to 37% in the third quarter of 2022 due to the decline in commercial checking deposit balances.


Consolidated Average Balances, Yields and Rates
	Three Months Ended September 30,
	2023						2022
(Dollars in thousands and tax-equivalent)	Average Balances		Interest (1)		Annualized Average Yield/Rate		Average Balances		Interest (1)		Annualized Average Yield/Rate
Assets:
Commercial investor real estate loans	$	5,125,459	$	60,482	4.68	%	$	4,898,683	$	51,463	4.17	%
Commercial owner-occupied real estate loans	1,769,717		20,865		4.68		1,755,891		20,284		4.58
Commercial AD&C loans	995,682		20,503		8.17		1,115,531		15,501		5.51
Commercial business loans	1,442,518		23,343		6.42		1,327,218		17,196		5.14
Total commercial loans	9,333,376		125,193		5.32		9,097,323		104,444		4.55
Residential mortgage loans	1,406,929		12,550		3.57		1,177,664		9,980		3.39
Residential construction loans	174,204		1,680		3.83		235,123		1,845		3.11
Consumer loans	421,189		8,491		8.00		422,963		5,531		5.19
Total residential and consumer loans	2,002,322		22,721		4.52		1,835,750		17,356		3.77
Total loans (2)	11,335,698		147,914		5.18		10,933,073		121,800		4.42
Loans held for sale	13,714		238		6.93		15,211		161		4.24
Taxable securities	1,239,564		6,682		2.16		1,251,599		5,735		1.83
Tax-advantaged securities	349,778		2,269		2.59		482,437		2,900		2.40
Total investment securities (3)	1,589,342		8,951		2.25		1,734,036		8,635		1.99
Interest-bearing deposits with banks	505,017		6,371		5.00		150,992		774		2.03
Federal funds sold	346		5		5.38		446		3		2.30
Total interest-earning assets	13,444,117		163,479		4.83		12,833,758		131,373		4.07

Less: allowance for credit losses - loans	(122,348)						(114,512)
Cash and due from banks	93,354						93,327
Premises and equipment, net	71,956						64,039
Other assets	599,263						644,983
Total assets	$	14,086,342					$	13,521,595

Liabilities and Stockholders' Equity:
Interest-bearing demand deposits	$	1,419,934	$	4,229	1.18	%	$	1,444,801	$	941	0.26	%
Regular savings deposits	861,634		5,571		2.57		555,057		21		0.02
Money market savings deposits	2,866,744		25,122		3.48		3,202,507		5,281		0.65
Time deposits	2,887,311		28,180		3.87		1,542,932		3,247		0.83
Total interest-bearing deposits	8,035,623		63,102		3.12		6,745,297		9,490		0.56
Federal funds purchased and Federal Reserve Bank borrowings	300,435		3,726		4.92		158,211		947		2.37
Repurchase agreements	67,298		356		2.10		104,742		30		0.11
Advances from FHLB	558,696		6,200		4.40		514,022		3,049		2.35
Subordinated debentures	370,565		3,946		4.26		369,958		3,946		4.27
Total borrowings	1,296,994		14,228		4.35		1,146,933		7,972		2.76
Total interest-bearing liabilities	9,332,617		77,330		3.29		7,892,230		17,462		0.88

Noninterest-bearing demand deposits	3,041,101						3,995,702
Other liabilities	174,071						147,236
Stockholders' equity	1,538,553						1,486,427
Total liabilities and stockholders' equity	$	14,086,342					$	13,521,595

Tax-equivalent net interest income and spread			$	86,149	1.54	%			$	113,911	3.19	%
Less: tax-equivalent adjustment			1,068						951
Net interest income			$	85,081					$	112,960

Interest income/earning assets					4.83	%					4.07	%
Interest expense/earning assets					2.28						0.54
Net interest margin					2.55	%					3.53	%

(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.37% and 25.47% for 2023 and 2022, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.1 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.

Interest Income

Total tax-equivalent interest income increased $32.1 million for the third 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 $20.7 million. During the comparative period, average interest-earning assets rose 5% over the prior year quarter as average total loans grew 4% and average investment securities declined 8%. Over the past twelve months, average total mortgage loans increased 19%, while average consumer loans stayed relatively unchanged.

The average yield on interest-earning assets improved to 4.83% for the current quarter compared to 4.07% for the same period of the prior year. Average yields on loans and investment securities for the current quarter increased by 76 and 26 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 $59.9 million in the third quarter of 2023 compared to the third 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 3.29% from 0.88% 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 September 30,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Securities gains	$	—	$	2	$	(2)	N/M
Gain on disposal of assets	—		(183)		183		N/M
Service charges on deposit accounts	2,704		2,591		113		4.4
Mortgage banking activities	1,682		1,566		116		7.4
Wealth management income	9,391		8,867		524		5.9

Income from bank owned life insurance	845		693		152		21.9
Bank card fees	450		438		12		2.7
Other income	2,319		2,908		(589)		(20.3)
Total non-interest income	$	17,391	$	16,882	$	509	3.0

N/M - Not meaningful

Total non-interest income for the third quarter of 2023 increased by 3% or $0.5 million compared to the prior year quarter. The current quarter's increase in non-interest income as compared to the prior year quarter was mainly driven by higher wealth management income and modest increases in other categories offset by lower lending-related fees in the other income category.

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

•Service charges on deposit accounts increased 4% as commercial service charges increased 23%, partially offset by a decline in ATM and return check charges.

•Income from mortgage banking activities increased by $0.1 million or 7% reflecting increased gains realized on sales in the current period.

•Wealth management income increased 6% in the third quarter of 2023 compared to the third quarter of 2022. Overall total assets under management increased to $5.5 billion at September 30, 2023 compared to $5.0 billion at September 30, 2022.

•Income from bank owned life insurance grew 22% as a result of increased yields on policies.

•Other income declined 20% due to lower credit related fees received during the comparative periods.

Non-interest Expense

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


	Three Months Ended September 30,				2023/2022		2023/2022
(Dollars in thousands)	2023		2022		$ Change		% Change
Salaries and employee benefits	$	44,853	$	40,126	$	4,727	11.8	%
Occupancy expense of premises	4,609		4,759		(150)		(3.2)
Equipment expense	3,811		3,825		(14)		(0.4)
Marketing	729		1,370		(641)		(46.8)
Outside data services	2,819		2,509		310		12.4
FDIC insurance	2,333		1,268		1,065		84.0
Amortization of intangible assets	1,245		1,432		(187)		(13.1)
Merger, acquisition and disposal expense	—		1		(1)		N/M
Professional fees and services	4,509		2,207		2,302		104.3
Other expenses	7,563		8,283		(720)		(8.7)
Total non-interest expense	$	72,471	$	65,780	$	6,691	10.2

N/M - Not meaningful

Total non-interest expense for the third quarter of 2023 increased by $6.7 million or 10% compared to the third quarter of 2022. The current quarter included $8.2 million of pension settlement expense related to the termination of the Company's pension plan and the comparative period included $1.2 million for contingent earn-out compensation based on the performance of the 2020 acquisition of Rembert Pendleton Jackson. Excluding these expenses from the current quarter and prior year quarter, total non-interest expense remained level period-to-period.

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

•Salaries and employee benefits, the largest component of non-interest expenses, increased $4.7 million or 12% driven by the pension settlement expense which was partially offset by a decline salary and incentive based compensation.

•Occupancy and equipment expenses for the quarter decreased a combined 2% as a result of increased software amortization and related expenses.

•FDIC insurance expense increased $1.1 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 104% 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 decreased 9% as the prior year quarter included the previously mentioned $1.2 million contingent payment expense. Excluding that expense, other expenses increased 7% due to increases in various expenses.

Income Taxes

Income tax expense was $6.9 million in the third quarter of 2023 compared to income tax expense of $11.6 million in the third quarter of 2022. The resulting effective tax rate was 24.9% for the third quarter of 2023 compared to an effective tax rate of 25.7% for the third quarter of 2022. The decrease in the current year's effective tax rate is the result of pre-tax income containing a lower proportion of taxable income compared to the prior year period.

Non-GAAP Financial Measures

The GAAP efficiency ratio in the third quarter of 2023 was 70.72% compared to 50.66% for the third quarter of 2022. The non-GAAP efficiency ratio was 60.91% in the third quarter of 2023 compared to 48.18% in the third 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 third 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 53% for the current quarter compared to the prior year quarter due to the combined impact of the declines in net revenues coupled with the increase in non-interest expense.

Current quarter core earnings were $27.8 million ($0.62 per diluted common share), compared to $35.7 million ($0.80 per diluted common share) for the quarter ended September 30, 2022. Return on average assets for the quarter ended

September 30, 2023 was 0.58% and return on average tangible common equity was 7.42% compared to 0.99% and 12.49%, respectively, for the third quarter of 2022. On a non-GAAP basis, the current quarter's core ROA was 0.78% and core ROTCE was 9.51% compared to core ROA of 1.05% and core ROTCE of 12.86% for the third quarter of 2022.

GAAP and Non-GAAP Efficiency Ratios and Measures


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022
Pre-tax pre-provision net income:
Net income	$	20,746		$	33,584
Plus/ (less) non-GAAP adjustments:
Income tax expense	6,890			11,588
Provision for credit losses	2,365			18,890
Pre-tax pre-provision net income	$	30,001		$	64,062

Efficiency ratio (GAAP):
Non-interest expense	$	72,471		$	65,780

Net interest income plus non-interest income	$	102,472		$	129,842

Efficiency ratio (GAAP)	70.72		%	50.66		%

Efficiency ratio (non-GAAP):
Non-interest expense	$	72,471		$	65,780
Less/ (plus) non-GAAP adjustments:
Amortization of intangible assets	1,245			1,432

Merger, acquisition and disposal expense	—			1

Pension settlement expense	8,157			—
Contingent payment expense	—			1,247
Non-interest expense - as adjusted	$	63,069		$	63,100

Net interest income plus non-interest income	$	102,472		$	129,842
Plus non-GAAP adjustment:
Tax-equivalent income	1,068			951
Less non-GAAP adjustment:
Securities gains	—			2
Gain on disposal of assets	—			(183)
Net interest income plus non-interest income - as adjusted	$	103,540		$	130,974

Efficiency ratio (non-GAAP)	60.91		%	48.18		%

GAAP and Non-GAAP Performance Ratios


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022
Core earnings (non-GAAP):
Net income (GAAP)	$	20,746		$	33,584
Plus/ (less) non-GAAP adjustments (net of tax):

Amortization of intangible assets	932			1,076


Pension settlement expense	6,088			—
Gain on disposal of assets	—			108
Investment securities gains	—			(2)
Contingent payment expense	—			929
Core earnings (non-GAAP)	$	27,766		$	35,695

Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)	44,960,455			44,780,560



Earnings per diluted common share (GAAP)	$	0.46		$	0.75
Core earnings per diluted common share (non-GAAP)	$	0.62		$	0.80

Core return on average assets (non-GAAP):
Average assets (GAAP)	$	14,086,342		$	13,521,595



Return on average assets (GAAP)	0.58		%	0.99		%
Core return on average assets (non-GAAP)	0.78		%	1.05		%

Return/ Core return on average tangible common equity (non-GAAP):
Net Income (GAAP)	$	20,746		$	33,584
Plus: Amortization of intangible assets (net of tax)	932			1,076
Net income before amortization of intangible assets	$	21,678		$	34,660

Core return on average tangible common equity (non-GAAP):
Average assets (GAAP)	$	14,086,342		$	13,521,595
Average goodwill	(363,436)			(363,436)
Average other intangible assets, net	(16,777)			(22,187)
Average tangible assets (non-GAAP)	$	13,706,129		$	13,135,972

Average total stockholders' equity (GAAP)	$	1,538,553		$	1,486,427
Average goodwill	(363,436)			(363,436)
Average other intangible assets, net	(16,777)			(22,187)
Average tangible common equity (non-GAAP)	$	1,158,340		$	1,100,804

Return on average tangible common equity (non-GAAP)	7.42		%	12.49		%
Core return on average tangible common equity (non-GAAP)	9.51		%	12.86		%

Average tangible common equity to average tangible assets (non-GAAP)	8.45		%	8.38		%

FINANCIAL CONDITION

Total assets at September 30, 2023 increased 2% to $14.1 billion compared to $13.8 billion at December 31, 2022. Total loan balances decreased by 1% driven by the activity within commercial real estate portfolios, which decreased by $158.4 million or 2%, while the commercial business portfolio remained relatively unchanged compared to December 31, 2022. Total investment securities declined $151.1 million or 10% from December 31, 2022 to September 30, 2023, as cash flows received from investment pay downs, maturities and calls were retained to strengthen our liquidity position. Deposit balances increased to $11.2 billion at September 30, 2023 compared to $11.0 billion at December 31, 2022. The availability of competitive high yields in savings and time products, in addition to short-term debt securities, resulted in noninterest-bearing deposits declining 18%. This run-off was more than compensated by offering higher yielding accounts along with the growth in core and brokered time deposits resulting in a 12% increase in interest-bearing deposits. The increase in deposits along with the stability of loan balances resulted in the loan to deposit ratio declining to 101.3% at September 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:


	September 30, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Commercial real estate:
Commercial investor real estate	$	5,137,694	45.4	%	$	5,130,094	45.0	%	$	7,600	0.1
Commercial owner-occupied real estate	1,760,384		15.6		1,775,037		15.5		(14,653)		(0.8)
Commercial AD&C	938,673		8.3		1,090,028		9.6		(151,355)		(13.9)
Commercial business	1,454,709		12.9		1,455,885		12.8		(1,176)		(0.1)
Total commercial loans	9,291,460		82.2		9,451,044		82.9		(159,584)		(1.7)
Residential real estate:
Residential mortgage	1,432,051		12.7		1,287,933		11.3		144,118		11.2
Residential construction	160,345		1.4		224,772		2.0		(64,427)		(28.7)
Consumer	416,436		3.7		432,957		3.8		(16,521)		(3.8)
Total residential and consumer loans	2,008,832		17.8		1,945,662		17.1		63,170		3.2
Total loans	$	11,300,292	100.0	%	$	11,396,706	100.0	%	$	(96,414)	(0.8)

Total loans declined $96.4 million or 1% to $11.3 billion at September 30, 2023 compared to $11.4 billion at December 31, 2022. Portfolio mix during the first nine months of 2023 remained relatively unchanged compared to the prior year-end. During the current year, commercial AD&C portfolio decreased by 14% as a result of our reduced concentration within the commercial real estate segments. Residential mortgage portfolio increased by 11% mainly due to migration of residential construction loans into the residential permanent portfolio, as a number of construction projects were completed. Overall, the lack of loan demand combined with lower payoff activity during the first nine months of 2023, as a result of the interest rate environment, resulted in a decline in total loans compared to the prior year.

Analysis of Investment Securities

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


	September 30, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Available-for-sale debt securities, at fair value:
U.S. treasuries and government agencies	$	94,845	6.9	%	$	93,622	6.1	%	$	1,223	1.3	%
State and municipal	251,879		18.1		265,997		17.2		(14,118)		(5.3)
Mortgage-backed and asset-backed	728,365		52.3		854,919		55.4		(126,554)		(14.8)



Total available-for-sale debt securities	1,075,089		77.3		1,214,538		78.7		(139,449)		(11.5)

Held-to-maturity debt securities, at amortized cost:


Mortgage-backed and asset-backed	241,464		17.3		259,452		16.8		(17,988)		(6.9)
Total held-to-maturity debt securities	241,464		17.3		259,452		16.8		(17,988)		(6.9)

Other investments, at cost:
Federal Reserve Bank stock	39,043		2.8		38,873		2.6		170		0.4
Federal Home Loan Bank of Atlanta stock	35,805		2.6		29,668		1.9		6,137		20.7
Other	677		—		677		—		—		—
Total other investments	75,525		5.4		69,218		4.5		6,307		9.1
Total securities	$	1,392,078	100.0	%	$	1,543,208	100.0	%	$	(151,130)	(9.8)

Total investment securities decreased by $151.1 million or 10% from December 31, 2022 to September 30, 2023, primarily due to pay downs, maturities, and calls coupled with an increase in unrealized losses. Due to the volatility experienced in the bond markets during the current year, we did not purchase any new investment securities, but rather retained the cash flows received from pay downs to strengthen our liquidity position. 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 September 30, 2023, 99% of the debt securities 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 was 4.8 years at both September 30, 2023 and December 31, 2022, respectively. Weighted average tax equivalent yield of the total debt securities portfolio was 2.05% at September 30, 2023. 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 September 30, 2023 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at September 30, 2023. Unrealized losses on available-for-sale debt securities are expected to recover over time as these securities approach maturity. We do not intend to sell, nor is it more likely than not that we will be required to sell these securities and have 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 $19.2 million at September 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 $533.2 million to $637.3 million at September 30, 2023 compared to December 31, 2022, as management increased on-balance sheet liquidity.

Deposits

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


	September 30, 2023				December 31, 2022				Period-to-Period Change
(Dollars in thousands)	Amount		%		Amount		%		Amount		%
Noninterest-bearing deposits	$	3,013,905	27.0	%	$	3,673,300	33.5	%	$	(659,395)	(18.0)	%
Interest-bearing deposits:
Demand	1,456,386		13.0		1,435,454		13.1		20,932		1.5
Money market savings	2,740,795		24.6		3,213,045		29.4		(472,250)		(14.7)
Regular savings	1,009,371		9.1		513,360		4.7		496,011		96.6
Time deposits of less than $250,000	2,305,130		20.7		1,644,645		15.0		660,485		40.2
Time deposits of $250,000 or more	625,425		5.6		473,617		4.3		151,808		32.1
Total interest-bearing deposits	8,137,107		73.0		7,280,121		66.5		856,986		11.8
Total deposits	$	11,151,012	100.0	%	$	10,953,421	100.0	%	$	197,591	1.8

Deposits and Borrowings

Total deposits increased $197.6 million or 2% to $11.2 billion at September 30, 2023 from December 31, 2022. Core deposits, which exclude brokered relationships, represented 90% 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 September 30, 2023, retail accounts represented 42% of core deposits while business accounts accounted for 58% 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 33% of total deposits at September 30, 2023. Commercial accounts represented 73% of uninsured deposits, while retail accounts accounted for 27% 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 18%. Client deployment of noninterest-bearing deposits into higher yielding accounts, along with growth in core and brokered time deposits, drove a 12% increase in interest-bearing deposits. Management 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. These deposits increased $646.5 million or 190% during the first nine months of 2023.

Total borrowings during the first nine months of 2023 increased by $45.1 million over the amounts at December 31, 2022. 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 September 30, 2023, contingent liquidity, which consists of available FHLB borrowings, fed funds, 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 $6.1 billion or 168% 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 September 30, 2023 compared to at December 31, 2022. During this period, stockholders' equity increased $54.1 million primarily from net income net of dividends paid.

Risk-Based Capital Ratios

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


	Ratios at		Minimum Value(1)	Well-Capitalized(2)
	September 30, 2023	December 31, 2022
Tier 1 leverage	9.50%	9.33%	4.00%	5.00%

Common equity Tier 1	10.83%	10.23%	4.50%	6.50%

Tier 1 capital to risk-weighted assets	10.83%	10.23%	6.00%	8.00%

Total capital to risk-weighted assets	14.85%	14.20%	8.00%	10.00%

(1) Minimum requirements to remain adequately capitalized.

(2) Well-capitalized under prompt corrective action regulations.

As of September 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 September 30, 2023 from December 31, 2022 as a result of an increase in Tier 1 capital, which resulted from net income exceeding the declared common dividends during this period coupled with a decrease in risk weighted assets as loan balances declined from December 31, 2022. The Tier 1 ratios and the leverage ratio also improved due to the growth of Tier 1 capital. The Company adopted CECL effective January 1, 2020 and elected to implement the five-year CECL deferral transition in the determination of its risk-based capital ratios. At September 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 8.42% of tangible assets at September 30, 2023, compared to 8.18% at December 31, 2022. This increase reflects a 5% increase in tangible common equity, mainly from an increase in retained earnings, partially reduced by a 2% increase in tangible assets since December 31, 2022.

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

Tangible Common Equity Ratio – Non-GAAP


(Dollars in thousands, except per share data)	September 30, 2023			December 31, 2022
Tangible common equity ratio:
Total stockholders' equity	$	1,537,914		$	1,483,768
Goodwill	(363,436)			(363,436)
Other intangible assets, net	(16,035)			(19,855)
Tangible common equity	$	1,158,443		$	1,100,477

Total assets	$	14,135,085		$	13,833,119
Goodwill	(363,436)			(363,436)
Other intangible assets, net	(16,035)			(19,855)
Tangible assets	$	13,755,614		$	13,449,828

Outstanding common shares	44,895,158			44,657,054

Tangible common equity ratio	8.42		%	8.18		%
Book value per common share	$	34.26		$	33.23
Tangible book value per common share	$	25.80		$	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 0.46% at September 30, 2023 compared to 0.35% at December 31, 2022. Non-performing loans were $51.8 million at September 30, 2023 compared to $39.4 million at December 31, 2022. Loans greater than 90 days or more were $0.4 million at September 30, 2023 compared to $1.0 million at December 31, 2022.

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

Our methodology for evaluating whether a loan shall be placed on non-accrual status begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring an allowance on an individual basis, 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 follow 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 our 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 monitor our exposure. 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 both September 30, 2023 and December 31, 2022, respectively.

Analysis of Credit Risk

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


(Dollars in thousands)	September 30, 2023			December 31, 2022
Non-accrual loans:
Commercial real estate:
Commercial investor real estate	$	20,108		$	9,943
Commercial owner-occupied real estate	4,744			5,019
Commercial AD&C	1,422			—
Commercial business	9,671			7,322
Residential real estate:
Residential mortgage	10,766			7,439
Residential construction	449			—
Consumer	4,187			5,059
Total non-accrual loans	51,347			34,782

Loans 90 days past due:
Commercial real estate:
Commercial investor real estate	—			—
Commercial owner-occupied real estate	—			—
Commercial AD&C	—			—
Commercial business	415			1,002
Residential real estate:
Residential mortgage	—			—
Residential construction	—			—
Consumer	—			—
Total 90 days past due loans	415			1,002

Restructured loans (accruing) (1)	—			3,575
Total non-performing loans	51,762			39,359
Other real estate owned, net	261			645
Total non-performing assets	$	52,023		$	40,004

Non-accrual loans to total loans	0.45		%	0.31		%
Non-performing loans to total loans	0.46		%	0.35		%
Non-performing assets to total assets	0.37		%	0.29		%
Allowance for credit losses to non-accrual loans	240.25		%	391.70		%
Allowance for credit losses to non-performing loans	238.32		%	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 are 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 recessionary pressures among the qualitative factors applied in the determination of the allowance.

Expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged off against the allowance, while recoveries are credited to the allowance when received. Management adjusts the level of the allowance through the provision for credit losses in the Condensed Consolidated Statement of Income.

For the nine months ended September 30, 2023 our provision for credit losses was a credit of $14.1 million as compared to a charge of $23.6 million for the same period in 2022. The credit to the provision for the nine months ended September 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 risk performance of the loan portfolio.

At September 30, 2023, the allowance for credit losses was $123.4 million as compared to $136.2 million at December 31, 2022. The allowance for credit losses as a percent of total loans was 1.09% and 1.20% at September 30, 2023 and December 31, 2022, respectively. The allowance for credit losses represented 238% of non-performing loans at September 30, 2023 as compared to 346% at December 31, 2022. The allowance attributable to the commercial portfolio represented 1.21% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.57%. With respect to the total commercial portion of the allowance, 27% 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 2.11%. The allowance coverage ratio for the investor real estate portfolio decreased to 1.23% at September 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 0.97% 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, 55% of the total allowance is attributable to the historical default and loss experience coupled with individual reserves, while 45% 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;

•the quality of our credit risk identification processes; and

•probability of the near-term recession and its impact on estimated losses.

The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when we determined that foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When repayment is expected from the operation of the collateral, we use the present value of expected cash flows from the operation of the collateral as the fair value.

When repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the appraised value less estimated cost to sell. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s life. The balance of collateral-dependent loans individually assessed for the allowance was $78.0 million, with individual allowances of $19.9 million against those loans at September 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 September 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)	September 30, 2023				December 31, 2022
Commercial real estate:	Amount		% of loans to total loans		Amount		% of loans to total loans
Commercial investor real estate	$	63,192	45.4	%	$	64,737	45.0	%
Commercial owner-occupied real estate	8,961		15.6		11,646		15.5
Commercial AD&C	9,100		8.3		18,646		9.6
Commercial business	30,720		12.9		28,027		12.8
Total commercial	111,973		82.2		123,056		82.9
Residential real estate:
Residential mortgage	8,499		12.7		9,424		11.3
Residential construction	672		1.4		1,337		2.0
Consumer	2,216		3.7		2,425		3.8
Total residential and consumer	11,387		17.8		13,186		17.1
Total allowance for credit losses - loans	$	123,360	100.0	%	$	136,242	100.0	%

Summary of Loan Credit Loss Experience

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


	Nine Months Ended			Year Ended
(Dollars in thousands)	September 30, 2023			December 31, 2022
Balance, January 1	$	136,242		$	109,145



Provision/ (credit) for credit losses - loans	(11,320)			26,680
Loan charge-offs:
Commercial real estate:
Commercial investor real estate	—			—
Commercial owner-occupied real estate	—			—
Commercial AD&C	—			—
Commercial business	(441)			(716)
Residential real estate:
Residential mortgage	(160)			(155)
Residential construction	—			—
Consumer	(1,917)			(234)
Total charge-offs	(2,518)			(1,105)
Loan recoveries:
Commercial real estate:
Commercial investor real estate	22			320
Commercial owner-occupied real estate	78			49
Commercial AD&C	—			—
Commercial business	190			799
Residential real estate:
Residential mortgage	108			102
Residential construction	—			8
Consumer	558			244
Total recoveries	956			1,522
Net (charge-offs)/ recoveries	(1,562)			417
Balance, period end	$	123,360		$	136,242

Annualized net charge-offs/ (recoveries) to average loans	0.02		%	—		%
Allowance for credit losses on loans to loans	1.09		%	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. Management measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the

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

We prepare a current base case and multiple alternative simulations at least once per quarter and report 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 if they are determined to be 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 at Risk
Change in Interest Rates:	+ 400 bp	+ 300 bp	+ 200 bp	+ 100 bp	- 100 bp	- 200 bp	-300 bp	-400 bp
Policy Limit	23.50%	17.50%	15.00%	10.00%	10.00%	15.00%	17.50%	23.50%
September 30, 2023	1.56%	1.22%	0.88%	0.56%	(0.10%)	(0.21%)	(0.55%)	(0.86%)
December 31, 2022	1.87%	1.58%	1.29%	0.75%	(0.89%)	(1.75%)	(2.66%)	(4.17%)

As reflected in the table above, the measures of net interest income at risk at September 30, 2023 stayed relatively stable as compared to December 31, 2022. The modest decreases in net interest income at risk during the current year are the result of an increase in deposit expense due to higher interest rates and growing interest-bearing account balances almost entirely offset by higher income generated from the loan portfolio coupled with lengthening maturities of the FHLB advances.

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 at Risk
Change in Interest Rates:	+ 400 bp	+ 300 bp	+ 200 bp	+ 100 bp	- 100 bp	- 200 bp	-300 bp	-400 bp
Policy Limit	35.00%	25.00%	20.00%	10.00%	10.00%	20.00%	25.00%	35.00%
September 30, 2023	(21.34%)	(15.84%)	(10.36%)	(4.99%)	4.75%	8.93%	11.70%	13.35%
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 remained relatively stable in most of the rising rate change scenarios from December 31, 2022 to September 30, 2023. The stability in EVE at risk is a reflection of the impact of higher market rates on loan values coupled with increasing cost of interest-bearing deposits and less noninterest-bearing

deposits being significantly offset by the premiums on longer term FHLB advances, borrowings under the Bank Term Funding Program and an increase in the core deposit premium.

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. We perform liquidity stress testing at least quarterly which includes systemic and idiosyncratic scenarios. Testing at the end of the third quarter of 2023 indicated that the Company demonstrates sufficient liquidity in most severe scenarios. At September 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, which exclude brokered deposit relationships, equaled 90% of total deposits at September 30, 2023. At September 30, 2023, contingent liquidity, which consists of available FHLB borrowings, fed funds, 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 $6.1 billion or 168% 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 September 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 September 30, 2023, we had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of $3.5 billion. FHLB availability based on pledged collateral at September 30, 2023 amounted to $2.9 billion, with $550.0 million outstanding against it. The secured lines of credit at the Federal Reserve Bank and correspondent banks totaled $710.6 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of September 30, 2023. In addition, we have federal funds borrowing capacity under unsecured lines of credit with correspondent banks of $1.2 billion with no amount outstanding at September 30, 2023. The Company has provided $309.8 million in collateral under the BTF Program as a contingent funding source, with $300.0 million in borrowings against it at September 30, 2023. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at September 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 September 30, 2023, the Bank could have declared a dividend of up to $209.0 million to Bancorp. At September 30, 2023, Bancorp had liquid assets of $91.3 million.

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

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


(In thousands)	September 30, 2023		December 31, 2022
Commercial real estate development and construction	$	717,838	$	887,154
Residential real estate-development and construction	680,993		798,607
Real estate-residential mortgage	30,768		21,118
Lines of credit, principally home equity and business lines	2,448,251		2,397,533
Standby letters of credit	76,512		77,424
Total commitments to extend credit and available credit lines	$	3,954,362	$	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 September 30, 2023, the total reserve for unfunded commitments was $5.2 million and is accounted for in other liabilities in the Condensed Consolidated Statements of Financial Condition. See Note 1 – Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for more information on the accounting policy for the allowance for unfunded commitments.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The most significant risk factors affecting our business include the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 and the Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 under Item 1A, “Risk Factors” and there have been no material changes in the risk factors discussed in such reports.

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 September 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 September 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.

Item 6. Exhibits


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

Signatures

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

SANDY SPRING BANCORP, INC.

(Registrant)

By: /s/ Daniel J. Schrider

Daniel J. Schrider

President and Chief Executive Officer

Date: November 3, 2023

By: /s/ Philip J. Mantua

Philip J. Mantua

Executive Vice President and Chief Financial Officer

Date: November 3, 2023