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, 2019

OR

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

For the transition period from                         to ____________

Commission File Number: 0-19065

SANDY SPRING BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

301-774-6400

(Registrant’s telephone number, including area code)

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

Title of each 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 outstanding as of November 5, 2019

Common stock, $1.00 par value – 35,631,246 shares

SANDY SPRING BANCORP, INC.
TABLE OF CONTENTS
		Page
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
	Condensed Consolidated Statements of Condition - Unaudited at
	September 30, 2019 and December 31, 2018	4
	Condensed Consolidated Statements of Income - Unaudited for the Three and Nine
	Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Comprehensive Income – Unaudited for
	the Three and Nine Months Ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine
	Months Ended September 30, 2019 and 2018	7
	Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the
	Three and Nine Months Ended September 30, 2019 and 2018	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
	ABOUT MARKET RISK	62
Item 4. CONTROLS AND PROCEDURES		62
PART II - OTHER INFORMATION
Item 1.    LEGAL PROCEEDINGS		62
Item 1A. RISK FACTORS		62
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		62
Item 3. DEFAULTS UPON SENIOR SECURITIES		63
Item 4. MINE SAFETY DISCLOSURES		63
Item 5. OTHER INFORMATION		63
Item 6. EXHIBITS		63
SIGNATURES		64

2

Forward-Looking Statements

This Quarterly Report on Form 10-Q, 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 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 risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2018 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits and other financial services that we provide and increases in loan delinquencies and defaults;

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

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

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

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

uncertainties and other factors relating to the acquisition of Revere Bank by Sandy Spring Bancorp, including the ability to obtain regulatory and shareholder approvals and meet other closing conditions to the transaction, and delay in closing the merger;

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

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

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

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

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

3

Part I

Item 1. FINANCIAL STATEMENTS

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED

			September 30,		December 31,
(Dollars in thousands)			2019		2018
Assets
	Cash and due from banks		$	89,377	$	67,014
	Federal funds sold			253		609
	Interest-bearing deposits with banks			120,306		33,858
		Cash and cash equivalents		209,936		101,481
	Residential mortgage loans held for sale (at fair value)			78,821		22,773
	Investments available-for-sale (at fair value)			894,272		937,335
	Other equity securities			51,938		73,389
	Total loans			6,596,548		6,571,634
		Less: allowance for loan losses		(54,992)		(53,486)
	Net loans			6,541,556		6,518,148
	Premises and equipment, net			59,487		61,942
	Other real estate owned			1,482		1,584
	Accrued interest receivable			23,438		24,609
	Goodwill			347,149		347,149
	Other intangible assets, net			8,322		9,788
	Other assets			221,137		145,074
Total assets			$	8,437,538	$	8,243,272
Liabilities
	Noninterest-bearing deposits		$	2,081,435	$	1,750,319
	Interest-bearing deposits			4,412,464		4,164,561
		Total deposits		6,493,899		5,914,880
	Securities sold under retail repurchase agreements and federal funds purchased			126,008		327,429
	Advances from FHLB			517,477		848,611
	Subordinated debentures			37,316		37,425
	Accrued interest payable and other liabilities			122,797		47,024
		Total liabilities		7,297,497		7,175,369
Stockholders' Equity
	Common stock -- par value $ 1.00 ; shares authorized 100,000,000; shares issued and outstanding 35,625,822
	and 35,530,734 at September 30, 2019 and December 31, 2018, respectively			35,626		35,531
	Additional paid in capital			609,103		606,573
	Retained earnings			498,020		441,553
	Accumulated other comprehensive loss			(2,708)		(15,754)
		Total stockholders' equity		1,140,041		1,067,903
Total liabilities and stockholders' equity			$	8,437,538	$	8,243,272
The accompanying notes are an integral part of these statements

4

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)				2019		2018		2019		2018
Interest income:
	Interest and fees on loans			$	79,167	$	76,786	$	239,028	$	215,050
	Interest on loans held for sale				572		336		1,145		983
	Interest on deposits with banks				783		211		1,405		1,082
	Interest and dividends on investment securities:
		Taxable			5,221		5,112		16,302		15,297
		Exempt from federal income taxes			1,337		1,921		4,591		6,035
	Interest on federal funds sold				2		8		8		28
			Total interest income		87,082		84,374		262,479		238,475
Interest expense:
Interest on deposits					16,332		10,773		46,958		26,583
Interest on retail repurchase agreements and federal funds purchased					257		383		945		599
Interest on advances from FHLB					3,222		5,141		13,389		15,557
Interest on subordinated debt					481		486		1,462		1,436
			Total interest expense		20,292		16,783		62,754		44,175
Net interest income					66,790		67,591		199,725		194,300
Provision for loan losses					1,524		1,890		3,029		5,620
			Net interest income after provision for loan losses		65,266		65,701		196,696		188,680
Non-interest income:
	Investment securities gains				15		82		20		145
	Service charges on deposit accounts				2,516		2,316		7,265		6,865
	Mortgage banking activities				4,408		1,672		10,541		5,943
	Wealth management income				5,493		5,344		16,268		15,792
	Insurance agency commissions				2,116		2,016		5,281		5,020
	Income from bank owned life insurance				662		663		2,505		3,664
	Bank card fees				1,462		1,436		4,181		4,199
	Other income				1,901		1,504		6,037		5,391
			Total non-interest income		18,573		15,033		52,098		47,019
Non-interest expense:
	Salaries and employee benefits				26,234		24,488		77,699		73,064
	Occupancy expense of premises				4,816		4,355		14,807		13,939
	Equipment expense				2,641		2,441		7,929		6,909
	Marketing				1,541		770		3,371		2,863
	Outside data services				1,973		1,736		5,713		4,840
	FDIC insurance				(83)		1,257		2,137		3,840
	Amortization of intangible assets				491		540		1,465		1,622
	Merger expenses				364		580		364		11,766
	Professional fees and services				1,546		1,351		4,425		4,090
	Other expenses				5,402		4,875		15,094		14,183
			Total non-interest expense		44,925		42,393		133,004		137,116
Income before income taxes					38,914		38,341		115,790		98,583
Income tax expense					9,531		9,107		27,814		23,285
			Net income	$	29,383	$	29,234	$	87,976	$	75,298
Per share information:
Basic net income per share				$	0.82	$	0.82	$	2.46	$	2.11
Diluted net income per share				$	0.82	$	0.82	$	2.45	$	2.11
Dividends declared per common share				$	0.30	$	0.28	$	0.88	$	0.82
The accompanying notes are an integral part of these statements

5

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED

				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)				2019		2018		2019		2018
Net income				$	29,383	$	29,234	$	87,976	$	75,298
	Other comprehensive income:
	Investments available-for-sale:
		Net change in unrealized gains/(losses) on investments available-for-sale			912		(5,399)		16,893		(22,318)
			Related income tax expense/(benefit)		(239)		1,411		(4,418)		5,839
		Net investment gains reclassified into earnings			(15)		(82)		(20)		(145)
			Related income tax expense		4		22		5		38
			Net effect on other comprehensive income/(loss) for the period		662		(4,048)		12,460		(16,586)
	Defined benefit pension plan:
		Recognition of unrealized loss			264		250		794		750
			Related income tax benefit		(69)		(66)		(208)		(250)
			Net effect on other comprehensive income for the period		195		184		586		500
	Total other comprehensive income/(loss)				857		(3,864)		13,046		(16,086)
Comprehensive income				$	30,240	$	25,370	$	101,022	$	59,212
The accompanying notes are an integral part of these statements

6

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

			Nine Months Ended September 30,
(Dollars in thousands)			2019		2018
Operating activities:
Net income			$	87,976	$	75,298
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			10,006		9,265
	Provision for loan losses			3,029		5,620
	Stock based compensation expense			2,259		1,941
	Tax benefits associated with share based compensation			75		250
	Deferred income tax expense			455		6,959
	Origination of loans held for sale			(638,820)		(321,224)
	Proceeds from sales of loans held for sale			590,997		331,212
	Gains on sales of loans held for sale			(8,225)		(5,809)
	Losses on sales of other real estate owned			173		104
	Investment securities gains			(20)		(145)
	Net (increase)/ decrease in accrued interest receivable			1,171		(2,072)
	Net (increase)/ decrease in other assets			(3,997)		1,653
	Net decrease in accrued expenses and other liabilities			(4,510)		(3,160)
	Other – net			2,341		3,988
		Net cash provided by operating activities		42,910		103,880
Investing activities:
	(Purchases of)/proceeds from other equity securities			21,451		(3,659)
	Purchases of investments available-for-sale			(83,835)		(55,251)
	Proceeds from sales of investment available-for-sale			-		34,691
	Proceeds from maturities, calls and principal payments of investments available-for-sale			141,880		83,789
	Net increase in loans			(25,327)		(454,760)
	Proceeds from the sales of other real estate owned			324		759
	Proceeds from sales of loans previously held for investment			-		59,945
	Acquisition of business activity, net of cash acquired			-		32,552
	Expenditures for premises and equipment			(4,269)		(8,545)
		Net cash provided by/ (used in) investing activities		50,224		(310,479)
Financing activities:
	Net increase in deposits			579,019		323,890
	Net increase/ (decrease) in retail repurchase agreements and federal funds purchased			(201,421)		16,424
	Proceeds from advances from FHLB			2,123,000		4,930,000
	Repayment of advances from FHLB			(2,454,134)		(5,068,745)
	Proceeds from issuance of common stock			1,068		1,140
	Stock tendered for payment of withholding taxes			(702)		(760)
	Dividends paid			(31,509)		(29,273)
		Net cash provided by financing activities		15,321		172,676
Net increase/ (decrease) in cash and cash equivalents				108,455		(33,923)
Cash and cash equivalents at beginning of period				101,481		112,500
Cash and cash equivalents at end of period			$	209,936	$	78,577
Supplemental disclosures:
	Interest payments		$	65,481	$	42,279
	Income tax payments			23,417		19,092
	Transfer from loans to residential mortgage loans held for sale			-		60,043
	Transfer from loans to other real estate owned			414		289
The accompanying notes are an integral part of these statements

7

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED

								Accumulated
				Additional				Other		Total
		Common		Paid-In		Retained		Comprehensive		Stockholders’
(Dollars in thousands, except per share data)		Stock		Capital		Earnings		Income (Loss)		Equity
Balances at July 1, 2019		$	35,615	$	608,006	$	479,389	$	(3,565)	$	1,119,445
	Net income		-		-		29,383		-		29,383
	Other comprehensive income, net of tax		-		-		-		857		857
Common stock dividends - $0.30 per share			-		-		(10,752)		-		(10,752)
Stock compensation expense			-		786		-		-		786
Common stock issued pursuant to:
	Stock option plan - 1,325 shares		1		34		-		-		35
	Employee stock purchase plan - 9,544 shares		10		277		-		-		287
Balances at September 30, 2019		$	35,626	$	609,103	$	498,020	$	(2,708)	$	1,140,041
Balance at July 1, 2018		$	35,512	$	604,631	$	406,762	$	(20,556)	$	1,026,349
	Net income		-		-		29,234		-		29,234
	Other comprehensive income, net of tax		-		-		-		(3,864)		(3,864)
Common stock dividends - $0.28 per share			-		-		(10,005)		-		(10,005)
Stock compensation expense			-		691		-		-		691
Common stock issued pursuant to:
	Stock option plan - 1,991 shares		2		51		-		-		53
	Employee stock purchase plan - 7,607 shares		8		250		-		-		258
Balances at September 30, 2018		$	35,522	$	605,623	$	425,991	$	(24,420)	$	1,042,716
The accompanying notes are an integral part of these statements

8

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED

								Accumulated
				Additional				Other		Total
		Common		Paid-In		Retained		Comprehensive		Stockholders’
(Dollars in thousands, except per share data)		Stock		Capital		Earnings		Income (Loss)		Equity
Balances at January 1, 2019		$	35,531	$	606,573	$	441,553	$	(15,754)	$	1,067,903
	Net income		-		-		87,976		-		87,976
	Other comprehensive income, net of tax		-		-		-		13,046		13,046
Common stock dividends - $0.88 per share			-		-		(31,509)		-		(31,509)
Stock compensation expense			-		2,259		-		-		2,259
Common stock issued pursuant to:
	Directors stock purchase plan - 867 shares		1		29		-		-		30
	Stock option plan - 12,222 shares		12		247		-		-		259
	Employee stock purchase plan - 27,210 shares		27		752		-		-		779
	Restricted stock - 54,789 shares		55		(757)		-		-		(702)
Balances at September 30, 2019		$	35,626	$	609,103	$	498,020	$	(2,708)	$	1,140,041
Balance at January 1, 2018		$	23,996	$	168,188	$	378,489	$	(6,857)	$	563,816
	Net income		-		-		75,298		-		75,298
	Other comprehensive income, net of tax		-		-		-		(16,086)		(16,086)
Common stock dividends - $0.82 per share			-		-		(29,273)		-		(29,273)
Stock compensation expense			-		1,941		-		-		1,941
Common stock issued pursuant to:
	Acquisition of WashingtonFirst - 11,446,197 shares		11,446		435,194		-		-		446,640
	Stock option plan - 19,918 shares		20		403		-		-		423
	Employee stock purchase plan - 21,428 shares		22		695		-		-		717
	Restricted stock - 37,705 shares		38		(798)		-		-		(760)
Reclassification of tax effects from other comprehensive income			-		-		1,477		(1,477)		-
Balances at September 30, 2018		$	35,522	$	605,623	$	425,991	$	(24,420)	$	1,042,716
The accompanying notes are an integral part of these statements

9

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

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”), prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, the interim financial statements do not include all of the information and notes required for complete financial statements. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2019. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. Certain reclassifications have been made to prior period amounts, as necessary, to conform to the current period presentation. 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 2018 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 22, 2019. There have been no significant changes to the Company’s accounting policies as disclosed in the 2018 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, Sandy Spring Insurance Corporation and West Financial Services, Inc. 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 loan losses and the related allowance, determination of impaired loans and the related measurement of impairment, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether impaired securities are other-than-temporarily impaired, 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 Update (ASU) No. 2014-09 – Revenue from Contracts with Customers. For revenue within the scope of ASU 2014-09, 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 revenue recognition guidance.

10

Wealth Management Income

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

Insurance Agency Commissions

Sandy Spring Insurance, a subsidiary of the Bank, performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated by a commission fee for placement of an insurance policy. Sandy Spring Insurance does not provide any captive management services or any claim handling services. Commission fees are set as a percentage of the premium for the insurance policy for which Sandy Spring Insurance is a producer. The Company recognizes revenue when the insurance policy has been contractually agreed to by the insurer and policyholder (at transaction date).

Service Charges on Deposit Accounts

Service charges on deposit accounts are earned on depository accounts for consumer and commercial account holders and include fees for account and overdraft services. Account services include fees for event-driven services and periodic account maintenance activities. The 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. Obligation for overdraft services is satisfied at the time of the overdraft and revenue is recognized as earned.

Loans Acquired with Deteriorated Credit Quality

Acquired loans with evidence of credit deterioration since their origination as of the date of the acquisition are recorded at their initial fair value. Credit deterioration is determined based on the probability of collection of all contractually required principal and interest payments. The historical allowance for loan losses related to the acquired loans is not carried over to the Company’s financial statements. The determination of credit quality deterioration as of the purchase date may include parameters such as past due and non-accrual status, commercial risk ratings, cash flow projections, type of loan and collateral, collateral value and recent loan-to-value ratios or appraised values. For loans acquired with evidence of credit deterioration, the Company determines at the acquisition date the excess of the loan’s contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount, representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans, is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). Subsequent to the purchase date, increases in expected cash flows over those expected at the purchase date are recognized prospectively as interest income over the remaining life of the loan as an adjustment to the accretable yield. The present value of any decreases in expected cash flows after the purchase date is recognized as impairment through addition to the valuation allowance.

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.

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 lease commencement date, initial direct costs and any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. 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.

11

Adopted Accounting Pronouncements

The FASB issued Update No. 2016-02, Leases, in February 2016. From the lessee’s perspective, the new standard requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The Company adopted the standard on January 1, 2019 (“adoption date”) using modified retrospective approach. The Company elected the transition option to apply the provisions of the new standard only as of the adoption date and did not restate comparative historical periods presented. The Company also elected a package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification of those leases in existence as of the adoption date.

The standard had a material impact on the Company’s Condensed Consolidated Statements of Condition, but did not have a material impact on Condensed Consolidated Statements of Income. The most significant impact at the adoption date was the recognition of ROU assets and lease liabilities for operating leases which totaled $77.7 million and $85.1 million, respectively. Refer to Note 12 – Leases for other required disclosures.

Pending Accounting Pronouncements

The FASB issued Update No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, in March 2017. This guidance is intended to eliminate the current diversity in practice with respect to the amortization period for certain purchased callable debt securities held at a premium. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this update shorten the amortization period for such callable debt securities held at a premium requiring the premium to be amortized to the earliest call date. This guidance is effective for a public business entity for its fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB issued Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating Step 2 from the goodwill impairment test. In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill, an entity had to determine the fair value at the impairment date of its assets and liabilities, including any unrecognized assets and liabilities, following a procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount over the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for a public business entity for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB issued Update No. 2016-13, Current Expected Credit Losses (CECL), in June 2016. This guidance changes the impairment model for most financial assets measured at amortized cost and certain other instruments. Entities will be required to use an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This will result in earlier recognition of loss allowances in most instances. Credit losses related to available-for-sale debt securities (regardless of whether the impairment is considered to be other-than-temporary) will be measured in a manner similar to the present, except that such losses will be recorded as allowances rather than as reductions in the amortized cost of the related securities. With respect to trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures, the guidance requires that an entity estimate its lifetime expected credit loss and record an allowance resulting in the net amount expected to be collected to be reflected as the financial asset. Entities will also be required to provide more disclosures, including information used to track credit quality by year of origination for most financing receivables. This guidance is effective for public business entities for the first interim or annual period beginning after December 15, 2019.

12

The Company expects to adopt the guidance in the first quarter of 2020. As a part of the Company’s implementation efforts, to date the following tasks have been completed:

Reconciled and validated historical loan, charge-off and recovery data.

Determined segmentation of the loan portfolio for application of the CECL calculation.

Determined the key assumptions to be utilized in the calculation.

Selected lifetime loss reserve calculation methods and established a methodology framework.

Updated qualitative factors framework.

Established a proposed internal controls framework under CECL.

The Company plans to utilize a third party software solution for its CECL calculation. Conceptual soundness of the proposed methodology framework along with the CECL model are currently being validated by an independent third party advisor. The ultimate impact of CECL on the allowance for credit losses will depend on the size and composition of the loan portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to the CECL model, methodology and key assumptions. At adoption, the Company will record a cumulative effect adjustment to retained earnings for incremental change in the allowance for credit losses.

Note 2 – Investments

Investments available-for-sale

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

			September 30, 2019								December 31, 2018
					Gross		Gross		Estimated				Gross		Gross		Estimated
			Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(In thousands)			Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. treasuries and government agencies			$	286,478	$	1,036	$	(1,133)	$	286,381	$	300,338	$	370	$	(4,030)	$	296,678
State and municipal				216,770		4,716		(5)		221,481		280,725		2,080		(781)		282,024
Mortgage-backed and asset-backed				373,146		3,450		(575)		376,021		355,267		653		(7,405)		348,515
Corporate debt				9,100		411		-		9,511		9,100		140		-		9,240
Trust preferred				310		-		-		310		310		-		-		310
	Total debt securities			885,804		9,613		(1,713)		893,704		945,740		3,243		(12,216)		936,767
Marketable equity securities				568		-		-		568		568		-		-		568
		Total investments available-for-sale	$	886,372	$	9,613	$	(1,713)	$	894,272	$	946,308	$	3,243	$	(12,216)	$	937,335

Any unrealized losses in the U.S. treasuries and government agencies, state and municipal, mortgage-backed and asset-backed investment securities at September 30, 2019 are due to changes in interest rates and not credit-related events. Unrealized losses on investment securities are considered temporary in nature and are expected to recover over time as these securities approach maturity.

The mortgage-backed securities portfolio at September 30, 2019 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($108.7 million), GNMA, FNMA or FHLMC mortgage-backed securities ($204.8 million) or SBA asset-backed securities ($62.5 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time to allow for any anticipated recovery in fair value.

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

13

		September 30, 2019
						Continuous Unrealized
						Losses Existing for:
		Number								Total
		of				Less than		More than		Unrealized
(Dollars in thousands)		Securities		Fair Value		12 months		12 months		Losses
U.S. treasuries and government agencies			8	$	103,180	$	1,133	$	-	$	1,133
State and municipal			2		2,134		-		5		5
Mortgage-backed and asset-backed			28		126,970		52		523		575
	Total		38	$	232,284	$	1,185	$	528	$	1,713

		December 31, 2018
						Continuous Unrealized
						Losses Existing for:
		Number								Total
		of				Less than		More than		Unrealized
(Dollars in thousands)		Securities		Fair Value		12 months		12 months		Losses
U.S. treasuries and government agencies			33	$	194,135	$	452	$	3,578	$	4,030
State and municipal			80		78,232		569		212		781
Mortgage-backed and asset-backed			110		308,254		1,592		5,813		7,405
	Total		223	$	580,621	$	2,613	$	9,603	$	12,216

The amortized cost and estimated fair values of debt securities available-for-sale by contractual maturity at the dates indicated are provided in the following table. The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following table 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.

		September 30, 2019				December 31, 2018
				Estimated				Estimated
		Amortized		Fair		Amortized		Fair
(In thousands)		Cost		Value		Cost		Value
Due in one year or less		$	87,362	$	87,981	$	63,482	$	63,747
Due after one year through five years			212,317		214,443		277,297		276,830
Due after five years through ten years			161,457		164,716		212,825		210,386
Due after ten years			424,668		426,564		392,136		385,804
	Total debt securities available for sale	$	885,804	$	893,704	$	945,740	$	936,767

At September 30, 2019 and December 31, 2018, investments available-for-sale with a book value of $420.6 million and $477.3 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at September 30, 2019 and December 31, 2018.

Equity securities

Other equity securities at the dates indicated are presented in the following table:

(In thousands)		September 30, 2019		December 31, 2018
Federal Reserve Bank stock		$	22,537	$	22,456
Federal Home Loan Bank of Atlanta stock			29,401		50,933
	Total equity securities	$	51,938	$	73,389

Note 3 – LOANS

Outstanding loan balances at September 30, 2019 and December 31, 2018 are net of unearned income, including net deferred loan fees of $1.4 million and $0.9 million, respectively. The loan portfolio segment balances at the dates indicated are presented in the following table:

14

(In thousands)		September 30, 2019		December 31, 2018
Residential real estate:
	Residential mortgage	$	1,199,275	$	1,228,247
	Residential construction		150,692		186,785
Commercial real estate:
	Commercial owner-occupied real estate		1,278,505		1,202,903
	Commercial investor real estate		2,036,021		1,958,395
	Commercial AD&C		678,906		681,201
Commercial business			772,619		796,264
Consumer			480,530		517,839
	Total loans	$	6,596,548	$	6,571,634

The fair value of the financial assets acquired in the Company’s acquisition of WashingtonFirst Bancshares, Inc. (“WashingtonFirst”) on January 1, 2018 included loans receivable with a gross amortized cost basis of $1.7 billion. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. Interest and credit fair value adjustments related to loans acquired without evidence of credit quality deterioration are accreted or amortized into interest income over the remaining expected lives of the loans. The specific credit adjustment on acquired credit impaired loans includes accretable and non-accretable components. Of the $14.5 million specific credit mark on acquired credit impaired loans, approximately $4.0 million was estimated to be an accretable adjustment recognized over the remaining expected lives of the loans and $10.5 million was estimated to be non-accretable adjustment.

In conjunction with the WashingtonFirst acquisition, the acquired loan portfolio was accounted for at fair value as follows:

(Dollars in thousands)	January 1, 2018
Gross amortized cost basis at January 1, 2018	$	1,697,760
Interest rate fair value adjustment		15,370
Credit fair value adjustment on pools of homogeneous loans		(22,421)
Credit fair value adjustment on purchased credit impaired loans		(14,518)
Fair value of acquired loan portfolio at January 1, 2018	$	1,676,191

The following table presents the acquired credit impaired loans receivable as of January 1, 2018 (the “Acquisition Date”):

(Dollars in thousands)	January 1, 2018
Contractual principal and interest at acquisition	$	49,412
Contractual cash flows not expected to be collected (Nonaccretable yield)		(17,915)
Expected cash flows at acquisition		31,497
Interest component of expected cash flows (Accretable yield)		(3,988)
Fair value of purchased credit impaired loans	$	27,509

The outstanding balance of purchased credit impaired loans receivable totaled $41.9 million, $26.0 million and $12.9 million at January 1, 2018, December 31, 2018 and September 30, 2019, respectively. The fair value of purchased credit impaired loans was $9.6 million and $15.3 million at September 30, 2019 and December 31, 2018, respectively. The decrease in the outstanding amounts of purchased credit impaired loans receivable from the Acquisition Date through the current period was driven by efforts to resolve the most material credit deteriorated borrowers. During 2018, liquidation of collateral resulted in full pay-off of the outstanding principal balances of $12.4 million and the related release of accretable and non-accretable adjustments into interest income in the total amounts of $0.8 million and $1.3 million, respectively. During the current year to date, the Company settled additional purchased credit impaired loans with total outstanding balances of $5.8 million resulting in the related release of accretable and non-accretable adjustments into interest income in the total amounts of $0.2 million and $1.6 million, respectively.

Activity for the accretable yield since the Acquisition Date was as follows:

15

	For the Period Ended,
(Dollars in thousands)	September 30, 2019		December 31, 2018
Accretable yield at the beginning of the period	$	1,279	$	-
Addition of accretable yield due to acquisition		-		3,988
Accretion into interest income		(869)		(1,860)
Disposals (including maturities, foreclosures, and charge-offs)		(199)		(849)
Accretable yield at the end of the period.	$	211	$	1,279

Note 4 – CREDIT QUALITY ASSESSMENT

Allowance for Loan Losses

Summary information on the allowance for loan loss activity for the period indicated is provided in the following table:

			Nine Months Ended September 30,
(In thousands)			2019		2018
Balance at beginning of year			$	53,486	$	45,257
	Provision for loan losses			3,029		5,620
	Loan charge-offs			(2,101)		(1,003)
	Loan recoveries			578		535
		Net charge-offs		(1,523)		(468)
Balance at period end			$	54,992	$	50,409

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

		For the Nine Months Ended September 30, 2019
				Commercial Real Estate								Residential Real Estate
								Commercial
		Commercial		Commercial		Commercial		Owner				Residential		Residential
(Dollars in thousands)		Business		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Balance at beginning of year		$	11,377	$	5,944	$	17,603	$	6,307	$	2,113	$	8,881	$	1,261	$	53,486
Provision (credit)			(422)		608		1,892		148		224		834		(255)		3,029
Charge-offs			(1,176)		-		-		-		(517)		(408)		-		(2,101)
Recoveries			45		228		13		-		166		120		6		578
	Net recoveries (charge-offs)		(1,131)		228		13		-		(351)		(288)		6		(1,523)
Balance at end of period		$	9,824	$	6,780	$	19,508	$	6,455	$	1,986	$	9,427	$	1,012	$	54,992
Total loans		$	772,619	$	678,906	$	2,036,021	$	1,278,505	$	480,530	$	1,199,275	$	150,692	$	6,596,548
Allowance for loans losses to total loans ratio			1.27%		1.00%		0.96%		0.50%		0.41%		0.79%		0.67%		0.83%
Balance of loans specifically evaluated for impairment		$	6,818	$	829	$	9,229	$	3,810		na.	$	1,360	$	-	$	22,046
Allowance for loans specifically evaluated for impairment		$	2,556	$	132	$	1,558	$	26		na.	$	-	$	-	$	4,272
Specific allowance to specific loans ratio			37.49%		15.92%		16.88%		0.68%		na.		-		-		19.38%
Balance of loans collectively evaluated		$	763,211	$	678,077	$	2,017,134	$	1,274,695	$	479,502	$	1,197,906	$	150,692	$	6,561,217
Allowance for loans collectively evaluated		$	7,268	$	6,648	$	17,950	$	6,429	$	1,986	$	9,427	$	1,012	$	50,720
Collective allowance to collective loans ratio			0.95%		0.98%		0.89%		0.50%		0.41%		0.79%		0.67%		0.77%
Balance of loans acquired with deteriorated credit quality		$	2,590	$	-	$	9,658	$	-	$	1,028	$	9	$	-	$	13,285
Allowance for loans acquired with deteriorated credit quality		$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance to loans acquired with deteriorated credit quality ratio			-		-		-		-		-		-		-		-

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		For the Year Ended December 31, 2018
				Commercial Real Estate								Residential Real Estate
								Commercial
		Commercial		Commercial		Commercial		Owner				Residential		Residential
(Dollars in thousands)		Business		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Balance at beginning of year		$	8,711	$	3,501	$	14,970	$	7,178	$	2,383	$	7,268	$	1,246	$	45,257
Provision (credit)			2,857		2,381		2,677		(871)		203		1,776		-		9,023
Charge-offs			(449)		-		(131)		-		(611)		(225)		-		(1,416)
Recoveries			258		62		87		-		138		62		15		622
	Net recoveries (charge-offs)		(191)		62		(44)		-		(473)		(163)		15		(794)
Balance at end of period		$	11,377	$	5,944	$	17,603	$	6,307	$	2,113	$	8,881	$	1,261	$	53,486
Total loans		$	796,264	$	681,201	$	1,958,395	$	1,202,903	$	517,839	$	1,228,247	$	186,785	$	6,571,634
Allowance for loan losses to total loans ratio			1.43%		0.87%		0.90%		0.52%		0.41%		0.72%		0.68%		0.81%
Balance of loans specifically evaluated for impairment		$	7,586	$	3,306	$	5,355	$	4,234		na.	$	1,729	$	-	$	22,210
Allowance for loans specifically evaluated for impairment		$	3,594	$	-	$	1,207	$	123		na.	$	-	$	-	$	4,924
Specific allowance to specific loans ratio			47.38%		-		22.54%		2.91%		na.		-		-		22.17%
Balance of loans collectively evaluated		$	780,523	$	677,895	$	1,938,712	$	1,196,487	$	516,567	$	1,226,508	$	186,785	$	6,523,477
Allowance for loans collectively evaluated		$	7,783	$	5,944	$	16,396	$	6,184	$	2,113	$	8,881	$	1,261	$	48,562
Collective allowance to collective loans ratio			1.00%		0.88%		0.85%		0.52%		0.41%		0.72%		0.68%		0.74%
Balance of loans acquired with deteriorated credit quality		$	8,155	$	-	$	14,328	$	2,182	$	1,272	$	10	$	-	$	25,947
Allowance for loans acquired with deteriorated credit quality		$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance to loan acquired with deteriorated credit quality ratio			-		-		-		-		-		-		-		-

The following table provides summary information regarding impaired loans at the dates indicated and for the periods then ended:

(In thousands)		September 30, 2019		December 31, 2018
Impaired loans with a specific allowance		$	13,371	$	12,876
Impaired loans without a specific allowance			8,675		9,334
	Total impaired loans	$	22,046	$	22,210
Allowance for loan losses related to impaired loans		$	4,272	$	4,924
Allowance for loan losses related to loans collectively evaluated			50,720		48,562
	Total allowance for loan losses	$	54,992	$	53,486
Average impaired loans for the period		$	23,014	$	20,211
Contractual interest income due on impaired loans during the period		$	1,317	$	2,513
Interest income on impaired loans recognized on a cash basis		$	362	$	506
Interest income on impaired loans recognized on an accrual basis		$	114	$	138

The following tables present the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged off at the dates indicated:

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			September 30, 2019
					Commercial Real Estate								Total Recorded
									Commercial		All		Investment in
					Commercial		Commercial		Owner		Other		Impaired
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
		Non-accruing	$	3,559	$	829	$	5,468	$	767	$	-	$	10,623
		Restructured accruing		269		-		-		-		-		269
		Restructured non-accruing		1,806		-		548		125		-		2,479
	Balance		$	5,634	$	829	$	6,016	$	892	$	-	$	13,371
	Allowance		$	2,556	$	132	$	1,558	$	26	$	-	$	4,272
Impaired loans without a specific allowance
		Non-accruing	$	115	$	-	$	2,438	$	1,140	$	-	$	3,693
		Restructured accruing		156		-		775		-		1,087		2,018
		Restructured non-accruing		913		-		-		1,778		273		2,964
	Balance		$	1,184	$	-	$	3,213	$	2,918	$	1,360	$	8,675
Total impaired loans
		Non-accruing	$	3,674	$	829	$	7,906	$	1,907	$	-	$	14,316
		Restructured accruing		425		-		775		-		1,087		2,287
		Restructured non-accruing		2,719		-		548		1,903		273		5,443
	Balance		$	6,818	$	829	$	9,229	$	3,810	$	1,360	$	22,046
Unpaid principal balance in total impaired loans			$	9,302	$	829	$	13,794	$	5,686	$	2,715	$	32,326

	September 30, 2019
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	7,509	$	2,358	$	7,153	$	4,451	$	1,543	$	23,014
Contractual interest income due on impaired loans during the period	$	434	$	113	$	523	$	165	$	82
Interest income on impaired loans recognized on a cash basis	$	200	$	-	$	16	$	138	$	8
Interest income on impaired loans recognized on an accrual basis	$	48	$	-	$	29	$	-	$	37

18

			December 31, 2018
					Commercial Real Estate								Total Recorded
									Commercial		All		Investment in
					Commercial		Commercial		Owner		Other		Impaired
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
		Non-accruing	$	4,126	$	-	$	5,117	$	767	$	-	$	10,010
		Restructured accruing		328		-		-		-		-		328
		Restructured non-accruing		1,766		-		-		772		-		2,538
	Balance		$	6,220	$	-	$	5,117	$	1,539	$	-	$	12,876
	Allowance		$	3,594	$	-	$	1,207	$	123	$	-	$	4,924
Impaired loans without a specific allowance
		Non-accruing	$	220	$	3,170	$	238	$	1,216	$	-	$	4,844
		Restructured accruing		172		-		-		-		1,442		1,614
		Restructured non-accruing		974		136		-		1,479		287		2,876
	Balance		$	1,366	$	3,306	$	238	$	2,695	$	1,729	$	9,334
Total impaired loans
		Non-accruing	$	4,346	$	3,170	$	5,355	$	1,983	$	-	$	14,854
		Restructured accruing		500		-		-		-		1,442		1,942
		Restructured non-accruing		2,740		136		-		2,251		287		5,414
	Balance		$	7,586	$	3,306	$	5,355	$	4,234	$	1,729	$	22,210
Unpaid principal balance in total impaired loans			$	11,056	$	4,419	$	9,909	$	6,656	$	3,081	$	35,121

	December 31, 2018
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	7,685	$	770	$	5,696	$	3,823	$	2,237	$	20,211
Contractual interest income due on impaired loans during the period	$	858	$	495	$	610	$	407	$	143
Interest income on impaired loans recognized on a cash basis	$	215	$	-	$	20	$	175	$	96
Interest income on impaired loans recognized on an accrual basis	$	63	$	-	$	-	$	-	$	75

19

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:

		September 30, 2019
				Commercial Real Estate								Residential Real Estate
								Commercial
				Commercial		Commercial		Owner				Residential		Residential
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
	Non-accrual loans (1)	$	6,393	$	829	$	8,454	$	3,810	$	4,561	$	12,574	$	-	$	36,621
	Loans 90 days past due		17		-		1,201		-		-		-		-		1,218
	Restructured loans		425		-		775		-		-		1,087		-		2,287
Total non-performing loans			6,835		829		10,430		3,810		4,561		13,661		-		40,126
	Other real estate owned		39		665		409		-		64		305		-		1,482
Total non-performing assets		$	6,874	$	1,494	$	10,839	$	3,810	$	4,625	$	13,966	$	-	$	41,608
(1) Includes $2.9 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

		December 31, 2018
				Commercial Real Estate								Residential Real Estate
								Commercial
				Commercial		Commercial		Owner				Residential		Residential
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
	Non-accrual loans (1)	$	7,086	$	3,306	$	5,355	$	4,234	$	4,107	$	9,336	$	159	$	33,583
	Loans 90 days past due		49		-		-		-		219		221		-		489
	Restructured loans		500		-		-		-		-		1,442		-		1,942
Total non-performing loans			7,635		3,306		5,355		4,234		4,326		10,999		159		36,014
	Other real estate owned		39		315		409		-		-		821		-		1,584
Total non-performing assets		$	7,674	$	3,621	$	5,764	$	4,234	$	4,326	$	11,820	$	159	$	37,598
(1) Includes $4.8 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

			September 30, 2019
					Commercial Real Estate								Residential Real Estate
									Commercial
					Commercial		Commercial		Owner				Residential		Residential
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Past due loans
	31-60 days		$	1,429	$	2,828	$	885	$	3,407	$	1,834	$	11,229	$	1,953	$	23,565
	61-90 days			916		-		2,203		-		1,185		3,602		477		8,383
	> 90 days			17		-		1,201		-		-		-		-		1,218
		Total past due		2,362		2,828		4,289		3,407		3,019		14,831		2,430		33,166
	Non-accrual loans (1)			6,393		829		8,454		3,810		4,561		12,574		-		36,621
	Loans acquired with deteriorated credit quality			2,590		-		9,658		-		1,028		9		-		13,285
	Current loans			761,274		675,249		2,013,620		1,271,288		471,922		1,171,861		148,262		6,513,476
		Total loans	$	772,619	$	678,906	$	2,036,021	$	1,278,505	$	480,530	$	1,199,275	$	150,692	$	6,596,548
(1) Includes $2.9 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

20

			December 31, 2018
					Commercial Real Estate								Residential Real Estate
									Commercial
					Commercial		Commercial		Owner				Residential		Residential
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Past due loans
	31-60 days		$	2,737	$	474	$	3,041	$	433	$	3,871	$	8,181	$	3,226	$	21,963
	61-90 days			-		-		789		-		1,477		2,517		-		4,783
	> 90 days			49		-		-		-		219		221		-		489
		Total past due		2,786		474		3,830		433		5,567		10,919		3,226		27,235
	Non-accrual loans (1)			7,086		3,306		5,355		4,234		4,107		9,336		159		33,583
	Loans acquired with deteriorated credit quality			8,155		-		14,328		2,182		1,272		10		-		25,947
	Current loans			778,237		677,421		1,934,882		1,196,054		506,893		1,207,982		183,400		6,484,869
		Total loans	$	796,264	$	681,201	$	1,958,395	$	1,202,903	$	517,839	$	1,228,247	$	186,785	$	6,571,634
(1) Includes $4.8 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio at the dates indicated:

		September 30, 2019
				Commercial Real Estate
								Commercial
				Commercial		Commercial		Owner
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Total
	Pass	$	756,295	$	678,077	$	2,014,378	$	1,267,241	$	4,715,991
	Special Mention (1)		2,242		-		2,503		3,501		8,246
	Substandard (2)		14,082		829		19,140		7,763		41,814
	Doubtful		-		-		-		-		-
Total		$	772,619	$	678,906	$	2,036,021	$	1,278,505	$	4,766,051
(1) Includes $1.0 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.
(2) Includes $11.9 million of purchased credit impaired loans acquired from WashingtonFirst and $6.7 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

		December 31, 2018
				Commercial Real Estate
								Commercial
				Commercial		Commercial		Owner
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Total
	Pass	$	773,958	$	677,574	$	1,934,886	$	1,189,903	$	4,576,321
	Special Mention (1)		1,942		321		3,826		2,738		8,827
	Substandard (2)		20,364		3,306		19,683		10,262		53,615
	Doubtful		-		-		-		-		-
Total		$	796,264	$	681,201	$	1,958,395	$	1,202,903	$	4,638,763
(1) Includes $4.2 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.
(2) Includes $24.3 million of purchased credit impaired loans acquired from WashingtonFirst and $7.2 million of loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

Homogeneous loan pools do not have individual loans subjected to internal risk ratings; therefore, the credit indicator applied to these pools is based on their delinquency status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at the dates indicated:

21

			September 30, 2019
					Residential Real Estate
					Residential		Residential
(In thousands)			Consumer		Mortgage		Construction		Total
	Performing		$	475,969	$	1,185,614	$	150,692	$	1,812,275
	Non-performing:
		90 days past due		-		-		-		-
		Non-accruing (1)		4,561		12,574		-		17,135
		Restructured loans		-		1,087		-		1,087
Total			$	480,530	$	1,199,275	$	150,692	$	1,830,497
(1) Includes $1.2 million of consumer loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

			December 31, 2018
					Residential Real Estate
					Residential		Residential
(In thousands)			Consumer		Mortgage		Construction		Total
	Performing		$	513,513	$	1,217,248	$	186,626	$	1,917,387
	Non-performing:
		90 days past due		219		221		-		440
		Non-accruing (1)		4,107		9,336		159		13,602
		Restructured loans		-		1,442		-		1,442
Total			$	517,839	$	1,228,247	$	186,785	$	1,932,871
(1) Includes $1.3 million of consumer loans acquired from WashingtonFirst and considered performing at the Acquisition Date.

During the nine months ended September 30, 2019, the Company restructured $2.0 million in loans that were designated as troubled debt restructurings. No modifications resulted in the reduction of the principal in the associated loan balances. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan. Loans restructured during the nine months ended September 30, 2019 had specific reserves of $0.5 million. For the year ended December 31, 2018, the Company restructured $1.6 million in loans. Modifications consisted principally of interest rate concessions, and no modifications resulted in the reduction of the recorded investment in the associated loan balances. Loans restructured during 2018 had specific reserves of $0.6 million at December 31, 2018. The commitments to lend additional funds on loans that have been restructured at September 30, 2019 and December 31, 2018 were not significant.

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

		For the Nine Months Ended September 30, 2019
				Commercial Real Estate
								Commercial		All
				Commercial		Commercial		Owner		Other
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
	Restructured accruing	$	170	$	-	$	775	$	-	$	-	$	945
	Restructured non-accruing		261		-		789		-		-		1,050
Balance		$	431	$	-	$	1,564	$	-	$	-	$	1,995
Specific allowance		$	243	$	-	$	214	$	-	$	-	$	457
Restructured and subsequently defaulted		$	-	$	-	$	-	$	-	$	-	$	-

22

		For the Year Ended December 31, 2018
				Commercial Real Estate
								Commercial		All
				Commercial		Commercial		Owner		Other
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
	Restructured accruing	$	-	$	-	$	-	$	-	$	-	$	-
	Restructured non-accruing		1,464		-		-		158		-		1,622
Balance		$	1,464	$	-	$	-	$	158	$	-	$	1,622
Specific allowance		$	563	$	-	$	-	$	-	$	-	$	563
Restructured and subsequently defaulted		$	-	$	-	$	-	$	-	$	-	$	-

Other Real Estate Owned

Other real estate owned totaled $1.5 million and $1.6 million at September 30, 2019 and December 31, 2018, respectively. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2019.

Note 5 – Goodwill and Other Intangible Assets

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

		September 30, 2019						Weighted		December 31, 2018						Weighted
		Gross				Net		Average		Gross				Net		Average
		Carrying		Accumulated		Carrying		Remaining		Carrying		Accumulated		Carrying		Remaining
(Dollars in thousands)		Amount		Amortization		Amount		Life		Amount		Amortization		Amount		Life
Amortizing intangible assets:
Core deposit intangibles		$	10,678	$	(3,252)	$	7,426	8.3	years	$	10,678	$	(1,941)	$	8,737	9.0	years
Other identifiable intangibles			1,478		(582)		896	9.9	years		1,478		(427)		1,051	10.6	years
	Total amortizing intangible assets	$	12,156	$	(3,834)	$	8,322			$	12,156	$	(2,368)	$	9,788
Goodwill		$	347,149			$	347,149			$	347,149			$	347,149

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

		Community				Investment
(Dollars in thousands)		Banking		Insurance		Management		Total
Balance December 31, 2018	$	331,173	$	6,788	$	9,188	$	347,149
No Activity		-		-		-		-
Balance September 30, 2019	$	331,173	$	6,788	$	9,188	$	347,149

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

(In thousands)		Amount
2019		$	478
2020			1,720
2021			1,507
2022			1,295
Thereafter			3,322
	Total amortizing intangible assets	$	8,322

Note 6 – Deposits

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

23

(In thousands)				September 30, 2019		December 31, 2018
Noninterest-bearing deposits				$	2,081,435	$	1,750,319
Interest-bearing deposits:
	Demand				751,762		703,145
	Money market savings				1,800,683		1,605,024
	Regular savings				324,464		330,231
	Time deposits of less than $100,000				466,847		427,421
	Time deposits of $100,000 or more				1,068,708		1,098,740
		Total interest-bearing deposits			4,412,464		4,164,561
			Total deposits	$	6,493,899	$	5,914,880

Note 7 – SUBORDINATED DEBT

In conjunction with the acquisition of WashingtonFirst, the Company assumed $25.0 million in non-callable subordinated debt and $10.3 million in callable junior subordinated debt securities. The associated purchase premiums at acquisition were $2.2 million and $0.1 million, respectively. The premiums are amortized over the contractual life of each obligation.

The subordinated debt has a maturity of ten years, is due in full on October 15, 2025, is non-callable until October 15, 2020 and currently bears a fixed interest rate of 6.00% per annum, payable quarterly, subject to a reset after 5 years (on October 5, 2020) at 3 month LIBOR plus 467 basis points. The entire amount of subordinated debt is considered Tier 2 capital under current regulatory guidelines.

In 2003, Alliance Bankshares Corporation, which was acquired by WashingtonFirst in 2012, issued $10.3 million of junior subordinated debt securities to Alliance Virginia Capital Trust I, of which Alliance Bankshares Corporation owned all of the common securities. The trust used the proceeds from the issuance of its underlying common securities and preferred securities, which were sold to third parties, to purchase the debt securities. These debt securities are the trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The obligations under the debt securities were assumed by the Company at the date of acquisition of WashingtonFirst. The debt securities are due on June 30, 2033 and are callable on any interest payment date, without penalty. The interest rate associated with the debt securities is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. The interest rate as of September 30, 2019 was 5.24%. Under the indenture governing the debt securities, the Company has the right to defer payments of interest for up to twenty consecutive quarterly periods. During any such extension period, distributions on the trust’s preferred securities will also be deferred, and the Company’s ability to pay dividends on its common stock will be restricted. The trust’s preferred securities are mandatorily redeemable upon maturity of the debt securities, or upon earlier redemption as provided in the indenture. If the debt securities are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. The Company unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the trust securities subject to certain exceptions, the redemption price with respect to any trust securities called for redemption and amounts due if the trust is liquidated or terminated. As of September 30, 2019, the Company was current on all interest payments. Under current regulatory guidelines the trust preferred securities are considered to be Tier 1 capital.

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

(In thousands)		September 30, 2019		December 31, 2018
Subordinated debentures		$	25,000	$	25,000
	Add: Purchase accounting premium		1,918		2,023
Trust preferred securities			10,310		10,310
	Add: Purchase accounting premium		88		92
Total subordinated debentures		$	37,316	$	37,425

Note 8 – Share Based Compensation

At September 30, 2019, the Company had two share based compensation plans in existence, the 2005 Omnibus Stock Plan (“Omnibus Stock Plan”) and the 2015 Omnibus Incentive Plan (“Omnibus Incentive Plan”). The Omnibus Stock Plan expired during the second quarter of 2015 but has outstanding options that may still be exercised. The Omnibus Incentive Plan is described in the following paragraph.

24

The Company’s 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 awards to selected directors and employees on a periodic basis at the discretion of the board. The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, of which 1,144,133 are available for issuance at September 30, 2019, has a term of ten 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 to ten years from the date of grant. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

The fair values of all of the options granted for the periods indicated have been estimated using a binomial option-pricing moddel. The weighted-average assumptions for the periods shown are presented in the following table:

	Nine Months Ended September 30,
	2019		2018
Dividend yield	-	%	2.64	%
Weighted average expected volatility	-	%	39.13	%
Weighted average risk-free interest rate	-	%	2.61	%
Weighted average expected lives (in years)	-		5.61
Weighted average grant-date fair value	-		$11.73

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

Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The Company recognized compensation expense of $0.7 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively, related to the awards of stock options and restricted stock grants. Compensation expense of $2.1 million and $1.8 million was recognized for the nine months ended September 30, 2019 and 2018, respectively. The intrinsic value of stock options exercised in the nine months ended September 30, 2019 and 2018 was $0.2 million and $0.4 million, respectively. The total of unrecognized compensation cost related to stock options was approximately $0.1 million as of September 30, 2019. That cost is expected to be recognized over a weighted average period of approximately 1.3years. The total of unrecognized compensation cost related to restricted stock was approximately $6.5 million as of September 30, 2019. That cost is expected to be recognized over a weighted average period of approximately 2.9 years. The fair value of the options vested during the nine months ended September 30, 2019 and 2018, was not significant.

The Company granted 96,191 shares of restricted stock in the first quarter of 2019, of which 21,390 shares are subject to a three year performance vesting schedule and 74,801 shares subject to a five year vesting schedule with one fifth of the shares vesting on April 1^st of each year. The Company granted an additional 10,203 shares of restricted stock during the current quarter, of which 2,125 shares are subject to a three year performance vesting schedule and 8,078 shares subject to a three year vesting schedule with one third of the shares vesting on the anniversary date of the grant July 22^nd. The Company did not grant any stock options during 2019.

25

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

				Weighted
	Number	Weighted		Average	Aggregate
	of	Average		Contractual	Intrinsic
	Common	Exercise		Remaining	Value
	Shares	Share Price		Life (Years)	(in thousands)
Balance at January 1, 2019	81,508	$	29.74		$	369
Granted	-	$	-
Exercised	(12,222)	$	21.20		$	156
Forfeited	(1,007)	$	37.11
Expired	(142)	$	42.48
Balance at September 30, 2019	68,137	$	31.14	3.4	$	349
Exercisable at September 30, 2019	54,037	$	29.00	2.9	$	349
Weighted average fair value of options
granted during the year		$	-

A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:

	Number	Weighted
	of	Average
	Common	Grant-Date
(In dollars, except share data):	Shares	Fair Value
Restricted stock at January 1, 2019	203,603	$	35.14
Granted	106,394	$	33.45
Vested	(69,842)	$	31.55
Forfeited	(6,673)	$	33.16
Restricted stock at September 30, 2019	233,482	$	35.50

Note 9 – Pension, Profit Sharing, and Other Employee Benefit Plans

Defined Benefit Pension Plan

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

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

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)		2019		2018		2019		2018
Interest cost on projected benefit obligation		$	403	$	385	$	1,207	$	1,155
Expected return on plan assets			(412)		(466)		(1,236)		(1,396)
Recognized net actuarial loss			264		250		794		750
	Net periodic benefit cost	$	255	$	169	$	765	$	509

26

Contributions

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of the plan assets in the current economy and, since the Plan is currently frozen, the remaining investment horizon of the Plan. After consideration of these factors, the Company made a contribution of $0.2 million in 2019. Management continues to monitor the funding level of the Plan and may make additional contributions as necessary during 2019.

Note 10 – 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)			2019		2018		2019		2018
Net income			$	29,383	$	29,234	$	87,976	$	75,298
Basic:
Basic weighted average EPS shares				35,850		35,723		35,829		35,699
		Basic net income per share	$	0.82	$	0.82	$	2.46	$	2.11
Diluted:
Basic weighted average EPS shares				35,850		35,723		35,829		35,699
Dilutive common stock equivalents				50		21		50		23
	Dilutive EPS shares			35,900		35,744		35,879		35,722
		Diluted net income per share	$	0.82	$	0.82	$	2.45	$	2.11
Anti-dilutive shares				8		6		10		6

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For condensed financial statements presented for the Company, non-owner changes in equity are comprised of unrealized gains or losses on available-for-sale debt securities 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:

	Unrealized Gains
	(Losses) on
	Investments		Defined Benefit
(In thousands)	Available-for-Sale		Pension Plan		Total
Balance at January 1, 2019	$	(6,630)	$	(9,124)	$	(15,754)
Other comprehensive income before reclassification, net of tax		12,475		-		12,475
Reclassifications from accumulated other comprehensive income, net of tax		(15)		586		571
Current period change in other comprehensive income, net of tax		12,460		586		13,046
Balance at September 30, 2019	$	5,830	$	(8,538)	$	(2,708)

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	Unrealized Gains
	(Losses) on
	Investments		Defined Benefit
(In thousands)	Available-for-Sale		Pension Plan		Total
Balance at January 1, 2018	$	687	$	(7,544)	$	(6,857)
Other comprehensive income before reclassification, net of tax		(16,479)		-		(16,479)
Reclassifications from accumulated other comprehensive income, net of tax		(107)		500		393
Current period change in other comprehensive income, net of tax		(16,586)		500		(16,086)
Reclassification of tax effects from accumulated other comprehensive income		148		(1,625)		(1,477)
Balance at September 30, 2018	$	(15,751)	$	(8,669)	$	(24,420)

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

				Nine Months Ended September 30,
(In thousands)				2019		2018
Unrealized gains on investments available-for-sale
	Affected line item in the Statements of Income:
	Investment securities gains			$	20	$	145
	Income before taxes				20		145
	Tax expense				(5)		(38)
	Net income			$	15	$	107
Amortization of defined benefit pension plan items
	Affected line item in the Statements of Income:
		Recognized actuarial loss(1)		$	(794)	$	(750)
			Income before taxes		(794)		(750)
			Tax benefit		208		250
			Net loss	$	(586)	$	(500)
(1) This amount is included in the computation of net periodic benefit cost. See Note 9.

In the first quarter of 2018, the Company elected to make a one-time reclassification from accumulated other comprehensive income to retained earnings for the effects of re-measuring the deferred tax assets and liabilities originally recorded in other comprehensive income as a result of the change in the federal tax rate by the Tax Cuts and Jobs Act.

NOTE 12 – 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.

As September 30, 2019, ROU assets and lease liabilities totaled $71.3 million and $78.8 million, respectively. For the three and nine months ended September 30, 2019, the Company recognized total operating lease expense in the amount of $2.9 million and $8.6 million, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2019 was $2.4 million and $6.7 million, respectively and is included in net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. The Company had one branch location that commenced operations during the current quarter. The associated new ROU asset obtained in exchange for lease obligations totaled $0.4 million.

As of September 30, 2019, the maturities of the Company’s operating lease liabilities were as follows:

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(In thousands)	Amount
Maturity:
One year	$	10,720
Two years		10,425
Three years		9,995
Four years		10,118
Five years		9,039
Thereafter		44,587
Total undiscounted lease payments		94,884
Less: Present value discount		(16,085)
Lease Liability	$	78,799

As of September 30, 2019, the weighted average remaining lease term was 10.6 years and the weighted average operating discount rate used to determine the operating lease liability was 3.29%.

The Company had no additional operating or finance leases that have not yet commenced operations at September 30, 2019. The Company does not have any lease arrangements with any of its related parties as of September 30, 2019.

Note 13 – Financial Instruments with Off-balance Sheet Risk and Derivatives

The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and, therefore, has no credit risk. The notional value of commercial loan swaps outstanding was $129.9 million with a fair value of $2.4 million as of September 30, 2019 compared to $16.6 million with a fair value of $0.4 million as of December 31, 2018. The swap positions are offset to minimize the potential impact on the Company’s financial statements. Fair values of the swaps are carried as both gross assets and gross liabilities in the Condensed Consolidated Statements of Condition. The associated net gains and losses on the swaps are recorded in other non-interest income.

Note 14 – Litigation

The Company and its subsidiaries are subject in the ordinary course of business 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 15 – Fair Value

Generally accepted accounting principles provide 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 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;

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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

Mortgage loans held for sale

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

Investments available-for-sale

U.S. government agencies, 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 conditions databases coupled with extensive quality control programs. Multiple quality control evaluation processes review available market, credit and deal level information to support the evaluation of the security. If there is a lack of objectively verifiable information available to support the valuation, the evaluation of the security is discontinued. 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 generally classified within Level 2 of the fair value hierarchy.

State and municipal securities

Proprietary valuation matrices are used for valuing all tax-exempt municipals that can incorporate changes in the municipal market as they occur. Market evaluation models include the ability to value bank qualified municipals and general market municipals that can be broken down further according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves. Taxable municipals are valued using a third party model that incorporates a methodology that captures the trading nuances associated with these bonds. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. 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 markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.

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:

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			September 30, 2019
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
(In thousands)			(Level 1)		(Level 2)		(Level 3)		Total
Assets
	Residential mortgage loans held for sale		$	-	$	78,821	$	-	$	78,821
	Investments available-for-sale:
		U.S. government agencies		-		286,381		-		286,381
		State and municipal		-		221,481		-		221,481
		Mortgage-backed and asset-backed		-		376,021		-		376,021
		Corporate debt		-		-		9,511		9,511
		Trust preferred		-		-		310		310
		Marketable equity securities		-		568		-		568
	Interest rate swap agreements			-		2,416		-		2,416
Liabilities
	Interest rate swap agreements		$	-	$	(2,416)	$	-	$	(2,416)

			December 31, 2018
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
(In thousands)			(Level 1)		(Level 2)		(Level 3)		Total
Assets
	Residential mortgage loans held for sale		$	-	$	22,773	$	-	$	22,773
	Investments available-for-sale:
		U.S. government agencies		-		296,678		-		296,678
		State and municipal		-		282,024		-		282,024
		Mortgage-backed and asset-backed		-		348,515		-		348,515
		Corporate debt		-		-		9,240		9,240
		Trust preferred		-		-		310		310
		Marketable equity securities		-		568		-		568
	Interest rate swap agreements			-		446		-		446
Liabilities
	Interest rate swap agreements		$	-	$	(446)	$	-	$	(446)

The following table provides unrealized losses included in assets measured in the Condensed Consolidated Statements of Condition at fair value on a recurring basis for the period indicated:

			Significant
			Unobservable
			Inputs
(In thousands)			(Level 3)
Investments available-for-sale:
	Balance at January 1, 2019		$	9,550
		Additions of Level 3 assets		-
		Sales of Level 3 assets		-
		Total unrealized gain included in other comprehensive income		271
	Balance at September 30, 2019		$	9,821

Assets Measured at Fair Value on a Nonrecurring Basis

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) 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:

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		September 30, 2019
		Quoted Prices in		Significant
		Active Markets		Other		Significant
		for Identical		Observable		Unobservable
(In thousands)		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total		Total Losses
Impaired loans		$	-	$	-	$	7,739	$	7,739	$	(6,961)
Other real estate owned			-		-		1,482		1,482		(281)
	Total	$	-	$	-	$	9,221	$	9,221	$	(7,242)

		December 31, 2018
		Quoted Prices in		Significant
		Active Markets		Other		Significant
		for Identical		Observable		Unobservable
(In thousands)		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total		Total Losses
Impaired loans		$	-	$	-	$	6,780	$	6,780	$	(10,932)
Other real estate owned			-		-		1,584		1,584		(262)
	Total	$	-	$	-	$	8,364	$	8,364	$	(11,194)

At September 30, 2019, impaired loans totaling $22.0 million were written down to fair value of $17.8 million as a result of specific loan loss allowances of $4.3 million associated with the impaired loans, which was included in the allowance for loan losses. Impaired loans totaling $22.2 million were written down to fair value of $17.3 million at December 31, 2018 as a result of specific loan loss allowances of $4.9 million associated with the impaired loans.

Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent. 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. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

Other real estate owned (“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 other real estate owned included in Level 3 is determined by independent market based appraisals and other available market information, less cost 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 non-recurring 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 of financial instruments that are not measured at fair value in the financial statements based on the exit price notion. 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.

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

					Fair Value Measurements
	September 30, 2019				Quoted Prices in
			Estimated		Active Markets for		Significant Other		Significant
	Carrying		Fair		Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Other equity securities	$	51,938	$	51,938	$	-	$	51,938	$	-
Loans, net of allowance		6,541,556		6,486,722		-		-		6,486,722
Other assets (1)		112,511		112,511		-		112,511		-
Financial Liabilities
Time deposits	$	1,535,555	$	1,540,933	$	-	$	1,540,933	$	-
Securities sold under retail repurchase agreements and
Federal funds purchased		126,008		126,008		-		126,008		-
Advances from FHLB		517,477		526,055		-		526,055		-
Subordinated debentures		37,316		37,189		-		-		37,189
(1) Includes bank owned life insurance products.

					Fair Value Measurements
	December 31, 2018				Quoted Prices in
			Estimated		Active Markets for		Significant Other		Significant
	Carrying		Fair		Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Other equity securities	$	73,389	$	73,389	$	-	$	73,389	$	-
Loans, net of allowance		6,518,148		6,376,307		-		-		6,376,307
Other assets (1)		110,823		110,823		-		110,823		-
Financial Liabilities
Time deposits	$	1,526,161	$	1,536,238	$	-	$	1,536,238	$	-
Securities sold under retail repurchase agreements and
Federal funds purchased		327,429		327,429		-		327,429		-
Advances from FHLB		848,611		850,186		-		850,186		-
Subordinated debentures		37,425		33,588		-		-		33,588
(1) Includes bank owned life insurance products.

Note 16 - Segment Reporting

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

The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to both individuals and businesses. Parent company income is included in the Community Banking segment, as the majority of parent company functions is related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income fees and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment and other expenses. Non-cash charges associated with amortization of intangibles were $0.4 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively. These charges totaled $1.3 million and $1.6 million for the nine months ended September 30, 2019 and 2018, respectively.

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The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank. Sandy Spring Insurance Corporation operates Sandy Spring Insurance, a general insurance agency located in Annapolis, Maryland, and Neff and Associates, located in Ocean City, Maryland. Major sources of revenue are insurance commissions from commercial lines, personal lines, and medical liability lines. Expenses include personnel and support charges. Non-cash charges associated with amortization of intangibles were not significant for the three and nine months ended September 30, 2019 and 2018, respectively.

The Investment Management segment is conducted through West Financial Services, Inc., a subsidiary of the Bank. This asset management and financial planning firm, located in McLean, Virginia, provides comprehensive investment management and financial planning to individuals, families, small businesses and associations, including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial currently has approximately $1.7 billion in assets under management. Major revenue sources include non-interest income earned on the above services. Expenses include personnel and support charges. Non-cash charges associated with amortization of intangibles were not significant for the three and nine months ended September 30, 2019 and 2018, respectively.

Information for the operating segments and reconciliation of the information to the condensed consolidated financial statements for the periods indicated is presented in the following tables:

	Three Months Ended September 30, 2019
	Community				Investment		Inter-Segment
(In thousands)	Banking		Insurance		Mgmt.		Elimination		Total
Interest income	$	87,068	$	13	$	4	$	(3)	$	87,082
Interest expense		20,295		-		-		(3)		20,292
Provision (credit) for loan losses		1,524		-		-		-		1,524
Noninterest income		14,080		2,123		2,538		(168)		18,573
Noninterest expense		41,806		1,635		1,652		(168)		44,925
Income before income taxes		37,523		501		890		-		38,914
Income tax expense		9,162		138		231		-		9,531
Net income	$	28,361	$	363	$	659	$	-	$	29,383
Assets	$	8,437,588	$	11,615	$	22,033	$	(33,698)	$	8,437,538

	Three Months Ended September 30, 2018
	Community				Investment		Inter-Segment
(In thousands)	Banking		Insurance		Mgmt.		Elimination		Total
Interest income	$	84,374	$	1	$	2	$	(3)	$	84,374
Interest expense		16,786		-		-		(3)		16,783
Provision for loan losses		1,890		-		-		-		1,890
Non-interest income		10,707		2,018		2,462		(154)		15,033
Non-interest expense		39,372		1,564		1,611		(154)		42,393
Income before income taxes		37,033		455		853		-		38,341
Income tax expense		8,755		127		225		-		9,107
Net income	$	28,278	$	328	$	628	$	-	$	29,234
Assets	$	8,038,263	$	9,473	$	15,969	$	(29,140)	$	8,034,565

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	Nine Months Ended September 30, 2019
	Community				Investment		Inter-Segment
(In thousands)	Banking		Insurance		Mgmt.		Elimination		Total
Interest income	$	262,465	$	15	$	9	$	(10)	$	262,479
Interest expense		62,764		-		-		(10)		62,754
Provision for loan losses		3,029		-		-		-		3,029
Noninterest income		39,643		5,296		7,660		(501)		52,098
Noninterest expense		123,876		4,359		5,270		(501)		133,004
Income before income taxes		112,439		952		2,399		-		115,790
Income tax expense		26,924		265		625		-		27,814
Net income	$	85,515	$	687	$	1,774	$	-	$	87,976
Assets	$	8,437,588	$	11,615	$	22,033	$	(33,698)	$	8,437,538

	Nine Months Ended September 30, 2018
	Community				Investment		Inter-Segment
(In thousands)	Banking		Insurance		Mgmt.		Elimination		Total
Interest income	$	238,474	$	2	$	5	$	(6)	$	238,475
Interest expense		44,181		-		-		(6)		44,175
Provision for loan losses		5,620		-		-		-		5,620
Non-interest income		35,130		5,019		7,331		(461)		47,019
Non-interest expense		128,705		4,245		4,627		(461)		137,116
Income before income taxes		95,098		776		2,709		-		98,583
Income tax expense		22,357		218		710		-		23,285
Net income	$	72,741	$	558	$	1,999	$	-	$	75,298
Assets	$	8,038,263	$	9,473	$	15,969	$	(29,140)	$	8,034,565

Note 17 – PENDING AQUISITION

On September 24, 2019, the Company and Revere Bank (“Revere”) entered into a definitive agreement for the Company to acquire the Maryland-based Revere.

Under the terms of the agreement, Revere shareholders will receive 1.05 shares of Sandy Spring common stock for each share of Revere common stock. The transaction has a value of $460.7 million in the aggregate, based on Sandy Spring’s closing price of $35.33 on September 23, 2019. Upon closing, Sandy Spring shareholders will own approximately 74% of the combined company and Revere shareholders will own approximately 26% of the combined company. Completion of the transaction is subject to receipt of regulatory and shareholder approvals and satisfaction of customary closing conditions.

As of June 30, 2019, Revere had more than $2.6 billion in assets and operated 11 full-service community banking offices throughout the Washington D.C. metropolitan region.

Note 18 – SUBSEQUENT EVENT

On November 5, 2019, the Company completed an offering of $175 million aggregate principal amount Fixed to Floating Rate Subordinated Notes due in 2029. The notes will bear a fixed interest rate of 4.25% per year through November 14, 2024. Beginning November 15, 2024, the interest rate will become a floating rate equal to three month LIBOR plus 262 basis points through the remaining maturity or early redemption date of the notes. The interest will be paid in arrears semi-annually during the fixed rate period and quarterly during the floating rate period.

The Company expects to use the proceeds from this issuance to redeem $10 million of outstanding trust preferred securities and $25 million of subordinated debt once each debt becomes callable. The remainder of the proceeds will be used for general corporate purposes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company

Sandy Spring Bancorp, Inc. (the “Company") is the bank holding company for Sandy Spring Bank (the "Bank"). The Company is an $8.4 billion community banking organization that focuses its lending and other services on businesses and consumers in the local market area. The Company, which began operating in 1988, is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve").

The Bank traces its origin to 1868, making it among the oldest institutions in the region. Independent and community-oriented, Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank also offers a variety of comprehensive insurance and wealth management services. The Bank is a state chartered bank subject to supervision and regulation by the Federal Reserve and the State of Maryland. The Bank's deposit accounts are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum 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.

The Company completed the acquisition of WashingtonFirst Bankshares, Inc., the parent company for WashingtonFirst Bank (collectively referred to as “WashingtonFirst”), during 2018. At the date of acquisition, WashingtonFirst had more than $2.1 billion in assets, loans of $1.7 billion and deposits of $1.6 billion. The all-stock transaction resulted in the issuance of 11.4 million common shares valued at approximately $447 million. The results of operations from this January 1, 2018 acquisition were included in the Company’s consolidated results of operation for 2018.

On September 24, 2019, the Company entered into a definitive agreement and plan of merger pursuant to which Revere Bank will merge with and into the Bank in a transaction valued at approximately $461 million. Revere Bank, headquartered in Rockville, Maryland has 11 banking offices and more than $2.6 billion in assets (as of June 30, 2019).

Overview

Net income for the Company for the third quarter of 2019 totaled $29.4 million ($0.82 per diluted share) as compared to net income of $29.2 million ($0.82 per diluted share) for the third quarter of 2018 and net income of $28.3 million ($0.79 per diluted share) for the second quarter of 2019.

The third quarter’s results reflect the following events:

Total loans at September 30, 2019 increased 3% compared to September 30, 2018. During this period, the impact of the 6% growth in commercial loans was offset by the decline in the mortgage loan portfolio. The decline of the mortgage loan portfolio was the result of the impact of mortgage refinance activity driven by the current interest rate environment, in addition to the sale of the majority of new mortgage loan production.

Total deposits grew 10% from the third quarter of 2018 and compared to the end of 2018. Deposit growth reduced the loan-to-deposit ratio from 111% at year-end 2018 to 102% at the end of the current quarter. The year-to-date deposit growth included a 19% increase in noninterest-bearing deposits and a 45% reduction in wholesale deposits.

The provision for loan losses for the current quarter was $1.5 million compared to $1.9 million for the third quarter of 2018 and $1.6 million for the prior quarter of the current year.

The net interest margin was 3.51% for the third quarter of 2019, compared to 3.71% for the third quarter of 2018 and 3.54% for the second quarter of 2019. The prior year’s quarterly margin was positively impacted by an interest income recovery of $2.0 million. Excluding the recovery, the net interest margin for the prior year quarter was 3.60%.

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Quarterly non-interest income increased 24% as compared to the same period in the prior year driven by income from mortgage banking activities, which grew 164%. Growth was experienced in almost every other major category of non-interest income for the second consecutive quarter.

Non-interest expense for the quarter increased $2.5 million or 6% compared to the same quarter of the prior year. Increases occurred in most major expense categories, notably compensation and benefits, which was driven by incentive-based programs, and an increase in marketing costs. A large portion of the overall expense increases was offset by the reduction in FDIC insurance expense during the current quarter.

The non-GAAP efficiency ratio continued to remain stable at 50.95% for the current quarter as compared to 49.27% for the third quarter of 2018 and 51.71% for the second quarter of 2019. Excluding the previously mentioned interest recovery, the non-GAAP efficiency ratio for the prior year quarter was 50.48%.

The local economy continues to experience low unemployment, wage growth and increased housing starts; however, these trends have been tempered by the concerns over deficit growth, continued domestic political turmoil, recessionary indications and geo-political uncertainty. These factors, in concert, affect economic expansion and create volatility in global economic markets. Recent trends in interest rates, while creating beneficial borrowing opportunities for individual consumers and small and mid-sized businesses, continue to cause concerns regarding the future movements in rates. Management is confident that the Company remains well positioned for continued growth opportunities as they present themselves, despite the current mixed economic environment.

Total assets at September 30, 2019 increased 5% compared to September 30, 2018. This growth was driven by organic loan growth as loan balances at September 30, 2019 increased 3% compared to September 30, 2018. Deposits increased 10% compared to balances at September 30, 2018. The Company’s liquidity position remains strong as a result of its operational cash flows in addition to the available borrowing lines with the Federal Home Loan Bank of Atlanta, the Federal Reserve and other sources, in addition to the size and composition of the available-for-sale investment portfolio. Stockholders’ equity has grown by $97.3 million compared to September 30, 2018 due to earnings over the preceding twelve months.

Non-performing loans (which excludes purchased credit impaired loans) represented 0.61% of total loans at September 30, 2019 compared to 0.52% at September 30, 2018. The Company’s non-performing loans were $40.1 million at September 30, 2019 compared to $33.3 million at September 30, 2018. The ratio of annualized net charge-offs to average loans for the current quarter was 0.03% compared to the prior year quarter which was not significant.

Net interest income for the third quarter of 2019 decreased 1% compared to the third quarter of 2018. During this period interest income increased $2.7 million but was more than offset by the increase in interest expense, which grew $3.5 million as a result of a combination of the growth of and increased rates paid on deposits. For the third quarter of 2019, the net interest margin was 3.51% compared to 3.71% for the third quarter of 2018. The prior year’s quarterly margin was positively impacted by an interest income recovery of $2.0 million. Excluding this recovery, the prior year’s net interest margin was 3.60%. The provision for loan losses was $1.5 million for the third quarter of 2019 compared to $1.9 million for the third quarter of 2018. Non-interest income increased 24% for the third quarter of 2019 as compared to the third quarter of 2018. This increase in non-interest income was driven by the impact of increased mortgage banking income and, to a lesser extent, income from other major categories of non-interest income. Non-interest expense increased 6% to $44.9 million for the third quarter of 2019 compared to $42.4 million in the third quarter of 2018, which included merger expenses of $0.4 million in the current quarter and $0.6 million in the prior year quarter. Excluding these expenses, non-interest expenses increased 7% compared to the third quarter of 2018 due to increased compensation and benefit costs driven by higher compensation costs associated with incentive-based sales programs, marketing campaign expenses and an increase in occupancy and equipment costs. The non-GAAP efficiency ratio was 50.95% for the third quarter of 2019, compared to 49.27% for the third quarter of 2018. The non-GAAP efficiency ratio for the prior year quarter was 50.48% after excluding the previously mentioned interest income recovery.

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Results of Operations

For the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

Net income for the Company for the first nine months of 2019 totaled $88.0 million ($2.45 per diluted share) compared to net income of $75.3 million ($2.11 per diluted share) for the first nine months of 2018.

Net Interest Income

Net interest income for the first nine months of 2019 was $199.7 million compared to $194.3 million for the first nine months of 2018. On a tax-equivalent basis, net interest income for the first nine months of 2019 was $203.3 million compared to $197.8 million for the first nine months of 2018, which is a 3% increase. Net interest income increased as a result of the Company’s interest income from organic loan growth during the previous twelve months exceeding the impact of deposit growth and the corresponding interest expense, as average interest rates rose during that period.

The following tables provide an analysis of net interest income performance that reflects a net interest margin that has decreased to 3.55% for the first nine months of 2019 compared to 3.62% for the first nine months of 2018. Net interest income for the first nine months of 2019 included $1.8 million of recovered interest income from previously acquired credit impaired loans compared to $2.0 million for the same period of the prior year. Excluding these recoveries, the net interest margin would have been 3.52% for the first nine months of 2019 compared to 3.59% for the first nine months of 2018. Additionally, after excluding the impact of amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the acquisition, the net interest margin for the first nine months of 2019 would have been 3.47%, compared to 3.45% for the first nine months of 2018.

The impact of the amortization of the fair value adjustments on net interest income for the first nine months of 2019 is presented in the following table:

		For the Nine Months Ended September 30, 2019
(In thousands)
Net Interest Income Excluding Purchase Accounting Adjustments:
Net Interest Income		$	199,725
	Accretion of fair value adjustment on pools of homogeneous loans		(978)
	Accretion of loan fair value adjustment on purchased credit impaired loans		(869)
	Settlements of purchased credit impaired loans		(1,799)
	Accretion of fair value adjustment on certificates of deposits		(428)
	Accretion of fair value adjustment on subordinated debentures		(109)
Net Interest Income Excluding Purchase Accounting Adjustments		$	195,542

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Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
		Nine Months Ended September 30,
				2019						2018
					Annualized						Annualized
	Average		(1)		Average		Average		(1)		Average
(Dollars in thousands and tax-equivalent)	Balances		Interest		Yield/Rate		Balances		Interest		Yield/Rate
Assets
Residential mortgage loans	$	1,229,790	$	35,408	3.84	%	$	1,091,515	$	30,280	3.70	%
Residential construction loans		175,236		5,582	4.26			210,774		6,203	3.93
Total mortgage loans		1,405,026		40,990	3.89			1,302,289		36,483	3.74
Commercial AD&C loans		671,375		29,853	5.95			597,283		25,592	5.73
Commercial investor real estate loans		1,969,599		74,428	5.05			1,939,205		71,824	4.95
Commercial owner occupied real estate loans		1,227,327		44,975	4.90			1,106,032		39,051	4.72
Commercial business loans		774,375		31,479	5.43			674,973		26,052	5.16
Total commercial loans		4,642,676		180,735	5.20			4,317,493		162,519	5.03
Consumer loans		502,476		18,797	5.00			531,539		17,310	4.41
Total loans (2)		6,550,178		240,522	4.91			6,151,321		216,312	4.70
Loans held for sale		39,107		1,145	3.91			30,349		983	4.32
Taxable securities		752,518		17,169	3.04			738,580		15,891	2.87
Tax-exempt securities (3)		219,510		5,827	3.54			290,177		7,662	3.52
Total investment securities (4)		972,028		22,996	3.15			1,028,757		23,553	3.05
Interest-bearing deposits with banks		83,981		1,405	2.24			86,446		1,082	1.67
Federal funds sold		623		8	1.78			2,607		28	1.41
Total interest-earning assets		7,645,917		266,076	4.65			7,299,480		241,958	4.43
Less: allowance for loan losses		(53,440)						(47,533)
Cash and due from banks		64,227						69,301
Premises and equipment, net		61,039						61,507
Other assets		590,186						535,778
Total assets	$	8,307,929					$	7,918,533
Liabilities and Stockholders' Equity
Interest-bearing demand deposits	$	733,872		1,305	0.24	%	$	730,520		657	0.12	%
Regular savings deposits		330,377		321	0.13			390,231		488	0.17
Money market savings deposits		1,710,520		19,617	1.53			1,520,953		13,028	1.15
Time deposits		1,629,716		25,715	2.11			1,245,510		12,410	1.33
Total interest-bearing deposits		4,404,485		46,958	1.43			3,887,214		26,583	0.91
Other borrowings		158,279		945	0.80			158,939		599	0.50
Advances from FHLB		689,224		13,389	2.60			1,000,060		15,557	2.08
Subordinated debentures		37,376		1,462	5.22			37,518		1,436	5.11
Total interest-bearing liabilities		5,289,364		62,754	1.59			5,083,731		44,175	1.16
Noninterest-bearing demand deposits		1,797,301						1,757,573
Other liabilities		122,564						59,371
Stockholders' equity		1,098,700						1,017,858
Total liabilities and stockholders' equity	$	8,307,929					$	7,918,533
Net interest income and spread				203,322	3.06	%				197,783	3.27	%
Less: tax-equivalent adjustment				3,597						3,483
Net interest income			$	199,725					$	194,300
Interest income/earning assets					4.65	%					4.43	%
Interest expense/earning assets					1.10						0.81
Net interest margin					3.55	%					3.62	%
(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 26.13% for both 2019 and 2018. The annualized
taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $3.6 million and $3.5 million in 2019 and 2018, respectively.
(2) Non-accrual loans are included in the average balances.
(3) Includes only investments that are exempt from federal taxes.
(4) Investments available-for-sale are presented at amortized cost.

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Effect of Volume and Rate Changes on Net Interest Income

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

			2019 vs. 2018							2018 vs. 2017
			Increase						Increase
			Or		Due to Change In Average:*				Or		Due to Change In Average:*
(Dollars in thousands and tax equivalent)			(Decrease)		Volume		Rate		(Decrease)		Volume		Rate
Interest income from earning assets:
	Residential mortgage loans		$	5,128	$	3,949	$	1,179	$	7,629	$	6,274	$	1,355
	Residential construction loans			(621)		(1,109)		488		1,547		1,299		248
	Commercial AD&C loans			4,261		3,254		1,007		14,466		12,412		2,054
	Commercial investor real estate loans			2,604		1,137		1,467		37,846		33,846		4,000
	Commercial owner occupied real estate loans			5,924		4,395		1,529		10,550		11,273		(723)
	Commercial business loans			5,427		4,004		1,423		10,731		8,047		2,684
	Consumer loans			1,487		(987)		2,474		4,814		2,152		2,662
	Loans held for sale			162		262		(100)		710		755		(45)
	Taxable securities			1,278		(23)		1,301		4,947		4,539		408
	Tax exempt securities			(1,835)		(1,814)		(21)		(1,793)		(238)		(1,555)
	Interest-bearing deposits with banks			323		(32)		355		793		529		264
	Federal funds sold			(20)		(25)		5		10		1		9
Total interest income				24,118		13,011		11,107		92,250		80,889		11,361
Interest expense on funding of earning assets:
	Interest-bearing demand deposits			648		3		645		285		79		206
	Regular savings deposits			(167)		(66)		(101)		325		42		283
	Money market savings deposits			6,589		1,805		4,784		9,695		2,475		7,220
	Time deposits			13,305		4,586		8,719		7,066		5,905		1,161
	Other borrowings			346		(3)		349		361		58		303
	Advances from FHLB			(2,168)		(5,513)		3,345		6,172		4,817		1,355
	Subordinated debentures			26		(5)		31		1,424		1,408		16
Total interest expense				18,579		807		17,772		25,328		14,784		10,544
		Net interest income	$	5,539	$	12,204	$	(6,665)	$	66,922	$	66,105	$	817
* 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.

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Interest Income

The Company's total tax-equivalent interest income increased 10% for the first nine months of 2019 compared to the prior year period. During this period, the yield on interest-earning assets increased 22 basis points to 4.65%. The previous tables reflect that the increase in interest income has been driven predominantly by the 5% growth in interest-earning assets as well as the rise in the associated interest rates during the past twelve months.

During the first nine months of 2019 the average balance of the loan portfolio increased 6% compared to the first nine months of 2018. This growth occurred in the majority of segments of the loan portfolio with the most significant growth in the commercial portfolios. The yield on average loans increased 21 basis points compared to the prior year period. Excluding the previously mentioned interest recoveries for the current year and the prior year, the increase in the yield on average loans remained at 21 basis points. The average yield on total investment securities increased 10 basis points as the average balance of the portfolio decreased 6% for the first nine months of 2019 compared to the first nine months of 2018. Composition of the average investment portfolio shifted to a higher percentage of taxable securities (77%) in the current period as compared to 72% for the prior year period. During the same period, the average yield for taxable securities rose 17 basis points versus the average yield on tax-exempt securities, which rose 2 basis points.

Interest Expense

For the first nine months of 2019 interest expense increased 42% compared to the first nine months of 2018. The majority of the increase from period to period was due to increased rates on the majority of deposit categories to stimulate deposit growth and provide funding for loan growth and the reduction of borrowed funds. The cost of interest-bearing deposits increased due predominantly to the 12% growth in money market and 31% growth in time deposit average balances, coupled with a 38 basis point increase in money market deposit rates and a 78 basis point increase in time deposit rates. Additionally, while the amount of average advances from FHLB borrowings decreased 31% from period to period, the average rate paid increased 52 basis points. The impact of these movements resulted in a 14% decrease in the associated interest expense. The overall impact to the total rate paid on interest-bearing liabilities of the average balance and rate changes was an increase of 43 basis points in the first nine months of 2019 compared to the first nine months of 2018.

Non-interest Income

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

			Nine Months Ended September 30,				2019/2018		2019/2018
(Dollars in thousands)			2019		2018		$ Change			% Change
	Securities gains		$	20	$	145	$	(125)		(86.2)	%
	Service charges on deposit accounts			7,265		6,865		400		5.8
	Mortgage banking activities			10,541		5,943		4,598		77.4
	Wealth management income			16,268		15,792		476		3.0
	Insurance agency commissions			5,281		5,020		261		5.2
	Income from bank owned life insurance			2,505		3,664		(1,159)		(31.6)
	Bank card fees			4,181		4,199		(18)		(0.4)
	Other income			6,037		5,391		646		12.0
		Total non-interest income	$	52,098	$	47,019	$	5,079		10.8

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Total non-interest income increased 11% to $52.1 million for the first nine months of 2019 compared to $47.0 million for the first nine months of 2018, which is an 11% increase. Excluding life insurance mortality proceeds of $0.6 million and $1.6 million from the first nine months of each year, non-interest income increased 13%. This increase was driven primarily by income from mortgage banking activities, which increased 77%, and to lesser degrees, wealth management income, insurance agency commissions and service charges. Further detail by type of non-interest income follows:

Service charges on deposit accounts increased 6% in the first nine months of 2019, compared to the first nine months of 2018 driven by commercial banking fees.

Income from mortgage banking activities increased 77% in the first nine months of 2019, compared to the first nine months of 2018. Origination volume associated with the mortgage lending operations was responsible for the growth in mortgage banking income for the first nine months of 2019. Sales of originated mortgage loans rose 51% during the current period compared to the same period for 2018.

Wealth management income, comprised of income from trust and estate services and investment management fees earned by the Company’s investment management subsidiary, increased 3% for the first nine months of 2019 compared to the same period of the prior year. Trust services fees increased 2% for the first nine months of 2019 compared to the prior year period due to an increase in personal trust services. Investment management fees increased 4% for the first nine months of 2019 compared to the same period of 2018, due to an increase in assets under management. Overall total assets under management increased to $3.2 billion at September 30, 2019 compared to $2.9 billion at September 30, 2018, primarily as a result of increased sales efforts.

Insurance agency commissions increased 5% for the first nine months of 2019 as compared to the first nine months of 2018, driven by an increase in commissions on physician’s liability policies.

Bank-owned life insurance income decreased for the first nine months of 2019 as compared to the first nine months of 2018 due to the decline in insurance mortality proceeds from year-to-year of $0.6 million and $1.6 million, respectively.

Bank card fee income remained level during the first nine months of 2019, compared to the first nine months of 2018.

Other non-interest income increased during the first nine months of 2019, compared to the first nine months of 2018 as a result of increased fee income.

Non-interest Expense

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

		Nine Months Ended September 30,				2019/2018		2019/2018
(Dollars in thousands)		2019		2018		$ Change			% Change
Salaries and employee benefits		$	77,699	$	73,064	$	4,635		6.3	%
Occupancy expense of premises			14,807		13,939		868		6.2
Equipment expenses			7,929		6,909		1,020		14.8
Marketing			3,371		2,863		508		17.7
Outside data services			5,713		4,840		873		18.0
FDIC insurance			2,137		3,840		(1,703)		(44.3)
Amortization of intangible assets			1,465		1,622		(157)		(9.7)
Merger expenses			364		11,766		(11,402)		(96.9)
Professional fees and services			4,425		4,090		335		8.2
Other expenses			15,094		14,183		911		6.4
	Total non-interest expense	$	133,004	$	137,116	$	(4,112)		(3.0)

Non-interest expense decreased 3% to $133.0 million in the first nine months of 2019 compared to $137.1 million in the first nine months of 2018. The first nine months of 2018 included $11.8 million in merger expenses. Excluding merger expenses from 2019 and 2018, non-interest expense increased 6% over the prior year period. The increase was driven by increases in expenses related to compensation, software, marketing and outside data services. A portion of these increases was offset by the decrease in FDIC insurance during the year. Further detail by category of non-interest expense follows:

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Salaries and employee benefits, the largest component of non-interest expenses, increased 6% in the first nine months of 2019 as a result of a combination of higher compensation expense from annual merit increases over the preceding twelve months and management’s decision, beginning in the current year, to increase the Company’s contribution to the employee retirement savings plan as a result of the reduction of the corporate tax rate that occurred at the end of 2017. The average number of full-time equivalent employees declined to 913 in the first nine months of 2019 compared to 921 in the first nine months of 2018.

Combined occupancy and equipment expenses increased 9% compared to the prior year as a result of increases to software cost and, to a lesser extent, increases in rental expense and equipment depreciation.

Marketing expense increased 18% as a result of increased advertising campaigns.

FDIC insurance experienced a 44% decrease due to the receipt of an assessment credit resulting from the industry deposit fund reaching stipulated benchmark levels.

Outside data services grew by $0.9 million or 18% primarily due to increased transaction volume.

Professional fees and services grew 8% from the prior year as a result of costs associated with consulting services and mortgage loan processing.

Operating Expense Performance

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

Non-GAAP Financial Measures

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

In general, the efficiency ratio is non-interest expense as a percentage of net interest income plus non-interest income. Non-interest expense used in the calculation of the non-GAAP efficiency ratio excludes merger expenses, the amortization of intangibles, and other non-recurring expenses. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income, and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains. The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Condensed Consolidated Statements of Income. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio remained relatively stable at 51.36% in the first nine months of 2019 compared to 50.57% for the first nine months of 2018.

In addition, the Company uses pre-tax, pre-provision income adjusted for merger expenses as a measure of the level of 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 the provision for loan losses, merger expenses and the provision for income taxes back to net income. This metric increased by 3% in the first nine months of 2019 compared to the first nine months of 2018 due primarily to the increases in net interest income and non-interest income which offset the increase in non-interest expense.

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			Nine Months Ended
			September 30,
(Dollars in thousands)			2019		2018
Pre-tax pre-provision pre-merger income:
Net income			$	87,976	$	75,298
	Plus non-GAAP adjustments:
		Merger expenses		364		11,766
		Income taxes		27,814		23,285
		Provision for loan losses		3,029		5,620
Pre-tax pre-provision pre-merger income			$	119,183	$	115,969
Efficiency ratio - GAAP basis:
Non-interest expense			$	133,004	$	137,116
Net interest income plus non-interest income			$	251,823	$	241,319
Efficiency ratio - GAAP basis				52.82%		56.82%
Efficiency ratio - Non-GAAP basis:
Non-interest expense			$	133,004	$	137,116
	Less non-GAAP adjustments:
		Amortization of intangible assets		1,465		1,622
		Merger expenses		364		11,766
Non-interest expense - as adjusted			$	131,175	$	123,728
Net interest income plus non-interest income			$	251,823	$	241,319
	Plus non-GAAP adjustment:
		Tax-equivalent income		3,597		3,483
	Less non-GAAP adjustment:
		Securities gains		20		145
	Net interest income plus non-interest income - as adjusted		$	255,400	$	244,657
	Efficiency ratio - Non-GAAP basis			51.36%		50.57%

Income Taxes

The Company’s income tax expense increased to $27.8 million in the first nine months of 2019, compared to income tax expense of $23.3 million in the first nine months of 2018 as a result of the increase in pre-tax income. The resulting effective tax rates were 24.0% for the first nine months of 2019 and 23.6% for the first nine months of 2018. This increase in the effective tax rate was the result of a decline in the proportion of tax-advantaged income to income before taxes for the first nine months of 2019 compared to the same period for 2018.

44

Results of Operations

For the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

Net income for the Company for the third quarter of 2019 totaled $29.4 million ($0.82 per diluted share) compared to net income of $29.2 million ($0.82 per diluted share) for the third quarter of 2018.

Net Interest Income

For the third quarter of 2019, net interest income decreased 1% to $66.8 million compared to $67.6 million for the third quarter of 2018. On a tax-equivalent basis, net interest income for the third quarter of 2019 was $67.9 million compared to $68.8 million for the third quarter of 2018, a decrease of 1%. During this period, interest income increased 3% primarily due to loan growth and interest expense increased 21% related to deposit growth, resulting in the decline in net interest income. The net interest margin for the current quarter was 3.51%, compared to the net interest margin for the third quarter of 2018 of 3.71%. The prior year’s quarterly margin was positively impacted by an interest income recovery of $2.0 million. Excluding this recovery, the prior year’s net interest margin was 3.60%. The current quarter’s margin benefited from the decrease in average borrowed funds in addition to an increase in average noninterest-bearing deposits compared to the prior year quarter. Amortization of the fair value adjustments to both interest-earning assets and interest-bearing liabilities directly attributable to the WashingtonFirst acquisition had a 4 basis point positive effect on the net interest margin for the current period, compared to 8 basis points for the same period of the prior year. The resulting adjusted net interest margin for the current quarter was 3.47% as compared to 3.52% for the prior year quarter.

The impact of the amortization of the fair value adjustments on net interest income for the current quarter is presented in the following table:

(In thousands)		For the Three Months Ended September 30, 2019
Net Interest Income Excluding Purchase Accounting Adjustments:
Net Interest Income		$	66,790
	Accretion of fair value adjustment on pools of homogeneous loans		(411)
	Accretion of loan fair value adjustment on purchased credit impaired loans		(205)
	Settlements of purchased credit impaired loans		-
	Accretion of fair value adjustment on certificates of deposits		(117)
	Accretion of fair value adjustment on subordinated debentures		(37)
Net Interest Income Excluding Purchase Accounting Adjustments		$	66,020

45

Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
		Three Months Ended September 30,
				2019						2018
					Annualized						Annualized
	Average		(1)		Average		Average		(1)		Average
(Dollars in thousands and tax-equivalent)	Balances		Interest		Yield/Rate		Balances		Interest		Yield/Rate
Assets
Residential mortgage loans	$	1,215,132	$	11,649	3.83	%	$	1,122,946	$	10,485	3.73	%
Residential construction loans		162,196		1,746	4.27			215,578		2,160	3.98
Total mortgage loans		1,377,328		13,395	3.89			1,338,524		12,645	3.77
Commercial AD&C loans		651,905		9,705	5.91			632,354		9,185	5.76
Commercial investor real estate loans		1,982,979		24,342	4.87			1,905,427		25,735	5.36
Commercial owner occupied real estate loans		1,258,000		15,749	4.97			1,190,865		14,484	4.83
Commercial business loans		786,150		10,350	5.22			700,791		9,196	5.21
Total commercial loans		4,679,034		60,146	5.10			4,429,437		58,600	5.25
Consumer loans		486,865		6,132	5.00			524,605		6,011	4.59
Total loans (2)		6,543,227		79,673	4.84			6,292,566		77,256	4.88
Loans held for sale		61,870		572	3.70			29,939		336	4.49
Taxable securities		744,461		5,504	2.95			720,317		5,342	2.97
Tax-exempt securities (3)		196,587		1,695	3.45			276,048		2,442	3.54
Total investment securities (4)		941,048		7,199	3.06			996,365		7,784	3.12
Interest-bearing deposits with banks		143,865		783	2.16			51,683		211	1.62
Federal funds sold		619		2	1.42			1,983		8	1.58
Total interest-earning assets		7,690,629		88,229	4.56			7,372,536		85,595	4.61
Less: allowance for loan losses		(54,147)						(49,194)
Cash and due from banks		64,154						64,653
Premises and equipment, net		60,537						62,452
Other assets		609,616						536,078
Total assets	$	8,370,789					$	7,986,525
Liabilities and Stockholders' Equity
Interest-bearing demand deposits	$	749,720		545	0.29	%	$	703,905		231	0.13	%
Regular savings deposits		326,913		110	0.13			347,299		93	0.11
Money market savings deposits		1,781,173		6,721	1.50			1,625,481		5,330	1.30
Time deposits		1,638,072		8,956	2.17			1,284,376		5,119	1.58
Total interest-bearing deposits		4,495,878		16,332	1.44			3,961,061		10,773	1.08
Other borrowings		146,939		257	0.69			188,133		383	0.81
Advances from FHLB		522,719		3,222	2.45			890,040		5,141	2.29
Subordinated debentures		37,340		481	5.15			37,483		486	5.19
Total interest-bearing liabilities		5,202,876		20,292	1.55			5,076,717		16,783	1.31
Noninterest-bearing demand deposits		1,909,884						1,822,931
Other liabilities		134,844						56,710
Stockholders' equity		1,123,185						1,030,167
Total liabilities and stockholders' equity	$	8,370,789					$	7,986,525
Net interest income and spread				67,937	3.01	%				68,812	3.30	%
Less: tax-equivalent adjustment				1,147						1,221
Net interest income			$	66,790					$	67,591
Interest income/earning assets					4.56	%					4.61	%
Interest expense/earning assets					1.05						0.90
Net interest margin					3.51	%					3.71	%
(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 26.13% for both 2019 and 2018. The annualized
taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.1 million and $1.2 million in 2019 and 2018, respectively.
(2) Non-accrual loans are included in the average balances.
(3) Includes only investments that are exempt from federal taxes.
(4) Investments available-for-sale are presented at amortized cost.

46

Interest Income

The Company's total tax-equivalent interest income increased 3% for the third quarter of 2019 compared to the prior year quarter. The previous table reflects the growth in interest-earning assets as loan growth during the previous twelve months more than offset modest declines in other interest-earning assets.

The average balance of the loan portfolio increased 4% for the third quarter of 2019 compared to the prior year period. A significant amount of this growth was concentrated in the commercial real estate loan portfolio. The yield on average loans decreased by 4 basis points compared to the prior year quarter, which included $2.0 million in an interest income recovery. Excluding the interest recovery, the average yield on loans increased 10 basis points compared to the prior year quarter. The average yield on total investment securities decreased 6 basis points while the average balance of the investment portfolio decreased by 6% for the third quarter of 2019 compared to the third quarter of 2018. The decrease in the yield on investments was driven primarily by the decrease in the yield on tax-exempt securities as the average balance also declined. The combined decrease in the yield on loans and the investment portfolio resulted in the 5 basis point decline in the yield on interest-earning assets from period to period. Exclusive of the interest recovery, the yield on interest-earning assets would have increased 6 basis points.

Interest Expense

Interest expense increased 21% in the third quarter of 2019 compared to the third quarter of 2018. The majority of the increase from period to period was attributable to the rates that were increased to promote deposit growth. The main driver in the rise in interest expense was the 52% rise in the cost of interest-bearing deposits partially offset by the 34% decline in the cost of borrowed funds. Deposit growth was primarily the result of the 9% growth in money market and the 27% growth in time deposit average balances. The increase in the average interest-bearing deposits directly facilitated a 41% decrease in average FHLB borrowings from period to period, as the average rate paid on those borrowings increased 16 basis points. Coupled with the impact of the decline in borrowed funds, the 5% increase in non-interest bearing deposits provided an additional benefit to the Company’s interest rate margin. Overall, the impact of the growth in interest-bearing liabilities and rates was an increase of 24 basis points in the average rate paid on interest-bearing liabilities in the third quarter of 2019 compared to the third quarter of 2018.

Non-interest Income

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

			Three Months Ended September 30,				2019/2018		2019/2018
(Dollars in thousands)			2019		2018		$ Change			% Change
	Securities gains		$	15	$	82	$	(67)		(81.7)	%
	Service charges on deposit accounts			2,516		2,316		200		8.6
	Mortgage banking activities			4,408		1,672		2,736		163.6
	Wealth management income			5,493		5,344		149		2.8
	Insurance agency commissions			2,116		2,016		100		5.0
	Income from bank owned life insurance			662		663		(1)		(0.2)
	Bank card fees			1,462		1,436		26		1.8
	Other income			1,901		1,504		397		26.4
		Total non-interest income	$	18,573	$	15,033	$	3,540		23.5

Total non-interest income increased 24% to $18.6 million for the third quarter of 2019 compared to $15.0 million for the third quarter of 2018. This increase was driven predominantly by income from mortgage banking activities and, to a lesser extent, modest increases in the majority of sources of non-interest income. Further detail by type of non-interest income follows:

Service charges on deposit accounts increased 9% in the third quarter of 2019, compared to the third quarter of 2018.

Income from mortgage banking activities increased by $2.8 million or 164% in the third quarter of 2019 as compared to the third quarter of 2018. The increased income from mortgage banking activities was attributable to the increased origination volume during the period. The Company sold the majority of its mortgage loan production for gains during the quarter versus retaining them in the loan portfolio.

Wealth management income increased 3% for the third quarter of 2019 as compared to the third quarter of 2018. Overall total assets under management increased to $3.2 billion at September 30, 2019 compared to $3.0 billion at September 30, 2018 due to client additions and the impact of rising markets.

Insurance agency commissions increased 5% in the third quarter of 2019, compared to the third quarter of 2018, driven by increases in commercial insurance income.

47

Bank card income grew 2% in the third quarter of 2019, compared to the third quarter of 2018 as transaction volume increased from the prior year.

Other non-interest income increased 26% in the third quarter of 2019, compared to the third quarter of 2018 as a result of increased fee income.

Non-interest Expense

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

		Three Months Ended September 30,				2019/2018		2019/2018
(Dollars in thousands)		2019		2018		$ Change			% Change
Salaries and employee benefits		$	26,234	$	24,488	$	1,746		7.1	%
Occupancy expense of premises			4,816		4,355		461		10.6
Equipment expenses			2,641		2,441		200		8.2
Marketing			1,541		770		771		100.1
Outside data services			1,973		1,736		237		13.7
FDIC insurance			(83)		1,257		(1,340)		(106.6)
Amortization of intangible assets			491		540		(49)		(9.1)
Merger expenses			364		580		(216)		(37.2)
Professional fees and services			1,546		1,351		195		14.4
Other expenses			5,402		4,875		527		10.8
	Total non-interest expense	$	44,925	$	42,393	$	2,532		6.0

Non-interest expense totaled $44.9 million in the third quarter of 2019 compared to $42.4 million in the third quarter of 2018, an increase of 6%. The current year included $0.4 million in merger costs compared to $0.6 million for the prior year. Exclusive of these expenses, non-interest expense increased 7%. Further detail by category of non-interest expense follows:

Salaries and employee benefits, the largest component of non-interest expenses, increased 7% in the third quarter of 2019 as a result of higher compensation expense associated with incentive-based sales programs. The average number of full-time equivalent employees declined to 917 in the third quarter of 2019 compared to 921 in the third quarter of 2018.

Occupancy and equipment expenses for the quarter increased 10% compared to the prior year quarter as a result of increases in rental expense and software costs.

Marketing expense increased as a result of increased advertising campaigns.

FDIC insurance expense decreased 107% due to the receipt of an assessment credit during the current quarter.

Outside data service expense grew 14% driven by transaction-based services offered by the Bank.

Professional fees and services increased 14% from the prior year due to increased costs associated with consulting services and mortgage loan processing costs.

Other non-interest expenses increased 11% in the third quarter of 2019 compared to the third quarter of 2018 primarily due to higher expenses incurred in the closure of redundant facilities, which were partially offset by a decrease in franchise taxes.

Income Taxes

The Company had income tax expense of $9.5 million in the third quarter of 2019, compared to income tax expense of $9.1 million in the third quarter of 2018. The resultant effective tax rate increased to 24.5% for the third quarter of 2019 compared to 23.8% for the third quarter of 2018 as a result of the lower proportion of tax-advantaged income to income before taxes in the current period versus 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 may indicate improved productivity as the growth rate in revenue streams exceeds the growth in operating expenses.

Non-GAAP Financial Measures

48

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

In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income. Non-interest expenses used in the calculation of the non-GAAP efficiency ratio exclude merger expenses, the amortization of intangibles, and other non-recurring expenses. Income for the non-GAAP efficiency ratio includes the favorable effect of tax-exempt income, and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains. The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Condensed Consolidated Statements of Income. The GAAP efficiency ratio in the third quarter of 2019 was 52.63% compared to 51.31% for the third quarter of 2018, as non-interest expense increased at a greater rate then net revenues. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio was 50.95% in the third quarter of 2019 compared to 49.27% in the third quarter of 2018 as the rate of increase in the non-GAAP expenses exceeded the rate of increase in the non-GAAP income.

In addition to efficiency ratios, the Company uses pre-tax, pre-provision income, excluding merger expenses, as a measure of the level of recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses which is readily comparable to other financial institutions. This measure is calculated by adding the provision for loan losses, merger expenses and the provision for income taxes back to net income. This metric remained level for the third quarter of 2019 compared to the third quarter of 2018.

49

			Three Months Ended
			September 30,
(Dollars in thousands)			2019		2018
Pre-tax pre-provision pre-merger income:
Net income			$	29,383	$	29,234
	Plus non-GAAP adjustments:
		Merger expenses		364		580
		Income taxes		9,531		9,107
		Provision for loan losses		1,524		1,890
Pre-tax pre-provision pre-merger income			$	40,802	$	40,811
Efficiency ratio - GAAP basis:
Non-interest expense			$	44,925	$	42,393
Net interest income plus non-interest income			$	85,363	$	82,624
Efficiency ratio - GAAP basis				52.63%		51.31%
Efficiency ratio - Non-GAAP basis:
Non-interest expense			$	44,925	$	42,393
	Less non-GAAP adjustments:
		Amortization of intangible assets		491		540
		Merger expenses		364		580
Non-interest expense - as adjusted			$	44,070	$	41,273
Net interest income plus non-interest income			$	85,363	$	82,624
	Plus non-GAAP adjustment:
		Tax-equivalent income		1,147		1,221
	Less non-GAAP adjustment:
		Securities gains		15		82
	Net interest income plus non-interest income - as adjusted		$	86,495	$	83,763
	Efficiency ratio - Non-GAAP basis			50.95%		49.27%

50

FINANCIAL CONDITION

The Company’s total assets grew to $8.4 billion at September 30, 2019, as compared to $8.2 billion at December 31, 2018 primarily as a result of an increase in cash and interest-bearing deposits with banks, in addition to an increase in other assets from the newly adopted lease accounting standard. Total loans remained level at September 30, 2019 compared December 31, 2018 at $6.6 billion despite $618 million in new funded commercial loan production during this period. In addition, commercial loans originated year-to-date had total unfunded commitments of $359 million as of September 30, 2019. The growth of the loan portfolio during the previous nine months was limited due to the attrition attributable to the competitive forces in the regional economy and shifts that have occurred in interest rates in addition to the sales of the majority of mortgage loan production. Total deposits grew 10% from the end of 2018 resulting in a reduction of the loan to deposit ratio from 111% at year-end 2018 to 102% at the end of the current quarter. The year-to-date deposit growth included a 19% increase in noninterest-bearing deposits and a 45% reduction in wholesale deposits. The increase in deposits enabled the reduction of higher cost borrowings, which declined $533 million from year-end 2018 through September 30, 2019.

Analysis of Loans

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

		September 30, 2019				December 31, 2018				Period-to-Period Change
(Dollars in thousands)		Amount		%		Amount		%		Amount		%
Residential real estate:
	Residential mortgage	$	1,199,275	18.2	%	$	1,228,247	18.7	%	$	(28,972)	(2.4)	%
	Residential construction		150,692	2.3			186,785	2.8			(36,093)	(19.3)
Commercial real estate:
	Commercial owner occupied real estate		1,278,505	19.4			1,202,903	18.3			75,602	6.3
	Commercial investor real estate		2,036,021	30.8			1,958,395	29.8			77,626	4.0
	Commercial AD&C		678,906	10.3			681,201	10.4			(2,295)	(0.3)
Commercial business			772,619	11.7			796,264	12.1			(23,645)	(3.0)
Consumer			480,530	7.3			517,839	7.9			(37,309)	(7.2)
	Total loans	$	6,596,548	100.0	%	$	6,571,634	100.0	%	$	24,914	0.4

Analysis of Investment Securities

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

			September 30, 2019				December 31, 2018				Period-to-Period Change
(Dollars in thousands)			Amount		%		Amount		%		Amount		%
Investments available-for-sale:
	U.S. treasuries and government agencies		$	286,381	30.3	%	$	296,678	29.4	%	$	(10,297)	(3.5)	%
	State and municipal			221,481	23.4			282,024	27.9			(60,543)	(21.5)
	Mortgage-backed and asset-backed			376,021	39.7			348,515	34.4			27,506	7.9
	Corporate debt			9,511	1.0			9,240	0.9			271	2.9
	Trust preferred			310	-			310	-			-	-
	Marketable equity securities			568	0.1			568	0.1			-	-
		Total available-for-sale securities		894,272	94.5			937,335	92.7			(43,063)	(4.6)
Other equity securities:
	Other equity securities			51,938	5.5			73,389	7.3			(21,451)	(29.2)
		Total other equity securities		51,938	5.5			73,389	7.3			(21,451)	(29.2)
Total securities			$	946,210	100.0	%	$	1,010,724	100.0	%	$	(64,514)	(6.4)

51

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, 2019, 98% of the investment portfolio was invested in Aa/AA or Aaa/AAA-rated securities. The composition and size of the portfolio at September 30, 2019 has remained stable compared to the prior year-end. The duration of the portfolio is monitored to ensure the adequacy and ability to meet liquidity demands. At September 30, 2019 the duration of the portfolio was 3.2 years compared to 3.9 years at December 31, 2018. The decrease in the duration is attributable to the declining interest rate environment during the first half of 2019. These attributes have resulted in a portfolio with low credit risk that could provide the liquidity necessary to meet the loan and operational demands.

Other Earning Assets

Residential mortgage loans held for sale increased to $79 million at September 30, 2019, compared to $23 million at December 31, 2018 as a result of the increased volume of loan originations during the period and the decision to sell more of the Company’s mortgage loan production. The aggregate of interest-bearing deposits with banks and federal funds increased by $86 million at September 30, 2019 compared to December 31, 2018 due to the timing of cash flows.

Deposits

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

			September 30, 2019				December 31, 2018				Period-to-Period Change
(Dollars in thousands)			Amount		%		Amount		%		Amount		%
Noninterest-bearing deposits			$	2,081,435	32.1	%	$	1,750,319	29.6	%	$	331,116	18.9	%
Interest-bearing deposits:
	Demand			751,762	11.6			703,145	11.9			48,617	6.9
	Money market savings			1,800,683	27.7			1,605,024	27.1			195,659	12.2
	Regular savings			324,464	5.0			330,231	5.6			(5,767)	(1.7)
	Time deposits of less than $100,000			466,847	7.2			427,421	7.2			39,426	9.2
	Time deposits of $100,000 or more			1,068,708	16.4			1,098,740	18.6			(30,032)	(2.7)
		Total interest-bearing deposits		4,412,464	67.9			4,164,561	70.4			247,903	6.0
Total deposits			$	6,493,899	100.0	%	$	5,914,880	100.0	%	$	579,019	9.8

Deposits and Borrowings

Total deposits increased by 10% from $5.9 billion at December 31, 2018 to $6.5 billion at September 30, 2019. The majority of this increase occurred in noninterest-bearing deposits with other notable increases in money market and time deposit categories. Interest-bearing deposits represented 68% of deposits with the remaining 32% in noninterest-bearing balances at September 30, 2019 compared to 70% and 30%, respectively, at December 31, 2018. In connection with the increase in deposits, total borrowings were reduced by $0.5 billion or 44% at September 30, 2019 compared to December 31, 2018, primarily in advances from the FHLB and overnight funding. This reduction, accompanied by the increase in noninterest-bearing deposits, benefited the Company’s net interest margin during the current period.

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 was $1.1 billion at September 30, 2019 and December 31, 2018. The ratio of average equity to average assets was 13.22% for the nine months ended September 30, 2019, as compared to 12.85% for the first nine months of 2018.

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.

Risk-Based Capital Ratios

52

			Minimum
	Ratios at		Regulatory
	September 30, 2019	December 31, 2018	Requirements
Total capital to risk-weighted assets	12.70%	12.26%	8.00%
Tier 1 capital to risk-weighted assets	11.52%	11.06%	6.00%
Common equity tier 1 capital	11.37%	10.90%	4.50%
Tier 1 leverage	9.96%	9.50%	4.00%

As of September 30, 2019, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.

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

Tangible Common Equity

Tangible 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 from stockholder’s equity and total assets, respectively. 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 equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

Tangible common equity totaled $787 million at September 30, 2019, compared to $727 million at December 31, 2018. At September 30, 2019, the ratio of tangible common equity to tangible assets has increased to 9.74% compared to 9.21% at December 31, 2018. Tangible common equity growth was the result of increased net earnings during the current year.

A reconciliation of the non-GAAP ratio of tangible equity to tangible assets and tangible book value per share are provided in the following table:

Tangible Common Equity Ratio – Non-GAAP

(Dollars in thousands, except per share data)		September 30, 2019		December 31, 2018
Tangible common equity ratio:
Total stockholders' equity		$	1,140,041	$	1,067,903
	Accumulated other comprehensive loss		2,708		15,754
	Goodwill		(347,149)		(347,149)
	Other intangible assets, net		(8,322)		(9,788)
Tangible common equity		$	787,278	$	726,720
Total assets		$	8,437,538	$	8,243,272
	Goodwill		(347,149)		(347,149)
	Other intangible assets, net		(8,322)		(9,788)
Tangible assets		$	8,082,067	$	7,886,335
Tangible common equity ratio			9.74%		9.21%
Tangible book value per share			$ 22.10		$ 20.45

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Credit Risk

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

Loans acquired with evidence of credit deterioration since their origination as of the date of the acquisition are recorded at their initial fair value. Credit deterioration is determined based on the probability of collection of all contractually required principal and interest payments. These loans are not considered non-performing for reporting purposes but are managed and monitored in the same manner and using the same techniques and strategies as organically generated loans. In accordance with GAAP, the historical allowance for loan losses related to the acquired loans is not carried over to the Company’s financial statements. The following credit related sections should be read in conjunction with the section “Loans Acquired with Deteriorated Credit Quality” in “Note 1 – Significant Accounting Policies” of the Notes to the Condensed Consolidated Financial Statements.

Total non-performing loans increased to $40.1 million or 0.61% of total loans at September 30, 2019 compared to $36.0 million or 0.55% of total loans at December 31, 2018. 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.

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 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 the monitoring of portfolio credit quality, early identification of potential problem credits and the proactive management of problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses (the “allowance”).

The allowance represents an estimation of the losses that are inherent in the loan portfolio. The adequacy of the allowance is determined through the ongoing evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish an adequate allowance for loan losses. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan losses, which is recorded as a current period operating expense.

The methodology for assessing the appropriateness of the allowance includes: (1) a general allowance that reflects historical losses supplemented by qualitative factors, as adjusted, by credit category, and (2) a specific allowance for impaired credits on an individual or portfolio basis. The amount of the allowance is reviewed quarterly by the Risk Committee of the board of directors.

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The Company recognizes a collateral dependent 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. When a commercial loan is placed on non-accrual status, it is considered to be impaired and all accrued but unpaid interest is reversed. Classification as an impaired loan is based on a determination that the Company may not collect all principal and interest payments according to contractual terms. Impaired loans exclude large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment such as residential real estate and consumer loans. Typically, all payments received on non-accrual loans are first applied to the remaining principal balance of the loans. Any additional recoveries are credited to the allowance. Integral to the assessment of the allowance process is an evaluation that is performed to determine whether a specific allowance on an impaired loan is warranted and, when losses are confirmed, a charge-off is taken to reduce the loan to its net realizable value. Any further collateral deterioration results in either further specific allowances being established or additional charge-offs. When additional deterioration becomes apparent, an action plan is developed for the particular loan and an appraisal will be obtained depending on the time elapsed since the prior appraisal, the loan balance and/or the result of the internal evaluation. A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the adequacy of the collateral based on an internal evaluation. The Company’s policy is to strictly adhere to regulatory appraisal standards. If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether a specific allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve a specific allowance or charge-off between monthly credit committee meetings to ensure that there are no significant time lapses during this process.

The Company’s methodology for evaluating whether a loan is impaired 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 impairment, the Company looks primarily to the discounted cash flows of the project itself or to the value of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as impaired.

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

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

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

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

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

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

The Company will specifically reserve for or charge-off the excess of the loan amount over the amount of the appraisal net of closing costs.

If an updated appraisal is received subsequent to the preliminary determination of a specific allowance or partial charge-off, and it is less than the initial appraisal used in the initial assessment, an additional specific 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.

55

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

The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and /or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view 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.

Collateral values or estimates of discounted cash flows (inclusive of any potential cash flow from guarantees) are evaluated to estimate the probability and severity of potential losses. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

The determination of the allowance requires significant judgment, and estimates of probable losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, federal and state regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the loan portfolio and the allowance. Such reviews may result in adjustments to the allowance based upon their analysis of the information available at the time of each examination.

The Company makes provisions for loan losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology previously discussed. The provision for loan losses was $1.5 million for the third quarter of 2019 compared to $1.9 million for the third quarter of 2018. The current quarter’s provision reflects the impact of organic loan production and the need to establish a loan loss provision for previously acquired loans that had reached their maturity under their original lending arrangements and were renewed by the Bank.

The Company typically sells a substantial portion of its fixed-rate residential mortgage originations in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of six to twelve months after the sale of the loan although the time frame for repurchase requests can extend for an indefinite period. Such transactions could be due to a number of causes including borrower fraud or early payment default. The Company has seen a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of $0.7 million for probable losses due to repurchases.

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

Mortgage loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The amortized cost of the Company's mortgage loan servicing rights was $1.0 million and $1.1 million at September 30, 2019 and December 31, 2018, respectively. The Company did not incur any impairment losses during the current period.

Allowance for Loan Losses

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During the third quarter of 2019, there were no changes in the Company’s methodology for assessing the appropriateness of the allowance for loan losses from the prior year. Variations can occur over time in the estimation of the allowance as a result of the credit performance of borrowers.

The allowance for loan losses as a percent of total loans was 0.83% and 0.81% at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, total non-performing loans, excluding credit deteriorated loans from acquisitions, were $40.1 million, or 0.61% of total loans, compared to $36.0 million, or 0.55% of total loans, at December 31, 2018. The growth in non-performing loans occurred as a result of modest increases in all segments of the loan portfolio, predominantly loans secured by real estate. Non-performing loans include accruing loans 90 days or more past due and restrucutred loans, but exclude acquired non-performing loans. The allowance for loan losses represented 137% of non-performing loans at September 30, 2019 as compared to 149% at December 31, 2018. While non-performing loans increased from December 31, 2018 to the current quarter, the related reserves for those loans remained stable due to adequate collateral values.

Continued analysis of the actual loss history on the problem credits in 2018 and 2019 provided an indication that the coverage of the inherent losses on the problem credits was adequate. The Company continues to monitor the impact of the economic conditions on our commercial customers together with the reduced inflow of non-accruals and criticized loans. The improvement in these credit metrics supports management’s outlook for continued improved credit quality performance.

The balance of impaired loans was $22.0 million, with specific allowances of $4.3 million against those loans at September 30, 2019, as compared to $22.2 million with specific allowances of $4.9 million, at December 31, 2018.

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 88% of total loans at September 30, 2019 and 87% of total loans at December 31, 2018. Certain loan terms may create concentrations of credit risk and increase the Company’s exposure to loss. These include terms that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans. The Company does not make loans that provide for negative amortization or option adjustable-rate mortgages.

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Summary of Loan Loss Experience

The following table presents the activity in the allowance for loan losses for the periods indicated:

			Nine Months Ended		Year Ended
(Dollars in thousands)			September 30, 2019		December 31, 2018
Balance, January 1			$	53,486	$	45,257
Provision for loan losses				3,029		9,023
Loan charge-offs:
Residential real estate:
	Residential mortgage			(408)		(225)
	Residential construction			-		-
Commercial real estate:
	Commercial investor			-		(131)
	Commercial owner occupied			-		-
	Commercial AD&C			-		-
Commercial business				(1,176)		(449)
Consumer				(517)		(611)
	Total charge-offs			(2,101)		(1,416)
Loan recoveries:
Residential real estate:
	Residential mortgage			120		62
	Residential construction			6		15
Commercial real estate:
	Commercial investor			13		87
	Commercial owner occupied			-		-
	Commercial AD&C			228		62
Commercial business				45		258
Consumer				166		138
	Total recoveries			578		622
	Net charge-offs			(1,523)		(794)
		Balance, period end	$	54,992	$	53,486
Net charge-offs to average loans				0.03%		0.01%
Allowance for loan losses to loans				0.83%		0.81%

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Analysis of Credit Risk

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

(Dollars in thousands)			September 30, 2019		December 31, 2018
Non-accrual loans:
Residential real estate:
	Residential mortgage		$	12,574	$	9,336
	Residential construction			-		159
Commercial real estate:
	Commercial investor			8,454		5,355
	Commercial owner occupied			3,810		4,234
	Commercial AD&C			829		3,306
Commercial business				6,393		7,086
Consumer				4,561		4,107
		Total non-accrual loans		36,621		33,583
Loans 90 days past due
Residential real estate:
	Residential mortgage			-		221
	Residential construction			-		-
Commercial real estate:
	Commercial investor			1,201		-
	Commercial owner occupied			-		-
	Commercial AD&C			-		-
Commercial business				17		49
Consumer				-		219
	Total 90 days past due loans			1,218		489
Restructured loans (accruing)				2,287		1,942
	Total non-performing loans			40,126		36,014
Other real estate owned, net				1,482		1,584
	Total non-performing assets		$	41,608	$	37,598
Non-performing loans to total loans				0.61%		0.55%
Non-performing assets to total assets				0.49%		0.46%
Allowance for loan to non-performing loans				137.05%		148.51%

Market Risk Management

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

The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin 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.

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The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. As an example, certain types of money market deposit accounts are assumed to reprice at 40 to 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Bank’s net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.

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

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

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

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

Estimated Changes in Net Interest Income
Change in Interest Rates:	+ 400 bp	+ 300 bp	+ 200 bp	+ 100 bp	- 100 bp	- 200 bp	-300 bp	400 bp
Policy Limit	23.50%	17.50%	15.00%	10.00%	10.00%	15.00%	17.50%	23.50%
September 30, 2019	14.92%	11.47%	7.97%	4.10%	(4.43%)	N/A	N/A	N/A
December 31, 2018	2.74%	2.29%	2.38%	1.15%	(1.74%)	(3.15%)	N/A	N/A

The impact of these various interest movements on net interest income are reflected in the preceding table. At September 30, 2019, further interest rates declines are probable and when coupled with the reduction of short-term borrowings, earning asset growth and deposit increases in the first nine months of 2019 would result in a negative impact to net interest income as compared to December 31, 2018. In a rising interest rate environment, net interest income at risk decreased compared to December 31, 2018. The decrease in the risk position would result primarily from the reduction in short-term borrowings and an increase in income from earning assets that reprice or mature within one year. All measures remained well within prescribed policy limits.

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

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Estimated Changes in Economic Value of Equity (EVE)
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, 2019	(4.51%)	(1.20%)	1.07%	1.78%	(3.35%)	N/A	N/A	N/A
December 31, 2018	(10.23%)	(7.18%)	(3.61%)	(1.70%)	(0.77%)	(2.80%)	N/A	N/A

Overall, the measure of the economic value of equity (“EVE”) at risk increased in the declining rate scenario from December 31, 2018 to September 30, 2019 due to the value of fixed rate liabilities, such as CD’s and certain borrowings, exceeding the current market value of those same liabilities, in addition to the declining value non-interest bearing deposits. In the rising interest rate scenarios, the measure of EVE improved in this same timeframe. The main driver of the improvement in the indicated EVE risk position during the period was the increase in the value of the noninterest-bearing demand deposit balances in addition to CD’s as interest rates rise. During the second quarter of 2019, a significant portion of long-term FHLB advances were restructured at lower rates which also provided a positive effect to the EVE risk position.

Liquidity Management

Liquidity is measured by a financial institution's ability to raise funds through loan repayments, maturing investments, deposit growth, borrowed funds, capital and the sale of highly marketable assets such as investment securities and residential mortgage loans. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities and calls, expected funding of loans and deposit withdrawals, and the market values of available-for-sale investments, so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the Company is able to pursue new business opportunities. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs at September 30, 2019.

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 deposits and time deposits of $100 thousand or more, to be a relatively stable funding source. Core deposits equaled 68% of total interest-earning assets at September 30, 2019. The Company’s growth and mortgage banking activities are also additional considerations when evaluating liquidity requirements. Also considered are changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the Funding and Liquidity Subcommittee of ALCO under formal policy guidelines, the Company’s liquidity position is measured weekly, looking forward at thirty day intervals from thirty (30) to three hundred sixty (360) days. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. At September 30, 2019, the Company’s liquidity and funds availability provides it with flexibility in funding loan demand and other liquidity demands.

The Company also has external sources of funds, which can be drawn upon when required. The main sources of external liquidity are available lines of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve. The line of credit with the Federal Home Loan Bank of Atlanta totaled $2.4 billion, all of which was available for borrowing based on pledged collateral, with $0.5 billion borrowed against it as of September 30, 2019. The secured lines of credit at the Federal Reserve and correspondent banks totaled $423 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of September 30, 2019. In addition, the Company had unsecured lines of credit with correspondent banks of $680 million at September 30, 2019. At September 30, 2019, there were no outstanding borrowings against these lines of credit. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at September 30, 2019.

The parent company (“Bancorp”) is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of September 30, 2019, the Bank could have declared a dividend of $148 million to Bancorp. At September 30, 2019, Bancorp had liquid assets of $26 million.

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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:

			September 30,	December 31,
(In thousands)		2019		2018
Commercial real estate development and construction		$	605,019	$	562,777
Residential real estate-development and construction			91,782		130,251
Real estate-residential mortgage			123,685		31,227
Lines of credit, principally home equity and business lines			1,355,134		1,296,481
Standby letters of credit			61,563		59,826
	Total commitments to extend credit and available credit lines	$	2,237,183	$	2,080,562

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, expirations 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 on a case by case basis periodically. Many of the commitments are expected to expire without being drawn upon. It is highly unlikely that all customers would draw on their lines of credit in full at any time and, therefore, the total commitment amount or line of credit amounts do not necessarily represent future cash requirements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Financial Condition - Market Risk and Interest Rate Sensitivity” 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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the risk factors as discussed in the 2018 Annual Report on Form 10-K.

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

In December 2018, the Company’s board of directors authorized the repurchase of up to 1,800,000 shares of common stock. The Company did not repurchase any shares of its common stock in the quarter ended September 30, 2019.

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Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not applicable

Item 5. Other Information - None

Item 6. Exhibits

Exhibit 2Agreement and Plan of Merger, dated as of September 23, 2019, by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank and Revere Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed on September 24, 2019, SEC File No. 0-19065)

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.SCHXBRL Taxonomy Extension Schema Document

Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEFXBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PREXBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Signatures

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

SANDY SPRING BANCORP, INC.

(Registrant)

By: /s/ Daniel J. Schrider

Daniel J. Schrider

President and Chief Executive Officer

Date: November 8, 2019

By: /s/ Philip J. Mantua

Philip J. Mantua

Executive Vice President and Chief Financial Officer

Date: November 8, 2019

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