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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, 2021
 
OR
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                         to ____________
 
Commission File Number: 0-19065
 
 
 
 
 
SANDY SPRING BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Maryland 52-1532952
(State of incorporation) (I.R.S. Employer Identification Number)
 
17801 Georgia Avenue, Olney, Maryland
 20832
(Address of principal executive office) (Zip Code)
 
301-774-6400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareSASRThe NASDAQ Stock Market, LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☒ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☐ Emerging growth company ☐ 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
The number of outstanding shares of common stock outstanding as of November 3, 2021
 
Common stock, $1.00 par value – 45,619,373 shares


SANDY SPRING BANCORP, INC.
TABLE OF CONTENTS
Page
 
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
2

Part I
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION – UNAUDITED
 
 September 30,December 31,
(Dollars in thousands)20212020
Assets:  
Cash and due from banks$105,937 $93,651 
Federal funds sold352 291 
Interest-bearing deposits with banks1,008,344 203,061 
Cash and cash equivalents1,114,633 297,003 
Residential mortgage loans held for sale (at fair value)44,678 78,294 
Investments available-for-sale (at fair value)1,429,555 1,348,021 
Equity securities41,097 65,760 
Total loans9,721,348 10,400,509 
Less: allowance for credit losses(107,920)(165,367)
Net loans9,613,428 10,235,142 
Premises and equipment, net58,362 57,720 
Other real estate owned1,105 1,455 
Accrued interest receivable36,219 46,431 
Goodwill370,223 370,223 
Other intangible assets, net27,531 32,521 
Other assets280,633 265,859 
Total assets$13,017,464 $12,798,429 
Liabilities:
Noninterest-bearing deposits$3,987,411 $3,325,547 
Interest-bearing deposits6,999,989 6,707,522 
Total deposits10,987,400 10,033,069 
Securities sold under retail repurchase agreements and federal funds purchased147,504 543,157 
Advances from FHLB— 379,075 
Subordinated debt172,639 227,088 
Total borrowings320,143 1,149,320 
Accrued interest payable and other liabilities163,861 146,085 
Total liabilities11,471,404 11,328,474 
Stockholders' equity:
Common stock -- par value $1.00 ; shares authorized 100,000,000; shares issued and outstanding
46,119,074 and 47,056,777 at September 30, 2021 and December 31, 2020, respectively
46,119 47,057 
Additional paid in capital799,766 846,922 
Retained earnings701,301 557,271 
Accumulated other comprehensive income/ (loss)(1,126)18,705 
Total stockholders' equity1,546,060 1,469,955 
Total liabilities and stockholders' equity$13,017,464 $12,798,429 

The accompanying notes are an integral part of these statements

3

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED
 Three Months EndedNine Months Ended
 September 30,September 30,
(Dollars in thousands, except per share data)2021202020212020
Interest income:    
Interest and fees on loans$104,384 $106,560 $319,563 $288,721 
Interest on loans held for sale379 398 1,465 1,094 
Interest on deposits with banks302 84 395 419 
Interest and dividends on investment securities:
Taxable3,958 4,488 12,230 17,270 
Tax-advantaged2,106 1,454 6,560 4,264 
Interest on federal funds sold— — — 1 
Total interest income111,129 112,984 340,213 311,769 
Interest expense:
Interest on deposits3,521 9,439 12,202 35,241 
Interest on retail repurchase agreements and federal funds purchased43 551 139 1,731 
Interest on advances from FHLB— 2,841 2,649 3,863 
Interest on subordinated debt961 2,669 5,973 7,602 
Total interest expense4,525 15,500 20,963 48,437 
Net interest income106,604 97,484 319,250 263,332 
Provision/ (credit) for credit losses(8,229)7,003 (47,141)90,158 
Net interest income after provision/ (credit) for credit losses114,833 90,481 366,391 173,174 
Non-interest income:
Investment securities gains49 51 178 432 
Service charges on deposit accounts2,108 1,673 5,936 5,149 
Mortgage banking activities4,942 14,108 20,887 25,567 
Wealth management income9,392 7,785 27,243 22,355 
Insurance agency commissions2,285 2,122 5,685 5,439 
Income from bank owned life insurance818 708 2,203 2,162 
Bank card fees1,775 1,525 5,078 4,102 
Other income3,025 1,418 12,309 5,276 
Total non-interest income24,394 29,390 79,519 70,482 
Non-interest expense:
Salaries and employee benefits38,653 36,041 114,295 98,391 
Occupancy expense of premises5,728 5,575 16,712 16,147 
Equipment expense3,214 3,133 9,456 9,103 
Marketing1,376 1,305 3,640 3,223 
Outside data services2,317 2,614 6,860 6,365 
FDIC insurance361 1,340 3,303 3,200 
Amortization of intangible assets1,635 1,968 4,991 4,566 
Merger and acquisition expense— 1,263 45 25,171 
Professional fees and services3,031 1,800 7,927 5,466 
Other expenses6,866 5,898 27,100 22,489 
Total non-interest expense63,181 60,937 194,329 194,121 
Income before income tax expense76,046 58,934 251,581 49,535 
Income tax expense19,070 14,292 61,878 9,244 
Net income$56,976 $44,642 $189,703 $40,291 
Per share information:
Basic net income per common share$1.21 $0.94 $4.00 $0.93 
Diluted net income per common share$1.20 $0.94 $3.98 $0.93 
Dividends declared per share$0.32 $0.30 $0.96 $0.90 

The accompanying notes are an integral part of these statements

4

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED
 
 Three Months EndedNine Months Ended
September 30,September 30,
(In thousands)2021202020212020
Net income$56,976 $44,642 $189,703 $40,291 
Other comprehensive income/ (loss):
Investments available-for-sale:
Net change in unrealized gains/ (losses) on investments available-for-sale(8,183)3,445 (27,149)29,074 
Related income tax expense/ (benefit)2,073 (909)6,931 (7,424)
Net investment gains reclassified into earnings(49)(51)(178)(432)
Related income tax expense12 13 45 110 
Net effect on other comprehensive income/ (loss)(6,147)2,498 (20,351)21,328 
Defined benefit pension plan:
Net change of unrealized loss 228 219 682 656 
Related income tax benefit(41)(48)(162)(159)
Net effect on other comprehensive income/ (loss)187 171 520 497 
Total other comprehensive income/ (loss)(5,960)2,669 (19,831)21,825 
Comprehensive income$51,016 $47,311 $169,872 $62,116 

The accompanying notes are an integral part of these statements

5

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED
 
(Dollars in thousands, except per share data)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income/ (Loss)		Total
Stockholders'
Equity
Balances at July 1, 2021$47,313 $850,555 $659,578 $4,834 $1,562,280 
Net income— — 56,976 — 56,976 
Other comprehensive loss, net of tax— — — (5,960)(5,960)
Total other comprehensive income51,016 
Common stock dividends - $0.32 per share
— — (15,253)— (15,253)
Stock compensation expense— 1,331 — — 1,331 
Common stock issued pursuant to:
Stock option plan - 53,079 shares
53 514 — — 567 
Employee stock purchase plan - 11,010 shares
11 468 — — 479 
Restricted stock vesting, net of withholding - 3,831 shares
4 (43)— — (39)
Repurchase of common stock - 1,261,828 shares
(1,262)(53,059)— — (54,321)
Balances at September 30, 2021$46,119 $799,766 $701,301 $(1,126)$1,546,060 
Balances at July 1, 2020$47,001 $843,876 $484,392 $14,824 $1,390,093 
Net income— — 44,642 — 44,642 
Other comprehensive income, net of tax— — — 2,669 2,669 
Total other comprehensive income47,311 
Common stock dividends - $0.30 per share
— — (14,205)— (14,205)
Stock compensation expense— 1,032 — — 1,032 
Common stock issued pursuant to:
Stock option plan - 1,575 shares
2 16 — — 18 
Employee stock purchase plan - 21,374 shares
21 503 — — 524 
Restricted stock vesting, net of withholding- 1,808 shares
2 (28)— — (26)
Adoption of ASC 326 - Financial Instruments - Credit Losses— — 2 — 2 
Balances at September 30, 2020$47,026 $845,399 $514,831 $17,493 $1,424,749 

The accompanying notes are an integral part of these statements

6

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY – UNAUDITED

(Dollars in thousands, except per share data)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income/ (Loss)		Total
Stockholders'
Equity
Balances at January 1, 2021$47,057 $846,922 $557,271 $18,705 $1,469,955 
Net income— — 189,703 — 189,703 
Other comprehensive income, net of tax— — — (19,831)(19,831)
Total comprehensive income169,872 
Common stock dividends - $0.96 per share
— — (45,673)— (45,673)
Stock compensation expense— 3,640 — — 3,640 
Common stock issued pursuant to:
Stock option plan - 193,602 shares
193 2,390 — — 2,583 
Employee stock purchase plan - 48,685 shares
49 1,532 — — 1,581 
Restricted stock vesting, net of withholding - 81,838
shares
82 (1,659)— — (1,577)
Repurchase of common stock - 1,261,828 shares
(1,262)(53,059)— — (54,321)
Balances at September 30, 2021$46,119 $799,766 $701,301 $(1,126)$1,546,060 
Balances at January 1, 2020$34,970 $586,622 $515,714 $(4,332)$1,132,974 
Net income— — 40,291 — 40,291 
Other comprehensive income, net of tax— — — 21,825 21,825 
Total comprehensive income62,116 
Common stock dividends - $0.90 per share
— — (38,953)— (38,953)
Stock compensation expense— 2,824 — — 2,824 
Common stock issued pursuant to:
Revere Bank Acquisition - 12,768,949 shares
12,769 276,320 — — 289,089 
Conversion of Revere Bank options - 395,298 options
— 3,611 — — 3,611 
Stock option plan - 10,213 shares
11 154 — — 165 
Employee stock purchase plan - 50,189 shares
50 1,259 — — 1,309 
Restricted stock vesting, net of withholding - 46,386 shares
46 (509)— — (463)
Adoption of ASC 326 - Financial Instruments - Credit
    Losses		— — (2,221)— (2,221)
Repurchase of common stock - 820,328 shares
(820)(24,882)— — (25,702)
Balances at September 30, 2020$47,026 $845,399 $514,831 $17,493 $1,424,749 

The accompanying notes are an integral part of these statements

7

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
 Nine Months Ended September 30,
(Dollars in thousands)20212020
Operating activities:  
Net income$189,703 $40,291 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,777 14,915 
Provision/ (credit) for credit losses(47,141)90,158 
Share based compensation expense3,640 2,824 
Deferred income tax/ (benefit)12,280 (22,965)
Origination of loans held for sale(1,211,421)(1,042,787)
Proceeds from sales of loans held for sale1,272,148 1,025,610 
Gains on sales of loans held for sale(27,111)(17,850)
Losses on sale of other real estate owned237 32 
Investment securities gains(178)(432)
Tax benefit associated with share based compensation1,316 (162)
Net (increase)/ decrease in accrued interest receivable10,212 (17,243)
Net (increase)/ decrease other assets(39,456)1,812 
Net increase/ (decrease) accrued expenses and other liabilities(22,402)5,173 
Other, net1,026 2,922 
Net cash provided by operating activities153,630 82,298 
Investing activities:
Sales/ (purchases) of equity securities24,663 (6,321)
Purchases of investments available-for-sale(708,727)(529,522)
Proceeds from sales of investment available-for-sale360,945 121,357 
Proceeds from maturities, calls and principal payments of investments available-for-sale264,461 329,197 
Net (increase)/ decrease in loans696,399 (1,107,824)
Proceeds from the sales of other real estate owned620 60 
Cash paid for the acquisition of business activity of RPJ, net of cash acquired— (26,925)
Cash acquired in the acquisition of business activity of Revere Bank, net of cash paid— 80,466 
Expenditures for premises and equipment(7,114)(3,399)
Net cash provided by/ (used in) investing activities631,247 (1,142,911)
Financing activities:
Net increase in deposits957,888 1,202,228 
Net increase/ (decrease) in in retail repurchase agreements and federal funds purchased(395,653)249,101 
Proceeds from FHLB advances— 400,000 
Repayment of FHLB advances(379,075)(637,982)
Retirement of subordinated debt(53,000)(10,310)
Proceeds from issuance of common stock4,164 1,474 
Stock tendered for payment of withholding taxes(1,577)(463)
Repurchase of common stock(54,321)(25,702)
Dividends paid(45,673)(38,953)
Net cash provided by financing activities32,753 1,139,393 
Net increase in cash and cash equivalents817,630 78,780 
Cash and cash equivalents at beginning of period297,003 146,103 
Cash and cash equivalents at end of period$1,114,633 $224,883 
Supplemental disclosures:
Interest payments$31,173 $47,105 
Income tax payments, net of refunds of $2,673 in 2021
58,348 28,099 
Transfers from loans to other real estate owned295 — 

The accompanying notes are an integral part of these statements

8

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
 

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Sandy Spring Bancorp, Inc. ("Sandy Spring" or, together with its subsidiaries, the "Company"), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”). Independent and community-oriented, Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage services and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Sandy Spring Bank also offers a comprehensive menu of insurance and wealth management services through its subsidiaries, Sandy Spring Insurance Corporation (“Sandy Spring Insurance”), West Financial Services, Inc. (“West Financial”) and Rembert Pendleton Jackson (“RPJ”).
 
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”), prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, the interim financial statements do not include all of the information and notes required for complete financial statements. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2021. In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods have been included. The Company has evaluated subsequent events through the date of the issuance of its financial statements.
 
These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 19, 2021. There have been no significant changes to any of the Company’s accounting policies as disclosed in the 2020 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, West Financial and RPJ. Consolidation has resulted in the elimination of all intercompany accounts and transactions. See Note 17 for more information on the Company’s segments and consolidation.
 
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, in addition to affecting the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for credit losses and the related allowance, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether available-for-sale debt securities with fair values less than amortized costs are impaired and require an allowance for credit losses, valuation of other real estate owned, valuation of share based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, the calculation of current and deferred income taxes, and the actuarial projections related to pension expense and the related liability.
 
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits with banks (items with stated original maturity of three months or less).
 
Revenue from Contracts with Customers
The Company’s revenue includes net interest income on financial instruments and non-interest income. Specific categories of revenue are presented in the Condensed Consolidated Statements of Income. Most of the Company’s revenue is not within the scope of Accounting Standard Codification (“ASC”) 606 – Revenue from Contracts with Customers. For revenue within the scope of ASC 606, the Company provides services to customers and has related performance obligations. The revenue from such services is recognized upon satisfaction of all contractual performance obligations. The following discusses key revenue streams within the scope of revenue recognition guidance.
 
9

Wealth Management Income
West Financial and RPJ provide comprehensive investment management and financial planning services. Wealth management income is comprised of income for providing trust, estate and investment management services. Trust services include acting as a trustee for corporate or personal trusts. Investment management services include investment management, record-keeping and reporting of security portfolios. Fees for these services are recognized based on a contractually-agreed fixed percentage applied to net assets under management at the end of each reporting period. The Company does not charge/recognize any performance-based fees.
 
Insurance Agency Commissions
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. Sandy Spring Insurance 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. An obligation for event-driven services is satisfied at the time of the event when service is delivered and revenue recognized as earned. Obligation for maintenance activities is satisfied over the course of each month and revenue is recognized at month end. The overdraft services obligation is satisfied at the time of the overdraft and revenue is recognized as earned.
 
Loan Financing Receivables
The Company’s financing receivables consist primarily of loans that are stated at their principal balance outstanding, net of any unearned income, acquisition fair value marks and deferred loan origination fees and costs. Interest income on loans is accrued at the contractual rate based on the principal balance outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
 
Loans are considered past due or delinquent when the principal or interest due in accordance with the contractual terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Immaterial shortfalls in payment amounts do not necessarily result in a loan being considered delinquent or past due. If any payments are past due and subsequent payments are resumed without payment of the delinquent amount, the loan shall continue to be considered past due. Whenever any loan is reported delinquent on a principal or interest payment or portion thereof, the amount reported as delinquent is the outstanding principal balance of the loan.
 
Loans, except for consumer installment loans, are placed into non-accrual status when any portion of the loan principal or interest becomes 90 days past due. Management may determine that certain circumstances warrant earlier discontinuance of interest accruals on specific loans if an evaluation of other relevant factors (such as bankruptcy, interruption of cash flows, etc.) indicates collection of amounts contractually due is unlikely. These loans are considered, collectively, to be non-performing loans. Consumer installment loans that are not secured by real estate are not placed on non-accrual, but are charged down to their net realizable value when they are four months past due. Loans designated as non-accrual have all previously accrued but unpaid interest reversed. Interest income is not recognized on non-accrual loans. All payments received on non-accrual loans are applied using a cost-recovery method to reduce the outstanding principal balance until the loan returns to accrual status. Loans may be returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Loans considered to be TDRs are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured collateral-dependent loans are individually assessed for allowance for credit losses and may either be in accruing or non-accruing status. Non-accruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category if the borrower is no longer experiencing financial difficulty, a re-underwriting event took place, and the revised loan terms of the subsequent restructuring agreement are considered to be consistent with terms that can be obtained in the market for loans with comparable credit risk.
 
Allowance for Credit Losses
The allowance for credit losses (“allowance” or “ACL”) represents an amount which, in management's judgment, reflects the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size
10

and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance is measured and recorded upon the initial recognition of a financial asset. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision or credit for credit losses, which is recorded as a current period expense.
 
Determination of the adequacy of the allowance is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the allowance is reviewed periodically by the Risk Committee of the Board of Directors and formally approved quarterly by that same committee of the Board.
 
The Company’s methodology for estimating the allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates; (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations; and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable. The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income as loans are moved to non-accrual status.
 
Loans are pooled into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. Portfolio segments used to estimate the allowance are the same as portfolio segments used for general credit risk management purposes. Refer to Note 3 for more details on the Company’s portfolio segments.
 
The Company applies two calculation methodologies to estimate the collective quantified component of the allowance: discounted cash flows method and weighted average remaining life method. Allowance estimates on commercial acquisition, development and construction (“AD&C”) and residential construction segments are based on the weighted average remaining life method. Allowance estimates on all other portfolio segments are based on the discounted cash flows method. Segments utilizing the discounted cash flows method are further sub-segmented into risk level pools, determined either by risk rating for commercial loans or Beacon Scores ranges for residential and consumer loans. To better manage risk and reasonably determine the sufficiency of reserves, this segregation allows the Company to monitor the allowance component applicable to higher risk loans separate from the remainder of the portfolio. Collective calculation methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a two-year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis. Economic variables that have the most significant impact on the allowance include: unemployment rate, house price index and number of business bankruptcies. Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience.
 
The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determines that a foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When a repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When the repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the collateral’s appraised value, less estimated costs to sell. Third party appraisals used in the individual reserve assessment are conducted at least annually with underlying assumptions that are reviewed by management. Third party appraisals may be obtained on a more frequent basis if deemed necessary. Internal evaluations of collateral value are conducted quarterly to ensure any further deterioration of the collateral value is recognized on a timely basis. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s remaining life. The Company may receive updated appraisals which contradict the preliminary determination of fair value used to establish an individual allowance on a loan. In these instances the individual allowance is adjusted to reflect the Company’s evaluation of the updated appraised fair value. In the event a loss was previously confirmed and the loan was charged down to the estimated fair value based on a previous appraisal, the balance of partially charged-off loans are not subsequently increased, but could be further decreased depending on the direction of the change in fair value. Payments on fully or partially charged-off loans are accounted for under the cost-recovery method. Under this method, all payments received are applied on a cash basis to reduce the entire outstanding principal balance, then to recognize a recovery of all previously charged-off amounts before any interest income may be recognized. Based on the individual reserve assessment, if the Company determines that the fair value of the collateral is less than the amortized cost basis of the loan, an individual allowance will be established measured as the difference between the fair value of the collateral
11

(less costs to sell) and the amortized cost basis of the loan. Once a loss has been confirmed, the loan is charged-down to its estimated fair value.
 
Large groups of smaller non-accrual homogeneous loans are not individually evaluated for allowance and include residential permanent and construction mortgages and consumer installment loans. These portfolios are reserved for on a collective basis using historical loss rates of similar loans over the weighted average life of each pool.

The Company reviews its unfunded commitments to determine if they are unconditionally cancellable by the Company. If the unfunded commitment is determined to not be unconditionally cancellable by the Company, a reserve for unfunded commitments is established. The reserve for unfunded commitments considers both the likelihood that the funding will occur and an estimate of expected credit losses over the life of the commitment.
 
Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP. However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.
 
Acquired Loans
Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (“PCD”) loans, or loans with no evidence of credit deterioration (“non-PCD”).
 
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. The Company uses a combination of individual and pooled review approaches to determine if acquired loans are PCD. At acquisition, the Company considers a number of factors to determine if an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration. These factors include:
 
•loans classified as non-accrual,
•loans with risk rating of special mention or worse (using the Company's risk rating scale),
•loans with multiple risk rating downgrades since origination,
•loans with evidence of being 60 days or more past due,
•loans previously modified in a troubled debt restructuring,
•loans that received an interest only or payment deferral modification, and
•loans in industries that show evidence of additional risk due to economic conditions.
 
The initial allowance related to PCD loans that share similar risk characteristics is established using a pooled approach. The Company uses either a discounted cash flow or weighted average remaining life method to determine the required level of the allowance. PCD loans that were classified as non-accrual as of the acquisition date and are collateral dependent are assessed for allowance on an individual basis.
 
For PCD loans, an initial allowance is established on the acquisition date and added to the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, the initial allowance on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
 
Non-PCD loans are pooled into segments together with originated loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.
 
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life, interest rate profile, market interest rate environment, payment schedules, risk ratings, probability of default and loss given default, and estimated prepayment rates. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the fair value discount or premium is
12

allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.
 
Leases
The Company determines if an arrangement is a lease at inception. All of the Company’s leases are currently classified as operating leases and are included in other assets and other liabilities on the Company’s Condensed Consolidated Statements of Condition. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's Condensed Consolidated Statements of Income.
 
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.
 
Pending Accounting Pronouncements
In March 2020, FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of LIBOR likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to guide the Company’s transition from LIBOR and has begun efforts to transition to alternative rates consistent with industry timelines. The Company has identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The Company is evaluating existing platforms and systems and preparing to offer new rates.
 
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, 2021December 31, 2020
(In thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value		Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair
Value
U.S. treasuries and government agencies$47,477 $260 $(8)$47,729 $42,750 $549 $(2)$43,297 
State and municipal325,384 5,486 (3,077)327,793 377,108 13,470 (211)390,367 
Mortgage-backed and asset-backed1,039,159 12,712 (5,247)1,046,624 881,201 24,078 (847)904,432 
Corporate debt7,000 409 — 7,409 9,100 825 — 9,925 
Total investments available-for-sale$1,419,020 $18,867 $(8,332)$1,429,555 $1,310,159 $38,922 $(1,060)$1,348,021 
 
Any unrealized losses in the U.S. treasuries and government agencies, state and municipal, mortgage-backed and asset-backed investment securities at September 30, 2021 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at September 30, 2021. Unrealized losses on investment securities are expected to recover over time as these securities approach maturity. The Company does not intend to sell, nor is it more likely than not it will be required to sell, these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.

The mortgage-backed securities portfolio at September 30, 2021 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($312.1 million), GNMA, FNMA or FHLMC mortgage-backed securities ($677.4 million) or SBA asset-backed securities ($57.1 million).
 
13

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 tables:
 September 30, 2021
 Number
of
Securities		Less Than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. treasuries and government agencies2 $10,967 $8 $— $— $10,967 $8 
State and municipal36 90,013 2,169 14,643 908 104,656 3,077 
Mortgage-backed and asset-backed60 446,119 4,789 15,604 458 461,723 5,247 
Total98 $547,099 $6,966 $30,247 $1,366 $577,346 $8,332 

 December 31, 2020
 Number
of
Securities		Less Than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. treasuries and government agencies2 $25,369 $2 $— $— $25,369 $2 
State and municipal8 22,753 211 — — 22,753 211 
Mortgage-backed and asset-backed24 44,746 154 76,879 693 121,625 847 
Total34 $92,868 $367 $76,879 $693 $169,747 $1,060 
 
The estimated fair values and amortized costs 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 tables using the expected average life of the individual securities based on statistics provided by independent third party industry sources. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

September 30, 2021December 31, 2020
(In thousands)Fair ValueAmortized CostFair ValueAmortized Cost
U.S. treasuries and government agencies:
One year or less$39,647 $39,559 $33,963 $33,833 
One to five years8,082 7,918 9,334 8,917 
Five to ten years— — — — 
After ten years— — — — 
State and municipal:
One year or less14,173 14,009 16,581 16,458 
One to five years25,081 24,229 44,910 43,857 
Five to ten years43,958 43,207 59,059 56,130 
After ten years244,581 243,939 269,817 260,663 
Mortgage-backed and asset-backed:
One year or less7,975 7,916 1 1 
One to five years15,344 15,063 21,637 21,229 
Five to ten years319,947 319,621 74,142 72,481 
After ten years703,358 696,559 808,652 787,490 
Corporate debt:
One year or less— — — — 
One to five years— — 2,318 2,100 
Five to ten years7,409 7,000 7,607 7,000 
After ten years— — — — 
Total available-for-sale debt securities$1,429,555 $1,419,020 $1,348,021 $1,310,159 
14


At September 30, 2021 and December 31, 2020, investments available-for-sale with a book value of $532.4 million and $465.7 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, 2021 and December 31, 2020.
 
Equity securities
Other equity securities at the dates indicated are presented in the following table:
(In thousands)September 30, 2021December 31, 2020
Federal Reserve Bank stock$34,028 $38,650 
Federal Home Loan Bank of Atlanta stock6,392 26,433 
Marketable equity securities677 677 
Total equity securities$41,097 $65,760 
 
NOTE 3 – LOANS
Outstanding loan balances at September 30, 2021 and December 31, 2020, are net of unearned income, including net deferred loan fees of $20.0 million and $24.5 million, respectively. Net deferred loan fees at September 30, 2021 and December 31, 2020, includes $13.0 million and $21.2 million, respectively, related to the loans originated under the Paycheck Protection Program (“PPP”).

The loan portfolio segment balances at the dates indicated are presented in the following table:
(In thousands)September 30, 2021December 31, 2020
Commercial real estate:
Commercial investor real estate$3,743,698 $3,634,720 
Commercial owner-occupied real estate1,661,092 1,642,216 
Commercial AD&C1,177,949 1,050,973 
Commercial business1,594,528 2,267,548 
Total commercial loans8,177,267 8,595,457 
Residential real estate:
Residential mortgage911,997 1,105,179 
Residential construction181,319 182,619 
Consumer450,765 517,254 
Total residential and consumer loans1,544,081 1,805,052 
    Total loans$9,721,348 $10,400,509 
 
Portfolio Segments
The Company currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments (classes) which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are:
 
•Commercial investor real estate loans - Commercial investor real estate loans consist of loans secured by nonowner-occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This commercial investor real estate category contains mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan.

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

•Commercial acquisition, development and construction loans - Commercial acquisition, development and construction loans are intended to finance the construction of commercial properties and include loans for the
15

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

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

•Residential mortgage loans - The residential mortgage loans category contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming.
 
•Residential construction loans - The Company makes residential construction loans generally to provide interim financing on residential property during the construction period. Borrowers are typically individuals who will ultimately occupy the single-family dwelling. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections.

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

NOTE 4 – CREDIT QUALITY ASSESSMENT
Allowance for Credit Losses
Summary information on the allowance for credit loss activity for the period indicated is provided in the following table:
 Nine Months Ended September 30,
(In thousands)20212020
Balance at beginning of period$165,367 $56,132 
Initial allowance on PCD loans at adoption of ASC 326— 2,762 
Transition impact of adopting ASC 326— 2,983 
Initial allowance on acquired Revere PCD loans— 18,628 
Provision/ (credit) for credit losses(47,141)90,158 
Loan charge-offs(11,496)(1,255)
Loan recoveries1,190 906 
Net charge-offs(10,306)(349)
Balance at period end$107,920 $170,314 
 
The following table provides summary information regarding collateral dependent loans individually evaluated for credit loss at the dates indicated:
(In thousands)September 30, 2021December 31, 2020
Collateral dependent loans individually evaluated for credit loss with an allowance$10,592 $20,717 
Collateral dependent loans individually evaluated for credit loss without an allowance27,831 77,001 
Total individually evaluated collateral dependent loans$38,423 $97,718 
Allowance for credit losses related to loans evaluated individually$7,537 $11,405 
Allowance for credit losses related to loans evaluated collectively100,383 153,962 
Total allowance for credit losses$107,920 $165,367 
16

 

 
The following tables provide information on the activity in the allowance for credit losses by the respective loan portfolio segment for the period indicated:
 
 For the Nine Months Ended September 30, 2021
 Commercial Real EstateResidential Real Estate 
(Dollars in thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Balance at beginning of period$57,404 $20,061 $22,157 $46,806 $11,295 $1,502 $6,142 $165,367 
Provision/ (credit) for credit losses(15,822)(8,165)8,538 (20,721)(6,607)(849)(3,515)(47,141)
Charge-offs(5,802)(136)(2,007)(3,315)— — (236)(11,496)
Recoveries176 — — 375 330 3 306 1,190 
Net recoveries (charge-offs)(5,626)(136)(2,007)(2,940)330 3 70 (10,306)
Balance at end of period$35,956 $11,760 $28,688 $23,145 $5,018 $656 $2,697 $107,920 
Total loans$3,743,698 $1,661,092 $1,177,949 $1,594,528 $911,997 $181,319 $450,765 $9,721,348 
Allowance for credit losses to total loans ratio0.96 %0.71 %2.44 %1.45 %0.55 %0.36 %0.60 %1.11 %
Balance of loans individually evaluated for credit loss$15,386 $9,854 $1,022 $10,088 $1,716 $— $357 $38,423 
Allowance related to loans evaluated individually$203 $— $509 $6,825 $— $— $— $7,537 
Individual allowance to loans evaluated individually ratio1.32 %— %49.80 %67.65 %— %— %— %19.62 %
Balance of loans collectively evaluated for credit loss$3,728,312 $1,651,238 $1,176,927 $1,584,440 $910,281 $181,319 $450,408 $9,682,925 
Allowance related to loans evaluated collectively$35,753 $11,760 $28,179 $16,320 $5,018 $656 $2,697 $100,383 
Collective allowance to loans evaluated collectively ratio0.96 %0.71 %2.39 %1.03 %0.55 %0.36 %0.60 %1.04 %

 For the Year Ended December 31, 2020
 Commercial Real EstateResidential Real Estate 
(Dollars in thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Balance at beginning of period$18,407 $6,884 $7,590 $11,395 $8,803 $967 $2,086 $56,132 
Initial allowance on PCD loans at adoption of ASC 3261,114 — — 1,549 — — 99 2,762 
Transition impact of adopting ASC 326(3,125)387 2,576 2,988 (388)(275)820 2,983 
Initial allowance on acquired Revere PCD loans7,973 2,782 1,248 6,289 243 6 87 18,628 
Provision for credit losses33,431 10,008 10,743 24,374 3,016 798 3,299 85,669 
Charge-offs(411)— — (491)(484)— (433)(1,819)
Recoveries15 — — 702 105 6 184 1,012 
Net recoveries (charge-offs)(396)— — 211 (379)6 (249)(807)
Balance at end of period$57,404 $20,061 $22,157 $46,806 $11,295 $1,502 $6,142 $165,367 
Total loans$3,634,720 $1,642,216 $1,050,973 $2,267,548 $1,105,179 $182,619 $517,254 $10,400,509 
Allowance for credit losses to total loans ratio1.58 %1.22 %2.11 %2.06 %1.02 %0.82 %1.19 %1.59 %
Balance of loans individually evaluated for credit loss$45,227 $11,561 $15,044 $23,648 $1,874 $— $364 $97,718 
Allowance related to loans evaluated individually$1,273 $— $603 $9,529 $— $— $— $11,405 
Individual allowance to loans evaluated individually ratio2.81 %— %4.01 %40.30 %— %— %— %11.67 %
Balance of loans collectively evaluated for credit loss$3,589,493 $1,630,655 $1,035,929 $2,243,900 $1,103,305 $182,619 $516,890 $10,302,791 
Allowance related to loans evaluated collectively$56,131 $20,061 $21,554 $37,277 $11,295 $1,502 $6,142 $153,962 
Collective allowance to loans evaluated collectively ratio1.56 %1.23 %2.08 %1.66 %1.02 %0.82 %1.19 %1.49 %

17

The following tables present collateral dependent loans individually evaluated for credit loss with the associated allowances for credit losses by the applicable portfolio segment and for the periods indicated:
 September 30, 2021
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Loans individually evaluated for
credit loss with an allowance:
        
Non-accruing$808 $— $1,022 $6,760 $— $— $— $8,590 
Restructured accruing— — — 529 — — — 529 
Restructured non-accruing336 — — 1,137 — — — 1,473 
Balance$1,144 $— $1,022 $8,426 $— $— $— $10,592 
 
Allowance$203 $— $509 $6,825 $— $— $— $7,537 
 
Loans individually evaluated for
credit loss without an allowance:
Non-accruing$4,731 $5,318 $— $400 $— $— $— $10,449 
Restructured accruing— — — 105 1,565 — — 1,670 
Restructured non-accruing9,511 4,536 — 1,157 151 — 357 15,712 
Balance$14,242 $9,854 $— $1,662 $1,716 $— $357 $27,831 
 
Total individually evaluated loans:
Non-accruing$5,539 $5,318 $1,022 $7,160 $— $— $— $19,039 
Restructured accruing— — — 634 1,565 — — 2,199 
Restructured non-accruing9,847 4,536 — 2,294 151 — 357 17,185 
Balance$15,386 $9,854 $1,022 $10,088 $1,716 $— $357 $38,423 
 
Total unpaid contractual principal
balance
$24,990 $11,867 $1,090 $11,912 $2,792 $— $364 $53,015 

18

 December 31, 2020
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Loans individually evaluated for
credit loss with an allowance:
        
Non-accruing$4,913 $— $1,328 $11,178 $— $— $— $17,419 
Restructured accruing— — — 589 — — — 589 
Restructured non-accruing699 — — 2,010 — — — 2,709 
Balance$5,612 $— $1,328 $13,777 $— $— $— $20,717 
 
Allowance$1,273 $— $603 $9,529 $— $— $— $11,405 
 
Loans individually evaluated for
credit loss without an allowance:
Non-accruing$39,615 $9,315 $13,716 $9,118 $— $— $— $71,764 
Restructured accruing— — — 126 1,602 — — 1,728 
Restructured non-accruing— 2,246 — 627 272 — 364 3,509 
Balance$39,615 $11,561 $13,716 $9,871 $1,874 $— $364 $77,001 
 
Total individually evaluated loans:
Non-accruing$44,528 $9,315 $15,044 $20,296 $— $— $— $89,183 
Restructured accruing— — — 715 1,602 — — 2,317 
Restructured non-accruing699 2,246 — 2,637 272 — 364 6,218 
Balance$45,227 $11,561 $15,044 $23,648 $1,874 $— $364 $97,718 
 
Total unpaid contractual principal
balance
$49,920 $15,309 $16,040 $30,958 $3,225 $— $364 $115,816 
 
The following tables present average principal balance of total non-accrual loans and contractual interest due on non-accrual loans for the periods indicated below:
 For the Nine Months Ended September 30, 2021
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Average non-accrual loans for the period$36,365 $9,479 $11,383 $13,742 $9,689 $31 $7,530 $88,219 
Contractual interest income due on non-
accrual loans during the period
$1,825 $645 $565 $847 $312 $2 $320 $4,516 

 For the Year Ended December 31, 2020
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Average non-accrual loans for the period$26,849 $6,605 $4,267 $16,532 $11,634 $— $6,675 $72,562 
Contractual interest income due on non-
accrual loans during the period
$6,547 $2,741 $4,505 $2,858 $918 $— $732 $18,301 
 
There was no interest income recognized on non-accrual loans during the nine months ended September 30, 2021. See Note 1 for additional information on the Company's policies for non-accrual loans. Loans designated as non-accrual have all previously accrued but unpaid interest reversed from interest income. During the nine months ended September 30, 2021 new loans placed on non-accrual status totaled $7.6 million and the related amount of reversed uncollected accrued interest was $0.1 million.

19

Credit Quality
The following section provides information on the credit quality of the loan portfolio for the periods indicated below:
 For the Nine Months Ended September 30, 2021
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Analysis of non-accrual loan activity:        
Balance at beginning of period$45,227 $11,561 $15,044 $22,933 $10,212 $— $7,384 $112,361 
Loans placed on non-accrual699 3,676 49 963 687 62 1,499 7,635 
Non-accrual balances transferred to OREO— (257)— — — — — (257)
Non-accrual balances charged-off(5,803)(136)(2,007)(2,793)— — (100)(10,839)
Net payments or draws(24,737)(4,990)(12,064)(11,649)(1,328)— (676)(55,444)
Non-accrual loans brought current— — — — (60)— (281)(341)
Balance at end of period$15,386 $9,854 $1,022 $9,454 $9,511 $62 $7,826 $53,115 


 For the Year Ended December 31, 2020
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Analysis of non-accrual loan activity:        
Balance at beginning of period$8,437 $4,148 $829 $8,450 $12,661 $— $4,107 $38,632 
PCD loans designated as non-accrual (1)
9,544 — — 2,539 8 — 993 13,084 
Loans placed on non-accrual37,882 8,572 15,844 17,442 1,485 — 4,061 85,286 
Non-accrual balances transferred to OREO— — — — (70)— — (70)
Non-accrual balances charged-off(411)— — (446)(416)— (121)(1,394)
Net payments or draws(10,225)(1,059)(1,629)(4,169)(2,598)— (1,521)(21,201)
Non-accrual loans brought current— (100)— (883)(858)— (135)(1,976)
Balance at end of period$45,227 $11,561 $15,044 $22,933 $10,212 $— $7,384 $112,361 
(1)Upon the adoption of the CECL standard, the Company transitioned from closed pool level accounting for PCI loans during the first quarter of 2020. Non-accrual loans are determined based on the individual loan level and aggregated for reporting.

 September 30, 2021
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Performing loans:        
Current$3,692,293 $1,646,076 $1,169,583 $1,579,499 $888,345 $180,496 $436,972 $9,593,264 
30-59 days10,984 — — 4,461 11,501 761 4,574 32,281 
60-89 days10,205 5,162 — 480 396 — 1,393 17,636 
Total performing loans3,713,482 1,651,238 1,169,583 1,584,440 900,242 181,257 442,939 9,643,181 
Non-performing loans:
Non-accrual loans15,386 9,854 1,022 9,454 9,511 62 7,826 53,115 
Loans greater than 90 days past due14,830 — 7,344 — 679 — — 22,853 
Restructured loans— — — 634 1,565 — — 2,199 
Total non-performing loans30,216 9,854 8,366 10,088 11,755 62 7,826 78,167 
Total loans$3,743,698 $1,661,092 $1,177,949 $1,594,528 $911,997 $181,319 $450,765 $9,721,348 

20

 December 31, 2020
 Commercial Real EstateResidential Real Estate
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		Residential
Mortgage		Residential
Construction		ConsumerTotal
Performing loans:        
Current$3,571,184 $1,624,265 $1,033,057 $2,238,617 $1,073,963 $182,557 $502,548 $10,226,191 
30-59 days14,046 6,390 29 4,859 16,213 — 5,275 46,812 
60-89 days4,130 — 2,843 263 2,709 62 2,047 12,054 
Total performing loans3,589,360 1,630,655 1,035,929 2,243,739 1,092,885 182,619 509,870 10,285,057 
Non-performing loans:
Non-accrual loans45,227 11,561 15,044 22,933 10,212 — 7,384 112,361 
Loans greater than 90 days past due133 — — 161 480 — — 774 
Restructured loans— — — 715 1,602 — — 2,317 
Total non-performing loans45,360 11,561 15,044 23,809 12,294 — 7,384 115,452 
Total loans$3,634,720 $1,642,216 $1,050,973 $2,267,548 $1,105,179 $182,619 $517,254 $10,400,509 

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

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

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

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

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

Loss – Loans classified as a loss are considered uncollectible and of such little value that their continuing to be carried as a loan is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.
21

The following table provides information about credit quality indicators by the year of origination as of September 30, 2021:
 September 30, 2021
 Term Loans by Origination YearRevolving 
(In thousands)20212020201920182017PriorLoansTotal
Commercial Investor R/E:        
Pass$764,573 $782,273 $613,930 $408,936 $370,635 $723,877 $22,226 $3,686,450 
Special Mention2,283 4,980 4,276 602 684 6,924 — 19,749 
Substandard13,032 592 4,320 8,653 10,064 838 — 37,499 
Doubtful— — — — — — — — 
Total$779,888 $787,845 $622,526 $418,191 $381,383 $731,639 $22,226 $3,743,698 
Commercial Owner-Occupied R/E:
Pass$267,459 $258,309 $326,143 $199,446 $174,397 $394,812 $4,755 $1,625,321 
Special Mention160 1,519 4,301 2,721 4,492 9,210 — 22,403 
Substandard1,237 2,585 4,134 2,280 359 2,773 — 13,368 
Doubtful— — — — — — — — 
Total$268,856 $262,413 $334,578 $204,447 $179,248 $406,795 $4,755 $1,661,092 
Commercial AD&C:
Pass$373,212 $248,812 $240,404 $106,188 $28,985 $— $169,051 $1,166,652 
Special Mention9,286 — — — — — 989 10,275 
Substandard49 390 577 — 6 — — 1,022 
Doubtful— — — — — — — — 
Total$382,547 $249,202 $240,981 $106,188 $28,991 $— $170,040 $1,177,949 
Commercial Business:
Pass$532,473 $245,034 $151,622 $110,341 $66,806 $61,688 $389,218 $1,557,182 
Special Mention109 2,247 7,634 1,711 673 554 8,094 21,022 
Substandard1,846 3,995 2,740 997 1,102 3,874 1,770 16,324 
Doubtful— — — — — — — — 
Total$534,428 $251,276 $161,996 $113,049 $68,581 $66,116 $399,082 $1,594,528 
Residential Mortgage:
Beacon score:
660-850$137,853 $170,633 $54,052 $81,896 $118,267 $255,214 $— $817,915 
600-6599,209 4,443 4,375 7,036 4,063 23,653 — 52,779 
540-599499 1,379 1,822 4,737 2,469 10,596 — 21,502 
less than 540985 5,184 1,759 1,727 653 9,493 — 19,801 
Total$148,546 $181,639 $62,008 $95,396 $125,452 $298,956 $— $911,997 
Residential Construction:
Beacon score:
660-850$95,213 $65,743 $9,013 $6,130 $1,248 $1,160 $— $178,507 
600-659195 — 1,189 — — 396 — 1,780 
540-599— — — — — — — — 
less than 5401,032 — — — — — — 1,032 
Total$96,440 $65,743 $10,202 $6,130 $1,248 $1,556 $— $181,319 
Consumer:
Beacon score:
660-850$3,312 $1,441 $3,531 $3,632 $1,571 $29,118 $367,144 $409,749 
600-659220 196 329 591 481 5,278 14,135 21,230 
540-599104 15 241 186 161 2,563 6,165 9,435 
less than 540120 56 604 473 67 2,305 6,726 10,351 
Total$3,756 $1,708 $4,705 $4,882 $2,280 $39,264 $394,170 $450,765 
Total loans$2,214,461 $1,799,826 $1,436,996 $948,283 $787,183 $1,544,326 $990,273 $9,721,348 

22


 The following table provides information about credit quality indicators by the year of origination as of December 31, 2020:
 December 31, 2020
 Term Loans by Origination YearRevolving 
(In thousands)20202019201820172016PriorLoansTotal
Commercial Investor R/E:        
Pass$910,426 $763,214 $448,406 $448,698 $469,077 $498,384 $33,531 $3,571,736 
Special Mention11,044 — 4,879 833 269 27 — 17,052 
Substandard589 4,245 13,649 20,619 673 6,157 — 45,932 
Doubtful— — — — — — — — 
Total$922,059 $767,459 $466,934 $470,150 $470,019 $504,568 $33,531 $3,634,720 
Commercial Owner-Occupied R/E:
Pass$285,310 $385,058 $234,578 $192,634 $204,925 $306,840 $1,664 $1,611,009 
Special Mention2,290 — 3,027 4,742 134 4,079 — 14,272 
Substandard1,610 4,335 2,065 465 219 8,009 — 16,703 
Doubtful— — — — — 232 — 232 
Total$289,210 $389,393 $239,670 $197,841 $205,278 $319,160 $1,664 $1,642,216 
Commercial AD&C:
Pass$485,631 $261,537 $149,703 $50,192 $89 $2,357 $80,764 $1,030,273 
Special Mention1,711 — — — — — — 1,711 
Substandard1,439 891 — 13,816 2,843 — — 18,989 
Doubtful— — — — — — — — 
Total$488,781 $262,428 $149,703 $64,008 $2,932 $2,357 $80,764 $1,050,973 
Commercial Business:
Pass$1,244,822 $208,682 $138,861 $86,830 $34,498 $81,760 $433,016 $2,228,469 
Special Mention1,929 1,382 1,119 708 309 621 4,319 10,387 
Substandard2,914 4,564 3,519 1,631 2,745 3,456 1,829 20,658 
Doubtful106 995 849 36 1,284 1,852 2,912 8,034 
Total$1,249,771 $215,623 $144,348 $89,205 $38,836 $87,689 $442,076 $2,267,548 
Residential Mortgage:
Beacon score:
660-850$229,033 $74,054 $138,824 $172,493 $129,701 $251,065 $— $995,170 
600-6594,824 7,706 10,763 11,719 8,173 21,424 — 64,609 
540-599350 1,238 5,219 2,608 4,791 10,167 — 24,373 
less than 5402,702 2,108 3,576 2,150 892 9,599 — 21,027 
Total$236,909 $85,106 $158,382 $188,970 $143,557 $292,255 $— $1,105,179 
Residential Construction:
Beacon score:
660-850$112,604 $44,647 $14,543 $2,805 $1,693 $— $172 $176,464 
600-6591,743 3,189 — — — — — 4,932 
540-599— — — — 369 — — 369 
less than 540854 — — — — — — 854 
Total$115,201 $47,836 $14,543 $2,805 $2,062 $— $172 $182,619 
Consumer:
Beacon score:
660-850$2,575 $4,609 $5,112 $2,110 $2,614 $24,444 $417,737 $459,201 
600-659374 445 334 428 467 5,401 21,052 28,501 
540-59989 1,216 294 339 601 3,926 6,153 12,618 
less than 540751 160 525 785 532 2,826 11,355 16,934 
Total$3,789 $6,430 $6,265 $3,662 $4,214 $36,597 $456,297 $517,254 
Total loans$3,305,720 $1,774,275 $1,179,845 $1,016,641 $866,898 $1,242,626 $1,014,504 $10,400,509 


 
23

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, 2021
 Commercial Real Estate  
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		All
Other
Loans		Total
Troubled debt restructurings:      
Restructured accruing$— $— $— $— $— $— 
Restructured non-accruing9,594 3,157 — 726 — 13,477 
Balance$9,594 $3,157 $— $726 $— $13,477 
Individual allowance$— $— $— $214 $— $214 
Restructured and subsequently defaulted$— $— $— $— $— $— 
 
 For the Year Ended December 31, 2020
 Commercial Real Estate  
(In thousands)Commercial
Investor R/E		Commercial
Owner-
Occupied R/E		Commercial
AD&C		Commercial
Business		All
Other
Loans		Total
Troubled debt restructurings:      
Restructured accruing$— $— $— $380 $549 $929 
Restructured non-accruing723 930 — 1,951 — 3,604 
Balance$723 $930 $— $2,331 $549 $4,533 
Individual allowance$65 $— $— $955 $— $1,020 
Restructured and subsequently defaulted$— $— $— $— $— $— 
 
During the nine months ended September 30, 2021, the Company restructured $13.5 million in loans that were designated as TDRs. TDR loans are subject to periodic credit reviews to determine the necessity and appropriateness of an individual credit loss allowance based on the collectability of the recorded investment in the TDR loan. Loans restructured as TDRs during the nine months ended September 30, 2021 had individual reserves of $0.2 million. For the year ended December 31, 2020, the Company restructured $4.5 million in loans. Loans restructured as TDRs during 2020 had individual reserves of $1.0 million at December 31, 2020. During both the nine months ended September 30, 2021 and for the year ended December 31, 2020 TDR modifications consisted principally of interest rate concessions, and did not result in the reduction of the recorded investment in the associated loan balances. The commitments to lend additional funds on loans that have been restructured at September 30, 2021 and December 31, 2020 were not significant.
 
Other Real Estate Owned
Other real estate owned ("OREO") totaled $1.1 million and $1.5 million at September 30, 2021 and December 31, 2020, respectively. There were no consumer mortgage loans secured by residential real estate property for which formal foreclosure proceedings were in process as of September 30, 2021.
 
24

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, 2021Weighted
Average
Remaining
Life		December 31, 2020Weighted
Average
Remaining
Life
(Dollars in thousands)Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Amortizing intangible assets:        
Core deposit intangibles$29,038 $(11,496)$17,542 7.7 years$29,038 $(7,969)$21,069 8.4 years
Other identifiable intangibles13,906 (3,917)9,989 10.0 years13,906 (2,454)11,452 10.7 years
Total amortizing intangible assets$42,944 $(15,413)$27,531 $42,944 $(10,423)$32,521 
Goodwill$370,223 $370,223 $370,223 $370,223 

The amount of goodwill by reportable segment is presented in the following table:
(In thousands)Community
Banking		InsuranceInvestment
Management		Total
Balances at December 31, 2020$331,688 $6,788 $31,747 $370,223 
No Activity— — — — 
Balances at September 30, 2021$331,688 $6,788 $31,747 $370,223 
 
The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:
(In thousands)Amount
Remaining 2021$1,610 
20225,844 
20235,089 
20244,333 
20253,567 
Thereafter7,088 
Total amortizing intangible assets$27,531 
 
NOTE 6 – DEPOSITS
The following table presents the composition of deposits at the dates indicated:
 
(In thousands)September 30, 2021December 31, 2020
Noninterest-bearing deposits$3,987,411 $3,325,547 
Interest-bearing deposits:
Demand1,399,060 1,292,164 
Money market savings3,595,643 3,339,645 
Regular savings496,432 418,051 
Time deposits of less than $100,000435,139 509,919 
Time deposits greater than $100,000 and less than $250,000643,414 670,717 
Time deposits of $250,000 or more430,301 477,026 
Total interest-bearing deposits6,999,989 6,707,522 
Total deposits$10,987,400 $10,033,069 

NOTE 7 – BORROWINGS
Subordinated Debt
On November 5, 2019, the Company completed an offering of $175.0 million aggregate principal amount Fixed to Floating Rate Subordinated Notes due in 2029. The notes bear a fixed interest rate of 4.25% per year through November 14, 2024. Beginning November 15, 2024, the interest rate will become a floating rate equal to three month LIBOR, or an alternative benchmark rate as determined pursuant to the terms of the indenture for the notes in the event LIBOR has been discontinued by
25

November 15, 2024, plus 262 basis points through the remaining maturity or early redemption date of the notes. The interest will be paid in arrears semi-annually during the fixed rate period and quarterly during the floating rate period. The Company incurred $2.9 million of debt issuance costs which are being amortized through the contractual life of the debt. The entire amount of the subordinated debt is considered Tier 2 capital under current regulatory guidelines.

In conjunction with the acquisition of WashingtonFirst Bankshares, Inc. ("WashingtonFirst"), the Company assumed $25.0 million in subordinated debt with an associated purchase premium at acquisition of $2.2 million. The premium was amortized over the contractual life of the obligation. The subordinated debt had a maturity of 10 years, maturing on October 15, 2025, and was non-callable through October 15, 2020. The subordinated debt held a fixed interest rate of 6.00% per annum through October 5, 2020 at which point the rate became variable at the three-month LIBOR plus 457 basis points payable quarterly. On July 15, 2021, the Company redeemed the entire outstanding principal balance of the WashingtonFirst subordinated debt.
 
In conjunction with the acquisition of Revere Bank ("Revere"), the Company assumed $31.0 million in subordinated debt with an associated purchase premium at acquisition of $0.2 million, which was amortized through the call date. The subordinated debt had a 10-year term, maturing on September 30, 2026, and was non-callable until September 30, 2021. The subordinated debt had a fixed interest rate of 5.625% per annum, payable semi-annually, through September 30, 2021 at which point the interest rate reset quarterly to an amount equal to three month LIBOR plus 441 basis points. On September 30, 2021, the Company redeemed the entire outstanding principal balance of the Revere subordinated debt.
 
The following table provides information on subordinated debt as of the date indicated:
(In thousands)September 30, 2021December 31, 2020
Fixed to floating rate sub debt, 4.25%
$175,000 $175,000 
WashingtonFirst sub debt— 25,000 
Revere fixed to floating rate sub debt— 31,000 
    Total Sub debt175,000 231,000 
Less: Debt held as investments by Sandy Spring— (3,000)
Add: Purchase accounting premium— 1,669 
Less: Debt issuance costs(2,361)(2,581)
Long-term borrowings$172,639 $227,088 
 
Other Borrowings
At September 30, 2021 and December 31, 2020, the Company had $147.5 million and $153.2 million, respectively, of outstanding retail repurchase agreements. The Company had no outstanding federal funds purchased at September 30, 2021 and $390.0 million at December 31, 2020. At September 30, 2021, the Company did not have any borrowings outstanding under the Paycheck Protection Program Liquidity Facility ("PPPLF").
 
At September 30, 2021, the Company had an available line of credit with the FHLB under which its borrowings are limited to $3.9 billion based on pledged collateral at prevailing market interest rates, with no outstanding borrowings against it at September 30, 2021. At December 31, 2020, lines of credit with the FHLB totaled $3.0 billion based on pledged collateral with $379.1 million borrowed against the line. During the nine months ended September 30, 2021, the Company early repaid $279.0 million of FHLB advances, resulting in a prepayment penalty of $9.1 million, which was recorded to other expense in the Condensed Consolidated Statements of Income.

Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $786.8 million, commercial real estate loans amounting to $2.8 billion, home equity lines of credit (“HELOC”) amounting to $226.4 million, and multifamily loans amounting to $303.2 million at September 30, 2021, as collateral under the borrowing agreement with the FHLB. At December 31, 2020, the Company had pledged collateral of qualifying mortgage loans of $1.0 billion, commercial real estate loans of $2.8 billion, HELOC loans of $226.2 million, and multifamily loans of $237.6 million under the FHLB borrowing agreement.

The Company also had secured lines of credit available from the Federal Reserve Bank and correspondent banks of $108.6 million and $276.2 million at September 30, 2021 and December 31, 2020, respectively, collateralized by loans, with no borrowings outstanding at the end of either period. In addition, the Company had unsecured lines of credit with correspondent banks of $1.4 billion and $1.1 billion at September 30, 2021 and December 31, 2020, respectively. Of the unsecured lines of
26

credit available there were no outstanding borrowings at September 30, 2021 and $390.0 million outstanding at December 31, 2020.

NOTE 8 – STOCKHOLDERS' EQUITY
In December 2020, the Company's board of directors authorized a stock repurchase plan that permits the repurchase of up to 2,350,000 shares of common stock. During the nine months ended September 30, 2021, the Company repurchased and retired 1,261,828 shares of common stock at an average price of $43.05 per share for a total cost of $54.3 million. Under the previous stock repurchase plan that was approved in 2018 and expired in December 2020, the Company was authorized to repurchase up to 1,800,000 shares. During the nine months ended September 30, 2020, the Company repurchased and retired 820,328 common shares for the total cost of $25.7 million. Cumulatively under the previous plan, as of December 31, 2020, the Company repurchased and retired 1,488,519 shares of its common stock at an average price of $33.58 per share for a total cumulative cost of $50.0 million.

NOTE 9 – SHARE BASED COMPENSATION
At September 30, 2021, 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.
 
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 share units to selected directors and employees on a periodic basis at the discretion of the Company’s Board of Directors. The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, of which 790,800 are available for issuance at September 30, 2021, has a term of 10 years, and is administered by a committee of at least three directors appointed by the Board of Directors. Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven or 10 years from the date of grant depending on the terms of the grant agreement. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. The Company generally issues authorized but previously unissued shares to satisfy option exercises.
 
The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatilities are generally based on historical volatilities. The expected term of share options granted is generally derived from historical experience.
 
Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option, restricted stock, restricted stock unit grant or performance share units. The Company recognized compensation expense of $1.3 million and $1.0 million for the three months ended September 30, 2021 and 2020, respectively, and of $3.6 million and $2.8 million, for the nine months ended September 30, 2021 and 2020, respectively, related to the awards of stock options, restricted stock grants, restricted stock unit grants and performance share unit grants. There was no unrecognized compensation cost related to stock options as of September 30, 2021. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $9.4 million as of September 30, 2021. That cost is expected to be recognized over a weighted average period of approximately 2.30 years.

During the nine months ended September 30, 2021, the Company granted 128,557 restricted shares, restricted stock units and performance share units, of which 32,728 units are subject to achievement of certain performance conditions measured over a three-year performance period and 95,829 restricted shares or units are subject to a three year vesting schedule. The Company did not grant any stock options under the Omnibus Incentive Plan during the nine months ended September 30, 2021.

27

A summary of share option activity for the period indicated is reflected in the following table:
 Number
of
Common
Shares		Weighted
Average
Exercise
Share Price		Weighted
Average
Contractual
Remaining
Life (Years)		Aggregate
Intrinsic
Value
(in thousands)
Balance at January 1, 2021430,038 $14.97 3.0 years$6,828 
Granted— $— 
Exercised(193,602)$13.35 $5,356 
Forfeited— $— 
Expired— $— 
Balance at September 30, 2021236,436 $16.30 2.5 years$6,311 
Exercisable at September 30, 2021236,436 $16.30 2.5 years$6,311 
 
A summary of the activity for the Company’s restricted stock, restricted stock units and performance share units for the period indicated is presented in the following table:
 Number
of
Common
Shares/Units		Weighted
Average
Grant-Date
Fair Value
Non-vested at January 1, 2021391,683 $29.50 
Granted128,557 $41.05 
Vested(119,228)$31.48 
Forfeited/ cancelled(6,859)$34.33 
Non-vested at September 30, 2021394,153 $32.62 
 
NOTE 10 – PENSION PLAN
Defined Benefit Pension Plan
The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”). Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus salary increases and additional years of service after such date no longer affect the defined benefit provided by the Plan, although additional vesting may continue to occur.
 
The Company's funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the Plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds.
 
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)2021202020212020
Interest cost on projected benefit obligation$316 $359 $952 $1,078 
Expected return on plan assets(312)(456)(936)(1,368)
Recognized net actuarial loss228 219 682 656 
Net periodic benefit cost$232 $122 $698 $366 

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of Plan assets in the current economy and, since the Plan is currently frozen, the remaining investment horizon of the Plan. After consideration of these factors, the Company made a $1.0 million contribution during the nine months ended September 30, 2021. Management continues to monitor the funding level of the Plan and may make additional contributions as necessary during 2021.
28

 
NOTE 11 – NET INCOME PER COMMON SHARE
The calculation of net income per common share for the periods indicated is presented in the following table:
 Three Months Ended September 30,Nine Months Ended September 30,
(Dollars and amounts in thousands, except per share data)2021202020212020
Net income$56,976 $44,642 $189,703 $40,291 
    Distributed and undistributed earnings allocated to
        participating securities		(354)(373)(1,219)(317)
Net income attributable to common shareholders$56,622 $44,269 $188,484 $39,974 
Total weighted average outstanding shares47,197 47,415 47,409 43,261 
    Less: Weighted average participating securities(294)(397)(307)(355)
Basic weighted average common shares46,903 47,018 47,102 42,906 
    Dilutive weighted average common stock equivalents184 157 213 165 
Diluted weighted average common shares47,087 47,175 47,315 43,071 
Basic net income per common share$1.21 $0.94 $4.00 $0.93 
Diluted net income per common share$1.20 $0.94 $3.98 $0.93 
Anti-dilutive shares— 37 — 22 

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME/ (LOSS)
Comprehensive income/ (loss) is defined as net income/ (loss) plus transactions and other occurrences that are the result of non-owner changes in equity. For Condensed Consolidated Financial Statements presented for the Company, non-owner changes in equity are comprised of unrealized gains or losses on investments available-for-sale and any minimum pension liability adjustments.
 
The following table presents the activity in net accumulated other comprehensive income/ (loss) and the components of the activity for the periods indicated:
(In thousands)Unrealized Gains
on Investments
Available-for-Sale		Defined Benefit
Pension Plan		Total
Balance at January 1, 2021$28,175 $(9,470)$18,705 
Other comprehensive loss before reclassification, net of tax(20,218)— (20,218)
Reclassifications from accumulated other comprehensive income, net of tax(133)520 387 
Current period change in other comprehensive income, net of tax(20,351)520 (19,831)
Balance at September 30, 2021$7,824 $(8,950)$(1,126)
 
(In thousands)Unrealized Gains/
(Losses) on
Investments
Available-for-Sale		Defined Benefit
Pension Plan		Total
Balance at January 1, 2020$4,000 $(8,332)$(4,332)
Other comprehensive income before reclassification, net of tax21,650 — 21,650 
Reclassifications from accumulated other comprehensive income, net of tax(322)497 175 
Current period change in other comprehensive income, net of tax21,328 497 21,825 
Balance at September 30, 2020$25,328 $(7,835)$17,493 

29

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income/ (loss) for the periods indicated:
 Nine Months Ended September 30,
(In thousands)20212020
Unrealized gains on investments available-for-sale:
Affected line item in the Statements of Income:
Investment securities gains$178 $432 
Income before taxes178 432 
Tax expense(45)(110)
Net income$133 $322 
Amortization of defined benefit pension plan items:
Affected line item in the Statements of Income:
Recognized actuarial loss (1)
$(682)$(656)
Loss before taxes(682)(656)
Tax benefit162 159 
Net loss$(520)$(497)
(1)This amount is included in the computation of net periodic benefit cost. See Note 10 for additional information on the pension plan.

NOTE 13 – LEASES
The Company leases real estate properties for its network of bank branches, financial centers and corporate offices. All of the Company’s leases are currently classified as operating. Most lease agreements include one or more options to renew, with renewal terms that can extend the original lease term from one to twenty years or more. The Company does not sublease any of its leased real estate properties.
 
The following table provides information regarding the Company's leases as of the dates indicated:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Components of lease expense:
  Operating lease cost (resulting from lease payments)$3,047 $3,154 $9,333 $9,281 
Supplemental cash flow information related to leases:
  Operating cash flows from operating leases$3,208 $4,158 $9,762 $10,160 
  ROU assets obtained in the exchange for lease liabilities due to:
      New leases$— $— $803 $— 
      Acquisitions$— $— $— $7,720 
September 30, 2021December 31, 2020
Supplemental balance sheet information related to leases:
  Operating lease ROU assets$59,597 $65,215 
  Operating lease liabilities$69,060 $74,982 
Other information related to leases:
  Weighted average remaining lease term of operating leases9.1 years9.5 years
  Weighted average discount rate of operating leases2.92%3.04%
 
30

At September 30, 2021, the maturities of the Company’s operating lease liabilities were as follows:
 
(In thousands)Amount
Maturity: 
Remaining 2021$3,169 
202211,368 
202311,332 
20249,423 
20257,596 
Thereafter37,302 
Total undiscounted lease payments80,190 
Less: Present value discount(11,130)
Lease liability$69,060 
 
The Company recognized lease liabilities of $1.8 million and ROU assets of $1.5 million for two operating leases that have not yet commenced operations at September 30, 2021. One lease is expected to commence operations during the fourth quarter of 2021 and one is expected to commence operations during the first quarter of 2022. The associated ROU assets include approximately $0.2 million of tenant allowances for improvements to the spaces. The Company does not have any lease arrangements with any of its related parties as of September 30, 2021.

NOTE 14 – DERIVATIVES
The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and, therefore, has no credit risk. The notional value of the swaps outstanding was $391.1 million as of September 30, 2021 compared to $320.5 million as of December 31, 2020. The fair values of swap positions net to zero to minimize the potential impact on the Company’s Condensed Consolidated Financial Statements. Fair values of the swaps are carried as both gross assets and gross liabilities in other assets and other liabilities, respectively, in the Condensed Consolidated Statements of Condition. The associated net gains and losses on the swaps are recorded in Other income in the Condensed Consolidated Statements of Income.
 
NOTE 15 – LITIGATION
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 16 – FAIR VALUE
GAAP provides entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes in fair value must be recorded in earnings. The Company applies the fair value option on residential mortgage loans held for sale. The fair value option on residential mortgage loans held for sale allows the recognition of gains on the sale of mortgage loans to more accurately reflect the timing and economics of the transaction.
 
The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below.

31

Basis of Fair Value Measurement:
Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, changes to interest rates could result in higher or lower measurements of the fair values.
 
Assets and Liabilities
Residential mortgage loans held for sale
Residential mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 in the fair value hierarchy.
 
Investments available-for-sale
U.S. treasuries and government agencies securities and mortgage-backed and asset-backed securities
Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms, and databases coupled with extensive quality control programs. Quality control evaluation processes use available market, credit and deal level information to support the evaluation of the security. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not adjust the quoted price for such securities. Such instruments are classified within Level 2 in the fair value hierarchy.
 
State and municipal securities
The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. The Company independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, including references to dealer or other market quotes, by reviewing valuations of comparable instruments, and by comparing the prices realized on the sale of similar securities. Such securities are classified within Level 2 in the fair value hierarchy.

Corporate debt
The fair value of corporate debt is determined by utilizing a discounted cash flow valuation technique employed by a third-party valuation specialist. The third-party specialist uses assumptions related to yield, prepayment speed, conditional default rates and loss severity based on certain factors such as, credit worthiness of the counterparty, prevailing market rates, and analysis of similar securities. The Company evaluates the fair values provided by the third-party specialist for reasonableness and classifies them as level 3 in the fair value hierarchy.

Interest rate swap agreements
Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.
32


Assets Measured at Fair Value on a Recurring Basis
The following tables set forth the Company’s financial assets and liabilities at the dates indicated that were accounted for or disclosed at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 September 30, 2021
 Quoted Prices in
Active Markets for
Identical Assets		Significant Other
Observable Inputs		Significant
Unobservable
Inputs		 
(In thousands)(Level 1)(Level 2)(Level 3)Total
Assets:    
Residential mortgage loans held for sale (1)
$— $44,678 $— $44,678 
Investments available-for-sale:
U.S. treasuries and government agencies— 47,729 — 47,729 
State and municipal— 327,793 — 327,793 
Mortgage-backed and asset-backed— 1,046,624 — 1,046,624 
Corporate debt— — 7,409 7,409 
Total investments available-for-sale— 1,422,146 7,409 1,429,555 
Interest rate swap agreements— 6,290 — 6,290 
Total assets$— $1,473,114 $7,409 $1,480,523 
Liabilities:
Interest rate swap agreements$— $(6,290)$— $(6,290)
Total liabilities$— $(6,290)$— $(6,290)
 (1) The outstanding principal balance for residential loans held for sale as of September 30, 2021 was $43.5 million.
 December 31, 2020
 Quoted Prices in
Active Markets for
Identical Assets		Significant Other
Observable Inputs		Significant
Unobservable
Inputs		 
(In thousands)(Level 1)(Level 2)(Level 3)Total
Assets:    
Residential mortgage loans held for sale (1)
$— $78,294 $— $78,294 
Investments available-for-sale:
U.S. treasuries and government agencies— 43,297 — 43,297 
State and municipal— 390,367 — 390,367 
Mortgage-backed and asset-backed— 904,432 — 904,432 
Corporate debt— — 9,925 9,925 
Total investments available-for-sale— 1,338,096 9,925 1,348,021 
Interest rate swap agreements— 9,183 — 9,183 
Total assets$— $1,425,573 $9,925 $1,435,498 
Liabilities:
Interest rate swap agreements$— $(9,183)$— $(9,183)
Total liabilities$— $(9,183)$— $(9,183)
 (1) The outstanding principal balance for residential loans held for sale as of December 31, 2020 was $75.5 million.

33

The following table provides a change in the fair value of assets measured in the Condensed Consolidated Statements of Condition at fair value with significant unobservable inputs (Level 3) on a recurring basis for the period indicated:
 Significant
Unobservable
Inputs
(In thousands)(Level 3)
Investments available-for-sale: 
Balance at January 1, 2021$9,925 
Additions of Level 3 assets— 
Sales of Level 3 assets(2,102)
Total unrealized loss included in other comprehensive income/ (loss)(414)
Balance at September 30, 2021$7,409 

Assets Measured at Fair Value on a Nonrecurring Basis
The following tables set forth the Company’s financial assets subject to fair value adjustments on a nonrecurring basis at the date indicated that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 September 30, 2021
(In thousands)Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		Significant
Other
Observable
Inputs (Level 2)		Significant
Unobservable
Inputs (Level 3)		TotalTotal Losses
Loans (1)
$— $— $721 $721 $(6,771)
Other real estate owned— — 1,105 1,105 (74)
Total$— $— $1,826 $1,826 $(6,845)
(1) Amounts represent the fair value of collateral for collateral dependent non-accrual loans allocated to the allowance for credit losses. Fair values are determined using actual market prices (Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).

 December 31, 2020
(In thousands)Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		Significant
Other
Observable
Inputs (Level 2)		Significant
Unobservable
Inputs (Level 3)		TotalTotal Losses
Loans (1)
$— $— $13,901 $13,901 $(11,326)
Other real estate owned— — 1,455 1,455 (286)
Total$— $— $15,356 $15,356 $(11,612)
(1) Amounts represent the fair value of collateral for collateral dependent non-accrual loans allocated to the allowance for credit losses. Fair values are determined using actual market prices (Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).
  
At September 30, 2021, loans totaling $38.4 million were written down to fair value of $30.9 million as a result of individual credit loss allowances of $7.5 million associated with the collateral dependent loans. Loans totaling $97.7 million were written down to fair value of $86.3 million at December 31, 2020 as a result of individual credit loss allowances of $11.4 million associated with the collateral dependent loans.
 
Fair value of the collateral dependent loans is measured based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly, based on the factors identified above.
 
OREO is adjusted to fair value upon acquisition of the real estate collateral. Subsequently, OREO is carried at the lower of carrying value or fair value. The estimated fair value for OREO included in Level 3 is determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations
34

or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial recognition, the Company records the OREO as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.
 
Fair Value of Financial Instruments
The Company discloses fair value information, based on the exit price notion, of financial instruments that are not measured at fair value in the financial statements. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.
 
Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates based on observable inputs (“Level 2”) or unobservable inputs (“Level 3”).

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

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented in the following tables:
   Fair Value Measurements
 September 30, 2021Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable Inputs
(Level 3)
(In thousands)Carrying
Amount		Estimated
Fair
Value
Financial assets:     
Cash and cash equivalents$1,114,633 $1,114,633 $1,114,633 $— $— 
Residential mortgage loans held for sale44,678 44,678 — 44,678 — 
Investments available-for-sale1,429,555 1,429,555 — 1,422,146 7,409 
Equity securities41,097 41,097 41,097 — — 
Loans, net of allowance9,613,428 9,677,624 — — 9,677,624 
Interest rate swap agreements6,290 6,290 — 6,290 — 
Accrued interest receivable36,219 36,219 36,219 — — 
Bank owned life insurance146,710 146,710 — 146,710 — 
Financial liabilities:
Time deposits$1,508,854 $1,515,231 $— $1,515,231 $— 
Other deposits9,478,546 9,478,546 9,478,546 — — 
Securities sold under retail repurchase agreements and
federal funds purchased147,504 147,504 — 147,504 — 
Advances from FHLB— — — — — 
Subordinated debt172,639 174,659 — — 174,659 
Interest rate swap agreements6,290 6,290 — 6,290 — 
Accrued interest payable3,714 3,714 3,714 — — 

35

   Fair Value Measurements
 December 31, 2020Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable Inputs
(Level 3)
(In thousands)Carrying
Amount		Estimated
Fair
Value
Financial assets:     
Cash and cash equivalents$297,003 $297,003 $297,003 $— $— 
Residential mortgage loans held for sale78,294 78,294 — 78,294 — 
Investments available-for-sale1,348,021 1,348,021 — 1,338,096 9,925 
Equity securities65,760 65,760 65,760 — — 
Loans, net of allowance10,235,142 10,336,355 — — 10,336,355 
Interest rate swap agreements9,183 9,183 — 9,183 — 
Accrued interest receivable46,431 46,431 46,431 — — 
Bank owned life insurance126,887 126,887 — 126,887 — 
Financial liabilities:
Time deposits$1,657,662 $1,674,112 $— $1,674,112 $— 
Other deposits8,375,407 8,375,407 8,375,407 — — 
Securities sold under retail repurchase agreements and
federal funds purchased543,157 543,157 — 543,157 — 
Advances from FHLB379,075 390,593 — 390,593 — 
Subordinated debt227,088 227,512 — — 227,512 
Interest rate swap agreements9,183 9,183 — 9,183 — 
Accrued interest payable3,254 3,254 3,254 — — 

NOTE 17 - 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 reflects 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 and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income fees, and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment, and other expenses. Non-cash charges associated with amortization of intangibles were $1.2 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, and were $3.5 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively.
 
The Insurance segment is conducted through Sandy Spring Insurance, a subsidiary of the Bank. Sandy Spring Insurance 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, occupancy, support charges, and other expenses. Non-cash charges associated with amortization of intangibles were immaterial for the three and nine months ended September 30, 2021 and 2020.
 
The Investment Management segment is conducted through West Financial and RPJ, subsidiaries of the Bank. These asset management and financial planning firms, located in McLean, Virginia and Falls Church, Virginia, respectively, provide comprehensive investment management and financial planning to individuals, families, small businesses and associations, including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial and RPJ had approximately $3.8 billion in combined assets under management as of September 30, 2021. Major revenue sources include non-interest income earned on the above services. Expenses include personnel, occupancy, support charges, and other expenses. Non-cash charges associated with amortization of intangibles were $0.5 million for both the three months ended September 30, 2021 and 2020, respectively, and were $1.4 million for both the nine months ended September 30, 2021 and 2020, respectively.
 

36

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


 Three Months Ended September 30, 2021
(In thousands)Community
Banking		InsuranceInvestment
Management		Inter-Segment
Elimination		Total
Interest income$111,129 $— $3 $(3)$111,129 
Interest expense4,528 — — (3)4,525 
Provision/ (credit) for credit losses(8,229)— — — (8,229)
Non-interest income16,644 2,282 5,685 (217)24,394 
Non-interest expense58,059 1,696 3,643 (217)63,181 
Income/(loss) before income taxes73,415 586 2,045 — 76,046 
Income tax expense/ (benefit)18,385 185 500 — 19,070 
Net income/ (loss)$55,030 $401 $1,545 $— $56,976 
Assets$13,017,464 $9,203 $57,324 $(66,527)$13,017,464 
 
 Three Months Ended September 30, 2020
(In thousands)Community
Banking		InsuranceInvestment
Management		Inter-Segment
Elimination		Total
Interest income$112,985 $1 $1 $(3)$112,984 
Interest expense15,503 — — (3)15,500 
Provision for credit losses7,003 — — — 7,003 
Non-interest income24,746 2,119 2,746 (221)29,390 
Non-interest expense57,856 1,580 1,722 (221)60,937 
Income/ (loss) before income taxes57,369 540 1,025 — 58,934 
Income tax expense/ (benefit)13,912 149 231 — 14,292 
Net income/ (loss)$43,457 $391 $794 $— $44,642 
Assets$12,678,396 $11,289 $57,088 $(68,642)$12,678,131 

 Nine Months Ended September 30, 2021
(In thousands)Community
Banking		InsuranceInvestment
Management		Inter-Segment
Elimination		Total
Interest income$340,213 $2 $7 $(9)$340,213 
Interest expense20,972 — — (9)20,963 
Provision/ (credit) for credit losses(47,141)— — — (47,141)
Non-interest income62,083 5,679 16,408 (4,651)79,519 
Non-interest expense179,803 4,507 10,670 (651)194,329 
Income before income taxes248,662 1,174 5,745 (4,000)251,581 
Income tax expense59,951 347 1,580 — 61,878 
Net income$188,711 $827 $4,165 $(4,000)$189,703 
Assets$13,017,464 $9,203 $57,324 $(66,527)$13,017,464 
 
37

 Nine Months Ended September 30, 2020
(In thousands)Community
Banking		InsuranceInvestment
Management		Inter-Segment
Elimination		Total
Interest income$311,771 $5 $3 $(10)$311,769 
Interest expense48,447 — — (10)48,437 
Provision for credit losses90,158 — — — 90,158 
Non-interest income57,976 5,446 7,705 (645)70,482 
Non-interest expense184,921 4,319 5,526 (645)194,121 
Income/ (loss) before income taxes46,221 1,132 2,182 — 49,535 
Income tax expense/ (benefit)8,396 313 535 — 9,244 
Net income/ (loss)$37,825 $819 $1,647 $— $40,291 
Assets$12,678,396 $11,289 $57,088 $(68,642)$12,678,131 
38

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
This report, as well as other periodic reports filed with the Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of Sandy Spring Bancorp, Inc. and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.
 
Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These principal risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Company’s 2020 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:
•risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues, the effectiveness of vaccination programs, the imposition of any shelter in place orders and restrictions on travel; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates;
•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, the ability of businesses to remain viable and consumer and business confidence, which could lead to decreases in the demand for loans, deposits and other financial services that we provide and increases in loan delinquencies and defaults;
•changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;
•our liquidity requirements could be adversely affected by changes in our assets and liabilities;
•our investment securities portfolio is subject to credit risk, market risk, and liquidity risk, as well as changes in the estimates we use to value certain of the securities in our portfolio;
•the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;
•acquisition risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits and costs savings from, and limit any unexpected liabilities associated with, any business combinations;
•competitive factors among financial services companies, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;
•the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other regulatory agencies; and
•the effect of fiscal and governmental policies of the United States federal government.
 
Forward-looking statements speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

The Company
Sandy Spring Bancorp, Inc. is the bank holding company for Sandy Spring Bank (the “Bank”). The Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. At September 30, 2021, the Company had $13.0 billion in total assets, compared to $12.8 billion at December 31, 2020. The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
 
Sandy Spring Bank is an independent and community-oriented bank that offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, Sandy Spring Insurance Corporation ("SSIC"), West Financial Services, Inc. ("West") and SSB
39

Wealth Management, Inc. (d/b/a Rembert Pendleton and Jackson, "RPJ”), the 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. Deposit accounts of the Bank are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.  

On April 1, 2020 ("Acquisition Date"), the Company completed the acquisition of Revere Bank ("Revere"), headquartered in Rockville, Maryland, resulting in the addition of more than $2.8 billion in assets. At the Acquisition Date, Revere had loans of $2.5 billion and deposits of $2.3 billion. The all-stock transaction resulted in the issuance of 12.8 million common shares and with total consideration valued at approximately $293 million. In addition, on February 1, 2020 the Company acquired RPJ, a wealth advisory firm located in Falls Church, Virginia with approximately $1.5 billion in assets under management on the date the acquisition closed. The results of operations from the Revere and RPJ acquisitions have been included in the consolidated results of operations from the date of the acquisitions. As a result of the growth, net interest income and non-interest expense increased from the prior year’s quarter.

Current State and Response
The Company's business, financial condition, and results of operations have been and may continue to be affected by the outbreak of the novel coronavirus ("COVID-19" or “pandemic”). Both globally and within the United States, the pandemic continues to have various effects on economic and commercial activity and financial markets, both nationally and locally. Area jurisdictions continue to monitor and modify their respective pandemic guidelines on a periodic basis based on contagion metrics. Businesses continue to observe and modify their activities and behaviors to remain in compliance with the jurisdictional directives while concurrently providing consumers with goods and services. These directives have resulted in business and operational disruptions, including business closures, curtailment of services, operational reorganizations, supply chain disruptions, and layoffs and furloughs. Certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, that are intended to ameliorate the macroeconomic effects of COVID-19 may adversely impact our business. Decreased short-term interest rates, such as those announced by the Federal Reserve during the past year has resulted in a negative impact on our results, as we have certain assets and liabilities that are sensitive to changes in interest rates. Management continually monitors developments, evaluates strategic and tactical initiatives and solutions and allocates the necessary resources to mitigate the negative impact of this significant market disruption caused by the pandemic. For a description of the potential impacts of COVID-19 on the Company, see “Item 1A-Risk Factors” in the Company’s 2020 Annual Report on Form 10-K.
 
The Company implemented business continuity plans and continues to provide financial services to clients. In response to COVID-19, the Company implemented numerous actions to address the health and safety of employees and clients and to assist clients that have been impacted by the pandemic. The Company returned all employees to its offices as of November 1, 2021.

Current Quarter Financial Overview
The Company recorded net income of $57.0 million ($1.20 per diluted common share) in the current quarter compared to net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020 and net income of $57.3 million ($1.19 per diluted common share) for the second quarter of 2021. The results for the third quarter reflect the positive impact of the significant decline in interest expense and a credit to the provision for credit losses which more than offset a decline in non-interest income and an increase in non-interest expense compared to the prior year quarter.

Core earnings, which exclude the impact of the provision for credit losses and provision on unfunded loan commitments, merger and acquisition expense, loss on FHLB redemptions, amortization of intangibles and investment securities gains, each on an after-tax basis, were $52.0 million ($1.10 per diluted common share) for the current quarter, compared to $52.1 million ($1.10 per diluted common share) for the quarter ended September 30, 2020 and $55.1 million ($1.16 per diluted common share) for the quarter ended June 30, 2021.

The provision for credit losses for the current quarter was a credit of $8.2 million as compared to a credit of $4.2 million for the second quarter of 2021. The credits for the provision for credit losses during 2021 reflect the continued declines in the forecasted unemployment rate and, to a lesser degree, improvements in other forecasted macroeconomic indicators. The current quarter's provision also contains the impact of various updated metrics applied in the determination the allowance for credit losses.
 
The third quarter’s results reflect the following events:
 
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•The Company's net income grew 28% to $57.0 million ($1.20 per diluted common share) in the current quarter compared to net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020. Core earnings were $52.0 million for the current quarter of 2021, compared to $52.1 million compared to the prior year quarter.

•At September 30, 2021, total assets were $13.0 billion, a 3% increase, compared to $12.7 billion at September 30, 2020. This increase year-over-year was the result of the $889.8 million growth in cash and cash equivalents, primarily as a result of the funds received from the forgiveness of PPP loans, which declined $601.6 million during the same period. Excluding PPP loans, the total loan portfolio remained at $9.3 billion at September 30, 2021 compared to September 30, 2020, a result of the combined run-off of $326.9 million residential mortgage and consumer loans offset by the year-over-year commercial loan growth of $315.9 million or 4%.

•Year-over-year deposits increased 10%, driven by 15% growth in noninterest-bearing deposits and 8% growth in interest-bearing deposits.

•During the past twelve months, time deposits declined $359.4 million and borrowings of $820.6 million were eliminated. The reduction in borrowings included the redemption of $31 million of subordinated debt acquired as part of the Revere acquisition and $25 million of subordinated debt acquired as part of the WashingtonFirst Bankshares, Inc. ("WashingtonFirst") acquisition.

•For the third quarter of 2021, the net interest margin was 3.52%, compared to 3.24% for the same quarter of 2020, and 3.63% for the second quarter of 2021. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the current quarter’s net interest margin would have been 3.49%, compared to 3.18% for third quarter of 2020, and 3.60% for the second quarter of 2021. Solely excluding the impact of the PPP loans, the current quarter’s net interest margin would have been 3.35%, compared to 3.30% for third quarter of 2020, and 3.52% for the second quarter of 2021.

•The provision for credit losses was a credit of $8.2 million for the current quarter compared to the prior quarter’s credit to the provision of $4.2 million. The credit to the provision for the current quarter was the result of the continued improvement in forecasted economic variables, in addition to the impact of updated metrics applied in the determination of the allowance for credit losses.

•Non-interest income for the current quarter decreased by 17% or $5.0 million compared to the prior year quarter. The decline was the direct result of the decline in income from mortgage banking activities, which was partially offset by growth in wealth management income, an increase in service charges on deposit accounts and growth in bank card fees. Other non-interest income also grew compared to the prior year quarter primarily as a result of the credit related fees and activity-based contractual vendor incentives.

•Non-interest expense increased $2.2 million or 4% for the third quarter of 2021, compared to the prior year quarter. This increase was driven by increases in compensation costs, professional fees and other non-interest expense, which were partially offset by the lack of merger and acquisition expense during the current quarter and a significant reduction in FDIC insurance.

•Return on average assets (“ROA”) for the quarter ended September 30, 2021 was 1.75% and return on average tangible common equity (“ROTCE”) was 19.56%, compared to 1.79% and 20.44%, respectively, for the second quarter of 2021. On a non-GAAP basis, the current quarter's core ROA was 1.60% and core ROTCE was 17.85%, compared to core ROA of 1.73% and core ROTCE of 19.68% for the prior quarter of 2021.

•For the third quarter of 2021, the GAAP efficiency ratio was 48.23% compared to 48.03% for the third quarter of 2020, and 46.89% for the second quarter of 2021. The non-GAAP efficiency ratio for the third quarter of 2021 was 46.67% compared to 45.36% for the second quarter of 2021.

•During the quarter the Company repurchased 1,261,828 shares of its common stock at an average price of $43.04 per share.





41

Summary of Third Quarter Results
 
Balance Sheet and Credit Quality
Total assets grew 3% to $13.0 billion at September 30, 2021, as compared to $12.7 billion at September 30, 2020. During this period, total loans declined by 6% to $9.7 billion at September 30, 2021, compared to $10.3 billion at September 30, 2020. Excluding PPP loans, total loans at September 30, 2021 remained at $9.3 billion, as compared to the prior year. During the past twelve months, the activity in the loan portfolio reflected the net reduction of loans originated under the PPP program of $601.6 million and a $261.9 million decline in the residential mortgage loan portfolio, which was partially offset by year-over-year non-PPP commercial loan growth of $315.9 million or 4%. During this period, commercial real estate loans increased $347.0 million or 6% and non-PPP commercial business loans declined $31.1 million or 3%. The year-over-year decline in the mortgage loan portfolio resulted from mortgage loan refinance activity driven by the low interest rate environment during the period and the strategic decision to sell the majority of new mortgage loan production.

At September 30, 2021, the remaining outstanding principal balance of PPP loans was $461.0 million. As of September 30, 2021, 6,629 PPP loans totaling $1.1 billion have been forgiven and an additional $50.0 million have been repaid by borrowers. At the end of the current quarter, loans with an aggregate balance of $14.5 million remain in deferral status. Currently, 99% of all commercial loans that had been granted modifications/deferrals due to pandemic-related financial stress have returned to their original payment plans.

Deposit growth was 10% during the past twelve months, as noninterest-bearing deposits experienced growth of 15% and interest-bearing deposits grew 8%. This growth was driven primarily by the impact of the PPP program and, to a lesser extent, growth in interest-bearing transaction relationships.

Tangible common equity increased to $1.1 billion or 9.10% of tangible assets at September 30, 2021, compared to $1.0 billion or 8.31% at September 30, 2020 as a result of accumulated earnings over the preceding twelve months. Excluding the impact of the PPP program from tangible assets at September 30, 2021, the tangible common equity ratio would be 9.44%. At September 30, 2021, the Company had a total risk-based capital ratio of 15.26%, a common equity tier 1 risk-based capital ratio of 12.50%, a tier 1 risk-based capital ratio of 12.50%, and a tier 1 leverage ratio of 9.33%.

Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. At September 30, 2021, the level of non-performing loans to total loans was 0.80% compared to 0.72% at September 30, 2020, and 0.93% at June 30, 2021. At September 30, 2021, non-performing loans totaled $78.2 million, compared to $74.7 million at September 30, 2020, and $94.3 million at June 30, 2021. Loans placed on non-accrual during the current quarter amounted to $5.7 million compared to $0.9 million for the prior year quarter and $1.5 million for the second quarter of 2021. Non-accrual loans at quarter end declined from the prior quarter due primarily to the partial payoffs and eventual charge-offs of a few large borrowings within the hospitality sector with an aggregate balance of $32.9 million. The amounts charged-off on these credits did not exceed their associated individual reserves and, as such, did not result in any additional impact on the current quarter's provision for credit losses. Loans greater than 90 days or more increased from the prior quarter as a result of maturities of existing portfolio loans that were in process of being extended. Loans amounting to $22.2 million were subsequently settled after September 30, 2021.

The Company recorded net charge-offs of $7.8 million for the third quarter of 2021, as compared to net charge-offs of $0.2 million for the third quarter of 2020 and net charge-offs of $2.2 million for the second quarter of 2021. The increase in charge-offs in the current quarter compared to the prior quarter and the prior year quarter was primarily the result of the previously mentioned charge-offs of non-accrual loans.

At September 30, 2021, the allowance for credit losses was $107.9 million or 1.11% of outstanding loans and 138% of non-performing loans, compared to $124.0 million or 1.23% of outstanding loans and 131% of non-performing loans at June 30, 2021. Excluding PPP loans, the allowance for credit losses to outstanding loans was 1.17% and 1.34%, at September 30, 2021 and June 30, 2021, respectively. The decline in the allowance during the current quarter compared to the previous quarter was the result of the removal of individual reserves associated with the charge-offs and continued improvement in forecasted economic metrics, in addition to the impact of various updated metrics applied in the determination of the allowance for credit losses.

Quarterly Results of Operations
The Company recorded net income of $57.0 million for the three months ended September 30, 2021, compared to a net income of $44.6 million for the prior year quarter. The results for the current quarter reflect the positive impact of the significant decline in interest expense and the credit to the provision for credit losses, which exceeded the decline in non-interest income
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and the increase in non-interest expense compared to the third quarter of the prior year. Pre-tax, pre-provision, pre-merger income was $67.8 million for the three months ended September 30, 2021 compared to $67.2 million for the prior year quarter.

For the third quarter of 2021, net interest income increased $9.1 million or 9% compared to the third quarter of 2020, due to a significant reduction in interest expense during the preceding twelve months. During this period, as general market interest rates declined significantly, interest income declined modestly by $1.9 million, interest expense on deposits, notably money market, time deposits, and borrowings declined to a greater extent, resulting in an $11.0 million decrease in interest expense. The decline in interest expense was comprised of a decrease of $5.9 million in interest expense on interest-bearing deposits and $5.1 million in interest expense on borrowings. For the current quarter, the PPP program contributed $11.4 million to net interest income, of which $9.6 million represented origination fees. The net interest margin for the third quarter of 2021 was 3.52% as compared to 3.24% for the same quarter of the prior year as primarily the result of the decreased funding costs during the period. Excluding the net $0.8 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current quarter would have been 3.49% compared to the adjusted net interest margin of 3.18% for the third quarter of 2020. Solely excluding the impact of PPP loans, the current quarter's net interest margin would have been 3.35%, compared to 3.30% for the third quarter of 2020.

The provision for credit losses was a credit of $8.2 million for the third quarter of 2021 compared to a charge of $7.0 million for the third quarter of 2020. The provision for credit losses for the second quarter of 2021 was a credit of $4.2 million. The credit to the provision for the quarter was the result of the continued improvement in forecasted economic variables, in addition to the impact of various updated metrics applied in the determination of the allowance for credit losses. The overall credit to the provision for the third quarter of 2021 was partially mitigated by the impact of adjustments to certain qualitative factors and the change in the portfolio mix as a result of the origination of new credits.

Non-interest income decreased $5.0 million or 17% during the current quarter compared to the same quarter of the prior year, as a result of a 65% decline in income from mortgage banking activities, which exceeded the 21% growth in wealth management income, 26% increase in service charges on deposit accounts and 16% growth in bank card fees. In addition, other non-interest income grew 113% compared to the prior year.

Non-interest expense increased $2.2 million or 4% for the third quarter of 2021, compared to the prior year quarter. The increase was driven by increases in compensation costs, professional fees and other non-interest expense, which were partially offset by the lack of merger and acquisition expense during the current quarter and a significant reduction in FDIC insurance expense.

For the third quarter of 2021, the GAAP efficiency ratio was 48.23% compared to 48.03% for the third quarter of 2020, and 46.89% for the second quarter of 2021. The non-GAAP efficiency ratio was 46.67% for the current quarter as compared to 45.27% for the third quarter of 2020, and 45.36% for the second quarter of 2021. The modest increase in the efficiency ratio (reflecting a decrease in efficiency) from the third quarter of the prior year to the current year quarter was the result of the 7% growth in non-GAAP non-interest expense outpacing the 3% growth in non-GAAP revenue. ROA for the quarter ended September 30, 2021 was 1.75% and ROTCE was 19.56% compared to 1.79% and 20.44%, respectively, for the second quarter of 2021. On a non-GAAP basis, the current quarter's core ROA was 1.60% and core ROTCE was 17.85% compared to core ROA of 1.73% and core ROTCE of 19.68% for the prior quarter of 2021.
Results of Operations
For the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

The Company recorded net income of $189.7 million ($3.98 per diluted common share) for the nine months ended September 30, 2021 compared to net income of $40.3 million ($0.93 per diluted common share) for the same period in the prior year. Pre-tax, pre-provision, pre-merger income was $204.5 million for the nine months ended September 30, 2021 compared to $164.9 million for the prior year period. The current year benefited from post-acquisition increased net interest income of $55.9 million, the $47.1 million credit to the provision for credit losses, and a $9.0 million increase in non-interest income driven primarily by wealth management and other non-interest income. The Company’s participation in the PPP resulted in a net positive pre-tax impact of $35.6 million year-to-date for 2021, compared to $13.0 million for the same period of 2020. The prior year's results reflected the combined impact of merger and acquisition expense associated with the Revere acquisition, the impact of the COVID-19 pandemic on economic forecast used in the determination of the allowance for credit losses and the additional provision for credit losses associated with the acquisition of Revere during that period.
 
Core earnings, on an after-tax basis, for the nine months ended September 30, 2021, which exclude the impact of the provision for credit losses, the provision for credit losses on unfunded loan commitments, merger and acquisition expense, amortization
43

of intangible assets, loss on FHLB redemptions, and investment securities gains, were $164.1 million ($3.47 per diluted common share), compared to $133.7 million ($3.10 per diluted common share) for the nine months ended September 30, 2020.

Year-to-date, the provision for credit losses was a credit of $47.1 million as compared to a charge of $90.2 million for the same period of 2020. For the nine months ended September 30, 2021, the credit for the provision for credit losses, compared to the prior year's charge to the provision, reflects the impact of the continued improvement in forecasted economic metrics, notably the rate of unemployment, anticipated business bankruptcies and the housing price index. These decreases were partially offset by various qualitative factors applied in the determination of the allowance. The charge to the provision for credit losses for the same period in 2020 predominantly reflected the combined results of the impact of the deteriorated economic forecasts during the first half of 2020 and the initial allowance on acquired Revere non-purchased credit deteriorated loans.
 
Net Interest Income
Net interest income for the nine months ended September 30, 2021 grew 21% to $319.3 million compared to $263.3 million for the nine months ended September 30, 2020. On a tax-equivalent basis, net interest income for the nine months ended September 30, 2021 was $322.1 million compared to $266.4 million for the nine months ended September 30, 2020, an increase driven primarily by the Revere acquisition, the impact of lower market interest rates on the cost of interest-bearing liabilities and a reduction in outstanding borrowings. Year-to-date, tax-equivalent interest income increased $28.2 million or 9% while interest expense decreased $27.5 million or 57% as compared to the same period in the prior year. The growth in net interest income benefited from $4.6 million in net amortization of the fair value marks derived from acquisitions. The year-to-date amortization of fair value marks resulted in a reduction of interest income of $0.6 million and a reduction of interest expense of $5.2 million. In addition to the impact of the amortization of the fair value marks on net interest income for the nine months ended September 30, 2021, the PPP program generated interest income of $35.6 million, of which $27.9 million represented origination fees, compared to $13.0 million and $8.3 million, respectively, for the same period of 2020.
 
The following tables provide an analysis of net interest income performance that reflects a net interest margin that has improved to 3.57% for the nine months ended September 30, 2021 compared to 3.33% for the nine months ended September 30, 2020. Year-over-year, the average yield on earning assets declined 14 basis points while the average rate paid on interest-bearing liabilities declined 52 basis points, resulting in the increased margin for the comparative period. Excluding the net $4.6 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.52%. The net interest margin for 2020, excluding the amortization of fair value marks, would have been 3.21%. Solely excluding the impact of the PPP loans, the current year-to-date's net interest margin would have been 3.46% compared to 3.36% for the nine months ended September 30, 2020.

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Consolidated Average Balances, Yields and Rates
 Nine Months Ended September 30,
 20212020
(Dollars in thousands and tax-equivalent)Average
Balances
Interest (1)
Annualized
Average
Yield/Rate		Average
Balances


Interest (1)
Annualized
Average
Yield/Rate
Assets:      
Commercial investor real estate loans$3,662,890 $114,525 4.18 %$3,079,873 $103,238 4.48 %
Commercial owner-occupied real estate loans1,658,076 57,224 4.61 1,532,154 54,215 4.73 
Commercial AD&C loans1,100,431 32,917 4.00 869,181 29,862 4.59 
Commercial business loans2,110,803 72,891 4.62 1,643,992 49,618 4.03 
Total commercial loans8,532,200 277,557 4.35 7,125,200 236,933 4.44 
Residential mortgage loans998,174 26,045 3.48 1,179,305 32,899 3.72 
Residential construction loans175,489 4,606 3.51 160,555 4,985 4.15 
Consumer loans472,356 12,761 3.61 528,152 15,550 3.93 
Total residential and consumer loans1,646,019 43,412 3.52 1,868,012 53,434 3.82 
Total loans (2)
10,178,219 320,969 4.22 8,993,212 290,367 4.31 
Loans held for sale66,314 1,465 2.95 47,734 1,094 3.05 
Taxable securities984,354 12,230 1.66 1,095,419 17,557 2.14 
Tax-advantaged securities446,917 7,995 2.39 232,165 5,407 3.11 
Total investment securities (3)
1,431,271 20,225 1.88 1,327,584 22,964 2.31 
Interest-bearing deposits with banks386,717 395 0.14 291,260 419 0.19 
Federal funds sold538 — 0.11 369 1 0.36 
Total interest-earning assets12,063,059 343,054 3.80 10,660,159 314,845 3.94 
Less: allowance for credit losses(138,378)(114,613) 
Cash and due from banks101,433 126,607  
Premises and equipment, net56,439 59,357  
Other assets744,642 751,967  
Total assets$12,827,195 $11,483,477  
Liabilities and Stockholders' Equity:    
Interest-bearing demand deposits$1,397,623 $700 0.07 %$1,017,873 $1,519 0.20 %
Regular savings deposits472,059 189 0.05 363,303 212 0.08 
Money market savings deposits3,419,948 3,951 0.15 2,588,870 10,554 0.54 
Time deposits1,647,792 7,362 0.60 1,973,773 22,956 1.55 
Total interest-bearing deposits6,937,422 12,202 0.24 5,943,819 35,241 0.79 
Other borrowings163,569 139 0.11 553,898 1,731 0.42 
Advances from FHLB148,823 2,649 2.38 585,063 3,863 0.88 
Subordinated debentures220,175 5,973 3.62 222,470 7,602 4.56 
Total borrowings532,567 8,761 2.20 1,361,431 13,196 1.29 
Total interest-bearing liabilities7,469,989 20,963 0.37 7,305,250 48,437 0.89 
Noninterest-bearing demand deposits3,677,254 2,697,492 
Other liabilities161,071 172,944 
Stockholders' equity1,518,881 1,307,791 
Total liabilities and stockholders' equity$12,827,195 $11,483,477 
Tax-equivalent net interest income and spread$322,091 3.43 %$266,408 3.05 %
Less: tax-equivalent adjustment2,841 3,076 
Net interest income$319,250 $263,332 
Interest income/earning assets3.80 %3.94 %
Interest expense/earning assets0.23 0.61 
Net interest margin3.57 %3.33 %
(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.64% and 25.54% for 2021 and 2020, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $2.8 million and $3.1 million in 2021 and 2020, respectively.
(2)Non-accrual loans are included in the average balances.
(3)Investments available-for-sale are presented at amortized cost.
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Effect of Volume and Rate Changes on Tax-Equivalent Net Interest Income
The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise tax-equivalent net interest income:
 
2021 vs. 2020
2020 vs. 2019
 Increase
Or
(Decrease)		Due to Change In Average:*Increase
Or
(Decrease)		Due to Change In Average:*
(Dollars in thousands and tax equivalent)VolumeRateVolumeRate
Interest income from earning assets:      
  Commercial investor real estate loans$11,287 $18,547 $(7,260)$28,810 $38,009 $(9,199)
  Commercial owner-occupied real estate loans3,009 4,401 (1,392)9,240 10,849 (1,609)
  Commercial AD&C loans3,055 7,232 (4,177)9 7,704 (7,695)
  Commercial business loans23,273 15,355 7,918 18,139 27,953 (9,814)
  Residential mortgage loans(6,854)(4,826)(2,028)(2,509)(1,424)(1,085)
  Residential construction loans(379)436 (815)(597)(456)(141)
  Consumer loans(2,789)(1,575)(1,214)(3,247)925 (4,172)
  Loans held for sale371 408 (37)(51)227 (278)
  Taxable securities(5,327)(1,658)(3,669)388 6,382 (5,994)
  Tax-exempt securities2,588 4,070 (1,482)(420)319 (739)
  Interest-bearing deposits with banks(24)108 (132)(986)1,153 (2,139)
  Federal funds sold(1)— (1)(7)(2)(5)
Total tax-equivalent interest income28,209 42,498 (14,289)48,769 91,639 (42,870)
Interest expense on funding of earning assets:
  Interest-bearing demand deposits(819)423 (1,242)214 457 (243)
  Regular savings deposits(23)62 (85)(109)28 (137)
  Money market savings deposits(6,603)2,616 (9,219)(9,063)7,214 (16,277)
  Time deposits(15,594)(3,310)(12,284)(2,759)4,831 (7,590)
  Other borrowings(1,592)(780)(812)786 1,417 (631)
  Advances from FHLB(1,214)(4,365)3,151 (9,526)(1,772)(7,754)
  Subordinated debentures(1,629)(78)(1,551)6,140 6,344 (204)
Total interest expense(27,474)(5,432)(22,042)(14,317)18,519 (32,836)
Tax-equivalent net interest income$55,683 $47,930 $7,753 $63,086 $73,120 $(10,034)
*Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.
 
Interest Income
The Company's total tax-equivalent interest income increased 9% for the first nine months of 2021 compared to the prior year period. The previous table reflects that the increase in interest income has been driven predominantly by the 13% growth in average interest-earning assets, which was predominantly the result of the Revere acquisition and, to a lesser extent, the participation in the PPP program. Income growth has occurred despite the overall decline in market interest rates over the previous twelve months, which was driven by concerns over slowing economic growth and the impact of the COVID-19 pandemic. During this period, the yield on interest-earning assets decreased 14 basis points to 3.80%.
 
During the first nine months of 2021 average loans outstanding increased 13% compared to the first nine months of 2020. Essentially all of the growth in the loan portfolio occurred due to the 20% increase in the commercial loan portfolio. During the comparative period, total average commercial real estate loans grew 17%, driven primarily by the Revere acquisition, and commercial business loans grew 28%, as a result of the origination of PPP loans. Excluding PPP loans, average commercial business loans grew 5% for the first nine months of 2021 compared to the same period in 2020. Average consumer loans, predominantly home equity loans, decreased 11% and the residential mortgage portfolio declined 12% during the same time period, both the direct result of the increased refinancing activity spurred by the low rate environment. Compared to the prior year, the yield on average loans decreased 9 basis points. The average yield on total investment securities decreased 43 basis points while the average balance of the investment portfolio increased 8% for the first nine months of 2021 compared to the first nine months of 2020. The effects of a larger average balances and lower yields resulted in a 12% decline in interest income from investment securities during the period. Composition of the average investment portfolio shifted to 69% in taxable securities in the current period, as compared to 83% for the prior year period. During the same period, the average yield for
46

taxable securities decreased 48 basis points and the average yield on tax-exempt securities decreased 72 basis points as cash flows and maturities in the portfolio were reinvested at lower rates in the current interest rate environment.

Interest Expense
For the first nine months of 2021 interest expense decreased $27.5 million or 57% compared to the first nine months of 2020. The first nine months of 2020 included a reduction in interest expense due to the impact of the $5.8 million in accelerated amortization of the fair value premium from the prepayment of FHLB advances acquired from Revere. In addition, the fair value premium amortization on time deposits and subordinated debt for the first nine months of 2021 was responsible for a $5.2 million reduction in interest expense compared to $5.3 million for the same period in 2020. Excluding these items, interest expense decreased 63% compared to the prior year period, driven by the decrease in interest expense on money market accounts and time deposits as market rates have experienced a decline from the prior year. The 39 basis point decline in money market rates during this time period, in addition to the 95 basis point decline in time deposit rates, including the fair value amortization on the time deposits, were the drivers in the decline in the total average rate paid on interest-bearing deposits. The cost of interest-bearing deposits, including the fair value amortization on time deposits, declined 55 basis points for the first nine months of 2021 compared to the first nine months of 2020. The exclusion of the amortization of the time deposit premium would result in a decline of 61 basis points in the average rate paid on interest-bearing deposits compared to the prior year. The time deposit amortization adjustment benefited the net interest margin by four basis points for the first nine months of 2021 and six basis points for the same period in 2020. For the first nine months of 2021, the effect of the amortization on borrowings accounted for a two basis point benefit to the net interest margin compared to a seven basis point benefit for 2020. In total, the impact of the amortization of the fair value marks was a 10 basis point reduction in the rate paid on interest-bearing liabilities for the nine months ending September 30, 2021 as compared to a 20 basis point reduction for the same period in 2020..

Non-interest Income
Non-interest income amounts and trends are presented in the following table for the periods indicated:
 
 Nine Months Ended September 30,
2021/2020
2021/2020
(Dollars in thousands)20212020$ Change% Change
Securities gains$178 $432 $(254)(58.8)%
Service charges on deposit accounts5,936 5,149 787 15.3 
Mortgage banking activities20,887 25,567 (4,680)(18.3)
Wealth management income27,243 22,355 4,888 21.9 
Insurance agency commissions5,685 5,439 246 4.5 
Income from bank owned life insurance2,203 2,162 41 1.9 
Bank card fees5,078 4,102 976 23.8 
Other income12,309 5,276 7,033 133.3 
Total non-interest income$79,519 $70,482 $9,037 12.8 
 
Total non-interest income increased 13% to $79.5 million for the nine months ended September 30, 2021, compared to $70.5 million for 2020. During the current year, income from mortgage banking activities decreased $4.7 million as a result of the lower levels of new mortgage and refinancing activity in the current year compared to 2020, which was significantly affected by historically low mortgage lending rates. Wealth management income increased $4.9 million year over year as a result of the first quarter 2020 acquisition of RPJ, in addition to the growth in assets under management and the client base during the past twelve months. Service charge income and bank card fees grew compared to the prior year as a result of customer activity. Other non-interest income also increased significantly compared to the prior year primarily as a result the payoff of a purchased credit deteriorated loan. Further detail by type of non-interest income follows:
 
•Service charges on deposit accounts increased 15% in the first nine months of 2021, compared to the first nine months of 2020. The growth in service charge income reflects the impact of an increase in the current year's transaction activity, in addition to the effects of the prior year's temporary suspension of certain service fees and lower transaction volume, both a resulting reaction to the COVID-19 pandemic.
•Income from mortgage banking activities decreased 18% in the first nine months of 2021, compared to the first nine months of 2020 as a result of the impact of rising rates on the pipeline of locked mortgage applications and decreased origination volume for the current year compared to the same period for 2020.
•Wealth management income, comprised of income from trust and estate services and investment management fees earned by the Company’s investment management subsidiaries, increased 22% for the first nine months of 2021 compared to the same period of the prior year, as a result of the first quarter 2020 acquisition of RPJ, in addition to the
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$699 million growth in assets under management during the past twelve months. Trust services fees increased 13% for the first nine months of 2021 compared to the prior year period. Overall, total assets under management increased to $5.7 billion at September 30, 2021 compared to $4.7 billion at September 30, 2020, due primarily the growth in the existing market values of assets managed by wealth management and trust services.
•Insurance agency commissions increased 5% for the first nine months of 2021 as compared to the first nine months of 2020, driven by increases in commercial and physicians liability insurance commissions compared to the prior year.
•Bank-owned life insurance income increased 2% for the first nine months of 2021 as compared to the first nine months of 2020 as a result of additional policies received from the Revere acquisition and recent other additions. The prior year included $0.1 million in insurance mortality proceeds compared to no mortality proceeds in the current year.
•Bank card fee income grew 24% during the first nine months of 2021, compared to the first nine months of 2020, as a result of increased transaction volume during the period.
•Other non-interest income increased by 133% or $7.0 million during the first nine months of 2021, compared to the first nine months of 2020. The increase for the current year was driven by the payoff of a purchased credit deteriorated loan, activity-based contractual vendor incentives and credit related fees.

Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the periods indicated:
 
 Nine Months Ended September 30,
2021/2020
2021/2020
(Dollars in thousands)20212020$ Change% Change
Salaries and employee benefits$114,295 $98,391 $15,904 16.2 %
Occupancy expense of premises16,712 16,147 565 3.5 
Equipment expense9,456 9,103 353 3.9 
Marketing3,640 3,223 417 12.9 
Outside data services6,860 6,365 495 7.8 
FDIC insurance3,303 3,200 103 3.2 
Amortization of intangible assets4,991 4,566 425 9.3 
Merger and acquisition expense45 25,171 (25,126)(99.8)
Professional fees and services7,927 5,466 2,461 45.0 
Other expenses27,100 22,489 4,611 20.5 
Total non-interest expense$194,329 $194,121 $208 0.1 
 
Non-interest expense increased to $194.3 million for the nine months ended September 30, 2021, compared to $194.1 million for 2020. The current year included $9.1 million in prepayment penalties on FHLB borrowings compared to $5.9 million in prepayment penalties in the prior year. The prior year also included $25.2 million in merger and acquisition expense. Excluding the impact of these items would result in a year-over-year growth rate in non-interest expense of 14%. This growth rate was driven by operational and compensation costs associated with the 2020 acquisitions, staffing cost and professional fees associated with certain strategic initiatives, increased incentive expense associated with mortgage lending and other volume-based activities, and increased intangible asset amortization, marketing and outside data services cost. Further detail by category of non-interest expense follows:
•Salaries and employee benefits, the largest component of non-interest expense, increased 16% or $15.9 million in the first nine months of 2021. Regular salaries represented $8.0 million of this increase, which was the result of staffing costs associated with the 2020 acquisitions and strategic initiatives. The remainder of the increase was primarily driven by existing incentive compensation programs and employee benefit costs.
•Combined occupancy and equipment expenses increased 4% compared to the prior year as a result of increased cost associated with the additional branches and business offices from Revere and RPJ, seasonal expenses and increased software costs.
•Marketing expense increased 13% for the first nine months of 2021 compared to the same period of the prior year, due to focused advertising campaigns.
•Outside data services expense increased 8% from the prior year period due to the increase in volume-based components of contractual-based services.
•FDIC insurance increased 3% for 2021 due to the initial impact from the growth as a result of the 2020 acquisition of Revere.
•Amortization of intangible assets increased as a result of the amortization expense from the core deposit intangible asset recognized in the Revere transaction and, to a lesser degree, the amortization of intangibles acquired from the RPJ acquisition.
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•Professional fees and services grew 45% from the prior year due to costs associated with various consulting projects and certain strategic initiatives.
•Other non-interest expenses increased $4.6 million due primarily to the prepayment penalties of $9.1 million incurred in the current year from liquidation of FHLB advances as compared to $5.9 million in prepayment penalties that were incurred in the prior year.

Income Taxes
The Company had income tax expense of $61.9 million in the first nine months of 2021, compared to income tax expense of $9.2 million in the first nine months of 2020 as a result of the increase in current year-to-date pre-tax earnings compared to the prior year's pre-tax earnings. The effective tax rate for the nine months ended September 30, 2021 was 24.60%, compared to a tax rate of 18.66% for the same period in 2020. The current year's effective tax rate reflects a more normalized rate while the prior year's rate reflected the favorable result of the changes to tax laws in 2020 that expanded the time permitted to utilize previous net operating losses. The Company applied this change to the 2018 acquisition of WashingtonFirst to realize a tax benefit of $1.8 million for 2020, resulting in a greater proportional benefit from the operating income in the first nine months of 2020.
 
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 and acquisition expense, the amortization of intangibles, and other non-core expenses, such as early prepayment penalties on FHLB advances. 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 (if any). The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Condensed Consolidated Statements of Income. The GAAP efficiency ratio for the first nine months of 2021 was 48.73% compared to 58.15% for the first nine months of 2020. The primary driver of the decrease from the prior year to the current for the nine months ended September 30 was due to the prior year's inclusion of merger and acquisition expense. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio for the first nine months of 2021 was 44.88% compared to 47.10% for the first nine months of 2020. The improvement in the current year’s non-GAAP efficiency ratio compared to the prior year was the result of the 19% growth in non-GAAP revenue, which outpaced the 14% growth in non-GAAP non-interest expense.
 
In addition, the Company uses pre-tax, pre-provision income adjusted for merger and acquisition expense 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 adjusting the provision for credit losses, merger and acquisition expense and the provision for income taxes from net income. This metric increased by 24% in the first nine months of 2021 compared to the same period for 2020, due primarily to the acquisition driven increase in net interest income and increases in categories of non-interest income which offset the increases in non-interest expense as staffing and operating costs increased.

The Company has presented core earnings, core earnings per share, core return on average assets and core return on average tangible common equity in order to present metrics that are more comparable to prior periods to provide an indication of the core performance of the Company year over year. Core earnings reflect net income exclusive of the provision for credit losses, provision for unfunded loan commitments, merger and acquisition expense, amortization of intangible assets, loss on FHLB redemptions, and investment securities gains, in each case net of tax. Core earnings were $164.1 million ($3.47 per diluted common share) for the nine months ended September 30, 2021, compared to $133.7 million ($3.10 per diluted common share)
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for the nine months ended September 30, 2020. Average tangible assets and average tangible common equity represents average assets and average stockholders’ equity, respectively, adjusted for average goodwill and average intangible assets. The ROA for the first nine months of 2021 was 1.98% compared to 0.47% for the same period of the prior year. For the nine months ended September 30, 2021, the non-GAAP core ROA was 1.71% compared to 1.55% for the same period in the prior year. ROTCE was 22.68% for the first nine months of 2021 compared to 5.87% for the first nine months of 2020. The non-GAAP core ROTCE was 19.62% for the first nine months of 2021 compared to 19.46% for the first nine months of 2020.

GAAP and Non-GAAP Efficiency Ratios and Measures
 Nine Months Ended September 30,
(Dollars in thousands)20212020
Pre-tax pre-provision pre-merger income:  
Net income$189,703$40,291
Plus/ (less) non-GAAP adjustments:
Merger and acquisition expense4525,171
Income tax expense61,8789,244
Provision/ (credit) for credit losses(47,141)90,158
Pre-tax pre-provision pre-merger income$204,485$164,864
Efficiency ratio (GAAP):
Non-interest expense$194,329$194,121
Net interest income plus non-interest income$398,769$333,814
Efficiency ratio (GAAP)48.73 %58.15 %
Efficiency ratio (non-GAAP):
Non-interest expense$194,329$194,121
Less non-GAAP adjustments:
Amortization of intangible assets4,9914,566
Loss on FHLB redemption9,1175,928
Merger and acquisition expense4525,171
Non-interest expense - as adjusted$180,176$158,456
Net interest income plus non-interest income$398,769$333,814
Plus non-GAAP adjustment:
Tax-equivalent income2,8413,076
Less non-GAAP adjustment:
Securities gains178432
Net interest income plus non-interest income - as adjusted$401,432$336,458
Efficiency ratio (non-GAAP)44.88 %47.10 %
 
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GAAP and Non-GAAP Performance Ratios
 Nine Months Ended September 30,
(Dollars in thousands)20212020
Core earnings (non-GAAP):
Net income$189,703$40,291
Plus/ (less) non-GAAP adjustments (net of tax):
Provision/ (credit) for credit losses(35,054)67,132
Provision/ (credit) for credit losses on unfunded loan commitments(950)—
Merger and acquisition expense3318,742
Amortization of intangible assets3,7113,400
Loss on FHLB redemption6,7794,414
Investment securities gains(132)(322)
Core earnings (non-GAAP)$164,090$133,657
Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)47,315,72543,070,672
Earnings per diluted common share (GAAP)$3.98$0.93
Core earnings per diluted common share (non-GAAP)$3.47$3.10
Core return on average assets (non-GAAP):
Average assets (GAAP)$12,827,195$11,483,477
Return on average assets (GAAP)1.98 %0.47 %
Core return on average assets (non-GAAP)1.71 %1.55 %
Core return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP)$1,518,881$1,307,791
Average goodwill(370,223)(363,906)
Average other intangible assets, net(30,228)(26,572)
Average tangible common equity (non-GAAP)$1,118,430$917,313
Return on average tangible common equity (GAAP)22.68 %5.87 %
Core return on average tangible common equity (non-GAAP)19.62 %19.46 %

Results of Operations
For the Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

For the third quarter of 2021, the Company realized net income of $57.0 million ($1.20 per diluted common share) compared to net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020. The results for the current quarter reflect the positive impact of the significant decline in interest expense and the credit to the provision for credit losses, which more than offset the decline in non-interest income and an increase in non-interest expense compared to the third quarter of the prior year. Pre-tax, pre-provision, pre-merger income was $67.8 million for the three months ended September 30, 2021 compared to $67.2 million for the prior year quarter.

For the current quarter, core earnings, which exclude the impact of the provision for credit losses and provision on unfunded loan commitments, merger and acquisition expense, loss on FHLB redemptions, amortization of intangibles and investment securities gains, each on an after-tax basis, for the current quarter were $52.0 million ($1.10 per diluted common share), compared to $52.1 million ($1.10 per diluted common share) for the quarter ended September 30, 2020 and $55.1 million ($1.16 per diluted common share) for the quarter ended June 30, 2021.

For the current quarter, the provision for credit losses was a credit of $8.2 million as compared to a charge of $7.0 million for the third quarter of 2020 and credit of $4.2 million for the second quarter of 2021. The credits for the provision for credit losses during 2021 continue to reflect the declines in the forecasted unemployment rate and, to a lesser degree, improvements in other
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forecasted macroeconomic indicators. The third quarter's provision also contains the impact of various metrics applied in the determination of the allowance for credit losses.

Net Interest Income
Net interest income increased $9.1 million or 9% for the third quarter of 2021 compared to the third quarter of 2020, as a result of the 71% reduction in interest expense during the preceding twelve months. During this period, as general market interest rates declined significantly, interest income declined modestly by $1.9 million while interest expense on deposits, notably money market, time deposits and borrowings declined to a greater extent, resulting in a $11.0 million decrease in interest expense. Of the total interest expense decline $5.9 million was on interest-bearing deposits and $5.1 million was on borrowings. Net interest income for the quarter included $11.4 million for the PPP program, of which $9.6 million represented origination fees.

The net interest margin for the current quarter was 3.52%, compared to the net interest margin for the third quarter of 2020 of 3.24%. Compared to the prior year’s quarter, the yield on $12.1 billion of average interest-earning assets was 3.67% compared to 3.75% on average interest-earning assets of $12.0 billion. The average rate paid on interest-bearing liabilities for the current quarter declined to 0.25% compared to 0.77% for the prior year quarter. Excluding the net $0.8 million impact from the amortization of the fair value marks derived from acquisitions, the net interest margin for the current quarter would have been 3.49% compared to the adjusted net interest margin of 3.18% for the third quarter of 2020.
 
Average interest-earning assets increased by 1% and average interest-bearing liabilities decreased by 8% in the third quarter of 2021 compared to the third quarter of 2020. The decrease in average interest-bearing liabilities was driven by the 75% decrease in average borrowings, primarily from the prepayment of advances from the FHLB and repayment of federal funds purchased. Average interest-bearing deposits increased 6% and noninterest-bearing deposits increased 18% in the third quarter of 2021, as compared to the same quarter of the prior year. The percentage of average noninterest-bearing deposits to total average deposits increased to 36% in the current quarter compared to 33% in the third quarter of 2020. The primary cause of the increase in average noninterest-bearing deposits was the PPP program and its impact on commercial loans and noninterest-bearing deposits, and the growth in core deposit relationships. At September 30, 2021 and 2020, average total loans comprised 82% and 85% of average interest-earning assets with an average yield of 4.21% and 4.14%, respectively. The average yield on investment securities increased to 1.87% for the quarter ended September 30, 2021, from 1.72% at September 30, 2020. The overall average yield on interest-earning assets declined from 3.75% at September 30, 2020 to 3.67% at September 30, 2021, despite the increase in the average yields on loans and investments. This decline was driven by the impact of interest-bearing deposits on banks which increased to $777.8 million or 6% of interest-earnings assets at a yield of 0.15% for the current quarter from $287.8 million or 2% of interest-earning assets that was yielding 0.12% for the prior year quarter. The impact of the decline in the yield on average interest-earning assets was partially mitigated by the 52 basis point decline in the average rate paid on average interest-bearing liabilities, as the rate paid decreased from 0.77% for the third quarter of 2020 to 0.25% for the third quarter of 2021. During this period, the 37 basis point decline in the average rate paid on interest-bearing deposits was the result of the reduction in rates paid on money market savings and time deposits. While the general market rate decline affected deposit rates, the average rate paid on time deposits declined further as a result of amortization of the fair value mark associated with the Revere acquisition. Excluding the amortization of all fair value marks, the average rate paid on total average interest-bearing liabilities was 0.37%.

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Consolidated Average Balances, Yields and Rates
 Three Months Ended September 30,
 20212020
(Dollars in thousands and tax-equivalent)Average
Balances
Interest (1)
Annualized
Average
Yield/Rate		Average
Balances
Interest (1)
Annualized
Average
Yield/Rate
Assets:      
Commercial investor real estate loans$3,678,886 $37,760 4.07 %$3,582,751 $39,547 4.39 %
Commercial owner-occupied real estate loans1,671,442 19,184 4.55 1,628,474 19,215 4.69 
Commercial AD&C loans1,161,183 11,702 4.00 977,607 10,647 4.33 
Commercial business loans1,820,598 22,849 4.98 2,207,388 20,015 3.61 
Total commercial loans8,332,109 91,495 4.36 8,396,220 89,424 4.24 
Residential mortgage loans934,365 7,867 3.37 1,189,452 10,899 3.67 
Residential construction loans170,511 1,438 3.35 173,280 1,733 3.98 
Consumer loans452,289 4,033 3.54 543,242 5,053 3.70 
Total residential and consumer loans1,557,165 13,338 3.41 1,905,974 17,685 3.70 
Total loans (2)
9,889,274 104,833 4.21 10,302,194 107,109 4.14 
Loans held for sale50,075 379 3.03 54,784 398 2.91 
Taxable securities984,452 3,958 1.61 1,148,573 4,190 1.46 
Tax-advantaged securities419,044 2,588 2.47 255,665 1,846 2.89 
Total investment securities (3)
1,403,496 6,546 1.87 1,404,238 6,036 1.72 
Interest-bearing deposits with banks777,763 302 0.15 287,817 84 0.12 
Federal funds sold440 — 0.16 430 — 0.10 
Total interest-earning assets12,121,048 112,060 3.67 12,049,463 113,627 3.75 
Less: allowance for credit losses(121,630)(162,488)
Cash and due from banks100,292 128,193 
Premises and equipment, net57,220 59,182 
Other assets729,530 761,543 
Total assets$12,886,460 $12,835,893 
Liabilities and Stockholders' Equity:
Interest-bearing demand deposits$1,425,893 $238 0.07 %$1,144,328 $365 0.13 %
Regular savings deposits494,331 67 0.05 391,291 66 0.07 
Money market savings deposits3,484,101 1,234 0.14 3,022,710 2,508 0.33 
Time deposits1,558,497 1,982 0.50 2,022,703 6,500 1.28 
Total interest-bearing deposits6,962,822 3,521 0.20 6,581,032 9,439 0.57 
Other borrowings145,551 43 0.12 709,217 551 0.31 
Advances from FHLB— — — 448,929 2,841 2.52 
Subordinated debentures206,648 961 1.86 230,309 2,669 4.64 
Total borrowings352,199 1,004 1.13 1,388,455 6,061 1.74 
Total interest-bearing liabilities7,315,021 4,525 0.25 7,969,487 15,500 0.77 
Noninterest-bearing demand deposits3,869,293 3,281,607 
Other liabilities147,381 183,053 
Stockholders' equity1,554,765 1,401,746 
Total liabilities and stockholders' equity$12,886,460 $12,835,893 
Tax-equivalent net interest income and spread$107,535 3.42 %$98,127 2.98 %
Less: tax-equivalent adjustment931 643 
Net interest income$106,604 $97,484 
Interest income/earning assets3.67 %3.75 %
Interest expense/earning assets0.15 0.51 
Net interest margin3.52 %3.24 %
(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.64% and 25.54% for 2021 and 2020, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $0.9 million and $0.6 million in 2021 and 2020, respectively.
(2)Non-accrual loans are included in the average balances.
(3)Investments available-for-sale are presented at amortized cost.
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Interest Income
The Company's total tax-equivalent interest income decreased 1% for the third quarter of 2021 compared to the prior year quarter. The previous table reflects the 1% growth in average interest-earning assets over the prior year quarter as average total loans declined 4% and average investment securities remained level at $1.4 billion. The decrease in average total loans was more than offset by the 170% growth in average interest-bearing deposits with banks, the result of funds received due to the forgiveness of PPP loans during the quarter. Average mortgage loans decreased as a result of sales in the secondary market of the majority of loan originations during the past twelve months. Average consumer loans, principally home equity loans and lines, also declined as a result of refinancing activity during the year.
 
The average yield on interest-earning assets declined to 3.67% for the current quarter compared to 3.75% for the same period of the prior year. While the average yields on loans and investment securities for the current quarter increased by 7 and 15 basis points, respectively, compared to the prior year quarter, the average yield on interest-bearing deposits with banks was 0.15%. The effect of the large average balance of interest-bearing deposits with banks at the low rate had the effect of offsetting the increases in the yields on loans and investments and resulted in an 8 basis point decline in the yield on interest earning assets from period to period. The yield on average loans for the current quarter included a reduction of 6 basis points from the amortization of the fair value premiums. The increase in the yield on investments was driven by an increase in yields on taxable investments exceeding the decline in tax-advantaged securities during the period. Excluding the amortization of fair value marks, the yield on interest-earning assets would have been 3.72%. Interest income for the current quarter included $11.4 million in interest income from PPP loans of which $9.6 million represented origination fees, as compared to $7.0 million and $4.3 million, respectively, for the prior year quarter.
 
Interest Expense
Interest expense decreased 71% in the third quarter of 2021 compared to the third quarter of 2020. The decrease from period to period was attributable to the elimination of borrowings, a decline in general market rates over the previous twelve months and the impact of the amortization of the acquisition fair value marks. As a result of the decrease in outstanding borrowings and the general decline in market interest rates, the average rate on interest-bearing liabilities for the current quarter declined to 0.25% from 0.77% as compared to the prior year quarter. The combined impact of the general decline in market rates and amortization of fair value marks on deposits, resulted in the 0.20% average rate paid on interest-bearing deposits for the current quarter compared to 0.57% for the same period of the prior year. The main driver in the 37 basis point decline in the average rate paid on interest-bearing deposits in the current quarter versus in the prior year quarter were the notable decreases in the rates paid on money market savings and time deposits. Contributing to the decline in the average rate paid on interest-bearing liabilities was the $2.4 million in amortization of fair value marks on time deposits and borrowings for the current quarter. Excluding the amortization of the fair value marks, the average rate paid on interest-bearing liabilities would have been 0.37%. The average rate paid also benefited from the growth in average noninterest-bearing deposits that increased to 36% of average deposits in the current quarter compared to 33% in the prior year’s third quarter.
 
Non-interest Income
Non-interest income amounts and trends are presented in the following table for the periods indicated:
 
 Three Months Ended September 30,
2021/2020
2021/2020
(Dollars in thousands)20212020$ Change% Change
Securities gains$49 $51 $(2)(3.9)%
Service charges on deposit accounts2,108 1,673 435 26.0 
Mortgage banking activities4,942 14,108 (9,166)(65.0)
Wealth management income9,392 7,785 1,607 20.6 
Insurance agency commissions2,285 2,122 163 7.7 
Income from bank owned life insurance818 708 110 15.5 
Bank card fees1,775 1,525 250 16.4 
Other income3,025 1,418 1,607 113.3 
Total non-interest income$24,394 $29,390 $(4,996)(17.0)
 
Total non-interest income decreased $5.0 million or 17% during the current quarter compared to the same quarter of the prior year, the result of a decline in income from mortgage banking activities. Compared to the prior year quarter, wealth management income grew 21%, service charges on deposit accounts increased 26% and bank card fees grew 16%. Other non-interest income also grew 113% compared to the prior year.

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Further detail by type of non-interest income follows:
•Service charges on deposit accounts increased 26% in the third quarter of 2021, compared to the third quarter of 2020. The growth reflects the impact of the prior year's temporary suspension of certain service fees as well as lower transaction volume in the prior year, both a resulting reaction to the COVID-19 pandemic.
•Income from mortgage banking activities decreased by $9.2 million or 65% in the third quarter of 2021 as compared to the third quarter of 2020 reflecting the impact of increased market rates and lower origination volume during the current quarter.
•Wealth management income increased 21% for the third quarter of 2021, as compared to the third quarter of 2020. The growth in wealth management income reflects the continued positive impact of the RPJ acquisition in 2020 in addition to the performance in the financial markets and the expansion of the wealth management client base. Trust service fees increased 16% compared to the third quarter of 2020 driven by investment management fee income. Overall total assets under management increased to $5.7 billion at September 30, 2021 compared to $4.7 billion at September 30, 2020.
•Income from bank owned life insurance increased by $0.1 million in the third quarter of 2021, compared to the third quarter of 2020, which included mortality proceeds of $0.1 million, due to additional polices over the preceding 12 months.
•Bank card income increased 16% in the third quarter of 2021, compared to the third quarter of 2020, due to a rise in consumer transaction volume.
•Other non-interest income increased $1.6 million or 113% in the third quarter of 2021, compared to the third quarter of 2020, primarily as a result of an increase in credit related fees and activity-based contractual vendor incentives.

Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the periods indicated:
 
 Three Months Ended September 30,
2021/2020
2021/2020
(Dollars in thousands)20212020$ Change% Change
Salaries and employee benefits$38,653 $36,041 $2,612 7.2 %
Occupancy expense of premises5,728 5,575 153 2.7 
Equipment expense3,214 3,133 81 2.6 
Marketing1,376 1,305 71 5.4 
Outside data services2,317 2,614 (297)(11.4)
FDIC insurance361 1,340 (979)(73.1)
Amortization of intangible assets1,635 1,968 (333)(16.9)
Merger and acquisition expense— 1,263 (1,263)(100.0)
Professional fees and services3,031 1,800 1,231 68.4 
Other expenses6,866 5,898 968 16.4 
Total non-interest expense$63,181 $60,937 $2,244 3.7 
 
Total non-interest expense increased $2.2 million or 4% for the third quarter of 2021, compared to the prior year quarter. The increase was driven by increases in compensation costs, professional fees and other non-interest expense, which were partially offset by the lack of merger and acquisition expense during the current quarter and a significant reduction in FDIC insurance expense. Salary and benefit expense increased $2.6 million as a result of staffing increases. Professional fees as services were $1.2 million higher during the current quarter as compared to the prior year quarter, primarily due to consulting fees associated with specific strategic initiatives. The total of occupancy and equipment expense increased 3% compared to the prior year due to increased cost amortization. Other decreases occurred in outside data services and FDIC insurance expense. Further detail of significant changes in the levels of non-interest expense by category follows:
 
•Salaries and employee benefits, the largest component of non-interest expenses, increased 7% in the third quarter of 2021 compared to the same period of the prior year, as a result of staffing increases associated with strategic business initiatives and an increase in employee benefits partially offset by a reduction in incentive based compensation.
•Occupancy and equipment expenses for the quarter increased a combined 3% compared to the prior year quarter as a result of an increase in the amortization of software cost.
•Marketing expense increased 5% compared to the prior year as a result of increased focused advertising initiatives.
•FDIC insurance expense declined 73% as a result of the reduction in risk factors applied by the regulatory agency in the determination of the Company's premium.
•Professional fees and services increased 68% from the prior year quarter due primarily to increased consulting fees associated with specific strategic initiatives.
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•Amortization of intangible assets decreased primarily as a result of the decline in the amortization expense for the core deposit intangible asset recognized in the prior year's Revere transaction.
•Other non-interest expense increased 16% from the prior year quarter as a result of various operationally related expenses .
 
Income Taxes
The Company had income tax expense of $19.1 million in the third quarter of 2021, compared to income tax expense of $14.3 million in the third quarter of 2020. The resulting effective tax rate increased to 25.1% for the third quarter of 2021 compared to an effective tax rate of 24.3% for the third quarter of 2020, primarily due to a higher pre-tax book income in the third quarter of 2021.
 
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 GAAP efficiency ratio in the third quarter of 2021 increased to 48.23% compared to 48.03% for the third quarter of 2020. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio was 46.67% in the third quarter of 2021 compared to 45.27% in the third quarter of 2020. The change in the current year’s non-GAAP efficiency ratio compared to the prior year, was the result of the 7% rate of growth in non-GAAP non-interest expense which outpaced the 3% growth in the non-GAAP revenue. Pre-tax, pre-provision income, excluding merger and acquisition expense, grew 1% for the third quarter of 2021 compared to the third quarter of 2020.

The Company recorded net income of $57.0 million ($1.20 per diluted common share) in the current quarter compared to a net income of $44.6 million ($0.94 per diluted common share) for the third quarter of 2020. At September 30, 2021, core earnings were $52.0 million ($1.10 per diluted common share), compared to $52.1 million ($1.10 per diluted common share) for the quarter ended September 30, 2020. ROA was 1.75% for the three months ended September 30, 2021 compared to 1.38% for the prior year quarter. For the three months ended September 30, 2021, the non-GAAP core ROA was 1.60% compared to 1.62% for the prior year quarter. ROTCE was 19.56% for the quarter ended September 30, 2021 compared to 17.84% for the third quarter of 2020. The non-GAAP core ROTCE was 17.85% for the quarter ended September 30, 2021 compared to 20.83% for the prior year quarter.

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GAAP and Non-GAAP Efficiency Ratios and Measures
 Three Months Ended September 30,
(Dollars in thousands)20212020
Pre-tax pre-provision pre-merger income:  
Net income$56,976$44,642
Plus non-GAAP adjustments:
Merger and acquisition expense—1,263
Income tax expense19,07014,292
Provision/ (credit) for credit losses(8,229)7,003
Pre-tax pre-provision pre-merger income$67,817$67,200
Efficiency ratio (GAAP):
Non-interest expense$63,181$60,937
Net interest income plus non-interest income$130,998$126,874
Efficiency ratio (GAAP)48.23 %48.03 %
Efficiency ratio (non-GAAP):
Non-interest expense$63,181$60,937
Less non-GAAP adjustments:
Amortization of intangible assets1,6351,968
Loss on FHLB redemption——
Merger and acquisition expense—1,263
Non-interest expense - as adjusted$61,546$57,706
Net interest income plus non-interest income$130,998$126,874
Plus non-GAAP adjustment:
Tax-equivalent income931643
Less non-GAAP adjustment:
Securities gains4951
Net interest income plus non-interest income - as adjusted$131,880$127,466
Efficiency ratio (non-GAAP)46.67 %45.27 %
 
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GAAP and Non-GAAP Performance Ratios
 Three Months Ended September 30,
(Dollars in thousands)20212020
Core earnings (non-GAAP):
Net income (GAAP)$56,976$44,642
Plus/ (less) non-GAAP adjustments (net of tax):
Provision/ (credit) for credit losses(6,065)5,140
Provision/ (credit) for credit losses on unfunded loan commitments(64)—
Merger and acquisition expense—919
Amortization of intangible assets1,2111,463
Loss on FHLB redemption——
Investment securities gains(36)(38)
Core earnings (non-GAAP)$52,022$52,126
Core earnings per common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP)47,086,82447,175,071
Earnings per diluted common share (GAAP)$1.20$0.94
Core earnings per diluted common share (non-GAAP)$1.10$1.10
Core return on average assets (non-GAAP):
Average assets (GAAP)$12,886,460$12,835,893
Return on average assets (GAAP)1.75 %1.38 %
Core return on average assets (non-GAAP)1.60 %1.62 %
Core return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP)$1,554,765$1,401,746
Average goodwill(370,223)(370,548)
Average other intangible assets, net(28,600)(35,470)
Average tangible common equity (non-GAAP)$1,155,942$995,728
Return on average tangible common equity (GAAP)19.56 %17.84 %
Core return on average tangible common equity (non-GAAP)17.85 %20.83 %
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FINANCIAL CONDITION
Total assets grew 2% to $13.0 billion at September 30, 2021, as compared to $12.8 billion at December 31, 2020. During this period, total loans declined by 6% to $9.7 billion at September 30, 2021, compared to $10.4 billion at December 31, 2020. Excluding PPP loans, total loans at September 30, 2021 remained at $9.3 billion, as compared to December 31, 2020. Deposit growth was 10% during 2021, as noninterest-bearing deposits experienced growth of 20% and interest-bearing deposits grew 4%. This growth was driven primarily by the impact of the PPP program and, to a lesser extent, growth in interest-bearing transaction relationships. The growth in deposits resulted in the loan to deposit ratio declining to 88.5% at September 30, 2021 from 103.7% at December 31, 2020.
 
Loans
Excluding PPP loans, total loans at September 30, 2021 remained level at $9.3 billion compared to year-end 2020. Excluding PPP loans, commercial business loans declined 6%, residential mortgage loans declined 15% and consumer loans decreased 13%. These declines in the loan portfolio were partially mitigated by the 4% or $254.8 million growth in commercial real estate loans. The decline in commercial business loans was a reflection of a significant level of early pay-offs coupled with diminished loan production in 2021. The decline in residential mortgage loans occurred as the majority of loan originations have been sold in the secondary market during the current year. Consumer loans decreased as consumers liquidated their home equity lines and loans via the refinancing of existing mortgage loans or upon the purchase of another home. At September 30, 2021, the remaining outstanding principal balance of PPP loans was $461.0 million. As of September 30, 2021, 6,629 PPP loans totaling $1.1 billion have been forgiven and an additional $50.0 million have been repaid by borrowers.

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

 September 30, 2021December 31, 2020Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Commercial real estate:      
Commercial owner-occupied real estate$3,743,698 38.5 %$3,634,720 34.9 %$108,978 3.0 %
Commercial investor real estate1,661,092 17.1 1,642,216 15.8 18,876 1.1 
Commercial AD&C1,177,949 12.1 1,050,973 10.1 126,976 12.1 
Commercial business1,594,528 16.4 2,267,548 21.8 (673,020)(29.7)
Total commercial loans8,177,267 84.1 8,595,457 82.6 (418,190)(4.9)
Residential real estate:
Residential mortgage911,997 9.4 1,105,179 10.6 (193,182)(17.5)
Residential construction181,319 1.9 182,619 1.8 (1,300)(0.7)
Consumer450,765 4.6 517,254 5.0 (66,489)(12.9)
Total residential and consumer loans1,544,081 15.9 1,805,052 17.4 (260,971)(14.5)
Total loans$9,721,348 100.0 %$10,400,509 100.0 %$(679,161)(6.5)

At the end of the current quarter, loans with an aggregate balance of $13.6 million remain in deferral status. Currently, 99% of all commercial loans that had been granted modifications/deferrals due to pandemic-related financial stress have returned to their original payment plans.



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

 September 30, 2021December 31, 2020Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Investments available-for-sale:      
U.S. treasuries and government agencies$47,729 3.2 %$43,297 3.1 %$4,432 10.2 %
State and municipal327,793 22.3 390,367 27.6 (62,574)(16.0)
Mortgage-backed and asset-backed1,046,624 71.2 904,432 64.0 142,192 15.7 
Corporate debt7,409 0.5 9,925 0.7 (2,516)(25.4)
Total available-for-sale securities1,429,555 97.2 1,348,021 95.4 81,534 6.0 
Other equity:     
Federal Reserve Bank stock34,028 2.3 38,650 2.7 (4,622)(12.0)
Federal Home Loan Bank of Atlanta stock6,392 0.5 26,433 1.9 (20,041)(75.8)
Other equity securities677 — 677 — — — 
Total other equity securities41,097 2.8 65,760 4.6 (24,663)(37.5)
Total securities$1,470,652 100.0 %$1,413,781 100.0 %$56,871 4.0 
 
The investment portfolio consists primarily of U.S. Treasuries, U.S. Agency securities, U.S. Agency mortgage-backed securities, U.S. Agency collateralized mortgage obligations, asset-backed securities and state and municipal securities. The portfolio is monitored on a continuing basis with consideration given to interest rate trends and the structure of the yield curve and with a frequent assessment of economic projections and analysis. At September 30, 2021, 95% of the investment portfolio was invested in Aaa/AAA or Aa/AA-rated securities. The duration of the portfolio is monitored to ensure the adequacy and ability to meet liquidity demands. The duration of the portfolio at September 30, 2021 remained at 4.2 years compared to December 31, 2020. The portfolio possesses low credit risk and provides a source of liquidity necessary to meet loan and operational demands.
 
Other Earning Assets
Residential mortgage loans held for sale decreased to $44.7 million at September 30, 2021, compared to $78.3 million at December 31, 2020, as a result of a decrease in origination volume during the period. The Company continues to sell the majority of its mortgage loan production in the secondary market. The aggregate of interest-bearing deposits with banks and federal funds sold increased by $805.3 million at September 30, 2021 compared to December 31, 2020, primarily as a result of the cash received from the forgiveness of PPP loans.
 
Deposits
The composition of deposits for the periods indicated is presented in the following table:
 
 September 30, 2021December 31, 2020Period-to-Period Change
(Dollars in thousands)Amount%Amount%Amount%
Noninterest-bearing deposits$3,987,411 36.3 %$3,325,547 33.1 %$661,864 19.9 %
Interest-bearing deposits:  
Demand1,399,060 12.7 1,292,164 12.9 106,896 8.3 
Money market savings3,595,643 32.7 3,339,645 33.3 255,998 7.7 
Regular savings496,432 4.5 418,051 4.2 78,381 18.7 
Time deposits of less than $100,000435,139 4.0 509,919 5.1 (74,780)(14.7)
Time deposits greater than $100,000 and less than $250,000643,414 5.9 670,717 6.7 (27,303)(4.1)
Time deposits of $250,000 or more430,301 3.9 477,026 4.7 (46,725)(9.8)
Total interest-bearing deposits6,999,989 63.7 6,707,522 66.9 292,467 4.4 
Total deposits$10,987,400 100.0 %$10,033,069 100.0 %$954,331 9.5 
 
Deposits and Borrowings
Total deposits increased by 10% to $11.0 billion at September 30, 2021 from $10.0 billion at December 31, 2020. This increase was positively affected by the influx of funds from the re-initiated PPP program in the first quarter of 2021, as a portion of the
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$469.4 million in PPP loan fundings were placed in existing deposit accounts at the Bank until utilized by the respective borrowers, and to a lesser extent growth in core deposit relationships. As a result, noninterest-bearing deposits increased 20% and interest-bearing deposits increased 4%. At September 30, 2021, interest-bearing deposits represented 64% of deposits with the remaining 36% in noninterest-bearing balances, compared to 67% and 33%, respectively, at December 31, 2020. Growth of interest-bearing deposits from December 31, 2020 through September 30, 2021 occurred primarily in demand deposits and money market savings accounts, the result of PPP fundings deposited principally in commercial deposit accounts. Total time deposits declined 9% at September 30, 2021 compared to December 31, 2020, primarily due to a 17% decline in core time deposits driven by the run-off precipitated by the declining rate environment.

Capital Management
Management monitors historical and projected earnings, dividends, and asset growth, as well as risks associated with the various types of on and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. Total stockholders' equity remained at $1.5 billion at September 30, 2021 compared to at December 31, 2020. During this period, the $144.0 million growth in retained earnings was offset by the stock repurchases of $54.3 million and the net other comprehensive loss of $19.8 million. The ratio of average equity to average assets was 11.84% for the nine months ended September 30, 2021, as compared to 11.39% for the nine months ended September 30, 2020.

Risk-Based Capital Ratios
Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as risk-based capital guidelines. The actual regulatory ratios and required ratios for capital adequacy are summarized for the Company in the following table.
 Ratios atMinimum
Regulatory
Requirements
 September 30, 2021December 31, 2020
Tier 1 leverage9.33%8.92%4.00%
Common equity tier 1 capital to risk-weighted assets12.50%10.58%4.50%
Tier 1 capital to risk-weighted assets12.50%10.58%6.00%
Total capital to risk-weighted assets15.26%13.93%8.00%
 
As of September 30, 2021, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.
 
The minimum capital level requirements applicable to the Company and the Bank are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
 
The increases in the ratios at September 30, 2021 from December 31, 2020 were driven by the year-to-date net income coupled with a decline in risk-based assets during the period. During 2020, the Company elected to apply the provisions of the CECL deferral transition in the determination of its risk-based capital ratios. At September 30, 2021, the impact of the application of this deferral transition provided an additional $11.0 million in Tier 1 capital and resulted in raising the common equity Tier 1 ratio by 12 basis points.
 
Tangible Common Equity
Tangible common equity, tangible assets, and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.
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Tangible common equity remained at $1.1 billion for September 30, 2021 as compared to December 31, 2020. At September 30, 2021, the ratio of tangible common equity to tangible assets has increased to 9.10% compared to 8.61% at December 31, 2020. The increase in the tangible common equity ratio ("TCE ratio") was caused by the 8% growth of tangible common equity during the first nine months of 2021, due to the net impact of earnings growth, partially reduced by the recent stock repurchases, versus the 2% growth in tangible assets.

A reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets along with tangible book value per share, book value per share and related non-GAAP tangible common equity ratio are provided in the following table:
 
Tangible Common Equity Ratio – Non-GAAP
(Dollars in thousands, except per share data)September 30, 2021December 31, 2020
Tangible common equity ratio:  
Total stockholders' equity$1,546,060 $1,469,955 
Goodwill(370,223)(370,223)
Other intangible assets, net(27,531)(32,521)
Tangible common equity$1,148,306 $1,067,211 
Total assets$13,017,464 $12,798,429 
Goodwill(370,223)(370,223)
Other intangible assets, net(27,531)(32,521)
Tangible assets$12,619,710 $12,395,685 
Tangible common equity ratio9.10 %8.61 %
Outstanding common shares46,119,074 47,056,777 
Tangible book value per common share$24.90 $22.68 
Book value per common share$33.52 $31.24 
 

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 as a part of an acquisition transaction with evidence of more-than-insignificant credit deterioration since their origination as of the date of the acquisition are considered “purchased credit deteriorated” or “PCD” loans and are recorded at their initial fair values. The identification of loans that have experienced a more-than-insignificant deterioration in credit quality since their origination requires judgment and an assessment of a number of factors. For further discussion regarding the acquired loans, including PCD loans, refer to that section of Note 1 - Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements.
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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 monitoring the credit quality of the portfolio, providing early identification of potential problem credits and proactive management of problem credits.

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

Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. The level of non-performing loans to total loans was 0.80% at September 30, 2021, compared to 0.72% at September 30, 2020, and 1.11% at December 31, 2020. At September 30, 2021, non-performing loans totaled $78.2 million, compared to $74.7 million at September 30, 2020, and $115.5 million at December 31, 2020. Loans placed on non-accrual during the current quarter amounted to $5.7 million compared to $0.9 million for the prior year quarter and $1.5 million for the second quarter of 2021. Non-accrual loans at September 30, 2021 declined throughout the current year due primarily to the partial payoffs and eventual charge-offs of a few large borrowings within the hospitality sector with an aggregate balance of $32.9 million. Charged-off amounts of these credits did not exceed their associated individual reserves, and as such, did not result in any additional impact on the current quarter's provision for credit losses. Loans greater than 90 days or more increased from the prior quarter as a result of maturities of existing portfolio loans that were in process of being extended. Loans amounting to $22.2 million were subsequently settled after September 30, 2021.

While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs, Northern Virginia and Baltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the conditions being experienced in various business sectors of the economy on both a regional and national level. As noted, risks, uncertainties and various other factors related to the COVID-19 pandemic includes the impact on the economy and the businesses of our borrowers and their ability to remit contractual payments on their obligations to the Company in a timely manner. The current ability to predict the outcome or impact of the remedial actions and stimulus measures adopted by the government on the economic well-being of our borrowers and the manifestations of all these factors including the future performance aspect of the credit portfolio remains uncertain.
 
The Company’s methodology for evaluating whether a loan shall be placed on non-accrual status begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring a specific allowance, the Company looks primarily to the value of the collateral (adjusted for estimated costs to sell) or projected cash flows generated by the operation of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as non-accrual.
 
Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:
•An internal evaluation is updated periodically to include borrower financial statements and/or cash flow projections.
•The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.
•Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.
•At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal.
•Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraised value (adjusted for estimated costs to sell) and the loan balance.
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•Evaluation of whether adverse changes in the value of the collateral are expected over the remainder of the loan’s expected life.
•The Company will individually assess the allowance for credit losses based on the fair value of the collateral for any collateral dependent loans where the borrower is experiencing financial difficulty or when the Company determines that the foreclosure is probable. The Company will charge-off the excess of the loan amount over the fair value of the collateral adjusted for the estimated selling costs.
 
Loans considered to be troubled debt restructurings (“TDRs”) are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured collateral-dependent loans are individually assessed for allowance for credit losses and may either be in accruing or non-accruing status. Non-accruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category if the borrower is no longer experiencing financial difficulty, a re-underwriting event took place and the revised loan terms of the subsequent restructuring agreement are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk.
 
The CARES Act provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. Federal regulatory agencies issued a joint statement that provided further guidance on loan modifications related to COVID-19. The CARES Act provided for extensions of up to 180 days in the delay of loan principal and/or interest payments for customers who are affected by the COVID-19 pandemic. These customers must meet certain criteria, such as they were in good standing and not more than 30 days past due prior to the pandemic, as well as other requirements noted in the regulatory agencies’ revised statement. In some cases, customers received a second and third accommodation. The initial period to request payment accommodation expired on December 31, 2020. However, recently passed legislation has extended this request period to December 31, 2021. Based on the guidance noted above, the Company does not classify the COVID-19 loan modifications as TDRs, nor are the customers considered past due with regards to their delayed payments. Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume where it left off upon entry into the program.

In an effort to provide for relief to borrowers that have suffered financial hardship due to the COVID-19 pandemic, the Company granted accommodations in the form of payment deferrals on over 2,600 loans with an aggregate balance of $2.1 billion. At September 30, 2021, loans with payment accommodation amounted to $13.6 million, of which $7.0 million were accommodations on commercial loans.

Applying the stipulated criteria for both rounds of the PPP program, at September 30, 2021, the Company had approved and funded over 8,500 loans for a total of $1.6 billion in PPP loans to businesses. Loans originated under the program are 100% guaranteed by the Small Business Administration. At September 30, 2021, the remaining outstanding principal balance of PPP loans was $461.0 million. As of September 30, 2021, 6,629 PPP loans totaling $1.1 billion have been forgiven by the SBA and an additional $50.0 million have been repaid by borrowers.
 
The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and/or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view the extension of a loan to be a satisfactory approach to resolving non-performing credits. On an exception basis, certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which are not affecting the performance of the credit or other identified weakness may be extended.
 
The Company typically sells 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
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repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of $0.6 million for possible losses due to repurchases.

The Company periodically engages in whole loan sale transactions of its residential mortgage loans as a part its interest rate risk management strategy. There were no whole loan sales of mortgage loans from the portfolio during the current year.
 
Mortgage loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The amortized cost of the Company's mortgage loan servicing rights was $0.4 million at September 30, 2021 compared to $0.6 million at December 31, 2020.
 
Analysis of Credit Risk
The following table presents information with respect to non-performing assets and 90-day delinquencies as of the periods indicated:
 
(Dollars in thousands)September 30, 2021December 31, 2020
Non-accrual loans:  
Commercial real estate:  
Commercial investor real estate$15,386 $45,227 
Commercial owner-occupied real estate9,854 11,561 
Commercial AD&C1,022 15,044 
Commercial business9,454 22,933 
Residential real estate:
Residential mortgage9,511 10,212 
Residential construction62 — 
Consumer7,826 7,384 
Total non-accrual loans53,115 112,361 
Loans 90 days past due:
Commercial real estate:
Commercial investor real estate14,830 133 
Commercial owner-occupied real estate— — 
Commercial AD&C7,344 — 
Commercial business— 161 
Residential real estate:
Residential mortgage679 480 
Residential construction— — 
Consumer— — 
Total 90 days past due loans22,853 774 
Restructured loans (accruing)2,199 2,317 
Total non-performing loans78,167 115,452 
Other real estate owned, net1,105 1,455 
Total non-performing assets$79,272 $116,907 
Non-performing loans to total loans0.80 %1.11 %
Non-performing assets to total assets0.61 %0.91 %
Allowance for credit losses to non-performing loans138.06 %143.23 %

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The following table discloses information on the credit quality of originated loans, acquired Revere loans and total loans:
 
 September 30, 2021
(Dollars in thousands)Originated
 Loans		Revere Acquired
 Loans		Total 
Loans
Performing loans:   
Current$7,798,880 $1,794,384 $9,593,264 
30-59 days29,774 2,507 32,281 
60-89 days12,811 4,825 17,636 
Total performing loans 7,841,465 1,801,716 9,643,181 
Non-performing loans:   
Non-accrual loans34,565 18,550 53,115 
Loans greater than 90 days past due10,798 12,055 22,853 
Restructured loans2,199 — 2,199 
Total non-performing loans47,562 30,605 78,167 
 Total loans$7,889,027 $1,832,321 $9,721,348 
Non-performing loans to total loans0.60 %1.67 %0.80 %
Allowance for credit losses to non-performing loans172.42 %84.67 %138.06 %
 
Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of the portion of the Company’s loans’ amortized cost basis not expected to be collected over the loans’ contractual life. As a part of the credit oversight and review process, the Company maintains an allowance for credit losses (the “allowance”). The following allowance section should be read in conjunction with “Allowance for Credit Losses” section in Note 1 – Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements. The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income when loans are placed on non-accrual status.
 
The appropriateness of the allowance is determined through ongoing evaluation of the credit portfolio, and involves consideration of a number of factors. Determination of the allowance is inherently subjective and requires significant estimates, including consideration of current conditions and future economic forecasts, which may be susceptible to significant volatility. The amount of expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged off against the allowance, while recoveries are credited to the allowance when received. Management adjusts the level of the allowance through the provision for credit losses in the Condensed Consolidated Statement of Income.
 
The provision for credit losses for the nine months ended September 30, 2021 amounted to a credit of $47.1 million as compared to a charge of $90.2 million for the same period in 2020. For the nine months ended September 30, 2021, the credit for the provision for credit losses, compared to the prior year's charge to the provision, reflects the impact of the continued improvement in forecasted economic metrics, notably the rate of unemployment, anticipated business bankruptcies and the housing price index. These decreases were partially offset by qualitative factors applied in the determination of the allowance. The charge to the provision for credit losses for the same period in 2020 predominantly reflected the combined results of the impact of the deteriorated economic forecasts during the first half of 2020 and the initial allowance on acquired Revere non-purchased credit deteriorated loans. The portion of the $47.1 million credit to provision directly attributable to the significant improvement in the economic forecast amounted to a credit of approximately $60.4 million. The remainder of the changes to the provision reflected the impact of changes in interest rates, existing terms, qualitative factors, individual reserves, portfolio composition and portfolio maturities.

At September 30, 2021, the allowance for credit losses was $107.9 million as compared to $165.4 million at December 31, 2020. The allowance for credit losses as a percent of total loans was 1.11% and 1.59% at September 30, 2021 and December 31, 2020, respectively. The allowance for credit losses represented 138% of non-performing loans at September 30, 2021 as compared to 143% at December 31, 2020. The allowance attributable to the commercial portfolio represented 1.22% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.54%. With respect to the total commercial portion of the allowance, 23% of this portion is allocated to the commercial business loan portfolio, resulting in the ratio of the allowance for commercial business loans to total commercial business loans of 1.45%. The ratio of the allowance attributable to ADC loans was 2.44% at the end of the current quarter. Excluding the PPP loans, which do not
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have an associated allowance, the allowance for credit losses as percentage of total loans outstanding would be 1.17% and associated allowance to the commercial business portfolio would be 2.04%.
 
The current methodology for assessing the appropriate allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions over a reasonable and supportable forecast period and the Company’s prepayment and curtailment rates, (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large lending relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations, and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or where the Company determined that foreclosure is probable. Under the current methodology, the impact of the utilization of the historical default and loss experience results in 61% of the total allowance being attributable to the historical performance of the portfolio while 39% of the allowance is attributable to the collective qualitative factors applied to determine the allowance.
 
The quantified collective portion of the allowance is determined by pooling loans into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. The Company selected two collective methodologies, the discounted cash flows and weighted average remaining life methodologies. Segments utilizing the discounted cash flow method are further sub-segmented based on the risk level (determined either by risk ratings or Beacon Scores). Collective calculation methodologies use the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a two year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis.
 
Economic variables which have the most significant impact on the allowance include:
•unemployment rate;
•number of business bankruptcies; and
•house price index.
 
The collective quantified component of the allowance is supplemented by a qualitative component to address various risk characteristics of the Company’s loan portfolio including:
•trends in early delinquencies;
•changes in the risk profile related to large loans in the portfolio;
•concentrations of loans to specific industry segments;
•expected changes in economic conditions;
•changes in the Company’s credit administration and loan portfolio management processes; and
•the quality of the Company’s credit risk identification processes.

The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determined that foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the appraised value less estimated cost to sell. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s life. The balance of collateral-dependent loans individually assessed for the allowance was $38.4 million, with individual allowances of $7.5 million against those loans at September 30, 2021.
 
If an updated appraisal is received subsequent to the preliminary determination of an individual allowance or partial charge-off, and it is less than the initial appraisal used in the initial assessment, an additional individual allowance or charge-off is taken on the related credit. Partially charged-off loans are not written back up based on updated appraisals and always remain on non-accrual with any and all subsequent payments first applied to the remaining balance of the loan as principal reductions. No interest income is recognized on loans that have been partially charged-off.
 
A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the adequacy of the collateral based on an internal evaluation. The Company’s policy is to strictly adhere to regulatory appraisal standards. If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether an individual allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve an individual allowance or
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charge-off between monthly credit committee meetings to ensure that there are no significant time lapses during this process. The Company's borrowers are concentrated in nine counties in Maryland, three counties in Virginia and in Washington D.C. Excluding the PPP loans, commercial and residential mortgages, including home equity loans and lines, represented 87% of total loans at September 30, 2021 and at December 31, 2020. 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.

Summary of Loan Credit Loss Experience
The following table presents the activity in the allowance for credit losses for the periods indicated:
 Nine Months EndedYear Ended
(Dollars in thousands)September 30, 2021December 31, 2020
Balance, January 1$165,367 $56,132 
Initial allowance on PCD loans at adoption of ASC 326— 2,762 
Transition impact of adopting ASC 326— 2,983 
Initial allowance on acquired Revere PCD loans— 18,628 
Provision/ (credit) for credit losses(47,141)85,669 
Loan charge-offs:
Commercial real estate:
Commercial investor real estate(5,802)(411)
Commercial owner-occupied real estate(136)— 
Commercial AD&C(2,007)— 
Commercial business(3,315)(491)
Residential real estate:
Residential mortgage— (484)
Residential construction— — 
Consumer(236)(433)
Total charge-offs(11,496)(1,819)
Loan recoveries:
Commercial real estate:
Commercial investor real estate176 15 
Commercial owner-occupied real estate— — 
Commercial AD&C— — 
Commercial business375 702 
Residential real estate:
Residential mortgage330 105 
Residential construction3 6 
Consumer306 184 
Total recoveries1,190 1,012 
Net charge-offs(10,306)(807)
Balance, period end$107,920 $165,367 
Annualized net charge-offs to average loans0.14 %0.01 %
Allowance for credit losses to loans1.11 %1.59 %
 

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
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income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity.
 
The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest income as a percentage of interest-earning assets. Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.
 
The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income or “NII” at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. As an example, certain types of money market deposit accounts are assumed to reprice at 40 to 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Company's net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
 
The Company prepares a current base case and multiple alternative simulations at least once per quarter and reports the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.
 
The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the statement of condition so that net interest income at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.
 
The Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists. If a measure of risk produced by the alternative simulations of the entire statement of condition violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a level that complies with policy limits within two quarters.
 
Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Estimated Changes in Net Interest Income
Change in Interest Rates:+ 400 bp+ 300 bp+ 200 bp+ 100 bp- 100 bp- 200 bp-300 bp-400 bp
Policy Limit23.50%17.50%15.00%10.00%10.00%15.00%17.50%23.50%
September 30, 202115.75%11.61%8.09%3.76%N/AN/AN/AN/A
December 31, 20203.94%2.90%2.14%0.85%N/AN/AN/AN/A
 
As reflected in the table above, the measures of net interest income at risk at September 30, 2021 rose in every rising interest rate change scenario compared to December 31, 2020. As the table indicates, in a rising interest rate environment, net interest income sensitivity increased compared to December 31, 2020. The change in the net interest income at risk is the result of increased asset sensitivity due to the increase in interest-bearing deposits with banks and reductions in FHLB advances and federal funds purchased during the period. At September 30, 2021, all measures remained well within prescribed policy limits.
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The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.
 
Estimated Changes in Economic Value of Equity
Change in Interest Rates:+ 400 bp+ 300 bp+ 200 bp+ 100 bp- 100 bp- 200 bp-300 bp-400 bp
Policy Limit35.00%25.00%20.00%10.00%10.00%20.00%25.00%35.00%
September 30, 2021(2.64%)(0.10%)2.09%2.34%N/AN/AN/AN/A
December 31, 2020(10.98%)(6.27%)(1.90%)0.33%N/AN/AN/AN/A
 
Overall, the measure of the economic value of equity ("EVE") at risk decreased in all of the rising rate scenarios from December 31, 2020 to September 30, 2021. Decreases in the risk associated with EVE during the period have been driven primarily by the increase in demand deposits, growth in money market deposits which experienced lower rates and the reduction in FHLB advances.
 
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, 2021.
 
Liquidity is measured using an approach designed to take into account core deposits, in addition to factors already discussed above. Management considers core deposits, defined to include all deposits other than brokered and outsourced deposits and certain time deposits of $250 thousand or more, to be a relatively stable funding source. Core deposits equaled 85% of total interest-earning assets at September 30, 2021. 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, 2021, the Company’s liquidity and funds availability provides it with flexibility in funding loan demand and other liquidity demands.
 
The Company also has external sources of funds available that can be drawn upon when required. The main sources of external liquidity are available lines of credit with the FHLB and the Federal Reserve Bank. The line of credit with the FHLB totaled $3.9 billion, all of which was available for borrowing based on pledged collateral, with no outstanding borrowings against it as of September 30, 2021. The secured lines of credit at the Federal Reserve Bank and correspondent banks totaled $108.6 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of September 30, 2021. In addition, the Company had unsecured lines of credit with correspondent banks of $1.4 billion at September 30, 2021. At September 30, 2021, there were no outstanding borrowings against these lines of credit. There were no outstanding borrowings under the PPPLF program at September 30, 2021. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at September 30, 2021.
 
The parent company (“Bancorp”) is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve Bank, cannot exceed net income for that year to date period plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of September 30, 2021, the Bank could have declared a dividend of up to $183.1 million to Bancorp. At September 30, 2021, Bancorp had liquid assets of $119.0 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:
(In thousands)September 30, 2021December 31, 2020
Commercial real estate development and construction$508,571 $871,290 
Residential real estate-development and construction874,829 94,096 
Real estate-residential mortgage94,162 335,288 
Lines of credit, principally home equity and business lines3,315,392 1,947,706 
Standby letters of credit69,521 71,777 
Total commitments to extend credit and available credit lines$4,862,475 $3,320,157 
 
Commitments to extend credit are agreements to provide financing to a customer with the provision that there are no violations of any condition established in the agreement. Commitments generally have interest rates determined by current market rates, expiration dates or other termination clauses and may require payment of a fee. Lines of credit typically represent unused portions of lines of credit that were provided and remain available as long as customers comply with the requisite contractual conditions. Commitments to extend credit are evaluated, processed and/or renewed regularly on a case by case basis, as part of the credit management process. The total commitment amount or line of credit amounts do not necessarily represent future cash requirements, as it is highly unlikely that all customers would draw on their lines of credit in full at one time.

As of September 30, 2021, the total reserve for unfunded commitments was $0.3 million and is accounted for in other liabilities in the Consolidated Statements of Financial Condition. See Note 1 – Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for more information on the accounting policy for the allowance for unfunded commitments.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See “Financial Condition - Market Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES
 
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
 
In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
 
Item 1A. Risk Factors
 
There have been no material changes in the risk factors as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
In December 2020, the Company’s Board of Directors authorized the repurchase of up to 2,350,000 shares of common stock. The Company repurchased 1,261,828 shares of its common stock at an average price of $43.04 per share during the three months ended September 30, 2021. Under the current authorization, 1,088,172 common shares remain available to be repurchased.

PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as a part of publicly announced plans or programsMaximum number that may yet be purchased under the plans or programs
July 1, 2021 through July 31, 202188,985 $41.85 88,985 2,261,015 
August 1, 2021 through August 31, 2021567,522 $43.11 567,522 1,693,493 
September 1, 2021 through September 30, 2021605,321 $43.17 605,321 1,088,172 


Item 3. Defaults Upon Senior Securities – None
 

Item 4. Mine Safety Disclosures – Not applicable
 

Item 5. Other Information - None
 

Item 6. Exhibits
 
 
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
SANDY SPRING BANCORP, INC.
(Registrant)
 
By: /s/ Daniel J. Schrider
Daniel J. Schrider
President and Chief Executive Officer
Date: November 5, 2021
By: /s/ Philip J. Mantua
Philip J. Mantua
Executive Vice President and Chief Financial Officer
Date: November 5, 2021

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