Forward-Looking Statements This report, as well as other periodic reports filed with theSecurities and Exchange Commission , and written or oral communications made from time to time by or on behalf ofSandy 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 2021 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 and acceptance of vaccination programs, the imposition of restrictions on business operations and/or 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; •the impacts related to or resulting fromRussia's military action inUkraine , including the broader impacts to financial markets and the global macroeconomic and geopolitical environments; •general business and economic conditions, including higher inflation and its impacts, 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 theFinancial Accounting Standards Board , theSecurities and Exchange Commission , thePublic Company Accounting Oversight Board and other regulatory agencies; and •the effect of fiscal and governmental policies ofthe 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 CompanySandy Spring Bancorp, Inc. is the bank holding company forSandy 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. AtJune 30, 2022 , the Company had$13.3 billion in total assets, compared to$12.6 billion atDecember 31, 2021 . Bancorp is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended and is subject to supervision and regulation by theBoard of Governors of theFederal Reserve System (the "Federal Reserve"). 39 -------------------------------------------------------------------------------- The Bank is an independent and community-oriented bank that offers a broad range of commercial banking, retail banking, mortgage and trust services throughout centralMaryland ,Virginia , and the greaterWashington, D.C. market. Through its subsidiaries,West Financial Services, Inc. ("West") andSSB Wealth Management, Inc. (d/b/aRembert Pendleton and Jackson, "RPJ"), the Bank also offers wealth management services. Prior toJune 2022 , the Company operatedSandy Spring Insurance Corporation , a subsidiary of the Bank. EffectiveJune 1, 2022 , the Company sold substantially all of the assets of theSandy Spring Insurance Corporation . The Bank is a state chartered bank subject to supervision and regulation by theFederal Reserve and theState of Maryland . Deposit accounts of the Bank are insured by theDeposit Insurance Fund administered by theFederal Deposit Insurance Corporation (the "FDIC") to the maximum amount permitted by law. The Bank is a member of theFederal Reserve System and is anEqual Housing Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers. Current Quarter Financial Overview The Company recorded net income of$54.8 million ($1.21 per diluted common share) in the current quarter compared to net income of$57.3 million ($1.19 per diluted common share) for the second quarter of 2021 and net income of$43.9 million ($0.96 per diluted common share) for the first quarter of 2022. The decline in earnings was the result of lower net interest income, the current quarter's provision for credit losses compared to the prior year's credit to the allowance and an increase in non-interest expense, partially offset by the increase in non-interest income. The decline in net interest income was the product of lower PPP fees and interest, partially offset by interest income from loan growth, and an increase in interest expense. Current quarter core earnings were$44.2 million ($0.98 per diluted common share), compared to$58.4 million ($1.23 per diluted common share) for the quarter endedJune 30, 2021 and$45.1 million ($0.99 per diluted common share) for the quarter endedMarch 31, 2022 . Core earnings are determined by excluding the after-tax impact of merger, acquisition and disposal expense, the loss on FHLB redemptions, amortization of intangibles, gain on disposal of assets and investment securities gains. Core earnings for the current period when compared to the prior year quarter were reduced primarily as a result of the activity associated with provisioning for credit losses, a decline in mortgage banking income, lower other non-interest income from isolated events that occurred in 2021 and a decline in net interest income. The provision for credit losses for the current quarter was a charge of$3.0 million compared to a credit of$4.2 million for the second quarter of 2021 and a charge of$1.6 million for the first quarter of 2022.
The current quarter reflects the following:
•AtJune 30, 2022 , total assets were$13.3 billion , a 3% increase compared to$12.9 billion atJune 30, 2021 . During the previous twelve months, liquidity resulting from PPP loan forgiveness was utilized to fund the growth in the loan and investment securities portfolios. Excluding PPP loan balances, total assets grew 10% year-over-year. •For the second quarter of 2022, the net interest margin was 3.49%, compared to 3.63% for the second quarter of 2021, and 3.49% for the first quarter of 2022. Excluding the amortization of the fair value marks derived from the previous acquisitions and interest and fees from PPP loans, the current quarter's net interest margin was 3.45%, compared to 3.49% for second quarter of 2021, and 3.41% for the first quarter of 2022. •The provision for credit losses was a charge of$3.0 million for the current quarter compared to the prior year quarter's credit to the provision of$4.2 million . The provision for the current quarter is a reflection of the growth in the loan portfolio, coupled with the management's consideration of the potential impact of recessionary pressures, which exceeded the benefit to the provision derived from continuing improvement in forecasted macroeconomic indicators. •Non-interest income for the current quarter increased by 34% or$9.0 million compared to the prior year quarter as a result of the$16.7 million gain from the disposition of assets of the Company's insurance subsidiary. Excluding the disposition gain, non-interest income declined 29% compared to the prior year quarter as a result of the$4.3 million decline in income from mortgage banking activities and the$3.4 million decline in other non-interest income compared to the second quarter of 2021. •Non-interest expense for the current quarter increased$2.0 million or 3% compared to the prior year quarter with a major component of the increase the result of$1.1 million in merger, acquisition and disposal expense. Other non-interest expense also increased$1.4 million driven by the combination of various operating expenses. •Return on average assets ("ROA") for the quarter endedJune 30, 2022 was 1.69% and return on average tangible common equity ("ROTCE") was 20.42% 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 1.37% and core ROTCE was 16.49% compared to core ROA of 1.83% and core ROTCE of 20.87% for the second quarter of 2021. 40 -------------------------------------------------------------------------------- •For the second quarter of 2022, the GAAP efficiency ratio was 46.03% compared to 46.89% for the second quarter of 2021, and 50.92% for the first quarter of 2022. The non-GAAP efficiency ratio for the second quarter of 2022 was 49.79% compared to 45.36% for the prior year quarter, and 49.34% for the first quarter of 2022. •During the quarter, the Company repurchased 625,710 shares of its common stock for$25.0 million at an average price of$39.93 per share. The repurchase plan that was authorized onMarch 30, 2022 permits the repurchase of up to$50.0 million in shares of common stock.
Summary of second quarter results
Balance Sheet and Credit Quality Total assets grew 3% to$13.3 billion atJune 30, 2022 , as compared to$12.9 billion atJune 30, 2021 . During this period, total loans grew by 7% to$10.8 billion atJune 30, 2022 , compared to$10.1 billion atJune 30, 2021 . AtJune 30, 2022 , excluding PPP loans, total assets grew 10% and total loans grew 17% compared toJune 30, 2021 . Total commercial loans, excluding the impact of PPP loan forgiveness, grew by$1.3 billion or 17% during the past twelve months. During this period, the Company generated gross commercial loan production of$4.4 billion , of which$3.0 billion was funded, offsetting$1.6 billion in commercial loan run-off. During the second quarter of 2022, funded commercial loan production was$804.6 million , an increase of 60% compared to$502.5 million for the same quarter of the prior year. The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios led by the$1.0 billion or 28% growth in the investor owned commercial portfolio. Year-over-year, the total mortgage loan portfolio grew 22%, as a greater number of conventional 1-4 family mortgages were retained to grow the portfolio. During the past twelve months, deposits increased 1%, driven by 3% growth in noninterest-bearing deposits reflecting the growth in transaction relationships, while interest-bearing deposits remained at$6.8 billion . During the period, time deposits decreased 9% and money market accounts decreased 4%, while savings and interest bearing demand categories experienced year-over-year growth of 15% and 12%, respectively. The tangible common equity ratio decreased to 8.45% of tangible assets atJune 30, 2022 , compared to 9.28% atJune 30, 2021 as a result of the$132.3 million repurchase of common shares during the previous twelve months, in combination with the$88.9 million increase in the accumulated other comprehensive loss due to the impact of the rising rate environment on values of the securities in the investment portfolio coupled with the increase in tangible assets during the past year. AtJune 30, 2022 , the Company had a total risk-based capital ratio of 16.07%, a common equity tier 1 risk-based capital ratio of 11.58%, a tier 1 risk-based capital ratio of 11.58%, and a tier 1 leverage ratio of 9.53%. Non-performing loans include non-accrual loans, accruing loans 90 days or more past due and restructured loans. AtJune 30, 2022 , the level of non-performing loans to total loans was 0.40% compared to 0.93% atJune 30, 2021 , and 0.46% atMarch 31, 2022 . AtJune 30, 2022 , non-performing loans totaled$43.5 million , compared to$94.3 million atJune 30, 2021 , and$46.3 million atMarch 31, 2022 . Loans placed on non-accrual during the current quarter amounted to$0.9 million compared to$1.5 million for the prior year quarter and$1.5 million for the first quarter of 2022. The Company realized an insignificant amount of net recoveries for the second quarter of 2022, as compared to net charge-offs of$2.2 million for the second quarter of 2021 and net charge-offs of$0.2 million for the first quarter of 2022. AtJune 30, 2022 , the allowance for credit losses was$113.7 million or 1.05% of outstanding loans and 261% of non-performing loans, compared to$110.6 million or 1.09% of outstanding loans and 239% of non-performing loans at the end of the previous quarter. The increase in the allowance during the current quarter compared to the previous quarter resulted from the growth in the loan portfolio and the effect of management's consideration of the potential impact of recessionary pressures. The impact from these metrics applied in the determination of the allowance continue to be partially mitigated by forecasted improvement in certain economic metrics, notably the projected improvement in unemployment rate in future periods. Quarterly Results of Operations Net income for the three months endedJune 30, 2022 was$54.8 million compared to net income of$57.3 million for the prior year quarter. The decline in earnings was the result of lower net interest income, the current quarter's provision for credit losses compared to the prior year's credit to the allowance and an increase in non-interest expense, partially offset by the increase in non-interest income. For the second quarter of 2022, net interest income decreased$2.1 million or 2% compared to the second quarter of 2021, as interest income declined$0.9 million and interest expense increased$1.2 million . The provision for credit losses was a charge 41 -------------------------------------------------------------------------------- of$3.0 million for the second quarter of 2022 compared to a credit of$4.2 million for the second quarter of 2021. The provision for credit losses for the first quarter of 2022 was a charge of$1.6 million . Non-interest income for the current quarter increased by 34% or$9.0 million compared to the prior year quarter driven by the$16.7 million gain on the sale of the Company's insurance business. Income from mortgage banking activities declined 74% and other non-interest income decreased 62% compared to the second quarter of 2021, which included isolated sources of income. Compared to the prior year quarter, wealth management income and bank card fees remained stable while service charges on deposit accounts grew 25%. Non-interest expense increased$2.0 million or 3% for the second quarter of 2022, compared to the prior year quarter. The majority of the increase was the result of$1.1 million of transaction costs associated with the sale of the insurance subsidiary's assets during the quarter. Other expenses increased$1.4 million as a result of the combination of the provision for lines of credit, franchise taxes and other operating costs. The remaining categories of non-interest expense experienced modest increases or decreases with professional fees declining$0.8 million during the current quarter compared to the prior year quarter as a result of lower consulting fees. Results of Operations For the Six Months EndedJune 30, 2022 Compared to the Six Months EndedJune 30, 2021 The Company recorded net income of$98.7 million for the six months endedJune 30, 2022 compared to net income of$132.7 million for the same period of the prior year. The decline in year-to-date earnings for the current year primarily reflects the impact of the decline in PPP fees and interest, partially offset by the impact on interest income from the growth in the commercial loan portfolio, and the activity in the provision for loan losses, which shifted from the significant credit in the prior year to the charge for the current year. Core earnings were$89.3 million ($1.97 per diluted common share) for the six months endedJune 30, 2022 compared to$142.0 million ($2.99 per diluted common share) for the prior year. Core earnings for the current period compared to the prior year period were reduced primarily as a result of the activity associated with the provision for credit losses, a decline in mortgage banking income and lower other non-interest income from isolated events that occurred in 2021. Core earnings for the current period excludes the gain from the disposal of the Company's insurance business and the associated transaction costs. Pre-tax, pre-provision net income, was$136.1 million for the six months endedJune 30, 2022 compared to$136.6 million for the prior year period. Net interest income for the current period included$4.4 million in PPP interest and fees compared to$24.1 million for the same period of 2021. Year-to-date, the provision for credit losses was a charge of$4.7 million as compared to a credit of$38.9 million for the same period of 2021. For the six months endedJune 30, 2022 , the provision for credit losses is a reflection of the growth in the loan portfolio, coupled with the management's consideration of the potential impact of recessionary pressures, which exceeded the benefit to the provision derived from continuing improvement in forecasted macroeconomic indicators. The prior year's credit to the provision for credit losses was a reflection of the net impact of forecasted economic metrics and other factors applied in the determination of the allowance. Net Interest Income Net interest income for the six months endedJune 30, 2022 decreased 2% or$5.2 million to$207.4 million compared to$212.6 million for the six months endedJune 30, 2021 . On a tax-equivalent basis, net interest income for the six months endedJune 30, 2022 was$209.3 million compared to$214.6 million for the six months endedJune 30, 2021 . A major component driving the decrease in net interest income for the current period was the$19.7 million reduction in PPP interest and fees from the prior year period to the current year period. Excluding the impact of this reduction, interest income grew$10.5 million or 5% compared to the prior year period, due to the significant growth in the commercial loan portfolio. Interest expense declined 24% or$3.9 million period-over-period due to lower deposit and borrowings costs, a result of higher rate time deposit run-off, lower money market rates and the redemption of FHLB advances in 2021. On a tax-equivalent basis, year-over-year net interest income decreased 2% compared to the same period in the prior year as a result of the$9.2 million decline in interest income, partially mitigated by the$3.9 million decrease in interest expense. The amortization of fair value marks for the current period resulted in the reductions of interest income of$0.5 million and interest expense of$1.1 million compared to additional interest income of$0.9 million and a reduction of interest expense of$2.9 million for the prior year period. The following tables provide an analysis of net interest income performance that reflects a net interest margin that has declined to 3.49% for the six months endedJune 30, 2022 compared to 3.60% for the six months endedJune 30, 2021 . For the comparative period, the average yield on earning assets declined 17 basis points while the average rate paid on interest-bearing liabilities declined nine basis points, resulting in the decreased margin. Excluding the impact of the amortization of the fair value marks derived from acquisitions and PPP interest and fees, the net interest margin for the current year would have been 3.43% compared to 3.46% for the prior year. 42 --------------------------------------------------------------------------------
Average Consolidated Balances, Yields and Rates
Six Months Ended June 30, 2022 2021 Annualized Annualized Average Average Average Average (Dollars in thousands and tax-equivalent) Balances Interest (1) Yield/Rate Balances Interest (1) Yield/Rate
Assets:
Commercial investor real estate loans$ 4,367,400 $ 86,782 4.01 %$ 3,654,760 $ 76,765 4.24 % Commercial owner-occupied real estate 1,651,282 38,040 4.65 loans 1,705,562 37,842 4.47 Commercial AD&C loans 1,099,498 22,320 4.09 1,069,552 21,215 4.00 Commercial business loans 1,353,446 32,174 4.79 2,258,311 50,042 4.47 Total commercial loans 8,525,906 179,118 4.24 8,633,905 186,062 4.35 Residential mortgage loans 1,017,741 16,652 3.27 1,030,608 18,178 3.53 Residential construction loans 209,264 3,267 3.15 178,020 3,168 3.59 Consumer loans 422,929 7,581 3.61 482,555 8,728 3.65 Total residential and consumer loans 1,649,934 27,500 3.34 1,691,183 30,074 3.57 Total loans (2) 10,175,840 206,618 4.09 10,325,088 216,136 4.22 Loans held for sale 15,155 343 4.53 74,568 1,086 2.91 Taxable securities 1,180,168 8,737 1.48 984,305 8,272 1.68 Tax-advantaged securities 471,919 5,633 2.39 461,084 5,407 2.35 Total investment securities (3) 1,652,087 14,370 1.74 1,445,389 13,679 1.89 Interest-bearing deposits with banks 229,257 471 0.41 187,954 93 0.10 Federal funds sold 650 1 0.43 588 - 0.09 Total interest-earning assets 12,072,989 221,803 3.70 12,033,587 230,994 3.87 Less: allowance for credit losses (111,302) (146,892) Cash and due from banks 75,750 102,013 Premises and equipment, net 61,733 56,042 Other assets 685,870 752,318 Total assets$ 12,785,040 $ 12,797,068 Liabilities and Stockholders' Equity: Interest-bearing demand deposits$ 1,494,809 $ 572 0.08 %$ 1,383,253 $ 462 0.07 % Regular savings deposits 553,435 41 0.01 460,738 122 0.05 Money market savings deposits 3,401,641 2,122 0.13 3,387,341 2,717 0.16 Time deposits 1,355,615 3,353 0.50 1,693,179 5,380 0.64 Total interest-bearing deposits 6,805,500 6,088 0.18 6,924,511 8,681 0.25 Federal funds purchased 49,271 181 0.74 30,519 13 0.09 Repurchase agreements 127,083 74 0.12 142,208 83 0.12 Advances from FHLB 1,915 17 1.74 224,467 2,649 2.38 Subordinated debentures 287,164 6,184 4.31 227,050 5,012 4.41 Total borrowings 465,433 6,456 2.80 624,244 7,757 2.51 Total interest-bearing liabilities 7,270,933 12,544 0.35 7,548,755 16,438 0.44 Noninterest-bearing demand deposits 3,880,919 3,579,642 Other liabilities 146,018 168,029 Stockholders' equity 1,487,170 1,500,642 Total liabilities and stockholders' equity$ 12,785,040 $ 12,797,068 Tax-equivalent net interest income and$ 209,259 3.35 %$ 214,556 3.43 %
spread
Less: tax-equivalent adjustment 1,858 1,910 Net interest income$ 207,401 $ 212,646 Interest income/earning assets 3.70 % 3.87 % Interest expense/earning assets 0.21 0.27 Net interest margin 3.49 % 3.60 % (1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.64% and 25.50% for 2022 and 2021, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to$1.9 million and$1.9 million in 2022 and 2021, respectively. (2)Non-accrual loans are included in the average balances. (3)Investments available-for-sale are presented at amortized cost. 43 --------------------------------------------------------------------------------
Effect of volume and rate changes on tax-equivalent net interest income The following table analyzes the reasons for year-to-year variations in the main components that make up tax-equivalent net interest income:
2022 vs. 2021 2021 vs. 2020 Increase Due to Change In Average:* Increase Due to Change In Average:* (Dollars in thousands and tax Or Or equivalent) (Decrease) Volume Rate (Decrease) Volume Rate
Interest income from earning assets:
Real estate loans to commercial investors
Commercial owner-occupied real estate loans (198) 1,263 (1,461) 3,040 3,737 (697) Commercial AD&C loans 1,105 613 492 2,000 5,324 (3,324) Commercial business loans (17,868) (21,240) 3,372 20,439 19,823 616 Residential mortgage loans (1,526) (221) (1,305) (3,822) (2,583) (1,239) Residential construction loans 99 516 (417) (84) 457 (541) Consumer loans (1,147) (1,054) (93) (1,769) (742) (1,027) Loans held for sale (743) (1,143) 400 390 446 (56) Taxable securities 465 1,513 (1,048) (5,095) (987) (4,108) Tax-exempt securities 226 131 95 1,846 3,017 (1,171) Interest-bearing deposits with banks 378 25 353 (242) (94) (148) Federal funds sold 1 - 1 (1) - (1) Total tax-equivalent interest income (9,191) (5,238) (3,953) 29,776 45,803
(16,027)
Interest expense on funding of earning assets: Interest-bearing demand deposits 110 40 70 (692) 356 (1,048) Regular savings deposits (81) 20 (101) (24) 37 (61) Money market savings deposits (595) 9 (604) (5,329) 2,479 (7,808) Time deposits (2,027) (967) (1,060) (11,076) (1,926) (9,150) Federal funds purchased 168 12 156 (858) (444) (414) Repurchase agreements (9) (9) - (226) 5 (231) Advances from FHLB (2,632) (2,057) (575) 1,627 (1,117) 2,744 Subordinated debentures 1,172 1,287 (115) 79 196 (117) Total interest expense (3,894) (1,665) (2,229) (16,499) (460) (16,039) Tax-equivalent net interest income$ (5,297) $
(3,573)
*Gaps that are the combined effect of volume and price, but cannot be identified separately, are attributed to volume and price gaps based on their respective relative amounts.
Interest Income The Company's total tax-equivalent interest income decreased 4% for the first six months of 2022 compared to the prior year period. The previous table reflects that the majority of the decrease in interest income was the result of the decline in interest income on commercial loans, specifically commercial business loans. This decline occurred as interest and fees associated with PPP loans decreased year over year by$19.7 million . Interest income on residential mortgage loans and consumer loans also declined a combined$2.6 million during the comparative period. Excluding PPP interest and fee income, interest income increased$10.5 million or 5% during the current period compared to the prior year period. During the first six months of 2022 average loans outstanding decreased 1% compared to the first six months of 2021. Excluding the impact of the reduction of PPP loans from the forgiveness program, average loans grew 10% period over period, almost entirely in commercial real estate. During the comparative period, total average commercial real estate loans grew 12% and commercial business loans grew 14%. Average consumer loans, predominantly home equity loans, decreased 12% and the residential mortgage portfolio declined 1% 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 13 basis points. The average yield on total investment securities decreased 15 basis points while the average balance of the investment portfolio increased 14% for the first six months of 2022 compared to the first six months of 2021. The larger average balance resulted in a 5% increase in interest income from investment securities during the period despite lower portfolio yields. Composition of the average investment portfolio shifted to 71% in taxable securities in the current period, as compared to 68% for the prior year period. During the same period, the average yield for investment securities decreased 15 basis points as cash flows and maturities in the portfolio were reinvested at lower rates in the current interest rate environment. 44 -------------------------------------------------------------------------------- Interest Expense For the first six months of 2022 interest expense decreased$3.9 million or 24% compared to the first six months of 2021. The year over year decrease was comprised of a$2.6 million or 30% decline in deposit interest expense and a$1.3 million or 17% decrease in borrowing cost. The majority of the decline in deposit interest expense occurred on money market and time deposit accounts due to the rate decline on the money market accounts and the run-off of higher rate time deposits. Borrowing expense declined as average borrowings declined coupled with the associated interest expense shifting away from FHLB borrowings to subordinated debt. The fair value premium amortization on time deposits for the first six months of 2022 was responsible for a$1.1 million reduction in interest expense compared to$2.6 million for the same period in 2021. During the comparative period, the rate paid on interest-bearing liabilities decreased nine basis points driven by the decline in the average rate paid on deposits. The drivers in the decline in the total average rate paid on interest-bearing deposits during this time period were the 14 basis point decline the average rate paid on time deposits and the three basis point decline in average money market rates. The cost of interest-bearing deposits, including the fair value amortization on time deposits, declined seven basis points for the first six months of 2022 compared to the first six months of 2021. The time deposit amortization adjustment benefited the net interest margin by two basis points for the first six months of 2022 compared to five basis points for the same period in 2021. Non-interest Income Non-interest income amounts and trends are presented in the following table for the periods indicated: Six Months Ended June 30, 2022/2021 2022/2021 (Dollars in thousands) 2022 2021 $ Change % Change Securities gains $ 46$ 129 $ (83) (64.3) % Gain on disposal of assets 16,699 - 16,699 N/M Service charges on deposit accounts 4,793 3,828 965 25.2 Mortgage banking activities 3,781 15,945 (12,164) (76.3) Wealth management income 18,435 17,851 584 3.3 Insurance agency commissions 2,927 3,400 (473) (13.9) Income from bank owned life insurance 1,498 1,385 113 8.2 Bank card fees 3,478 3,303 175 5.3 Other income 4,183 9,284 (5,101) (54.9) Total non-interest income$ 55,840 $ 55,125 $ 715 1.3 For the six months endedJune 30, 2022 , non-interest income included a$16.7 million gain on the disposal of assets associated with the sale of insurance business and resulted in an increase of 1% to$55.8 million compared to$55.1 million for 2021. Excluding the gain, non-interest income decreased 29% driven by a 76% decline in income from mortgage banking activities and a 55% decline in other income. The decline in income from mortgage banking activities is the result of the rising interest rate environment, which has dampened new mortgage and refinancing activity. Other income declined from the prior year, which included the full payoff of a purchased credit deteriorated loan and activity-based vendor incentives. These declines exceeded the 3% growth in wealth management income, 25% growth in service charges on deposit accounts and 5% growth in bank card fees. Wealth management income grew, despite the erosion of assets under management due to marketplace volatility, as a result of increased asset management fees. Service charge and bank card income growth occurred as a result of increased commercial account service charges and customer activity. Further detail by type of non-interest income follows: •Service charges on deposit accounts increased 25% in the first six months of 2022, compared to the first six months of 2021. The growth in service charge income reflects the impact of an increase in the current year's service charges on commercial demand deposit accounts and return check transaction volume. •Income from mortgage banking activities decreased 76% in the first six months of 2022, compared to the first six months of 2021, as a result of reduced demand for new home mortgages and refinancing. •Wealth management income, comprised of income from trust and estate services and investment management fees earned by the Company's investment management subsidiaries, increased 3% for the first six months of 2022 compared to the same period of the prior year. The increase in wealth management income was comprised of a 5% increase in investment management fees and a 1% increase in trust services fees for the first six months of 2022 compared to the prior year period. Overall, total assets under management decreased to$5.2 billion atJune 30, 2022 compared to$5.7 billion atJune 30, 2021 , as a result of the volatility in the marketplace. •Insurance agency commissions decreased 14% for the first six months of 2022 as compared to the first six months of 2021, due the sale of the Company's insurance business inJune 2022 . 45 -------------------------------------------------------------------------------- •Bank-owned life insurance income increased 8% for the first six months of 2022 as compared to the first six months of 2021 as a result of improved policy returns. •Bank card fee income grew 5% during the first six months of 2022, compared to the first six months of 2021, as a result of increased transaction volume during the period. •Other income decreased by 55% or$5.1 million during the first six months of 2022, compared to the first six months of 2021. The decrease for the current year was the result of the prior year's inclusion of 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: Six Months Ended June 30, 2022/2021 2022/2021 (Dollars in thousands) 2022 2021 $ Change % Change Salaries and employee benefits$ 78,923 $ 75,642 $ 3,281 4.3 % Occupancy expense of premises 9,768 10,984 (1,216) (11.1) Equipment expense 7,095 6,242 853 13.7 Marketing 2,473 2,264 209 9.2 Outside data services 4,983 4,543 440 9.7 FDIC insurance 2,062 2,942 (880) (29.9) Amortization of intangible assets 2,974 3,356 (382) (11.4) Merger, acquisition and disposal expense 1,067 45 1,022 N/M Professional fees and services 4,389 4,896 (507) (10.4) Other expenses 13,404 20,234 (6,830) (33.8) Total non-interest expense$ 127,138 $ 131,148 $ (4,010) (3.1) Non-interest expense decreased 3% to$127.1 million for the six months endedJune 30, 2022 , compared to$131.1 million for 2021. Excluding merger, acquisition and disposal expense from the current and prior year periods and the$9.1 million in prepayment penalties on FHLB borrowings that occurred in the prior year, non-interest expense increased 3% year-over-year. The drivers of the increase in adjusted non-interest expense were a 4% increase in salaries and benefits and a 20% increase in other expense, excluding the FHLB prepayment penalties. The year-over-year increase in salaries and benefits was the result of staffing increases, salary adjustments and increased benefit costs. The principal component of the increase in other expense was the$1.2 million increase in the provision for credit losses provided on lines of credit compared to the prior year period. Marketing and outside data services costs increased 9% and 10%, respectively, whileFDIC insurance premiums and professional fee and service costs decreased 30% and 10%, respectively, for the period. Further detail by category of non-interest expense follows: •Salaries and employee benefits, the largest component of non-interest expense, increased 4% or$3.3 million in the first six months of 2022. Regular salaries represented$1.4 million of this increase, which was the result of staffing increases and adjustments. The remainder of the increase was driven by changes to the stock compensation plan which only affect the current period expense. •Combined occupancy and equipment expenses decreased 2% compared to the prior year as a result of decreased rental costs associated with the reduction in branches and business offices partially offset by increased software costs. •Marketing expense increased 9% for the first six months of 2022 compared to the same period of the prior year, due to focused advertising initiatives. •Outside data services expense increased 10% from the prior year period due to the increase in volume-based components of contractual-based services. •FDIC insurance decreased 30% for 2022 as a result of the reduction in risk factors applied by the regulatory agency in the determination of the Company's premium. •Amortization of intangible assets decreased as a result of the decline in the core deposit intangible amortization of the asset recognized in the Revere acquisition and, to a lesser degree, the amortization of intangibles acquired from the RPJ acquisition. •Professional fees and services declined 10% from the prior year due to costs associated with various consulting projects and initiatives. •Other non-interest expenses decreased$6.8 million due primarily to the prepayment penalties of$9.1 million incurred in the prior year from the liquidation of FHLB advances. This decrease has been partially offset in the current year by the increase in the provision for lines of credit, franchise taxes and other operating costs as compared to the prior year. 46 -------------------------------------------------------------------------------- Income Taxes The Company had income tax expense of$32.7 million in the first six months of 2022, compared to income tax expense of$42.8 million in the first six months of 2021, as a result of the decrease in current year-to-date pre-tax earnings compared to the prior year's pre-tax earnings. The effective tax rate for the six months endedJune 30, 2022 was 24.87%, compared to a tax rate of 24.39% for the same period in 2021. The increase in the current year's effective tax rate is the result of pre-tax income containing a greater proportion of taxable income compared to the prior year period. Operating Expense Performance Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest expense as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios indicate improved productivity. Non-GAAP Financial Measures 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, acquisition and disposal 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 gain on disposal of assets and securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and other non-recurring gains (if any). 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. For the six months endedJune 30, 2022 , the GAAP efficiency ratio was 48.30% compared to 48.98% for the same period in 2021. The current period's improvement in the GAAP efficiency ratio compared to the prior year period is directly related to the prior year's inclusion of the loss on the FHLB redemption in non-interest expense. The non-GAAP efficiency ratio the current year was 49.57% compared to 44.01% for to prior year. The current year's non-GAAP efficiency ratio compared to the prior year, indicates a decline in efficiency, the result of the 8% decrease in non-GAAP revenue combined with the 4% growth in non-GAAP non-interest expense. In addition, the Company uses pre-tax, pre-provision net income, as a measure of the level of certain recurring income before taxes. Management believes this provides financial statement users with a useful metric of the run-rate of revenues and expenses that is readily comparable to other financial institutions. This measure is calculated by adding/(subtracting) the provision (credit) for credit losses and the provision for income taxes back to/from net income. This metric remained level the first six months of 2022 compared to the same period for 2021, due to the impact of the activity in the provision for credit losses for each period and the impact it had on each period's net income. 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 merger, acquisition and disposal expense, amortization of intangible assets, loss on FHLB redemptions, gain on disposal of assets and investment securities gains, in each case net of tax. Core earnings were$89.3 million ($1.97 per diluted common share) for the six months endedJune 30, 2022 , compared to$142.0 million ($2.99 per diluted common share) for the six months endedJune 30, 2021 . Average tangible assets and average tangible common equity represents average assets and average stockholders' equity, respectively, adjusted for average goodwill and average intangible assets. The ROA for the first six months of 2022 was 1.56% compared to 2.09% for the same period of the prior year. For the six months endedJune 30, 2022 , the non-GAAP core ROA was 1.41% compared to 2.24% for the same period in the prior year. ROTCE was 18.21% for the first six months of 2022 compared to 24.35% for the first six months of 2021. The non-GAAP core ROTCE was 16.47% for the first six months of 2022 compared to 26.04% for the first six months of 2021. 47 --------------------------------------------------------------------------------
GAAP and Non-GAAP Efficiency Ratios and Measures
Six Months Ended June 30, (Dollars in thousands) 2022 2021 Pre-tax pre-provision net income: Net income $ 98,735$ 132,727
Plus/(minus) non-GAAP adjustments:
Income tax expense 32,687 42,808 Provision/ (credit) for credit losses 4,681 (38,912) Pre-tax pre-provision net income $ 136,103$ 136,623 Efficiency ratio (GAAP): Non-interest expense $ 127,138$ 131,148 Net interest income plus non-interest income $ 263,241$ 267,771 Efficiency ratio (GAAP) 48.30 % 48.98 % Efficiency ratio (non-GAAP): Non-interest expense $ 127,138$ 131,148 Less non-GAAP adjustments: Amortization of intangible assets 2,974 3,356 Loss on FHLB redemption - 9,117 Merger, acquisition and disposal expense 1,067 45 Non-interest expense - as adjusted $ 123,097$ 118,630 Net interest income plus non-interest income $ 263,241$ 267,771 Plus non-GAAP adjustment: Tax-equivalent income 1,858 1,910 Less non-GAAP adjustment: Securities gains 46 129 Gain on disposal of assets 16,699 - Net interest income plus non-interest income - as adjusted $ 248,354$ 269,552 Efficiency ratio (non-GAAP) 49.57 % 44.01 % 48
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GAAP and non-GAAP performance ratios
Six Months Ended June 30, (Dollars in thousands) 2022 2021 Core earnings (non-GAAP): Net income $ 98,735$ 132,727 Plus/ (less) non-GAAP adjustments (net of tax): Merger, acquisition and disposal expense 793 34 Amortization of intangible assets 2,211 2,500 Loss on FHLB redemption - 6,792 Gain on disposal of assets (12,417) - Investment securities gains (34) (96) Core earnings (non-GAAP) $ 89,288$ 141,957 Core earnings per common share (non-GAAP): Weighted-average common shares outstanding - diluted (GAAP) 45,223,086 47,469,470 Earnings per diluted common share (GAAP) $ 2.17 $ 2.77 Core earnings per diluted common share (non-GAAP) $ 1.97 $ 2.99 Core return on average assets (non-GAAP): Average assets (GAAP)
Return on average assets (GAAP) 1.56 % 2.09 % Core return on average assets (non-GAAP) 1.41 % 2.24 %
Basic return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP) $ 1,487,170$ 1,500,642 Average goodwill (369,098) (370,223) Average other intangible assets, net (24,580) (31,056) Average tangible common equity (non-GAAP)
$1,093,492
Return on average tangible common equity (non-GAAP) 18.21 % 24.35 % Core return on average tangible common equity (non-GAAP) 16.47 % 26.04 %
Results of operations for the three months ended
Net income for the three months endedJune 30, 2022 was$54.8 million compared to net income of$57.3 million for the prior year quarter. The decline in earnings was the result of lower net interest income, the current quarter's provision for credit losses compared to the prior year's credit to the allowance, and an increase in non-interest expense, which were partially offset by the increase in non-interest income. The decline in net interest income was the product of lower PPP fees and interest partially offset by higher interest income from loan growth, and an increase in interest expense. Non-interest income increased as a result of the sale of the Company's insurance business, offsetting lower mortgage banking income. Non-interest expense increased primarily as a result of the transaction costs associated with the asset sale and increases in various categories of operational costs in the current quarter compared to the prior year quarter. Current quarter core earnings were$44.2 million ($0.98 per diluted common share), compared to$58.4 million ($1.23 per diluted common share) for the quarter endedJune 30, 2021 and$45.1 million ($0.99 per diluted common share) for the quarter endedMarch 31, 2022 . Pre-tax, pre-provision net income was$76.2 million for the three months endedJune 30, 2022 compared to$71.3 million for the prior year quarter and$59.9 million for the first quarter of 2022. Net Interest Income Net interest income for the second quarter of 2022 decreased$2.1 million or 2% compared to the second quarter of 2021, due to the combined impact of the$0.9 million reduction in interest income and the increase of$1.2 million in interest expense. The decline in interest income was driven by a$12.0 million decline in interest and fees on PPP loans, which was substantially offset by higher interest income from the remaining categories of commercial loans and, to a lesser degree, an increase in investment securities income. The increase in interest expense was primarily the result of the interest expense associated with 49 -------------------------------------------------------------------------------- issuance of subordinated debt late in the first quarter of the current year. The net interest margin for the second quarter of 2022 was 3.49% as compared to 3.63% for the same quarter of the prior year, as the yield on interest-earning assets declined 11 basis points and the rate paid on interest-bearing liabilities increased six basis points. Excluding the effects of amortization of the fair value marks derived from acquisitions and interest and fees from PPP loans, the net interest margin was 3.45% for the current quarter compared to 3.49% for second quarter of 2021. Average interest-earning assets increased by 2% and average interest-bearing liabilities remained flat in the second quarter of 2022 compared to the second quarter of 2021. The composition of total average interest-bearing deposits shifted to savings and demand deposits accounts that provides the customers with greater liquidity in anticipation of rising rates. As a result, average time deposits declined 15% while average savings deposits and average demand deposits increased 17% and 6%, respectively. The percentage of average noninterest-bearing deposits to total average deposits increased to 37% in the current quarter compared to 35% in the second quarter of 2021. The primary cause of the increase in average noninterest-bearing deposits was due to the growth in core deposit relationships. AtJune 30, 2022 and 2021, average total loans comprised 85% and 86% of average interest-earning assets with an average yield of 4.12% and 4.22%, respectively. In addition, the average yield on investment securities decreased to 1.83% for the current quarter compared to 1.87% for the prior year quarter. These portfolio yield movements resulted in the decline in the overall average yield on interest-earning assets to 3.75% atJune 30, 2022 from 3.86% atJune 30, 2021 . The average rate paid on average interest-bearing liabilities grew by six basis points, as the average rate paid increased from 0.37% for the second quarter of 2021 to 0.43% for the second quarter of 2022 driven by the increase in the average rate paid on borrowings, which increased 47 basis points compared to the average rate paid on interest-bearing deposits, which remained flat at 22 basis points for the comparative quarters. 50 --------------------------------------------------------------------------------
Average Consolidated Balances, Yields and Rates
Three Months Ended June 30, 2022 2021 Annualized Annualized Average Average Average Average (Dollars in thousands and tax-equivalent) Balances Interest (1) Yield/Rate Balances Interest (1) Yield/Rate
Assets:
Commercial investor real estate loans$ 4,512,937 $ 45,148 4.01 %$ 3,675,119 $ 38,411 4.19 % Commercial owner-occupied real estate 1,727,325 19,410 4.51 1,663,543 19,360 4.67 loans Commercial AD&C loans 1,096,369 11,727 4.29 1,089,287 10,819 3.98 Commercial business loans 1,334,350 15,820 4.76 2,225,885 25,248 4.55 Total commercial loans 8,670,981 92,105 4.26 8,653,834 93,838 4.35 Residential mortgage loans 1,070,836 8,878 3.32 994,899 8,634 3.47 Residential construction loans 221,031 1,710 3.10 176,135 1,562 3.56 Consumer loans 421,022 3,992 3.80 468,686 4,183 3.58 Total residential and consumer loans 1,712,889 14,580 3.41 1,639,720 14,379 3.51 Total loans (2) 10,383,870 106,685 4.12 10,293,554 108,217 4.22 Loans held for sale 12,744 145 4.56 66,958 549 3.28 Taxable securities 1,195,129 4,630 1.55 1,052,229 4,373 1.66 Tax-advantaged securities 491,052 3,082 2.51 430,676 2,567 2.38 Total investment securities (3) 1,686,181 7,712 1.83 1,482,905 6,940 1.87 Interest-bearing deposits with banks 200,560 358 0.72 193,749 47 0.10 Federal funds sold 479 1 0.81 535 - 0.10 Total interest-earning assets 12,283,834 114,901 3.75 12,037,701 115,753 3.86 Less: allowance for credit losses (112,656) (130,734) Cash and due from banks 84,931 97,813 Premises and equipment, net 62,422 55,718 Other assets 673,161 737,857 Total assets$ 12,991,692 $ 12,798,355 Liabilities and Stockholders' Equity: Interest-bearing demand deposits$ 1,488,034 $ 414 0.11 %$ 1,400,661 $ 226 0.06 % Regular savings deposits 559,906 22 0.02 476,999 66 0.06 Money market savings deposits 3,376,742 1,497 0.18 3,364,348 1,254 0.15 Time deposits 1,402,777 1,862 0.53 1,658,203 2,305 0.56 Total interest-bearing deposits 6,827,459 3,795 0.22 6,900,211 3,851 0.22 Federal funds purchased 53,055 166 1.26 19,506 3 0.06 Repurchase agreements 122,728 35 0.11 136,286 40 0.12 Advances from FHLB 3,809 17 1.74 73,626 373 2.03
Subordinated debentures 369,994 3,946 4.27 227,027 2,510 4.42 Total borrowings 549,586 4,164 3.04 456,445 2,926 2.57 Total interest-bearing liabilities 7,377,045 7,959 0.43 7,356,656 6,777 0.37 Noninterest-bearing demand deposits 4,001,762 3,763,135 Other liabilities 144,849 154,689 Stockholders' equity 1,468,036 1,523,875 Total liabilities and stockholders' equity$ 12,991,692 $ 12,798,355 Tax-equivalent net interest income and$ 106,942 3.32 %$ 108,976 3.49 %
spread
Less: tax-equivalent adjustment 992 930 Net interest income$ 105,950 $ 108,046 Interest income/earning assets 3.75 % 3.86 % Interest expense/earning assets 0.26 0.23 Net interest margin 3.49 % 3.63 % (1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.64% and 25.50% for 2022 and 2021, respectively. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to$1.0 million and$0.9 million in 2022 and 2021, respectively. (2)Non-accrual loans are included in the average balances. (3)Investments available-for-sale are presented at amortized cost. 51 -------------------------------------------------------------------------------- Interest Income Excluding interest and fees associated with the PPP loan program, the Company's total tax-equivalent interest income increased 11% for the second quarter of 2022 compared to the prior year quarter. Interest and fees from the PPP loan program amounted to$1.3 million in the current quarter compared to$13.2 million in the prior year quarter. Average interest-earning assets rose 2% over the prior year quarter as average total loans grew 1% and average investment securities grew 14%. Excluding average PPP loan balances, average total loans grew 13% over the previous twelve months. Average total mortgage loans increased 10% as a result of the growth of the conventional 1-4 family mortgage loan portfolio in addition to the residential construction portfolio over the past twelve months. Average consumer loans, principally home equity loans and lines, declined 10% as a result of refinancing activity during the year. The average yield on interest-earning assets declined to 3.75% for the current quarter compared to 3.86% for the same period of the prior year. Average yields on loans and investment securities for the current quarter decreased by 10 and four basis points, respectively, compared to the prior year quarter, a reflection of the general market interest rates during the majority of the previous twelve months. The decrease in the yield on investments was driven primarily by the decrease in yields on taxable investments during the period. Excluding PPP interest and fees and the amortization of fair value marks, the yield on interest-earning assets would have been 3.73% as compared to 3.78% in the prior year quarter. Interest Expense Interest expense increased 17% in the second quarter of 2022 compared to the second quarter of 2021. The increase from period to period was driven by the increase in borrowing costs as a result of the issuance of$200 million of subordinated debt late in the first quarter of 2022. The impact of this resulted in the average rate on interest-bearing liabilities for the current quarter rising to 0.43% from 0.37% as compared to the prior year quarter. The offsetting impact of increasing market rates and the favorable amortization of fair value marks on time deposits resulted in the average rate paid on interest-bearing deposits for the current quarter compared to the same period of the prior year remaining at 0.22%. During this period, the composition of total average interest-bearing deposits shifted from time deposits to savings and demand deposits accounts as consumers seek greater liquidity in anticipation of rising rates. For the comparative period, average time deposits declined 15% while average savings deposits and average demand deposits increased 17% and 6%, respectively. Amortization of fair value marks on time deposits resulted in a reduction of the average rate paid on total average deposits of three basis points for the current quarter and seven basis points for last year's second quarter. Excluding the amortization of those fair value marks, the average rate paid on interest-bearing liabilities would have been 0.46% for the current quarter compared to 0.43% for the prior year quarter. The average rate paid was positively impacted by the growth in average noninterest-bearing deposits that increased to 37% of average deposits in the current quarter compared to 35% in the prior year's second quarter. The primary cause of the increase in average noninterest-bearing deposits was due to the growth in core deposit relationships. Non-interest Income Non-interest income amounts and trends are presented in the following table for the periods indicated: Three Months Ended June 30, 2022/2021 2022/2021 (Dollars in thousands) 2022 2021 $ Change % Change Securities gains $ 38$ 71 $ (33) (46.5) % Gain on disposal of assets 16,699 - 16,699 N/M Service charges on deposit accounts 2,467 1,976 491 24.8 Mortgage banking activities 1,483 5,776 (4,293) (74.3) Wealth management income 9,098 9,121 (23) (0.3) Insurance agency commissions 812 1,247 (435) (34.9) Income from bank owned life insurance 703 705 (2) (0.3) Bank card fees 1,810 1,785 25 1.4 Other income 2,135 5,578 (3,443) (61.7) Total non-interest income$ 35,245 $ 26,259 $ 8,986 34.2 Total non-interest income increased$9.0 million or 34% for the second quarter of 2022, compared to the prior year quarter as a direct result of the gain on the sale of the Company's insurance business. Excluding the disposal gain, non-interest income declined 29% compared to the prior year quarter. The gain was partially offset by a decline in income from mortgage banking activities and the decline in other non-interest income compared to the same quarter of the prior year. Wealth management income remained stable and service charges on deposit accounts grew. Other non-interest income declined from the prior year quarter, which included the full payoff of a purchased credit deteriorated loan and activity-based vendor incentives. 52 --------------------------------------------------------------------------------
Further details by type of non-interest income follow:
•Service charges on deposit accounts increased 25% in the second quarter of 2022, compared to the second quarter of 2021, reflecting the impact of an increase in the current year's service charges on commercial demand deposit accounts and returned check transaction volume. •Income from mortgage banking activities decreased by$4.3 million or 74% in the second quarter of 2022 as compared to the second quarter of 2021, reflecting the impact of reduced origination volume, the result of increasing mortgage lending rates during the comparative period. •Wealth management income remained stable for the second quarter of 2022, as compared to the second quarter of 2021, due to the due to market volatility during the current quarter compared to the prior year quarter. Overall total assets under management decreased to$5.2 billion atJune 30, 2022 compared to$5.7 billion atJune 30, 2021 . •Income from bank owned life insurance was unchanged for the second quarter of 2022, compared to the second quarter of 2021. •Bank card income increased 1% in the second quarter of 2022, compared to the second quarter of 2021, due to a rise in transaction income. •Other income decreased$3.4 million or 62% in the second quarter of 2022, compared to the second quarter of 2021 which included the full payoff of a purchased credit deteriorated loan and activity-based vendor incentives. Non-interest Expense Non-interest expense amounts and trends are presented in the following table for the periods indicated: Three Months Ended June 30, 2022/2021 2022/2021 (Dollars in thousands) 2022 2021 $ Change % Change Salaries and employee benefits$ 39,550 $ 38,990 $ 560 1.4 % Occupancy expense of premises 4,734 5,497 (763) (13.9) Equipment expense 3,559 3,020 539 17.8 Marketing 1,280 1,052 228 21.7 Outside data services 2,564 2,260 304 13.5 FDIC insurance 1,078 1,450 (372) (25.7) Amortization of intangible assets 1,466 1,659 (193) (11.6) Merger, acquisition and disposal expense 1,067 - 1,067 N/M Professional fees and services 2,372 3,165 (793) (25.1) Other expenses 7,321 5,882 1,439 24.5 Total non-interest expense$ 64,991 $ 62,975 $ 2,016 3.2 Total non-interest expense increased$2.0 million or 3% for the second quarter of 2022, compared to the prior year quarter. The majority of the increase was the result of merger, acquisition and disposal expense associated with the sale of the Company's insurance business during the quarter. Other expenses increased as a result of the combination of the provision for lines of credit, franchise taxes and other operating costs. The remaining categories of non-interest expense experienced modest increases or decreases with professional fees declining during the current quarter 25% compared to the prior year quarter as a result of lower consulting fees. 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 1% in the second quarter of 2022 compared to the same period of the prior year. While the compensation component increased 1%, benefit cost, driven by stock compensation costs from plan changes, increased 2%. •Occupancy and equipment expenses for the quarter decreased a combined 3% compared to the prior year quarter as a result of lower rental expense. •Marketing expense increased 22% compared to the prior year as a result of increased advertising initiatives. •FDIC insurance expense declined 26% 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 decreased 25% from the prior year quarter due primarily to consulting fees associated with specific projects and initiatives. •Amortization of intangible assets decreased primarily as a result of the decline in the amortization expense for the core deposit intangible asset recognized from previous acquisitions. •Other non-interest expense increased 24% as a result of the combination of the provision for lines of credit, franchise taxes and other operating costs. 53 -------------------------------------------------------------------------------- Income Taxes The Company had income tax expense of$18.4 million in the second quarter of 2022, compared to income tax expense of$18.3 million in the second quarter of 2021. The resulting effective tax rate was 25.1% for the second quarter of 2022 compared to an effective tax rate of 24.2% for the second quarter of 2021. The increase in the current year's effective tax rate is the result of pre-tax income containing a greater proportion of taxable income compared to the prior year period. Non-GAAP Financial Measures The GAAP efficiency ratio in the second quarter of 2022 decreased to 46.03% compared to 46.89% for the second quarter of 2021. The GAAP and non-GAAP efficiency ratios are reconciled and provided in the following table. The non-GAAP efficiency ratio was 49.79% in the second quarter of 2022 compared to 45.36% in the second quarter of 2021. The change in the current year's non-GAAP efficiency ratio compared to the prior year was the result of the 7% decline in non-GAAP revenue coupled with the 2% growth in non-GAAP non-interest expense. Pre-tax pre-provision net income increased 7% for the current quarter compared to the prior year quarter as a result of the impact of the$16.7 million gain from the sale of the Company's insurance business that more than offset the decline in net interest income and the increase in non-interest expense. For the quarter endedJune 30, 2022 , core earnings were$44.2 million ($0.98 per diluted common share), compared to$58.4 million ($1.23 per diluted common share) for the quarter endedJune 30, 2021 . ROA was 1.69% for the three months endedJune 30, 2022 compared to 1.79% for the prior year quarter. For the three months endedJune 30, 2022 , the non-GAAP core ROA was 1.37% compared to 1.83% for the prior year quarter. ROTCE was 20.42% for the quarter endedJune 30, 2022 compared to 20.44% for the second quarter of 2021. The non-GAAP core ROTCE was 16.49% for the quarter endedJune 30, 2022 compared to 20.87% for the prior year quarter. 54 --------------------------------------------------------------------------------
GAAP and Non-GAAP Efficiency Ratios and Measures
Three Months Ended June 30, (Dollars in thousands) 2022 2021 Pre-tax pre-provision net income: Net income $ 54,800 $ 57,263 Plus/ (less) non-GAAP adjustments: Income tax expense 18,358 18,271 Provision/ (credit) for credit losses 3,046 (4,204) Pre-tax pre-provision net income $ 76,204 $ 71,330 Efficiency ratio (GAAP): Non-interest expense $ 64,991 $ 62,975 Net interest income plus non-interest income $ 141,195$ 134,305 Efficiency ratio (GAAP) 46.03 % 46.89 % Efficiency ratio (non-GAAP): Non-interest expense $ 64,991 $ 62,975 Less/ (plus) non-GAAP adjustments: Amortization of intangible assets 1,466 1,659 Merger, acquisition and disposal expense 1,067 - Non-interest expense - as adjusted $ 62,458 $ 61,316 Net interest income plus non-interest income $ 141,195$ 134,305 Plus non-GAAP adjustment: Tax-equivalent income 992 930 Less non-GAAP adjustment: Securities gains 38 71 Gain on disposal of assets 16,699 - Net interest income plus non-interest income - as adjusted $ 125,450$ 135,164 Efficiency ratio (non-GAAP) 49.79 % 45.36 % 55
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GAAP and non-GAAP performance ratios
Three Months Ended June 30, (Dollars in thousands) 2022 2021 Core earnings (non-GAAP): Net income (GAAP) $ 54,800 $ 57,263 Plus/ (less) non-GAAP adjustments (net of tax): Merger, acquisition and disposal expense 793 - Amortization of intangible assets 1,090 1,236 Gain on disposal of assets (12,417) - Investment securities gains (28) (53) Core earnings (non-GAAP) $ 44,238 $ 58,446 Core earnings per common share (non-GAAP): Weighted-average common shares outstanding - diluted (GAAP) 45,111,693 47,523,198 Earnings per diluted common share (GAAP) $ 1.21 $ 1.19 Core earnings per diluted common share (non-GAAP) $ 0.98 $ 1.23 Core return on average assets (non-GAAP): Average assets (GAAP) $
12,991,692
Return on average assets (GAAP) 1.69 % 1.79 % Core return on average assets (non-GAAP) 1.37 % 1.83 %
Basic return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP) $ 1,468,036$ 1,523,875 Average goodwill (367,986) (370,223) Average other intangible assets, net (23,801) (30,224) Average tangible common equity (non-GAAP) $
1,076,249
Return on average tangible common equity (non-GAAP) 20.42 % 20.44 % Core return on average tangible common equity (non-GAAP) 16.49 % 20.87 % 56 -------------------------------------------------------------------------------- FINANCIAL CONDITION Total assets grew 6% to$13.3 billion atJune 30, 2022 , as compared to$12.6 billion atDecember 31, 2021 . During this period, total loans increased by 8% to$10.8 billion atJune 30, 2022 , compared to$10.0 billion atDecember 31, 2021 . Excluding PPP loans, total loans atJune 30, 2022 increased$979.8 million or 10%, as compared to$9.8 billion atDecember 31, 2021 . Deposit growth was 3% during 2022, as noninterest-bearing deposits experienced growth of 9% and interest-bearing deposits remained stable. The growth in loans resulted in the loan to deposit ratio increasing to 98.3% atJune 30, 2022 from 93.8% atDecember 31, 2021 . Analysis of Loans A comparison of the loan portfolio at the dates indicated is presented in the following table: June 30, 2022 December 31, 2021
Period-to-Period Change (Dollars in thousands) Amount % Amount % Amount % Commercial real estate: Commercial investor real estate$ 4,761,658 44.2 %$ 4,141,346 41.5 %$ 620,312 15.0 % Commercial owner-occupied real estate 1,767,326 16.4 1,690,881 17.0 76,445 4.5 Commercial AD&C 1,094,528 10.1 1,088,094 10.9 6,434 0.6 Commercial business 1,353,380 12.5 1,481,834 14.9 (128,454) (8.7) Total commercial loans 8,976,892 83.2 8,402,155 84.3 574,737 6.8 Residential real estate: Residential mortgage 1,147,577 10.6 937,570 9.4 210,007 22.4 Residential construction 235,486 2.2 197,652 2.0 37,834 19.1 Consumer 426,335 4.0 429,714 4.3 (3,379) (0.8) Total residential and consumer loans 1,809,398 16.8 1,564,936 15.7 244,462 15.6 Total loans$ 10,786,290 100.0 %$ 9,967,091 100.0 %$ 819,199 8.2 Total commercial loans, excluding PPP loans, grew by$735 million or 9% sinceDecember 31, 2021 . During this period, the Company generated commercial gross loan production of$2.0 billion , of which$1.4 billion was funded, offsetting$614 million in commercial loan run-off. During the first six months of 2022, the funded commercial loan production increased 71% compared to$790.2 million for the same period of the prior year. The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios led by the$620 million or 15% growth in the investor owned commercial portfolio. Excluding PPP loans, commercial business loans increased 2%. The residential mortgage loan portfolio grew 22% as a greater number of conventional 1-4 family mortgages were retained to offset the run-off that occurred in the prior year. Consumer loans remained relatively unchanged from year-end 2021. 57
-------------------------------------------------------------------------------- Analysis ofInvestment Securities The composition of investment securities at the periods indicated is presented in the following table: June 30, 2022 December 31, 2021 Period-to-Period Change (Dollars in thousands) Amount % Amount % Amount % Available-for-sale debt securities: U.S. treasuries and government agencies$ 101,410 6.4 % $ 68,539 4.5 % $ 32,871 48.0 % State and municipal 299,222 18.8 326,402 21.7 (27,180) (8.3) Mortgage-backed and asset-backed 868,191 54.4 1,070,955 71.1 (202,764) (18.9) Total available-for-sale debt securities 1,268,823 79.6 1,465,896 97.3 (197,073) (13.4)
Debt securities held to maturity:
Mortgage-backed and asset-backed 274,337 17.2 - - 274,337 N/M Total held-to-maturity debt securities 274,337 17.2 - - 274,337 N/M Other investments: Federal Reserve Bank stock 38,731 2.4 34,097 2.3 4,634 13.6 Federal Home Loan Bank of Atlanta stock 12,856 0.8 6,392 0.4 6,464 101.1 Other 677 - 677 - - - Total other investments 52,264
3.2 41,166 2.7 11,098 27.0 Total securities$ 1,595,424 100.0 %$ 1,507,062 100.0 % $ 88,362 5.9 The investment portfolio consists primarily ofU.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. The overall distribution of the portfolio between investment types has remained relatively stable during the first six months of 2022. During the quarter endedMarch 31, 2022 , the Company transferred certain debt securities from available-for-sale to held-to-maturity. The total amortized cost of debt securities transferred was$305.6 million with the associated fair value of$289.4 million and unrealized losses of$16.2 million at the date of transfer. The transfer occurred to lessen the impact on the Company's tangible common equity in contemplation of anticipated future increases in general market interest rates. AtJune 30, 2022 , 99% of the investment portfolio was invested in Aaa/AAA or Aa/AA-rated securities. The duration of the portfolio is monitored to ensure the adequacy and ability to meet liquidity demands. The duration of the portfolio increased to 5.2 years atJune 30, 2022 compared to 4.3 years atDecember 31, 2021 as a result of the recent increase in market interest rates. 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$23.6 million atJune 30, 2022 , compared to$39.4 million atDecember 31, 2021 , as a result of a decrease in origination volume during the period. The Company continues to sell a portion of its mortgage loan production in the secondary market. The aggregate of interest-bearing deposits with banks and federal funds sold decreased by$217.3 million atJune 30, 2022 compared toDecember 31, 2021 , as a result of providing a source of funding for loan growth during the period. 58 --------------------------------------------------------------------------------
Deposits
The composition of deposits for the periods indicated is presented in the following table: June 30, 2022 December 31, 2021 Period-to-Period Change (Dollars in thousands) Amount % Amount % Amount % Noninterest-bearing deposits$ 4,129,440 37.6 %$ 3,779,630 35.6 %$ 349,810 9.3 % Interest-bearing deposits: Demand 1,590,484 14.5 1,604,714 15.1 (14,230) (0.9) Money market savings 3,185,150 29.0 3,415,663 32.1 (230,513) (6.7) Regular savings 560,324 5.1 533,862 5.0 26,462 5.0 Time deposits of less than$250,000 1,168,317 10.7 910,464 8.6 257,853 28.3 Time deposits of$250,000 or more 335,746 3.1 380,398 3.6 (44,652) (11.7) Total interest-bearing deposits 6,840,021 62.4 6,845,101 64.4 (5,080) (0.1) Total deposits$ 10,969,461 100.0 %$ 10,624,731 100.0 %$ 344,730 3.2 Deposits and Borrowings Total deposits increased by 3% to$11.0 billion atJune 30, 2022 from$10.6 billion atDecember 31, 2021 . This growth was essentially the result of non-interest-bearing deposits which grew 9% while interest-bearing deposits remained stable. AtJune 30, 2022 , interest-bearing deposits represented 62% of deposits with the remaining 38% in noninterest-bearing balances, compared to 64% and 36%, respectively, atDecember 31, 2021 . The mix in interest-bearing deposits shifted during the period as the decline in money market deposits was effectively offset by growth in the remaining interest-bearing deposit categories. Growth of time deposits fromDecember 31, 2021 throughJune 30, 2022 was driven by a$369.8 million increase in brokered time deposits while core time deposits declined$156.6 million , a result of rate sensitive attrition precipitated by customers seeking liquidity in anticipation rising interest rates on deposit accounts. 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 atJune 30, 2022 compared to atDecember 31, 2021 . During this period, the growth in retained earnings from net income was more than offset by the combination of the quarterly dividend distribution, the$88.9 million increase in the accumulated other comprehensive loss during the period resultant of the impact of increased market interest rates on the available-for-sale securities portfolio atJune 30, 2022 , and the$25.0 million in repurchased common stock. The ratio of average equity to average assets was 11.63% for the six months endedJune 30, 2022 , as compared to 11.73% for the six months endedJune 30, 2021 . Risk-Based Capital Ratios Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as risk-based capital guidelines. The actual regulatory ratios and required ratios for capital adequacy are summarized for the Company in the following table. Ratios at Minimum Regulatory June 30, 2022 December 31, 2021 Requirements Tier 1 leverage 9.53% 9.26% 4.00% Common equity tier 1 capital to risk-weighted assets 11.58% 11.91% 4.50% Tier 1 capital to risk-weighted assets 11.58% 11.91% 6.00% Total capital to risk-weighted assets 16.07% 14.59% 8.00% As ofJune 30, 2022 , 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. 59 -------------------------------------------------------------------------------- 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 increase in the Company's total capital ratio atJune 30, 2022 fromDecember 31, 2021 was driven primarily by the issuance of$200 million in Tier 2 qualifying subordinated notes duringMarch 2022 . This debt issuance provided increased capacity for greater real estate lending and participation in the Company's stock repurchase program. The decline in the Tier 1 ratios reflects the impact of the stock repurchase program that was initiated in the second quarter of the current year. The increase in the leverage ratio was the result of Tier 1 capital growing at a faster rate than the average assets applied in the calculation. During 2020, the Company elected to apply the provisions of the CECL deferral transition in the determination of its risk-based capital ratios. AtJune 30, 2022 , the impact of the application of this deferral transition provided an additional$9.8 million in Tier 1 capital and resulted in raising the common equity Tier 1 ratio by 10 basis points. Tangible Common Equity Tangible common equity, tangible assets, and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. Tangible common equity remained at$1.1 billion forJune 30, 2022 as compared toDecember 31, 2021 . AtJune 30, 2022 , the ratio of tangible common equity to tangible assets has decreased to 8.45% compared to 9.21% atDecember 31, 2021 . The decrease in the tangible common equity ratio was caused by a combination of the 3% decline in tangible common equity during the first six months of 2022, the result of the$88.9 million increase in the accumulated other comprehensive loss and the 6% growth in tangible assets. A reconciliation of total stockholders' equity to tangible common equity and total assets to tangible assets along with tangible book value per share, book value per share and related non-GAAP tangible common equity ratio are provided in the following table:
Tangible Common Equity Ratio – Non-GAAP
(Dollars in thousands, except per share data) June 30, 2022 December 31, 2021 Tangible common equity ratio: Total stockholders' equity$ 1,477,169 $
1,519,679
Goodwill (363,436)
(370,223)
Other intangible assets, net (22,694) (25,920) Tangible common equity$ 1,091,039 $ 1,123,536 Total assets$ 13,303,009 $ 12,590,726 Goodwill (363,436) (370,223) Other intangible assets, net (22,694) (25,920) Tangible assets$ 12,916,879 $ 12,194,583 Outstanding common shares 44,629,697 45,118,930 Tangible common equity ratio 8.45 % 9.21 % Tangible book value per common share$ 24.45 $ 24.90 Book value per common share$ 33.10 $ 33.68 60
-------------------------------------------------------------------------------- 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. To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration, accompanied by various oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower's ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include monitoring the credit quality of the portfolio, providing early identification of potential problem credits and proactive management of problem credits. 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. Payments received on non-accrual loans are first applied to the remaining principal balance of the loans. Additional recoveries are credited to the allowance up to the amount of all previous charge-offs. The level of non-performing loans to total loans decreased to 0.40% atJune 30, 2022 compared to 0.49% atDecember 31, 2021 . Non-performing loans were$43.5 million atJune 30, 2022 compared to$48.8 million atDecember 31, 2021 . Loans placed on non-accrual during the current quarter amounted to$0.9 million compared to$1.5 million for the prior year quarter and$1.5 million for the first quarter of 2022. Loans greater than 90 days or more were$0.4 million compared to$0.6 million atDecember 31, 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 andBaltimore 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. 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. 61 -------------------------------------------------------------------------------- •At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal. •Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraised value (adjusted for estimated costs to sell) and the loan balance. •Evaluation of whether adverse changes in the value of the collateral are expected over the remainder of the loan's expected life. •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 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 the majority of its fixed-rate residential mortgage originations in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of six to twelve months after the sale of the loan although the time frame for repurchase requests can extend for an indefinite period. Such transactions could be due to a number of causes including borrower fraud or early payment default. The Company has seen a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of$0.5 million for probable losses due to repurchases. The Company periodically engages in whole loan sale transactions of its residential mortgage loans as a part its interest rate risk management strategy. There were no whole loan sales of mortgage loans from the portfolio during the current year.
Mortgage loan servicing fees are recognized at amortized cost and are subject to ongoing impairment monitoring. The amortized cost of the Company’s mortgage servicing fees remained at
62 -------------------------------------------------------------------------------- Analysis of Credit Risk The following table presents information with respect to non-performing assets and 90-day delinquencies as of the periods indicated: (Dollars in thousands) June 30, 2022 December 31, 2021 Non-accrual loans: Commercial real estate: Commercial investor real estate$ 11,245 $ 12,489 Commercial owner-occupied real estate 7,869 9,306 Commercial AD&C 1,353 650 Commercial business 7,542 8,420 Residential real estate: Residential mortgage 7,305 8,441 Residential construction 1 55 Consumer 5,692 6,725 Total non-accrual loans 41,007 46,086 Loans 90 days past due: Commercial real estate: Commercial investor real estate - - Commercial owner-occupied real estate - - Commercial AD&C - - Commercial business - - Residential real estate: Residential mortgage 353 557 Residential construction - - Consumer - - Total 90 days past due loans 353 557 Restructured loans (accruing) 2,119 2,167 Total non-performing loans 43,479 48,810 Other real estate owned, net 739 1,034 Total non-performing assets $
44,218 $49,844
Non-accrual loans to total loans 0.38 % 0.46 % Non-performing loans to total loans 0.40 % 0.49 % Non-performing assets to total assets 0.33 % 0.40 % Allowance for credit losses to non-accrual loans 277.20 % 236.83 % Allowance for credit losses to non-performing loans 261.44 % 223.61 % 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 forecasted economic metrics with the greatest impact were the expected future unemployment rate, the expected level of business bankruptcies and, to a lesser degree, the house price index. In addition to these metrics, management has included the potential impact of recent recessionary pressures among the qualitative factors applied in the determination of the allowance. Expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged off against 63 -------------------------------------------------------------------------------- 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 six months endedJune 30, 2022 was$4.7 million as compared to a credit of$38.9 million for the same period in 2021. For the six months endedJune 30, 2022 , the provision for credit losses, compared to the prior year's credit to the provision, reflects the impact of the growth of the loan portfolio and the consideration of a potential recession, both of which exceeded the benefit to the provision derived from continued improvement in forecasted macroeconomic metrics. The credit to the provision for credit losses for the same period in 2021 predominantly reflected the results of the impact of the improved economic forecasts during the period. AtJune 30, 2022 , the allowance for credit losses was$113.7 million as compared to$109.1 million atDecember 31, 2021 . The allowance for credit losses as a percent of total loans was 1.05% and 1.10% atJune 30, 2022 andDecember 31, 2021 , respectively. The allowance for credit losses represented 261% of non-performing loans atJune 30, 2022 as compared to 224% atDecember 31, 2021 . The allowance attributable to the commercial portfolio represented 1.15% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.58%. With respect to the total commercial portion of the allowance, 22% 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 1.64%. The ratio of the allowance attributable to AD&C loans was 1.22% at the end of the current quarter, compared to 1.87% atDecember 31, 2021 . This decline in the allowance ratio was predominantly the result of shorter weighted average remaining life of loans in this portfolio. The current methodology for assessing the appropriate allowance includes: (1) a collective quantified reserve that reflects 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 46% of the total allowance being attributable to the historical performance of the portfolio while 54% 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 64 -------------------------------------------------------------------------------- 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$30.5 million , with individual allowances of$6.2 million against those loans atJune 30, 2022 . 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 byCredit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether an individual allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve an individual allowance or charge-off between monthly credit committee meetings to ensure that there are no significant time lapses during this process. The Company's borrowers are concentrated in nine counties inMaryland , three counties inVirginia and inWashington D.C. Excluding the PPP loans, commercial and residential mortgages, including home equity loans and lines, represented 87% of total loans at bothJune 30, 2022 and atDecember 31, 2021 , respectively. 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. The following table presents an allocation of the allowance for credit losses by portfolio as of each period end. The allowance is allocated in the following table to various loan categories based on the methodology used to estimate credit losses; however, the allocation does not restrict the usage of the allowance for any specific loan category. (In thousands) June 30, 2022 December 31, 2021 % of loans to % of loans to Commercial real estate: Amount total loans Amount total loans Commercial investor real estate$ 56,794 44.2 %$ 45,289 41.5 % Commercial owner-occupied real estate 10,784 16.4 11,687 17.0 Commercial AD&C 13,383 10.1 20,322 10.9 Commercial business 22,238 12.5 23,170 14.9 Total commercial 103,199 83.2 100,468 84.3
Residential real estate: Residential mortgage 7,254 10.6 5,384 9.4 Residential construction 1,141 2.2 1,048 2.0 Consumer 2,076 4.0 2,245 4.3 Total residential and consumer 10,471 16.8 8,677 15.7 Total allowance$ 113,670 100.0 %$ 109,145 100.0 % 65
-------------------------------------------------------------------------------- Summary of Loan Credit Loss Experience The following table presents the activity in the allowance for credit losses for the periods indicated: Six Months Ended Year Ended (Dollars in thousands) June 30, 2022 December 31, 2021 Balance, January 1$ 109,145 $ 165,367 Provision/ (credit) for credit losses 4,681
(45,556)
Loan charge-offs: Commercial real estate: Commercial investor real estate -
(5,802)
Commercial owner-occupied real estate - (136) Commercial AD&C - (2,007) Commercial business (507) (4,069) Residential real estate: Residential mortgage (131) - Residential construction - - Consumer (124) (299) Total charge-offs (762) (12,313) Loan recoveries: Commercial real estate: Commercial investor real estate 319
285
Commercial owner-occupied real estate 12 - Commercial AD&C - - Commercial business 65 565 Residential real estate: Residential mortgage 20 410 Residential construction 5 5 Consumer 185 382 Total recoveries 606 1,647 Net charge-offs (156) (10,666) Balance, period end$ 113,670 $ 109,145 Annualized net charge-offs to average loans 0.00 % 0.11 % Allowance for credit losses to loans 1.05 % 1.10 % Market Risk Management The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity. The Company's interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest 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 inU.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts 66 -------------------------------------------------------------------------------- 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 Limit 23.50% 17.50% 15.00% 10.00% 10.00% 15.00% 17.50% 23.50% June 30, 2022 2.91% 2.48% 1.98% 1.22% -3.91% N/A N/A N/A December 31, 2021 8.61% 6.53% 4.80% 2.16% N/A N/A N/A N/A As reflected in the table above, the measures of net interest income at risk atJune 30, 2022 declined in every rising interest rate change scenario compared toDecember 31, 2021 . As the table indicates, in each rising interest rate environment, net interest income sensitivity decreased compared toDecember 31, 2021 . The change in the net interest income at risk is the result of a decrease in asset sensitivity due to the decrease in interest-bearing deposits with banks, recent loan growth at market rates and the increase in non-interest bearing deposits. The impact of those changes was further affected by the increase in short-term borrowings during the period. AtJune 30, 2022 , all measures remained well within prescribed policy limits. The table also indicates that should the interest rate environment decline, net interest income would be reduced. This potential reduction in net interest income could occur because of the current low level of deposit rates and those rates being unable to reprice lower as current asset yields decline. 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 Limit 35.00% 25.00% 20.00% 10.00% 10.00% 20.00% 25.00% 35.00% June 30, 2022 (15.43%) (11.65%) (7.66%) (3.70%) 2.58% N/A N/A N/A December 31, 2021 (10.29%) (6.18%) (2.16%) 0.05% N/A N/A N/A N/A 67
-------------------------------------------------------------------------------- Overall, the measure of the economic value of equity ("EVE") at risk increased in all of the rising rate scenarios fromDecember 31, 2021 toJune 30, 2022 . The increase in the risk associated with EVE during the period was primarily the result of reduced asset market values of loans and investments driven by the increase in the interest rate environment during period. 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 atJune 30, 2022 . Liquidity is measured using an approach designed to take into account core deposits, in addition to factors already discussed above. Management considers core deposits, defined to include all deposits other than brokered and outsourced deposits, to be a relatively stable funding source. Core deposits equaled 81% of total interest-earning assets atJune 30, 2022 . 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. AtJune 30, 2022 , 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 theFederal Reserve Bank . AtJune 30, 2022 , the Company had the ability to pledge collateral at prevailing market rates under a line of credit with the FHLB of$3.9 billion . FHLB availability based on pledged collateral atJune 30, 2022 , amounted to$3.1 billion , with$175.0 million outstanding against it. The secured lines of credit at theFederal Reserve Bank and correspondent banks totaled$684.9 million , all of which was available for borrowing based on pledged collateral, with no borrowings against it as ofJune 30, 2022 . In addition, the Company had unsecured lines of credit with correspondent banks of$1.3 billion with$75.0 million outstanding atJune 30, 2022 . Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate atJune 30, 2022 . 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 theFederal 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 ofJune 30, 2022 , the Bank could have declared a dividend of up to$108.5 million to Bancorp. AtJune 30, 2022 , Bancorp had liquid assets of$100.0 million . Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and risk assessment are considered when determining the amount and structure of credit arrangements.
Credit commitments in the form of consumer real estate, business real estate and business real estate on the dates indicated are as follows:
(In thousands) June 30, 2022 December 31, 2021 Commercial real estate development and construction$ 690,429 $ 621,725 Residential real estate-development and construction 821,951 885,806 Real estate-residential mortgage 36,783 54,072 Lines of credit, principally home equity and business lines 2,261,447 2,096,874 Standby letters of credit 77,094 70,642 Total commitments to extend credit and available credit lines$ 3,887,704 $ 3,729,119 68
-------------------------------------------------------------------------------- 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 ofJune 30, 2022 , the total reserve for unfunded commitments was$0.3 million and is accounted for in other liabilities in the Condensed Consolidated Statements of Financial Condition. See Note 1 - Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for more information on the accounting policy for the allowance for unfunded commitments. 69
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