EDGAR 10-K Filing

Company CIK: 824410
Filing Year: 2022
Filename: 824410_10-K_2022_0000824410-22-000010.json

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ITEM 1. BUSINESS
Item 1. BUSINESS
General
Sandy Spring Bancorp, Inc. ("Sandy Spring" or, together with its subsidiaries, the "Company") is the bank holding company for Sandy Spring Bank (the "Bank"). The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding Company Act") and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company began operating in 1988 while Sandy Spring Bank traces its origin to 1868, making it among the oldest banking institutions in the region. The Bank offers a broad range of commercial and retail banking, mortgage, private banking and trust services at over 50 locations throughout central Maryland, Northern Virginia, and Washington D.C. The Bank is a state chartered bank subject to supervision and regulation by the Federal Reserve and the State of Maryland. The Bank's deposit accounts are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing Lender. The Company, the Bank, and their other subsidiaries are Affirmative Action/Equal Opportunity Employers.
The Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. Through its subsidiaries, Sandy Spring Insurance Corporation ("SSIC"), West Financial Services, Inc. ("West Financial") and SSB Wealth Management, Inc. (d/b/a Rembert Pendleton Jackson, "RPJ"), Sandy Spring Bank offers a comprehensive menu of insurance and investment management services. At December 31, 2021, the Company had $12.6 billion in assets, a $0.2 billion decrease from total assets at December 31, 2020. During this period, total loans declined by 4% to $10.0 billion at December 31, 2021, compared to $10.4 billion at December 31, 2020. Excluding Paycheck Protection Program ("PPP" or "PPP program") loans, total loans at December 31, 2021 grew 5% to $9.8 billion as compared to $9.3 billion at December 31, 2020, as the commercial loan portfolio grew $681.1 million, while the residential mortgage loan portfolio declined $152.6 million. Excess liquidity resulting from deposit growth and PPP loan forgiveness during 2021 was applied to reduce borrowings as well as fund the loan growth that occurred in the last quarter of the current year.
On April 1, 2020 (“Acquisition Date”), the Company completed the acquisition of Revere Bank ("Revere"), headquartered in Rockville, Maryland. The acquisition resulted in the initial addition of 11 banking offices and more than $2.8 billion in assets as of the Acquisition Date. At the Acquisition Date, Revere had loans of $2.5 billion and deposits of $2.3 billion. The all-stock transaction resulted in the issuance of 12.8 million common shares and with total consideration exchanged valued at approximately $293 million. In addition, on February 1, 2020 the Company acquired RPJ, a wealth advisory firm located in Falls Church, Virginia with approximately $1.5 billion in assets under management.
The Company's and the Bank's principal executive office is located at 17801 Georgia Avenue, Olney, Maryland 20832, and its telephone number is 301-774-6400.
Availability of Information
This report is not part of the proxy materials for the Company’s annual meeting of shareholders; it is provided along with the annual proxy statement for convenience of use and as an expense control measure. The Company makes available through the Investor Relations area of the Company website, at www.sandyspringbank.com, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Access to these reports is provided by means of a link to a third-party vendor that maintains a database of such filings. In general, the Company intends that these reports be available as soon as practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). Technical and other operational obstacles or delays caused by the vendor may delay their availability. The SEC maintains a website (www.sec.gov) where these filings are also available through the SEC’s EDGAR system. There is no charge for access to these filings through either the Company’s website or the SEC’s website.
Market and Economic Overview
Sandy Spring Bank is headquartered in Montgomery County, Maryland and conducts business primarily in Central Maryland, Northern Virginia and Washington D.C. The Bank's footprint serves the Washington metropolitan area, which is one of the country’s most economically successful regions. The region’s economic strength is due to the region’s significant federal government presence and strong growth in the business and professional services sector. The proximity to numerous armed forces installations in Maryland, including the United States Cyber Command in Ft. Meade, Maryland, together with a strategic location between two of the country’s
leading ports - the Port of Baltimore and the Port of Norfolk - and its proximity to numerous interstates and railways have provided opportunities for growth in a variety of areas, including logistics and transportation.
According to the U.S. Census Bureau, the region is home to four of the top ten most highly educated counties in the nation and four of the top ten most affluent counties, as measured by household income. The Company’s geographical location provides access to key neighboring markets such as Philadelphia, New York City, Pittsburgh and the Richmond/Norfolk, Virginia corridor. While the region continues to experience the economic effects of the novel coronavirus ("COVID-19" or “pandemic”), the region’s unemployment rate remained below the national average as the region has the benefit of a highly trained and educated workforce concentrated in government and white-collar service businesses. These factors, along with the ability of the regional infrastructure to support remote working, has provided a greater amount of resiliency in the face of the impact of the pandemic on the overall employment metrics for our market/region.
Both globally and within the United States, the pandemic has resulted in negative impacts and a disruption to economic and commercial activity. The local economy that the Company operates began to strengthen and improve into 2021. Economic improvement had resulted in many positive economic trends, such as low unemployment, increased consumer confidence, and increased housing development and housing prices. However, the Company's business opportunities may be tempered by concerns such as employment opportunities, the effects of the remote workplace, the impact of inflation, the effect of current and proposed government stimulus, wage growth and the strength of the dollar. Volatility in global economic markets, continued domestic political turmoil and various episodes of geopolitical unrest continue to provide a degree of uncertainty in the financial markets. Overall, management continues to be encouraged by the resiliency of the current economic environment and the prospects for continued growth of the Company.
Loan Products
The Company currently offers a complete menu of loan products primarily in the Company’s identified market footprint that are discussed in detail below and on the following pages. These following sections should be read in conjunction with the section “Credit Risk” on page 55 of this report.
Commercial Loans
Included in this category are commercial real estate loans, commercial construction loans and other commercial loans. The Company’s commercial loan clients represent a diverse cross-section of small to mid-size local businesses within the Company’s market footprint, whose owners and employees are often established Bank customers. Such banking relationships are a natural business for the Company, with its long-standing community roots and extensive experience in serving and lending to this market segment.
Commercial loans are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in the ability of the borrower to repay the loan. Collateral generally is required to provide the Company with an additional source of repayment in the event of default by a commercial borrower. The structure of the collateral package, including the type and amount of the collateral, varies from loan to loan depending on the financial strength of the borrower, the amount and terms of the loan, and the collateral available to be pledged by the borrower, but generally may include real estate, accounts receivable, inventory, equipment or other assets. Loans also may be supported by personal guarantees from the principals of the commercial loan borrowers. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required information depends upon the size and complexity of the credit and the collateral that secures the loan. Credit risk for commercial loans arises from borrowers lacking the ability or willingness to repay the loan, and in the case of secured loans, by a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. A risk rating system is applied to the commercial loan portfolio to measure credit risk and differentiate the level of risk posed by individual credits. The Company has no commercial loans to borrowers in similar industries that exceed 10% of total loans.
During 2021 and 2020, the Company participated in the Small Business Administration’s (“SBA”) PPP program, which provided forgivable loans to small businesses to enable them to maintain payroll, hire back employees who have been laid off, and cover applicable overhead. These loans are fully guaranteed by the SBA and eligible for full forgiveness when the proceeds are utilized for certain payroll and other expenses under guidelines provided by the SBA. Loans that do not meet the forgiveness criteria enter a repayment period of 2 or 5 years. Total lending under the PPP program by the Company for 2021 and 2020 amounted to 8,574 loans for a total of $1.6 billion. At December 31, 2021, loans totaling $1.4 billion have been forgiven and an additional $52.0 million have
been repaid by borrowers. The remaining outstanding principal balance of PPP loans, net of deferred origination fees, at December 31, 2021 was $183.5 million.
Included in commercial loans are credits directly originated by the Company and, to a lesser extent, loan participations acquired from other lenders. The Company's commercial lending policy requires each loan, regardless of whether it is directly originated or is purchased, to have viable repayment sources. The risks associated with purchased participations are similar to those of directly originated commercial loans, although additional risk may arise from the limited ability to control actions of the primary lender. The Company also purchases whole loans and loan participations as part of its asset/liability management strategy. Strict policies are in place governing the degree of risk assumed and volume of loans held. At December 31, 2021, other financial institutions had $222.7 million in outstanding commercial and commercial real estate loan participations sold by the Company. In addition, at December 31, 2021, the Company had $131.2 million in outstanding commercial and commercial real estate loan participations purchased from other lenders.
Commercial Real Estate
The Company's commercial real estate loans consist of both loans secured by owner-occupied properties and nonowner-occupied properties ("investor real estate loans") where an established banking relationship exists. The commercial real estate categories contain mortgage loans to developers and owners of commercial real estate. Commercial real estate loans are governed by the same lending policies and subject to credit risk as previously described for commercial loans. Commercial real estate loans secured by owner-occupied properties are based upon the borrower’s financial condition and the ability of the borrower and the business to provide for repayment. Investor real estate loans secured by nonowner-occupied properties involve investment properties for multi-family, warehouse, retail, and office space with a history of occupancy and cash flow. The Company seeks to reduce the risks associated with commercial mortgage lending by generally lending in its market area, using conservative loan-to-value ratios and obtaining periodic financial statements and tax returns from borrowers to perform loan reviews. It is also the Company's general policy to obtain personal guarantees from the principals of the borrowers and to underwrite the business entity from a cash flow perspective. Interest rate risks are mitigated by using either floating interest rates or by fixing rates for a short period of time, generally less than three years. While loan amortizations may be approved for up to 360 months, each loan generally has a call provision (maturity date) of five to ten years or less.
Commercial acquisition, development and construction ("AD&C") loans to residential builders are generally made for the construction of residential homes for which a binding sales contract exists and the prospective buyers have been pre-qualified for permanent mortgage financing by either third-party lenders (mortgage companies or other financial institutions) or the Company. Loans for the development of residential land are extended when evidence is provided that the lots under development will be or have been sold to builders satisfactory to the Company. These loans are generally extended for a period of time sufficient to allow for the clearing and grading of the land and the installation of water, sewer and roads, which is typically a minimum of eighteen months to three years.
The Company primarily lends for AD&C in local markets that are familiar and understandable, works selectively with top-quality builders and developers, and requires substantial equity from its borrowers. The underwriting process is designed to confirm that the project will be economically feasible and financially viable; projects are generally evaluated as though the Company will provide permanent financing. The Company's portfolio growth objectives do not include speculative commercial construction projects or projects lacking reasonable proportionate sharing of risk. Development and construction loans are secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely upon the value of the underlying collateral, the Company considers the financial condition and reputation of the borrower and any guarantors, the amount of the borrower's equity in the project, independent appraisals, cost estimates and pre-construction sales information.
Commercial Business Loans
The Company also originates commercial business loans. Commercial term loans are made to provide funds for equipment and general corporate needs. This loan category is designed to support borrowers who have a proven ability to service debt over a term generally not to exceed 84 months. The Company generally requires a first lien position on all collateral and requires guarantees from owners having at least a 10% interest in the involved business. Interest rates on commercial term loans are generally floating or fixed for a term not to exceed seven years. Management monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries or similar collateral. Commercial business loans are evaluated for historical and projected cash flow attributes, balance sheet strength, and primary and alternate resources of personal guarantors. Commercial term loan documents require borrowers to forward regular financial information on both the business and personal guarantors. Loan covenants require at
least annual submission of complete financial information and in certain cases this information is required monthly, quarterly or semi-annually depending on the degree to which the Company desires information resources for monitoring a borrower’s financial condition and compliance with loan covenants. Examples of properly margined collateral for loans, as required by Bank policy, would be an 80% advance on the lesser of appraisal or recent sales price on commercial property, an 80% or less advance on eligible receivables, a 50% or less advance on eligible inventory and an 80% advance on appraised residential property. Collateral borrowing certificates may be required to monitor certain collateral categories on a monthly or quarterly basis. Loans may require personal guarantees. Key person life insurance may be required as appropriate and as necessary to mitigate the risk of loss of a primary owner or manager. Whenever appropriate and available, the Bank seeks governmental loan guarantees, such as the SBA's loan programs, to reduce risks.
Commercial lines of credit are granted to finance a business borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. In addition to the risks inherent in term loan facilities, line of credit borrowers typically require additional monitoring to protect the lender against increasing loan volumes and diminishing collateral values. Commercial lines of credit are generally revolving in nature and require close scrutiny. The Company generally requires at least an annual out of debt period (for seasonal borrowers) or regular financial information (monthly or quarterly financial statements, borrowing base certificates, etc.) for borrowers with more growth and greater permanent working capital financing needs. Advances against collateral value are limited. Lines of credit and term loans to the same borrowers generally are cross-defaulted and cross-collateralized. Interest rate charges on this group of loans generally float at a factor at or above the prime lending rate.
Residential Real Estate Loans
The residential real estate category contains loans principally to consumers secured by residential real estate. Loans for residential real estate may carry either a fixed rate of interest or an adjustable rate over the life of loan. Adjustable rate mortgage (“ARM”) loans have a 30 year amortization period with a fixed rate of interest for the first five, seven or ten years, re-pricing semiannually or annually thereafter at a predetermined spread to an index. The Company's residential real estate lending policy requires each loan to have viable repayment sources. Residential real estate loans are evaluated for the adequacy of these repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Credit risk for residential real estate loans arises from borrowers lacking the ability or willingness to repay the loan or by a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent liquidation of the real estate collateral. The residential real estate portfolio includes both conforming and non-conforming mortgage loans.
Conforming mortgage loans represent loans originated in accordance with underwriting standards set forth by government-sponsored entities (“GSEs”), including the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Government National Mortgage Association (“Ginnie Mae”), which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage lenders. These loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less or have mortgage insurance to insure down to 80%, and are made to borrowers in good credit standing. In recent years, the Company has made the strategic decision to sell the majority of new mortgage loan production in the secondary market. For any loans retained by the Company, title insurance insuring the priority of its mortgage lien, as well as fire and extended coverage casualty insurance protecting the properties securing the loans is required. Borrowers may be required to advance funds with each monthly payment of principal and interest, to a loan escrow account from which the Company makes disbursements for items such as real estate taxes and mortgage insurance premiums. Appraisers approved by the Company appraise the properties securing substantially all of the Company's residential mortgage loans.
Non-conforming mortgage loans represent loans that generally are not saleable in the secondary market to the GSEs for inclusion in conventional mortgage-backed securities due to the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan, among other factors. The Company originates non-conforming loans for its own portfolio and for sale to third-party investors, usually large mortgage companies, under commitments by the mortgage company to purchase the loans subject to compliance with pre-established investor criteria. Non-conforming loans generated for sale include loans that may not be underwritten using customary underwriting standards. These loans typically are held after funding for thirty days or less, and are included in residential mortgages held for sale. The Company may sell both conforming and non-conforming loans on either a servicing released or servicing retained basis.
The Company makes residential real estate development and construction loans generally to provide interim financing on property during the development and construction period. Borrowers include builders, developers and persons who will ultimately occupy the single-family dwelling. Residential real estate development and construction loan funds are disbursed periodically as pre-specified
stages of completion are attained based upon site inspections. Interest rates on these loans are usually adjustable. Loans to individuals for the construction of primary personal residences are typically secured by the property under construction, frequently include additional collateral (such as a second mortgage on the borrower's present home), and commonly have maturities of twelve to eighteen months. The Company attempts to obtain the permanent mortgage loan under terms, conditions and documentation standards that permit the sale of the mortgage loan in the secondary mortgage loan market.
Consumer Loans
Consumer lending continues to be important to the Company’s full-service, community banking business. This category of loans includes primarily home equity loans and lines, installment loans and personal lines of credit.
The home equity category consists mainly of revolving lines of credit to consumers that are secured by residential real estate. Home equity lines of credit and other home equity loans are originated by the Company for typically up to 85% of the appraised value, less the amount of any existing prior liens on the property. While home equity loans have maximum terms of up to twenty years and interest rates are generally fixed, home equity lines of credit have maximum terms of up to ten years for draws and thirty years for repayment, and interest rates are generally adjustable. The Company secures these loans with mortgages on the homes (typically a second mortgage). Purchase money second mortgage loans originated by the Company have maximum terms ranging from ten to thirty years. These loans generally carry a fixed rate of interest for a term of 15 or 20 years. Home equity lines are generally governed by the same lending policies and subject to the same credit risk as described for residential real estate loans.
Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles. These consumer loans are generally governed by the same overall lending policies as described for residential real estate loans. Credit risk for consumer loans arises from borrowers lacking the ability or willingness to repay the loan, and in the case of secured loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral.
Consumer installment loans are generally offered for terms of up to six years at fixed interest rates. Automobile loans can be for up to 100% of the purchase price or the retail value listed by the National Automobile Dealers Association. The terms of the loans are determined by the age and condition of the collateral. Collision insurance policies are required on all of these loans, unless the borrower has substantial other assets and income. The Company also makes other consumer loans, which may or may not be secured. The term of the loans usually depends on the collateral. The majority of outstanding unsecured loans usually do not exceed $50 thousand and have a term of no longer than 36 months.
Deposit Activities
Subject to the Company’s Asset/Liability Committee (the “ALCO”) policies and current business plan, the Company seek to maintain deposit market share within the Company’s primary markets while managing funding costs to preserve the net interest margin.
One of the Company’s primary objectives as a community bank is to develop long-term, multi-product customer relationships from its comprehensive menu of financial products. To that end, the lead product to develop such relationships is typically a deposit product. The Company relies primarily on core deposit growth to fund long-term loan growth.
Treasury Activities
The Company's treasury function manages the wholesale segments of the balance sheet, including investments, purchased funds and long-term debt, and is responsible for all facets of interest rate risk management for the Company, which includes the pricing of deposits consistent with conservative interest rate risk and liquidity practices. Management’s objective is to achieve the maximum level of consistent earnings over the long term, while minimizing interest rate risk, credit risk and liquidity risk and optimizing capital utilization. In managing the investment portfolio under its stated objectives, the Company invests primarily in U.S. Treasury and Agency securities, U.S Agency mortgage-backed and asset-backed securities (“MBS”), U.S. Agency collateralized mortgage obligations (“CMO”), municipal bonds and, to a minimal extent, corporate bonds. Treasury strategies and activities are overseen by the Risk Committee of the board of directors, ALCO and the Company’s Investment Committee, which reviews all investment and funding transactions. The ALCO activities are summarized and reviewed quarterly with the Company’s board of directors.
The primary objective of the investment portfolio is to provide appropriate liquidity consistent with anticipated levels of deposit funding and loan demand with a minimal level of risk. The overall average duration of 4.3 years of the investment portfolio together with the types of investments (96% of the portfolio is rated AA or above) is intended to provide sufficient cash flows to support the
Company’s lending goals. Liquidity is also provided by secured lines of credit maintained with the Federal Home Loan Bank of Atlanta (“FHLB”), the Federal Reserve Bank, and to a lesser extent, unsecured lines of credit with correspondent banks.
Borrowing Activities
The Company’s borrowing activities are achieved through the use of lines of credit to address overnight and short-term funding needs, match-fund loan activity and lock in attractive rates. Borrowing activities may encompass a variety of sources to raise borrowed funds at competitive rates, including federal funds purchased, FHLB advances, retail repurchase agreements and long-term debt. FHLB borrowings typically carry rates at varying spreads from the Secured Overnight Funding Rate ("SOFR") rate or treasury yield curve for the equivalent term because they may be secured with investments or high quality loans. Federal funds purchased, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate. The Company issued $175 million in subordinated debt in November 2019. This debt issuance provided capital to support future growth. A portion of the proceeds from this subordinated issuance funded the 2021 redemptions of higher priced debt that was assumed as part of the WashingtonFirst and Revere acquisitions. The Company's outstanding subordinated debt is considered Tier 2 capital under current regulatory guidelines.
Human Capital
The Company’s vision is to be recognized as an outstanding financial services company creating remarkable experiences for its clients, employees, shareholders, and communities. Attracting, retaining and developing qualified employees and providing them with a remarkable employee experience is a key to providing a remarkable client experience and is an important contributor to the Company’s success.
Employee Profile
The following table describes the composition of the Company’s workforce at December 31, 2021:
Employees
Full-time employees 1,084
Part-time employees 29
Temporary employees 3
Total employees 1,116
Women 58.6 %
Minorities 41.4 %
Talent Acquisition
The Company’s demand for qualified candidates grows as the Company’s business grows. Building a diverse and inclusive workforce is a component of the Company's strategic plan. The Company attracts talented individuals with a combination of competitive pay and benefits. The Company’s minimum wage for entry-level positions, following a brief training period, is $15.00 per hour. Through systematic talent management, career development and succession planning, the Company is striving to source a larger percentage of candidates internally.
Professional Development
The Company’s performance management program is an interactive practice that engages employees through monthly coaching sessions with their manager, annual reviews, and annual goal setting. The Company offers a variety of programs to help employees learn new skills, establish and meet personalized development goals, take on new roles and become better leaders.
Employee Engagement
The Company recognizes that employees who are involved in, enthusiastic about and committed to their work and workplace contribute meaningfully to the success of the Company. On a regular basis, the Company solicits employee feedback through a confidential, company-wide survey on culture, management, career opportunities, compensation, and benefits. The results of this survey are reviewed with the board of directors and are used to update employee programs, initiatives, and communications. The Company has a number of other engagement initiatives, including quarterly town hall meetings with the Company’s Chief Executive
Officer and other senior leaders and utilizes a number of recognition programs to reward employees for their efforts. The Company was again recognized as an employer of choice by the Baltimore Sun, Washington Post and the American Banker Magazine.
Succession Planning
The Company is focused on facilitating internal succession by fostering internal mobility, enhancing its talent pool through professional development programs, structuring its training program to teach skills for 21st century banking, and expanding opportunities through structured diversity and inclusion initiatives.
Pandemic Impact and Response
The Company's business, financial condition, and results of operations have been and may continue to be affected by the outbreak of COVID-19. Both globally and within the United States, the pandemic continues to have various effects on economic and commercial activity and financial markets. Area jurisdictions continue to monitor and modify their respective pandemic guidelines on a periodic basis based on contagion metrics. Businesses continue to observe and modify their activities and behaviors to remain in compliance with the jurisdictional directives while concurrently providing consumers with goods and services. These directives have resulted in business, supply and operational disruptions, including business closures, curtailment of services, operational reorganizations, supply chain disruptions, and layoffs and furloughs. Certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, that are intended to ameliorate the macroeconomic effects of COVID-19 may adversely impact our business. Low short-term interest rates, such as those maintained by the Federal Reserve since early 2020 have negatively impacted our results, as we have certain assets and liabilities that are sensitive to changes in interest rates. Management continually monitors developments, evaluates strategic and tactical initiatives and solutions and allocates the necessary resources to mitigate the negative impact of this significant market disruption caused by the pandemic. For a description of the potential impacts of COVID-19 on the Company, see “Item 1A - Risk Factors”. To address the potential impact of COVID-19 on operations, the Company implemented business continuity plans and continues to provide financial services to clients. In response to COVID-19, the Company implemented numerous actions to address the health and safety of employees and clients and to assist clients that have been impacted by the pandemic.
Competition
The Bank's principal competitors for deposits are other financial institutions, including other banks, credit unions, and savings institutions, located in the Bank’s primary market area of central Maryland, Northern Virginia and Washington D.C. Competition among these institutions is based primarily on interest rates and other terms offered, product offerings, service charges imposed on deposit accounts, the quality of services rendered, the convenience of banking facilities, and online and mobile banking functionality. Additional competition for depositors' funds comes from mutual funds, U.S. Government securities, and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.
The banking business in Central Maryland, Northern Virginia and Washington D.C. generally, and the Bank's primary service areas specifically, are highly competitive with respect to both loans and deposits. The Bank competes with many larger banking organizations that have offices over a wide geographic area. These larger institutions have certain inherent advantages, such as the ability to finance wide-ranging advertising campaigns and promotions and to allocate their investment assets to regions offering the highest yield and demand. They also offer services, such as international banking, that are not offered directly by the Bank (but are available indirectly through correspondent institutions), and, by virtue of their larger total capitalization, such banks have substantially higher legal lending limits, which are based on bank capital, than does the Bank. The Bank can arrange loans in excess of its lending limit, or in excess of the level of risk it desires to take, by arranging participations with other banks. The primary factors in competing for loans are interest rates, loan origination fees, and the range of services offered by lenders. Competitors for loan originations include other commercial banks, mortgage bankers, mortgage brokers, savings associations, and insurance companies.
SSIC operates Sandy Spring Insurance, a general insurance agency located in Annapolis, Maryland, and Neff & Associates, an insurance agency located in Ocean City, Maryland. Both agencies face competition primarily from other insurance agencies and insurance companies. West Financial, located in McLean, Virginia, and RPJ, located in Falls Church, Virginia, both wholly owned subsidiaries of the Bank, are asset management and financial planning companies. West Financial and RPJ face competition primarily from other financial planners, banks, and financial management companies.
In addition to competing with other commercial banks, credit unions and savings associations, commercial banks such as the Bank compete with non-bank institutions for funds. For instance, yields on corporate and government debt and equity securities affect the ability of commercial banks to attract and hold deposits. Mutual funds also provide substantial competition to banks for deposits. Other entities, both governmental and in private industry, raise capital through the issuance and sale of debt and equity securities and indirectly compete with the Bank in the acquisition of deposits.
Monetary Policy
The Company and the Bank are affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of governmental policies on the earnings of the Company and the Bank cannot be predicted.
Regulation, Supervision, and Governmental Policy
The following is a brief summary of certain statutes and regulations that significantly affect the Company and its subsidiaries. A number of other statutes and regulations may affect the Company and the Bank but are not discussed in the following paragraphs.
Bank Holding Company Regulation
The Company is registered as a bank holding company under the Holding Company Act and, as such, is subject to supervision and regulation by the Federal Reserve. As a bank holding company, the Company is required to furnish to the Federal Reserve annual and quarterly reports of its operations and additional information and reports. The Company is also subject to regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the bank holding company would directly or indirectly own or control more than 5% of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.
Prior to acquiring control of the Company or the Bank, any company must obtain approval of the Federal Reserve. For purposes of the Holding Company Act, “control” is defined as ownership of 25% or more of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank.
The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, non-bank activities that are closely related to banking, and other financially related activities. The activities of the Company are subject to these legal and regulatory limitations under the Holding Company Act and Federal Reserve regulations.
The Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act) to file a written notice with the Federal Reserve before the person or persons acquire control of the Company or the Bank. The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank.
In general, a bank holding company that qualifies as a financial holding company under federal banking law may engage in an expanded list of non-bank activities. Non-bank and financially related activities of bank holding companies, including companies that become financial holding companies, also may be subject to regulation and oversight by regulators other than the Federal Reserve. The Company is not a financial holding company, but may choose to become one in the future.
The Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total average assets and capital to risk-weighted assets. See “Regulatory Capital Requirements.”
The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.
A holding company must serve as a source of strength for its subsidiary banks and the Federal Reserve may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal banking regulator to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors.
Bank Regulation
The Bank is a state chartered bank and trust company subject to supervision by the State of Maryland. As a member of the Federal Reserve System, the Bank is also subject to supervision by the Federal Reserve. Deposits of the Bank are insured by the FDIC to the legal maximum limit. Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of branches, mergers and acquisitions, corporate activities, changes in control, electronic funds transfers, responsiveness to community needs, management practices, compensation policies, and other aspects of operations are subject to regulation by the appropriate federal and state supervisory authorities. In addition, the Bank is subject to numerous federal, state and local laws and regulations that set forth specific restrictions and procedural requirements with respect to extensions of credit (including to insiders), credit practices, disclosure of credit terms and discrimination in credit transactions.
The Federal Reserve regularly examines the operations and condition of the Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of the Bank’s depositors and the Deposit Insurance Fund. In addition, the Bank is required to furnish quarterly and annual reports to the Federal Reserve. The Federal Reserve’s enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.
The Federal Reserve has adopted regulations regarding capital adequacy, which require member banks to maintain specified minimum ratios of capital to total average assets and capital to risk-weighted assets. See “Regulatory Capital Requirements.” Federal Reserve and State regulations limit the amount of dividends that the Bank may pay to the Company. See Note 12 - Stockholders’ Equity in the Notes to the Consolidated Financial Statements.
The Bank is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Company and other affiliates, and on investments in their stock or other securities. These restrictions prevent the Company and the Bank’s other affiliates from borrowing from the Bank unless the loans are secured by specified collateral, and require those transactions to have terms comparable to terms of arms-length transactions with third parties. In addition, secured loans and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10% of the Bank’s capital and surplus and as to the Company and all other affiliates together to an aggregate of 20% of the Bank’s capital and surplus. Certain exemptions to these limitations apply to extensions of credit and other transactions between the Bank and its subsidiaries. These
regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses.
Under Federal Reserve regulations, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting requirements. A bank’s real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the “Interagency Guidelines”) adopted by the federal bank regulators. The Interagency Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the limits specified in the guidelines. The Interagency Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits.
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Large banks (generally, those with $10 billion or more in assets) are assigned an individual rate based on a scorecard that combines certain measures, including regulatory examination component ratings, to produce a score that is converted into an assessment rate. Assessment rates currently range from 1.5 to 40 basis points. No institution may pay a dividend if in default of the federal deposit insurance assessment. Deposit insurance assessments are based on total average assets, excluding PPP loans, less average tangible common equity. The FDIC has authority to increase insurance assessments. Management cannot predict what insurance assessment rates will be in the future.
Interchange fees, or “swipe” fees, are fees that merchants pay to credit card companies and debit card-issuing banks such as the Bank for processing electronic payment transactions on their behalf. The maximum permissible interchange fee that a non-exempt issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, subject to an upward adjustment of 1 cent if an issuer certifies that it has implemented policies and procedures reasonably designed to achieve the fraud-prevention standards set forth by the Federal Reserve. In addition, card issuers and networks are prohibited from entering into arrangements requiring that debit card transactions be processed on a single network or only two affiliated networks, and allows merchants to determine transaction routing. Debit card issuers with total consolidated assets of less than $10 billion are exempt from these interchange fee restrictions. The exemption for small issuers ceases to apply as of July 1 of the year following the calendar year in which the debit card issuer has total consolidated assets of $10 billion or more at calendar year-end. In November 2020, the federal banking regulators adopted regulatory relief that allowed the Company to select either December 31, 2019, or December 31, 2020, whichever is the lower asset measurement, for purposes of determining its qualification for the small issuer exemption. As a result, the Company, which had total consolidated assets of less than $10 billion at December 31, 2019, will become subject to the interchange restrictions beginning July 1, 2022.
Consumer Financial Protection Laws and Enforcement
The Consumer Financial Protection Bureau (“CFPB”) is responsible for promoting fairness and transparency for mortgages, credit cards, deposit accounts and other consumer financial products and services and for interpreting and enforcing the federal consumer financial laws that govern the provision of such products and services. The CFPB is also authorized to prevent any institution under its authority from engaging in an unfair, deceptive, or abusive act or practice in connection with consumer financial products and services.
The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the federal banking agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. As an insured depository institution with total assets of more than $10 billion, the Bank is subject to the CFPB’s supervisory and enforcement authorities.
Regulation of Registered Investment Advisor Subsidiaries.
The Company's subsidiaries West Financial and RPJ are investment advisors registered with the SEC under the Investment Advisors Act of 1940. In this capacity, West Financial and RPJ are subject to oversight and inspections by the SEC. Among other things, registered investment advisors like West Financial and RPJ must comply with certain disclosure obligations, advertising and fee restrictions and requirements relating to client suitability and custody of funds and securities. Registered investment advisors are also subject to anti-fraud provisions under both federal and state law.
Regulatory Capital Requirements
The Federal Reserve establishes capital and leverage requirements for the Company and the Bank. Specifically, the Company and the Bank are subject to the following minimum capital requirements: (1) a leverage ratio of 4%; (2) a common equity Tier 1 risk-based capital ratio of 4.5%; (3) a Tier 1 risk-based capital ratio of 6%; and (4) a total risk-based capital ratio of 8%.
The Company’s Common Equity Tier 1 capital consists solely of common stock plus related surplus and retained earnings, adjusted for goodwill, intangible assets and the related deferred taxes. Additional Tier 1 capital may include other perpetual instruments historically included in Tier 1 capital, such as non-cumulative perpetual preferred stock, if applicable. Capital rules also permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of unsecured instruments that are subordinated to deposits and general creditors and have a minimum original maturity of at least five years, among other requirements, plus instruments that the rule has disqualified from Tier 1 capital treatment. Instruments that are included in Tier 2 capital, but have a maturity of less than five years, must be ratably discounted over their remaining life until they reach maturity.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” of 2.5 percent on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity and the buffer applies to all three measurements: Common Equity Tier 1, Tier 1 capital and total capital.
Supervision and Regulation of Mortgage Banking Operations
The Company’s mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans’ Administration (“VA”) and Fannie Mae with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as the Company are required annually to submit audited financial statements to Fannie Mae, FHA and VA. Each of these regulatory entities has its own financial requirements. The Company’s affairs are also subject to examination by the Federal Reserve, Fannie Mae, FHA and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Fair Housing Act, Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. The Company’s mortgage banking operations are also affected by various state and local laws and regulations and the requirements of various private mortgage investors.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s record of making loans in its assessment areas; (b) investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (c) service, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of the community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. The Bank was assigned an “outstanding” rating as a result of its last CRA examination.
Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is
designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA Patriot Act” or the “Patriot Act”, contains prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the Patriot Act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
Other Laws and Regulations
Some of the aspects of the lending and deposit business of the Bank that are subject to regulation by the Federal Reserve and the FDIC include reserve requirements and disclosure requirements in connection with personal and mortgage loans and deposit accounts. In addition, the Bank is subject to numerous federal and state laws and regulations that include specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of credit terms, and discrimination in credit transactions.
Enforcement Actions
Federal statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease-and-desist orders, receivership, conservatorship, or the termination of the deposit insurance.
Information About Our Executive Officers
The following listing sets forth the name, age (as of February 18, 2022), principal position and recent business experience of each executive officer:
R. Louis Caceres, 59, became Executive Vice President and Chief Wealth Officer of the Bank in 2002. Prior to that, Mr. Caceres was a Senior Vice President of the Bank.
Kenneth C. Cook, 62, became Executive Vice President and Division President of Commercial Banking in 2020. Prior to that, Mr. Cook was the President and Co-CEO of Revere Bank.
Gary J. Fernandes, 53, became Executive Vice President and Chief Human Resources Officer in 2021. Mr. Fernandes joined the Bank in March 2015 after a career with a major international delivery and logistics company.
Aaron M. Kaslow, 57, became Executive Vice President, General Counsel and Secretary of the Company and Chief Legal Officer of the Bank in 2019. Prior to that, Mr. Kaslow was the leader of the Financial Institutions practice at the law firm of Kilpatrick Townsend & Stockton LLP.
Philip J. Mantua, CPA, 63, became Executive Vice President and Chief Financial Officer of the Company and the Bank in 2004. Prior to that, Mr. Mantua was Senior Vice President of Managerial Accounting.
Ronda M. McDowell, 57, became an Executive Vice President and Chief Operations Officer of the Bank in 2021. Prior to that, Ms. McDowell served as an Executive Vice President and Chief Credit Officer of the Bank.
Joseph J. O'Brien, Jr., 58, became Executive Vice President and Chief Banking Officer in 2011. Mr. O’Brien joined the Bank in July 2007 as Executive Vice President for Commercial Banking.
John D. Sadowski, 58, became Executive Vice President and Chief Information Officer of the Bank in 2011. Prior to that, Mr. Sadowski served as a Senior Vice President of the Bank.
Daniel J. Schrider, 57, became President of the Company and the Bank effective March 26, 2008 and Chief Executive Officer effective January 1, 2009. Prior to that, Mr. Schrider served as an Executive Vice President and Chief Revenue Officer of the Bank.
Kevin Slane, 62, became Executive Vice President and Chief Risk Officer of the Bank in 2018. Prior to that, Mr. Slane was the Director of Enterprise Risk Management at Hancock Whitney Bank in the southeast United States.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS
Investing in the Company’s common stock involves risks, including the possibility that the value of the investment could fall substantially and that dividends or other distributions could be reduced or eliminated. Investors should carefully consider the following risk factors before making an investment decision regarding the Company’s stock. The risk factors may cause the Company’s future earnings to be lower or its financial condition to be less favorable than expected, which could adversely affect the value of, and return on, an investment in the Company. In addition, other risks that the Company is not aware of, or which are not believed to be material, may cause earnings to be lower, or may deteriorate the financial condition of the Company. Consideration should also be given to the other information in this Annual Report on Form 10-K, as well as in the documents incorporated by reference into this Form 10-K.
Risks Related to the COVID-19 Pandemic
The ongoing COVID-19 pandemic and measures taken to limit its spread could adversely our business, financial condition, and results of operations.
The COVID-19 pandemic has negatively impacted economic and commercial activity and financial markets, both globally and within the United States. Measures to contain the virus, such as stay-at-home orders, travel restrictions, closure of non-essential businesses, occupancy limitations and social distancing requirements, resulted in significant business and operational disruptions, including business closures, and mass layoffs and furloughs. Though most restrictions have generally been lifted or eased and consumer and business spending and unemployment levels have improved significantly, the economic recovery has been uneven, with industries such as travel, entertainment, hospitality and food service lagging, and, as of December 31, 2021, many companies have not returned workers to their offices. Supply chain disruptions precipitated by the abrupt economic slowdown have contributed to increased costs, lost revenue, and inflationary pressures for many segments of the economy. Further, a significant number of workers left their jobs during the COVID-19 pandemic, leading to wage inflation in many industries as businesses attempt to fill vacant positions.
The United States government has taken significant steps to attempt to mitigate the economic effects of the pandemic. Congress appropriated approximately $4.7 trillion of fiscal stimulus in response to the COVID-19 pandemic pursuant to the Coronavirus Aid, Relief, and Economic Security Act, the American Rescue Plan Act and other supplemental legislation. In March 2020, the Federal Open Market Committee of the Federal Reserve reduced the target range for the federal funds rate to between 0.0% and 0.25%, compared to the previous target of between 1.00% and 1.25%. The Federal Reserve also took several actions to support financial markets, enable banks to continue to lend through the pandemic, and support businesses of all sizes. Whether the economic stimulus will have a lasting positive effect or whether it will contribute to higher inflation or other economic ill effects is unknown.
Several vaccines for COVID-19 have been developed and widely distributed in the United States. However, it is unknown how effective they will be long-term or whether variants of the virus will develop against which the vaccines are less effective.
The extent to which the COVID-19 pandemic will ultimately affect our business is unknown and will depend, among other things, on the duration of the pandemic, the actions undertaken by national, state and local governments and health officials to contain the virus or mitigate its effects, the safety and effectiveness of the vaccines that have been developed and the extent to which they are accepted by the public, the development of effective therapies, the permanence of operating conditions that developed during the pandemic, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume. The longer the pandemic persists, the more pronounced the ultimate effects are likely to be.
The continuation of the COVID-19 pandemic and the efforts to contain the virus, including effects of economic stimulus, and the exhaustion or expiration of stimulus benefits, could:
•reduce the demand for loans and other financial services;
•result in increases in loan delinquencies, problem assets, and foreclosures;
•cause the value of collateral for loans, especially real estate, to decline in value;
•reduce the availability and productivity of our employees;
•cause our vendors and counterparties to be unable to meet existing obligations to us;
•negatively impact the business and operations of third-party service providers that perform critical services for our business;
•cause the value of our securities portfolio to decline; and
•cause the net worth and liquidity of loan guarantors to decline, impairing their ability to honor commitments to us.
Any one or a combination of the above events could have a material, adverse effect on our business, financial condition, and results of operations.
Risks Related to the Economy, Financial Markets, Interest Rates and Liquidity
The geographic concentration of the Company’s operations makes the Company susceptible to downturns in local economic conditions.
The Company’s lending operations are concentrated in central Maryland, Northern Virginia and Washington D.C. The Company’s success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could limit growth in loans and deposits, impair the Company’s ability to collect amounts due on loans, increase problem loans and charge-offs and otherwise negatively affect the Company’s performance and financial condition. Declines in real estate values could cause some of the Company’s residential and commercial real estate loans to be inadequately collateralized, which would expose the Company to a greater risk of loss in the event that the recovery on amounts due on defaulted loans is resolved by selling the real estate collateral under duress or to expedite payment.
Changes in interest rates may adversely affect earnings and financial condition.
The Company’s net income depends to a great extent upon the level of net interest income. Changes in interest rates can increase or decrease net interest income and net income. Net interest income is the difference between the interest income earned on loans, investments, and other interest-earning assets, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond the Company’s control, including inflation, unemployment, money supply, fiscal policies of the U.S. government, domestic and international events, and events in U.S. and other financial markets. The Company attempts to manage its risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on the Company’s net interest margin and results of operations. Changes in the market interest rates for types of products and services in various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors.
At December 31, 2021, the Company’s interest rate sensitivity simulation model projected that net interest income would increase by 2.16% if interest rates immediately rose by 100 basis points. The results of an interest rate sensitivity simulation model depend upon a number of assumptions regarding customer behavior, movement of interest rates and cash flows, any of which may prove to be inaccurate. For further discussion regarding the impact of interest rates movements on net interest income, refer to the Market Risk Management section of Management's Discussion and Analysis on page 63.
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations.
The Company has certain loans, interest rate swap agreements, investment securities and debt obligations whose interest rate is indexed to the London InterBank Offered Rate (LIBOR). In 2017, the United Kingdom’s Financial Conduct Authority (the "FCA"), which is responsible for regulating LIBOR, announced that the publication of LIBOR is not guaranteed beyond 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023. The FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR. In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny. The language in the Company’s LIBOR-based contracts and financial instruments has developed over time and may have
various events that trigger when a successor index to LIBOR would be selected. If a trigger is satisfied, contracts and financial instruments may give the Company or the calculation agent, as applicable, discretion over the selection of the substitute index for the calculation of interest rates. The implementation of a substitute index for the calculation of interest rates under the Company’s loan agreements may result in disputes or litigation with counter-parties over the appropriateness or comparability to LIBOR of the substitute index, which could have an adverse effect on the Company’s results of operations. Even when robust fallback language is included, there can be no assurance that the replacement rate plus any spread adjustment will be economically equivalent to LIBOR, which could result in a lower interest rate being paid to the Company on such assets. To mitigate the risks associated with the expected discontinuation of LIBOR, the Company implemented enhanced fallback language for LIBOR-linked commercial loans, adhered to the International Swaps and Derivatives Association 2020 Fallbacks Protocol for interest rate swap agreements, and has updated its systems to accommodate alternative reference rates, and began originating loans utilizing alternative reference rates at the end of 2021.
The Alternative Reference Rates Committee (a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York) has identified the Secured Overnight Financing Rate, or SOFR, as the recommend alternative to LIBOR. The use of SOFR as a substitute for LIBOR is voluntary and may not be suitable for all market participants. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. To approximate economic equivalence to LIBOR, SOFR can be compounded over a relevant term and a spread adjustment may be added. Market practices related to SOFR calculation conventions continue to develop and may vary. Inconsistent calculation conventions among financial products may expose us to increased basis risk and resulting costs.
Other alternatives to LIBOR also exist. The American Financial Exchange (“AFX”) has also created the American Interbank Offered Rate (“Ameribor”) as another potential replacement for LIBOR. Ameribor is calculated daily as the volume-weighted average interest rate of the overnight unsecured loans on AFX. Because of the difference in how it is constructed, Ameribor may diverge significantly from LIBOR in a range of situations and market conditions. Credit sensitive rates may become unrepresentative or subject to manipulation to the extent that they are based on a low volume of underlying transactions and sensitive to market stress.
The Company is subject to liquidity risks.
Effective liquidity management is essential for the operation of the Company’s business. The Company requires sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. The Company’s access to funding sources in amounts adequate to finance its activities on terms that are acceptable to the Company could be impaired by factors that affect the Company specifically or the financial services industry or economy generally. Core deposits and FHLB advances are the Company’s primary source of funding. A significant decrease in core deposits, an inability to renew FHLB advances, an inability to obtain alternative funding to core deposits or FHLB advances, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on the Company’s business, financial condition and results of operations.
The Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk.
The investment securities portfolio has risk factors beyond the Company’s control that may significantly influence its fair value. These risk factors include, but are not limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and instability in the credit markets. Lack of market activity with respect to some securities has, in certain circumstances, required the Company to base its fair market valuation on unobservable inputs. Any changes in these risk factors, in current accounting principles or interpretations of these principles could impact the Company’s assessment of fair value. Adjustments to the allowance for credit losses on available-for-sale investment securities would negatively affect the Company’s earnings and regulatory capital ratios.
Credit Risks
The Company’s allowance for credit losses may not be adequate to cover its actual credit losses, which could adversely affect the Company’s financial condition and results of operations.
The Company maintains an allowance for credit losses in an amount that is believed to be appropriate to provide for expected losses inherent in the portfolio. The Company has a proactive program to monitor credit quality and to identify loans that may become non-performing; however, at any time there could be loans in the portfolio that may result in losses, but that have not been identified as non-performing or potential problem credits. The Company may be unable to identify all deteriorating credits prior to them becoming non-performing assets, or to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions to the allowance may be required based on changes in the forecasted economic conditions, changes in the loans comprising the portfolio and changes in the financial condition of borrowers, or as a result of assumptions used by management in determining the allowance. Additionally, banking regulators, as an integral part of their supervisory function, periodically review the adequacy of the Company’s allowance for credit losses. These regulatory agencies may require an increase in the provision for expected credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s. Any increase in the allowance for credit losses could have a negative effect on the financial condition and results of operations of the Company.
The Company may not be able to adequately measure and limit its credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely, or at all, or that the value of any collateral supporting the loan will be insufficient to cover the Company’s outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Many of the Company’s loans are made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. The Company’s risk management practices, such as monitoring the concentration of loans within specific industries and credit approval practices, may not adequately reduce credit risk, and credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with the Company’s loan portfolio could lead to unexpected losses and have a material adverse effect on the Company’s business, financial condition and results of operations.
If non-performing assets increase, earnings will be adversely impacted.
Non-performing assets adversely affect net income in various ways. Interest income is not accrued on non-accrual loans or other real estate owned. The Company must record a reserve for expected credit losses, which is established through a current period charge in the form of a provision for expected credit losses, and from time to time must write-down the value of properties in the Company’s other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activities. Finally, if the estimate for the recorded allowance for credit losses proves to be incorrect and the allowance is inadequate, the allowance will have to be increased and, as a result, the Company's earnings would be adversely affected.
The Company’s commercial real estate lending activities expose it to increased lending risks and related loan losses.
At December 31, 2021, the Company’s commercial real estate loan portfolio totaled $6.9 billion, or 69% of its total loan portfolio. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the income stream of the borrowers. These loans involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. To the extent that borrowers have more than one commercial real estate loan outstanding, an adverse development with respect to one loan or one credit relationship could expose the Company to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. Moreover, if loans that are collateralized by commercial real estate become troubled and the value of the real estate has deteriorated significantly, then the Company may not be able to recover the full contractual amount of principal and interest that the Company anticipated at the time it originated the loan. A decline in the value of the collateral for a loan may require the Company to increase its allowance for credit losses, which would adversely affect the Company’s earnings and financial condition.
Imposition of limits by the bank regulators on commercial real estate lending activities could curtail the Company’s growth and adversely affect its earnings.
Regulatory guidance on concentrations in commercial real estate lending provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where total commercial investor real estate loans, including loans secured by apartment buildings, nonowner-occupied investor real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or
more during the preceding 36 months. At December 31, 2021, the Bank’s total commercial investor real estate loans, including loans secured by apartment buildings, nonowner-occupied commercial real estate, and construction and land loans represented 380% of the Bank’s total risk-based capital and the growth in the commercial real estate ("CRE") portfolio exceeded 67% over the preceding 36 months, significantly driven by the 2020 acquisition of Revere. Management has established a CRE lending framework to monitor specific exposures and limits by types within the CRE portfolio and takes appropriate actions, as necessary. If the Federal Reserve, the Bank’s primary federal regulator, were to impose restrictions on the amount of commercial real estate loans the Bank can hold in its portfolio, the Company’s earnings would be adversely affected.
The Company’s concentration of residential mortgage loans exposes it to increased lending risks.
At December 31, 2021, 11%, of the Company’s loan portfolio was secured by one-to-four family real estate, a significant majority of which is located in central Maryland, Northern Virginia and Washington, D.C. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of the Company’s residential mortgages to be inadequately collateralized, which would expose the Company to a greater risk of loss if it seeks to recover on defaulted loans by selling the real estate collateral.
The Company may be subject to certain risks related to originating and selling mortgage loans.
When mortgage loans are sold, it is customary to make representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require the repurchase or substitution of mortgage loans in the event the Company breaches any of these representations or warranties. In addition, there may be a requirement to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. The Company receives a limited number of repurchase and indemnity demands from purchasers as a result of borrower fraud and early payment default of the borrower on mortgage loans. If repurchase and indemnity demands increase materially, the Company’s results of operations could be adversely affected.
Any delays in the Company’s ability to foreclose on delinquent mortgage loans may negatively impact the Company’s business.
The origination of mortgage loans occurs with the expectation that, if the borrower defaults, the ultimate loss would be mitigated by the value of the collateral that secures the mortgage loan. The ability to mitigate the losses on defaulted loans depends upon the ability to promptly foreclose upon the collateral after an appropriate cure period. The length of the foreclosure process depends on state law and other factors, such as the volume of foreclosures and actions taken by the borrower to stop the foreclosure. Any delay in the foreclosure process will adversely affect the Company by increasing the expenses related to carrying such assets, such as taxes, insurance, and other carrying costs, and exposes the Company to losses as a result of potential additional declines in the value of such collateral.
Risks Related to the Company’s Trust and Wealth Management Business
The Company’s trust and wealth management fees may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease the Company’s revenues and net earnings.
The Company’s trust and wealth management businesses derive a significant amount of their revenues from investment management fees based on assets under management. The Company’s ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of the Company’s past performance, in either relative or absolute terms, general market and economic conditions, and competition from other investment management firms. A decline in the fair value of the assets under management would decrease the Company’s trust and wealth management fee income.
Investment performance is one of the most important factors in retaining existing clients and competing for new trust and wealth management clients. Poor investment performance could reduce the Company’s revenues and impede the growth of the Company’s trust and wealth management business in the following ways: existing clients may withdraw funds from the Company’s trust and wealth management business in favor of better performing products or firms; asset-based management fees could decline from a decrease in assets under management; the Company’s ability to attract funds from existing and new clients might diminish; and the Company’s portfolio managers may depart, to join a competitor or otherwise.
Even when market conditions are generally favorable, the Company’s investment performance may be adversely affected by the investment style of its portfolio managers and the particular investments that they make or recommend. To the extent that the Company’s future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of
the Company’s trust and wealth management business will likely be reduced and the Company’s ability to attract new clients will likely be impaired.
The Company’s investment management contracts are terminable without cause and on relatively short notice by the Company’s clients, which makes the Company vulnerable to short-term declines in the performance of the securities under the Company’s management.
Like most wealth management businesses, the investment advisory contracts the Company maintains with its clients are typically terminable by the client without cause upon less than 30 days’ notice. As a result, even short-term declines in the performance of the accounts that the Company manages, which can result from factors outside the Company’s control, such as adverse changes in general market or economic conditions or the poor performance of some of the investments the Company has recommended to its clients, could lead some of the Company’s clients to move assets under the Company’s management to other investment advisors that have investment product offerings or investment strategies different than the Company’s. A decline in assets under management, and a corresponding decline in investment management fees, would adversely affect the Company’s results of operations.
The wealth management business is heavily regulated, and the regulators have the ability to limit or restrict the Company’s activities and impose fines or suspensions on the conduct of the Company’s business.
The wealth management business is highly regulated, primarily at the federal level. The failure of the Company’s subsidiaries that are registered investment advisors to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions including revocation of such subsidiaries’ registration as an investment adviser. Changes in the laws or regulations governing the Company’s wealth management business could have a material adverse impact on the Company’s business, financial condition and results of operations.
Strategic and Other Risks
Combining acquired businesses may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of acquisitions may not be realized.
The success of the Company’s mergers and acquisitions, including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully combine and integrate the acquired business in a manner that permits growth opportunities and does not materially disrupt existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors, employees and other constituents or to achieve the anticipated benefits and cost savings of the transaction. The loss of key employees could adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on the Company’s financial results and the value of its common stock. If the Company experiences difficulties with the integration process, the anticipated benefits of a transaction may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause the Company to lose customers or cause customers to remove their accounts from the Company and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on the Company during this transition period and for an undetermined period after completion of a transaction. It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on the ability to combine the businesses in a manner that permits those cost savings to be realized.
The Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of their services.
The Company believes that its continued growth and future success will depend in large part on the skills of its management team , as well as on its ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. The loss of service of one or more of the Company’s executive officers or key personnel could reduce the Company’s ability to successfully implement its long-term business strategy, its business could suffer and the value of the Company’s common stock could be materially adversely affected. Leadership changes will occur from time to time and the Company cannot predict whether significant resignations will occur or whether the Company will be able to recruit additional qualified personnel. The Company believes its management team possesses valuable knowledge about the banking industry and the Company’s markets and that their knowledge and relationships would be very difficult to replicate. Although the Company’s Chief Executive Officer and certain other executive officers have entered into employment agreements with the Company, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. The Company’s success also depends on the experience of its branch
managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively affect the Company’s banking operations. Competition for qualified employees is intense, and the process of locating key personnel with the combination of skills, attributes and business relationships required to execute the Company’s business plan may be lengthy. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business, financial condition and results of operations.
Restrictions on unfriendly acquisitions could prevent a takeover of the Company.
The Company’s articles of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by the Company’s board of directors. The Maryland General Corporation Law also includes provisions that make an acquisition of the Company more difficult. These provisions include super-majority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. The Company’s articles of incorporation also authorize the issuance of additional shares by the board of directors without shareholder approval on terms or in circumstances that could deter a future takeover attempt. These provisions may prevent a future takeover attempt in which the shareholders otherwise might receive a substantial premium for their shares over then-current market prices.
Market competition may decrease the Company’s growth or profits.
The Company competes for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than possessed by the Company. Credit unions have federal tax exemptions, which may allow them to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy create a competitive landscape that may decrease the Company’s net interest margin, increase the Company’s operating costs, and may make it harder to compete profitably.
Operational Risks
The high volume of transactions processed by the Company exposes the Company to significant operational risks.
The Company relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from the Company’s operations, including, but not limited to, the risk of fraud by employees or outside persons, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the Company’s internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulations, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. A breakdown in the Company’s internal control system, improper operation of systems or improper employee actions could result in material financial loss, the imposition of regulatory action, and damage to the Company’s reputation.
Failure to keep up with technological change in the financial services industry could have a material adverse effect on the Company’s competitive position or profitability.
The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s risk management framework may not be effective in mitigating risks and/or losses to the Company.
The Company’s risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which the Company is subject, including, among others, credit, market, liquidity, interest rate, operational and
compliance. The Company’s framework also includes financial or other modeling methodologies that involve management assumptions and judgment. The Company’s risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to the Company. If the Company’s risk management framework is not effective, the Company could suffer unexpected losses and the Company’s business, financial condition, or results of operations could be materially and adversely affected. The Company may also be subject to potentially adverse regulatory consequences.
The Company’s information systems may experience an interruption or security breach.
The Company relies heavily on communications and information systems to conduct its business. The Company, its customers, and other financial institutions with which the Company interacts, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems, misappropriation of funds, and theft of proprietary Company or customer data. While the Company has policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of the Company’s information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of the Company’s information systems could damage its reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, require the Company to incur additional expense, or expose the Company to civil litigation and possible financial liability.
Security breaches and other disruptions could compromise the Company’s information and expose the Company to liability, which would cause its business and reputation to suffer.
In the ordinary course of the Company’s business, the Company collects and stores sensitive data, including intellectual property, its proprietary business information and that of the Company’s customers, suppliers and business partners, and personally identifiable information of its customers and employees, in the Company’s third-party data centers and on its networks. The secure processing, maintenance and transmission of this information is critical to the Company’s operations and business strategy. Despite the security measures the Company has implemented to help ensure data security and compliance with applicable laws, rules and regulations, which include firewalls, regular penetration testing and other measures, the Company’s facilities and systems, and those of the Company’s third-party service providers and vendors, may be vulnerable to cyber-attacks, security breaches, ransomware, unauthorized activity and access, malicious code, acts of vandalism, computer viruses, theft of data, misplaced or lost data, fraud, misconduct or misuse, social engineering attacks and denial of service attacks, phishing attacks, programming or human errors, physical break-ins, or other disruptions, any of which could result in the loss or disclosure of confidential or personal client or employee information or the Company’s own proprietary information. Any such loss or disclosure of confidential information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt the Company’s operations and the services it provides to customers, damage its reputation, and cause a loss of confidence in its products and services, which could adversely affect the Company’s business, revenues and competitive position.
The Company is subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage the Company’s reputation and otherwise adversely affect the Company’s business, financial condition and earnings. The Company’s business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that the Company maintains and in those maintained by third parties with whom the Company contracts to provide data services. The Company also maintains important internal company data such as personally identifiable information about its employees and information relating to its operations. The Company is subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, the Company’s business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on the Company’s ability to share nonpublic personal information about its customers with non-affiliated third parties; (ii) requires that the Company provide certain disclosures to customers about its information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by the Company with non-affiliated third parties (with certain exceptions); and (iii) requires that the Company develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on the Company’s size and complexity, the nature and scope of its activities, and the sensitivity of customer information it processes, as well as plans for responding to data security breaches. Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that the Company’s collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase costs.
Furthermore, the Company may not be able to ensure that all of its clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with the Company, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), the Company could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of the Company’s measures to safeguard personal information, or even the perception that such measures are inadequate, could cause the Company to lose customers or potential customers for its products and services and thereby reduce its revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject the Company to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage the Company’s reputation and otherwise adversely affect the Company’s business, financial condition and earnings.
The reliance of the Company on third-party vendors could expose it to additional cyber risk and liability.
The operation of the Company’s business involves outsourcing of certain business functions and reliance on third-party providers, which may result in transmission and maintenance of personal, confidential, and proprietary information to and by such vendors. Although the Company requires third-party providers to maintain certain levels of information security, such providers remain vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious attacks that could ultimately compromise sensitive information possessed by the Company. Although the Company contracts to limit its liability in connection with attacks against third-party providers, the Company remains exposed to risk of loss associated with such vendors.
The Company outsources certain aspects of its data processing to certain third-party providers, which may expose it to additional risk.
The Company outsources certain key aspects of the Company’s data processing to certain third-party providers. While the Company has selected these third-party providers carefully, it cannot control their actions. If the Company’s third-party providers encounter difficulties, including those that result from their failure to provide services for any reason or their poor performance of services, or if the Company has difficulty in communicating with them, its ability to adequately process and account for customer transactions could be affected, and the Company’s business operations could be adversely impacted. Replacing these third-party providers could also entail significant delay and expense.
The Company’s third-party providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. Threats to information security also exist in the processing of customer information through various other third-party providers and their personnel. The Company may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of the Company’s third-party providers or the activities of the Company’s customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Company to claims, regulatory scrutiny, litigation and other possible liabilities.
The Company is dependent on its information technology and telecommunications systems; third-party service providers and systems failures, interruptions or breaches of security could have an adverse effect on its financial condition and results of operations.
The Company’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems third-party service providers. The Company outsources many of its major systems, such as data processing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt the Company’s operations. Because the Company’s information technology and telecommunications systems interface with and depend on third-party systems, it could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of the Company’s ability to provide customer service, compromise its ability to operate effectively, damage the Company’s reputation, result in a loss of customer business and/or subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.
In addition, the Company provides its customers the ability to bank remotely, including online over the internet. The secure transmission of confidential information is a critical element of remote banking. The Company’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. The Company may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Further, the Company outsources some of the data processing functions used for remote banking, and accordingly it is dependent on the expertise and performance of its third-party providers. To the extent that the Company’s activities, the activities of its customers, or the activities of the Company’s third-party service providers involve the storage and transmission of confidential information, security breaches and viruses could expose the Company to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Company’s systems and could adversely affect its reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject the Company to additional regulatory scrutiny, expose it to civil litigation and possible financial liability and cause reputational damage.
The adoption of flexible work from home arrangements poses a number of operational risks that could adversely affect the Company’s business, financial condition and results of operations.
As a result of the COVID-19 pandemic, in March 2020, the Company transitioned to a remote working environment, with a peak of 85% of employees working remotely. While the Company has since brought employees back to the office, it has adopted more flexible work arrangements that permit some employees to work from home full or part time. Having employees conduct their daily work in the Company’s offices helps to ensure a level of productivity and operational security that may not be achieved when working remotely for an extended period. Remote work arrangements could strain the Company’s technology resources and introduce operational risks, including heightened cybersecurity risk, as remote working environments can be less secure. Over time, remote work arrangements may decrease the ability to maintain the Company’s culture, which is integral to the Company’s success. Additionally, a remote working environment may impede the Company’s ability to undertake new business projects and foster a creative environment. As remote work arrangements become more flexible and commonplace, the Company’s ability to compete for qualified employees could be challenged. The prevalence of remote work arrangements will expand competition among employers and may put the Company at a disadvantage if it is unable or unwilling to offer the same level of flexibility. Failure to attract and retain the desired workforce could have a negative effect on the Company’s business, financial condition and results of operations.
Risks Related to the Company’s Financial Statements
Changes in accounting standards or interpretation of new or existing standards may affect how the Company reports its financial condition and results of operations.
From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change accounting regulations and reporting standards that govern the preparation of the Company’s financial statements. In addition, the FASB, SEC, bank regulators and the outside independent auditors may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These changes can be difficult to predict and can materially impact how to record and report the Company’s financial condition and results of operations. In some cases, there could be a requirement to apply a new or revised accounting standard retroactively, resulting in the restatement of prior period financial statements.
The Current Expected Credit Loss accounting standard could require the Company to increase its allowance for credit losses and may have a material adverse effect on its financial condition and results of operations.
Accounting Standard Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for the Company on January 1, 2020. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the previously applied incurred loss model. CECL requires advanced modeling techniques, heavy reliance on assumptions, and dependence on historical data that may not accurately forecast losses. CECL can result in greater volatility in the level of the allowance for credit losses, depending on various factors and assumptions applied in the model, such as the forecasted economic conditions in the foreseeable future and loan payment behaviors. Any increase in the allowance for credit losses, or expenses incurred to determine the appropriate level of the allowance for credit losses, can have an adverse effect on the Company’s financial condition and results of operations.
Impairment in the carrying value of goodwill and other intangible assets could negatively impact the Company’s financial condition and results of operations.
At December 31, 2021, goodwill and other intangible assets totaled $396.1 million. Goodwill represents the excess of purchase price paid over the fair value of the net assets acquired in a business combination. The estimated fair values of the acquired assets and
assumed liabilities may be subject to refinement as additional information relative to closing date fair values becomes available and may result in adjustments to goodwill within the first 12 months following the closing date of the acquisition. Goodwill and other intangible assets are reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. A significant decline in expected future cash flows, a material change in interest rates, a significant adverse change in the business climate, slower growth rates or a significant or sustained decline in the price of the Company’s common stock may necessitate taking charges in the future related to the impairment of goodwill and other intangible assets. The amount of any impairment charge could be significant and could have a material adverse impact on the Company’s financial condition and results of operations.
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models.
The processes that the Company uses to estimate its allowance for credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on its financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models that the Company uses for determining its allowance for expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models that the Company uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on its business, financial condition and results of operations.
Regulatory Risks
The Company operates in a highly regulated industry, and compliance with, or changes to, the laws and regulations that govern its operations may adversely affect the Company.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Sandy Spring Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System and by Maryland banking authorities. Sandy Spring Bancorp is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. Federal and state laws and regulations govern numerous matters affecting the Company and the Bank, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and sound financial condition, permissible types, amounts and terms of loans and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. These and other restrictions limit the manner in which the Company may conduct business and obtain financing. The laws, rules, regulations, and supervisory guidance and policies applicable to the Company and the Bank are subject to regular modification and change. Such changes may, among other things, increase the cost of doing business, limit the types of financial services and products the Company may offer, or affect the competitive balance between banks and other financial institutions. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on the Company’s business, financial condition, or results of operations. The burdens imposed by federal and state regulations put banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies.
The Company will become subject to reduced interchange income in 2022.
Debit card interchange fee restrictions set forth in Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is known as the Durbin Amendment, as implemented by regulations of the Federal Reserve, cap the maximum debit interchange fee that a debit card issuer may receive per transaction at the sum of $0.21 plus five basis points. A debit card issuer that adopts certain fraud prevention procedures may charge an additional $0.01 per transaction. Debit card issuers with total consolidated assets of less than $10 billion are exempt from these interchange fee restrictions. The Company, which had total consolidated assets of greater than $10 billion at December 31, 2021, will become subject to the interchange restrictions of the Durbin Amendment beginning July 1, 2022. The reduction in interchange income could have an adverse effect on the Company’s business, financial condition and results of operations.
The Company’s ability to pay dividends is limited by law.
The ability to pay dividends to shareholders largely depends on Sandy Spring Bancorp’s receipt of dividends from Sandy Spring Bank. The amount of dividends that Sandy Spring Bank may pay to Sandy Spring Bancorp is limited by federal laws and regulations. The ability of Sandy Spring Bank to pay dividends is also subject to its profitability, financial condition and cash flow requirements. There is no assurance that Sandy Spring Bank will be able to pay dividends to Sandy Spring Bancorp in the future. In addition, as a bank holding company, the Company’s ability to declare and pay dividends is dependent on federal regulatory considerations, including limits on dividends should the Company not maintain the required capital conservation buffer and guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality and financial condition. The Company may limit the payment of dividends, even when the legal ability to pay them exists, in order to retain earnings for other uses.
Federal banking agencies periodically conduct examinations of the Company’s business, including compliance with laws and regulations; the failure to comply with any supervisory actions to which the Company is or becomes subject as a result of such examinations could adversely affect the Company.
As part of the bank regulatory process, the Federal Reserve and the Maryland banking authorities periodically conduct comprehensive examinations of the Company’s business, including compliance with laws and regulations. If, as a result of an examination, either of these banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. The Federal Reserve may enjoin “unsafe or unsound” practices or violations of law, require affirmative actions to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in the Company’s capital levels, restrict the Company’s growth, assess civil monetary penalties against the Company, the Bank or their respective officers or directors, and remove officers and directors. The FDIC also has authority to review the Bank’s financial condition, and, if the FDIC were to conclude that the Bank or its directors were engaged in unsafe or unsound practices, that the Bank was in an unsafe or unsound condition to continue operations, or that the Bank or the directors violated applicable law, the FDIC could move to terminate the Bank’s deposit insurance. If the Company becomes subject to such regulatory actions, its business, financial condition, earnings and reputation could be adversely affected.
The Company is subject to numerous laws designed to protect consumers, including the Community Reinvestment Act ("CRA") fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA requires the Federal Reserve to assess the Bank’s performance in meeting the credit needs of the communities it serves, including low- and moderate-income neighborhoods. If the Federal Reserve determines that the Bank needs to improve its performance or is in substantial non-compliance with CRA requirements, various adverse regulatory consequences may ensue. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rule-making authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The ongoing broad rule-making powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services.
A successful regulatory challenge to an institution’s performance under the CRA, fair lending laws or regulations, or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank
Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal and state bank regulators also focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If the Company’s policies, procedures and systems are deemed to be deficient or the policies, procedures and systems of the financial institutions that the Company may acquire in the future are deficient, the Company would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans, which would negatively impact the Company’s business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.
General Risk Factors
Changes in U.S. or regional economic conditions could have an adverse effect on the Company’s business, financial condition and results of operations.
The Company’s business activities and earnings are affected by general business conditions in the United States and in the Company’s local market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and, in particular, the Company’s market area. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Elevated levels of unemployment, declines in the values of real estate, extended federal government shutdowns, or other events that affect household and/or corporate incomes could impair the ability of the Company’s borrowers to repay their loans in accordance with their terms and reduce demand for banking products and services.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Additionally, concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. The Company and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. The Company and its customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on the Company’s customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. In addition, the Company could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Company’s efforts to take these risks into account in making lending and other decisions may not be effective in protecting the Company from the negative impact of new laws and regulations or changes in consumer or business behavior.
The market price for the Company’s stock may be volatile.
The market price for the Company’s common stock has fluctuated, ranging between $33.23 and $51.62 per share during the 12 months ended December 31, 2021. The overall market and the price of the Company’s common stock may experience volatility. There may be a significant impact on the market price for the common stock due to, among other things:
•past and future dividend practice;
•financial condition, performance, creditworthiness and prospects;
•quarterly variations in operating results or the quality of the Company’s assets;
•operating results that vary from the expectations of management, securities analysts and investors;
•changes in expectations as to the future financial performance;
•announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Company or its competitors;
•the operating and securities price performance of other companies that investors believe are comparable to the Company;
•future sales of the Company’s equity or equity-related securities;
•the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and
•changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility or other geopolitical, regulatory or judicial events.
There can be no assurance that a more active or consistent trading market in the Company’s common stock will develop. As a result, relatively small trades could have a significant impact on the price of the Company’s common stock.
Future sales of the Company’s common stock or other securities may dilute the value and adversely affect the market price of the Company’s common stock.
In many situations, the Company’s board of directors has the authority, without any vote of the Company’s shareholders, to issue shares of authorized but unissued stock, including shares authorized and unissued under the Company’s equity incentive plans. In the future, additional securities may be issued, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the Company’s common stock. In addition, option holders may exercise their options at a time when the Company would otherwise be able to obtain additional equity capital on more favorable terms.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may negatively impact the Company’s financial performance.
From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our net deferred tax asset. Local, state or federal tax authorities may interpret laws and regulations differently than does the Company and challenge tax positions that the Company has taken on its tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest, penalties or litigation costs that could have a material adverse effect on the Company’s operating results.
Negative public opinion regarding the Company or failure to maintain the Company’s reputation in the communities it serves could adversely affect the Company’s business and prevent the Company from growing its business.
The Company’s reputation within the communities it serves is critical to its success. The Company believes it has set itself apart from its competitors by building strong personal and professional relationships with its customers and being an active member of the communities it serves. As such, the Company strives to enhance its reputation by recruiting, hiring and retaining employees who share the Company’s core values of being an integral part of the communities it serves and delivering superior service to its customers. If the Company’s reputation is negatively affected by the actions of its employees or otherwise, the Company may be less successful in attracting new talent and customers or may lose existing customers, and its business, financial condition and earnings could be adversely affected. Further, negative public opinion can expose the Company to litigation and regulatory action and delay and impede the Company’s efforts to implement its growth strategy, which could further adversely affect its business, financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
Item 2. PROPERTIES
The Company’s headquarters is located in Olney, Maryland. As of December 31, 2021, The Company owns 12 of its full-service community banking centers. The remaining banking locations, in addition to the offices of SSIC, West Financial and RPJ are leased. See Note 8 - Leases to the Notes to the Consolidated Financial Statements for additional information.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Company becomes involved in litigation arising from the banking, financial, and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of currently pending legal proceedings will have a material effect on the Company's financial condition, operating results or liquidity.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Listing
Common shares of Sandy Spring Bancorp, Inc. are listed on the NASDAQ Global Select Market under the symbol “SASR”. At January 31, 2022 there were approximately 2,600 holders of record of the Company’s common stock.
Transfer Agent and Registrar
Computershare, P.O. Box 505005, Louisville, KY 40233-5005
Share Transactions with Employees
Shares issued under the employee stock purchase plan, which was authorized in 2011, and amended and restated in 2020, totaled 60,018 in 2021 and 65,337 in 2020, while issuances pursuant to exercises of stock options and vesting of restricted shares were 352,135 and 72,449 in the respective years. There were no shares issued under the director stock purchase plan in 2020. The director stock purchase plan expired on December 31, 2020 and was not re-authorized.
Issuer Purchases of Equity Securities
In December 2020, the Company's board of directors authorized a stock repurchase plan that permitted the repurchase of up to 2,350,000 shares of common stock. The Company repurchased all 2,350,000 authorized shares of its common stock at an average price of $45.65 per share during 2021. The following table sets forth information regarding repurchases of shares of the Company’s common stock during the fourth quarter of 2021.
Period Total number of shares purchased Average price paid per share Total number of shares purchased as a part of publicly announced plans or programs Maximum number that may yet be purchased under the plans or programs
October 1, 2021 through October 31, 2021 505,124 $ 47.60 505,124 583,048
November 1, 2021 through November 30, 2021 525,859 $ 49.70 525,859 57,189
December 1, 2021 through December 31, 2021 57,189 $ 48.42 57,189 -
Total Return Comparison
The following graph and table show the cumulative total return on the common stock of the Company over the last five years, compared with the cumulative total return of a broad stock market index (the Standard and Poor’s 500 Index or “S&P 500”), and a narrower index of Mid-Atlantic bank holding company peers with assets of $6.5 billion to $30 billion. The cumulative total return on the stock or the index equals the total increase in value since December 31, 2016, assuming reinvestment of all dividends paid into the stock or the index. The graph and table were prepared assuming that $100 was invested on December 31, 2016, in the common stock and the securities included in the indexes.
Sandy Spring Bancorp, Inc.
Period Ending
Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21
Sandy Spring Bancorp, Inc. 100.00 100.07 82.74 103.48 92.05 141.59
S&P 500 Index 100.00 121.83 116.49 153.17 181.35 233.41
Peer Group 100.00 95.46 82.94 98.54 82.90 113.98
The Peer Group Index includes seventeen publicly traded bank holding companies, other than the Company, headquartered in the Mid-Atlantic region and with assets of $6.5 billion to $30 billion. The companies included in this index are: Atlantic Union Bankshares Corporation (VA), ConnectOne Bancorp, Inc. (NJ); Customers Bancorp, Inc. (PA); Eagle Bancorp, Inc. (MD); First Bancorp (NC); First Commonwealth Financial Corporation (PA); First Financial Bancorp (OH); Fulton Financial Bancorp (PA); Investors Bancorp,
Inc. (NJ); Lakeland Bancorp, Inc. (NJ); Northwest Bankshares, Inc. (PA); OceanFirst Financial Corp. (NJ); Park National Corporation (OH); Peoples Bancorp, Inc. (OH); Premier Financial Corp. (OH); S&T Bancorp, Inc. (PA); TowneBank (VA): United Bankshares, Inc. (WV); Univest Financial Corporation (PA) and WesBanco, Inc. (WV). Returns are weighted according to the issuer’s stock market capitalization at the beginning of each year shown. The Company modified the criteria used to form the Peer Group Index to reflect the Company’s asset growth.
Equity Compensation Plans
The following table presents the number of shares available for issuance under the Company’s equity compensation plans at December 31, 2021.
Plan category Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights Weighted average exercise
price of outstanding options,
warrants and rights Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column)
Equity compensation plans approved by security holders 159,741 $17.18 794,433
Equity compensation plans not approved by security holders - - -
Total 159,741 $17.18 794,433

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Net income for Sandy Spring Bancorp, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2021 was $235.1 million ($4.98 per diluted common share) compared to $97.0 million ($2.18 per diluted common share) for the year ended December 31, 2020, representing a 142% increase in net income and a 129% increase in earnings per diluted common share. The results during 2021 were significantly driven by the effect of credits to the provision for credit losses compared to the prior year's results, which included the impact of the adoption of the expected credit loss accounting standard ("CECL standard") and merger and acquisition expense. Net interest income grew 17% as a result of the combined growth in the commercial loan portfolio and the reduction in interest expense incurred on time and money market deposits, in addition to the significant reduction in borrowings. The Company's participation in the Paycheck Protection Program ("PPP" or "PPP program") contributed to the year-over-year interest income growth associated with the commercial loan portfolio. The significant credit to the provision for credit losses during the current year was primarily the result of continued improvement of economic forecasts during the year. Non-interest income moderated in the current year as the decline in income from mortgage banking activities was offset by increases in other areas of non-interest income. Non-interest expense, exclusive of merger costs and the losses from early redemption of Federal Home Loan Bank of Atlanta ("FHLB") borrowings, increased 12% predominantly as the result of increased compensation costs and professional fees.
Current year core earnings, which exclude the impact of the provision for credit losses and provision on unfunded loan commitments, merger and acquisition expense, loss on FHLB redemptions, amortization of intangibles and investment securities gains, each on an after-tax basis, were $211.9 million ($4.52 per diluted common share), compared to $189.4 million ($4.29 per diluted common share) for the year ended December 31, 2020.
These results reflect the following:
•Total assets at December 31, 2021, declined 2% to $12.6 billion, compared to $12.8 billion at December 31, 2020. During the year, excess liquidity, the product of deposit growth and PPP loan forgiveness, was used to reduce borrowings as well as fund the loan growth that occurred late in 2021.
•Total loans declined 4%, driven by a reduction of $874.4 million in PPP loans. Excluding the impact of the PPP forgiveness, total commercial loans grew by $681.1 million during the year, while residential mortgage and consumer loans declined a combined $255.1 million due to run-off. The second half of 2021 saw $2.1 billion in gross loan production, of which $1.5 billion was funded, that more than offset $873.8 million in commercial loan run-off. During the fourth quarter of the current year, funded commercial loan production increased to $937.3 million or 115% compared to $435.2 million for the same quarter of the prior year.
•Year-over-year deposits increased 6%, driven by 14% growth in noninterest-bearing deposits and 2% growth in interest-bearing deposits, reflecting the impact of the PPP program and the growth in transaction relationships, while time deposits declined $366.8 million. The loan-to-deposit ratio declined to 94% at the end of 2021 compared to 104% at the end of 2020.
•The net interest margin was 3.56% in 2021, compared to 3.35% in 2020. Excluding the amortization of fair value marks, the net interest margin for the current year would have been 3.52% compared to 3.23% for the prior year.
•The provision for credit losses was a credit of $45.6 million for 2021, compared to a charge of $85.7 million for 2020. The current year's credit for the provision for credit losses reflects the impact of the continued improvement in forecasted economic metrics, notably the rate of unemployment, anticipated business bankruptcies and the housing price index.
•Non-interest income decreased 1% to $102.1 million for 2021, compared to $102.7 million for 2020, driven by a decrease in income from mortgage banking activities which was partially offset by increases in wealth management income, service charge income, bank card fees and other non-interest income.
•Non-interest expense increased to $260.5 million for 2021, compared to $255.8 million for the prior year. The prior year included $25.2 million in merger and acquisition expense. The current year's growth included $9.1 million in prepayment penalties from the liquidation of FHLB advances, compared to $5.9 million for 2020. Excluding merger and acquisition expense and the prepayment penalties, non-interest expense rose 12%, driven primarily by increases in compensation costs and professional fees.
•The GAAP efficiency ratio was 49.47% in 2021 compared to 54.90% for the prior year. This improvement in the efficiency ratio is the result of the 13% growth in revenues exceeding the 2% growth in non-interest expense during the current year. The non-GAAP efficiency ratio was 46.17% for 2021, compared to 46.53% for 2020 as a result of the growth in non-GAAP revenue outpacing the growth in non-GAAP non-interest expense.
The Company’s non-performing loans represented 0.49% of total loans at December 31, 2021, compared to 1.11% at December 31, 2020. The ratio of net charge-offs to average loans was 0.11% for 2021, compared to 0.01% for the prior year.
Customer funding sources at year-end 2021, which include deposits plus other short-term borrowings from core customers, increased 6% compared to year end 2020. Deposit growth was 6% during the past twelve months, as noninterest-bearing deposits experienced growth of 14% and interest-bearing deposits grew 2% reflecting the impact of the PPP program and the growth in transaction relationships, while time deposits declined $366.8 million. Liquidity continues to remain strong due to the availability of borrowing lines with the FHLB and the Federal Reserve Bank and the size and composition of the investment portfolio.
Stockholders’ equity at December 31, 2021 increased 3% to $1.5 billion, compared to December 31, 2020. Tangible common equity increased to 9.21% of tangible assets at December 31, 2021, compared to 8.61% at December 31, 2020 as a result of 2021 earnings, net of the $107.3 million repurchase of common shares, and the decrease in tangible assets during the past year. At December 31, 2021, the Bank remained above all “well-capitalized” regulatory requirement levels. Book value per common share was $33.68 at December 31, 2021 compared to $31.24 at December 31, 2020. Tangible book value per common share was $24.90 at December 31, 2021, compared to $22.68 at December 31, 2020.
Net income for the year ended December 31, 2021 was $235.1 million, compared to $97.0 million for the year ended December 31, 2020. The results from 2021 included the positive effect from the credits to the provision for credit losses as forecasted economic metrics continued to improve throughout the year. The fourth quarter of 2021 experienced significant growth in the commercial loan portfolio and resulted in a provision being recorded during the quarter compared to a credit to the provision for the previous three quarters of 2021.
Net interest income increased 17% to $424.5 million compared to $363.2 million in 2020. The income generated by the PPP program, net of its associated funding costs, contributed a net of $25.7 million to the growth in net interest income year-over-year. The net interest margin improved to 3.56% for the ended December 31, 2021, compared to 3.35% for the prior year. Excluding the net $4.1 million impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.52% compared to 3.23% for the prior year.
Non-interest income decreased 1% to $102.1 million for 2021, compared to $102.7 million for 2020. During the current year, income from mortgage banking activities decreased as mortgage loan originations declined in response to the rise in residential lending rates. Wealth management income increased $6.3 million, driven by the growth in the assets under management and the client base. In addition, service charge income, bankcard fees, loan prepayment fees and other non-interest income also experienced double digit growth from the prior year.
Non-interest expense increased 2% to $260.5 million for 2021, compared to $255.8 million for 2020. The current year's growth included $9.1 million in prepayment penalties from the early redemption of FHLB advances compared to $5.9 million for 2020. The prior year also included $25.2 million in merger and acquisition expense. Excluding the impact of these items results in a year-over-year growth rate in non-interest expense of 12%. This growth was driven by a combination of operational and compensation costs associated with the 2020 acquisitions, staffing increases, and incentive compensation associated with volume-based and performance benchmarks, in addition to increases in professional fees and services associated with certain strategic initiatives, intangible asset amortization, marketing and outside data services cost.
Selected Financial Data
Consolidated Summary of Financial Results
(Dollars in thousands, except per share data)
2021 2020 2019 2018 2017
Results of Operations:
Tax-equivalent interest income $ 453,987 $ 427,688 $ 352,615 $ 328,797 $ 202,258
Interest expense 25,766 60,401 82,561 63,637 26,031
Tax-equivalent net interest income 428,221 367,287 270,054 265,160 176,227
Tax-equivalent adjustment 3,703 4,128 4,746 4,715 7,459
Provision/ (credit) for credit losses (45,556) 85,669 4,684 9,023 2,977
Net interest income after provision for credit losses 470,074 277,490 260,624 251,422 165,791
Non-interest income 102,055 102,716 71,322 61,049 51,243
Non-interest expense 260,470 255,782 179,085 179,783 129,099
Income before taxes 311,659 124,424 152,681 132,688 87,935
Income tax expense 76,552 27,471 36,428 31,824 34,726
Net income 235,107 96,953 116,433 100,864 53,209
Net income attributable to common shareholders $ 233,599 $ 96,170 $ 115,671 $ 100,285 $ 52,748
Per Share Data:
Net income - basic per common share $ 5.00 $ 2.19 $ 3.25 $ 2.82 $ 2.20
Net income - diluted per common share $ 4.98 $ 2.18 $ 3.25 $ 2.82 $ 2.20
Dividends declared per share $ 1.28 $ 1.20 $ 1.18 $ 1.10 $ 1.04
Book value per common share $ 33.68 $ 31.24 $ 32.40 $ 30.06 $ 23.50
Tangible book value per common share - Non-GAAP (1)
$ 24.90 $ 22.68 $ 22.25 $ 20.01 $ 19.90
Dividends declared to diluted net income per common share 25.70 % 55.05 % 36.31 % 39.01 % 47.27 %
Period End Balances:
Assets $ 12,590,726 $ 12,798,429 $ 8,629,002 $ 8,243,272 $ 5,446,675
Investment securities 1,507,062 1,413,781 1,125,136 1,010,724 775,025
Loans 9,967,091 10,400,509 6,705,232 6,571,634 4,314,248
Deposits 10,624,731 10,033,069 6,440,319 5,914,880 3,963,662
Borrowings 313,798 1,149,320 936,788 1,213,465 885,192
Stockholders’ equity 1,519,679 1,469,955 1,132,974 1,067,903 563,816
Average Balances:
Assets $ 12,818,202 $ 11,775,096 $ 8,367,139 $ 7,965,514 $ 5,239,920
Investment securities 1,457,483 1,350,483 979,757 1,018,016 813,601
Loans 10,034,866 9,317,493 6,569,069 6,225,498 4,097,988
Deposits 10,663,823 8,982,623 6,266,757 5,689,601 3,849,186
Borrowings 478,398 1,279,481 861,926 1,190,930 798,733
Stockholders’ equity 1,518,607 1,339,491 1,108,310 1,024,795 550,926
Performance Ratios:
Return on average assets 1.83 % 0.82 % 1.39 % 1.27 % 1.02 %
Return on average common equity 15.48 7.24 10.51 9.84 9.66
Return on average tangible common equity - Non-GAAP (1)
21.01 10.25 15.33 14.66 11.35
Yield on average interest-earning assets 3.77 3.90 4.58 4.47 4.08
Rate on average interest-bearing liabilities 0.35 0.82 1.56 1.24 0.77
Net interest spread 3.42 3.08 3.02 3.23 3.31
Net interest margin 3.56 3.35 3.51 3.60 3.55
Efficiency ratio - GAAP (2)
49.47 54.90 53.20 55.92 58.68
Efficiency ratio - Non-GAAP (2)
46.17 46.53 51.52 50.87 54.59
Capital Ratios:
Tier 1 leverage 9.26 % 8.92 % 9.70 % 9.50 % 9.24 %
Common equity tier 1 capital to risk-weighted assets 11.91 10.58 11.06 10.90 10.84
Tier 1 capital to risk-weighted assets 11.91 10.58 11.21 11.06 10.84
Total regulatory capital to risk-weighted assets 14.59 13.93 14.85 12.26 11.85
Tangible common equity to tangible assets - Non-GAAP (1)
9.21 8.61 9.40 9.02 8.91
Average equity to average assets 11.85 11.38 13.25 12.87 10.51
Credit Quality Ratios:
Allowance for credit losses to total loans 1.10 % 1.59 % 0.84 % 0.81 % 1.05 %
Non-performing loans to total loans 0.49 1.11 0.62 0.55 0.68
Non-performing assets to total assets 0.40 0.91 0.50 0.46 0.58
Net charge-offs to average loans 0.11 0.01 0.03 0.01 0.04
(1)See the discussion of tangible common equity in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Tangible Common Equity.”
(2)See the discussion of the efficiency ratio in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Non-GAAP Financial Measures.”
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary for assets and liabilities that are required to be recorded at fair value. A decline in the value of assets required to be recorded at fair value may warrant an impairment write-down or valuation allowance to be established. Carrying assets and liabilities at fair value inherently results in greater financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available.
Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating the reported financial results:
•Allowance for credit losses;
•Goodwill and other intangible asset impairment;
•Accounting for income taxes;
Allowance for Credit Losses
The allowance for credit losses (“ACL”) represents management's judgement of an estimated amount of lifetime expected losses that may be incurred on outstanding loans at the balance sheet date. This estimate is based on the risk characteristics of each segment of the loan portfolio, historical losses and defaults, an expectation of supportable future economic conditions and payment performance of the Company’s borrowers. The Company’s methodology for estimating the allowance includes a collective quantified reserve, a collective qualitative reserve and individual allowances on specific credits. Loans are pooled into segments based on similar characteristics of borrowers, collateral types, types of associated industries and business purposes of the loans. Accordingly, the determination of the appropriateness of the allowance is complex and applies significant and highly subjective estimates. The use of significant judgement and the estimates of expected lifetime losses in the loan portfolio may vary significantly from actual amounts incurred. While management utilizes available applicable data to recognize expected losses, based on changes in the behavior of the portfolio in response to interest rates and economic conditions, the composition of the loan portfolio and the financial condition of the respective borrowers, future additions to the allowance may be necessary. The reasonableness of the allowance and the underlying methodology applied to determine the estimate is reviewed periodically by the Risk Committee of the board of directors and formally approved quarterly by the same committee of the board.
Further details regarding the methodologies applied to estimate the various components of the allowance are provided in Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements. Information regarding the management of credit risk and changes in the allowance for credit losses during the period is provided in those sections of Management’s Discussion and Analysis beginning on page 55.
Goodwill and Other Intangible Asset Impairment
Current accounting guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company assesses qualitative factors on a quarterly basis. Based on the assessment of these qualitative factors, if it is determined that it is more likely than not that the fair value of a reporting unit is not less than the carrying value, then performing the impairment process is not necessary. However, if it is determined that it is more likely than not that the carrying value exceeds the fair value a quantified analysis is required to determine whether an impairment exists. Determining the fair value of a reporting unit requires the Company to use a degree of subjectivity. The Company has applied this accounting guidance with respect to its Community Banking, Investment Management and Insurance segments.
Annually, the Company performs an impairment test of goodwill as of October 1 of each year. During the year, any triggering event that occurs may affect goodwill and could require an impairment assessment. Based upon the lack of triggering events the Company concluded in its annual impairment test of goodwill and other intangible assets that no impairment has occurred on October 1 nor December 31.
Other intangible assets have finite lives and are reviewed for impairment annually. These assets are amortized over their estimated useful lives on a straight-line or sum-of-the-years basis over varying periods that initially did not exceed 15 years. Intangible assets are reviewed or analyzed periodically to determine if it appears that their value has diminished beyond the value in the financial statements. The review or analysis of the intangible assets did not indicate that any impairment has occurred during 2021.
Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for more details on the Company’s accounting policy for Goodwill and Other Intangible Assets.
Accounting for Income Taxes
Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company’s adherence to the required accounting guidance may result in volatility in quarterly and annual effective income tax rates due to the requirement that any change in judgment or measurement taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the applicable reporting and accounting requirements.
Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for more details on the Company’s accounting policy for Income Taxes.
Accounting Pronouncements Adopted During the Current Year
For further information regarding accounting pronouncements adopted during the current year, refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Pending Accounting Pronouncements
Refer to Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements for more details regarding pending accounting pronouncements.
Net Interest Income
The largest source of the Company’s operating revenue is net interest income, which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. For purposes of this discussion and analysis, the interest earned on tax-advantaged loans and tax-exempt investment securities has been adjusted to an amount comparable to interest subject to normal income taxes. The result is referred to as tax-equivalent interest income and tax-equivalent net interest income. The following discussion of net interest income should be considered in conjunction with the impact of the acquisition of Revere in the second quarter of 2020 and a review of the information provided in the table that provides yields and rates on average balances.
2021 vs. 2020
Net interest income for 2021 was $424.5 million, compared to $363.2 million for 2020, a 17% increase. This $61.4 million increase was driven by a 13% increase in interest income from the commercial loan portfolio growth and the 57% decrease in interest expense during the current year. During the year, average interest-earning assets grew 10% while interest-bearing liabilities remained stable, as the 14% increase in lower rate average interest-bearing deposits was offset by the 63% reduction in more expensive borrowings. Excess liquidity resulting from deposit growth and PPP loan forgiveness was used to reduce borrowings as well as fund loan growth. On a tax-equivalent basis, net interest income for 2021 was $428.2 million, compared to $367.3 million for 2020. The drivers of the positive effects on net interest income were partially mitigated by a decrease in interest income from the investment securities and mortgage and consumer loan portfolios. The PPP program, net of its funding cost, contributed $44.7 million to the growth in net interest income during the current year compared to $19.0 million in the prior year. An analysis of the net interest income performance is presented in the following tables.
For the current year, the net interest margin improved to 3.56%, compared to 3.35% for the prior year. Excluding the net impact of the $4.1 million in amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.52%. The net interest margin for 2020, excluding the amortization of fair value marks, would have been 3.23%.
2020 vs. 2019
Net interest income for 2020 was $363.2 million, compared to $265.3 million for 2019, a 37% increase. On a tax-equivalent basis, net interest income for 2020 was $367.3 million, compared to $270.1 million for 2019. The growth in net interest income during 2020 from 2019 primarily reflected the effects of the Revere Bank acquisition. This growth was tempered by the impact of the 68 basis point decrease in the yield on interest-earning assets, which grew 42% during the period, as this impact was partially offset by the positive effect of the 74 basis point decline in the rate paid on interest-bearing liabilities, which grew 39%. Overall, the net interest margin decreased to 3.35% for 2020 compared to 3.51% for 2019.
Excluding the $12.7 million net impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for 2020 would have been 3.23%. The amortization of the fair value marks recognized during 2020 included a benefit realized from the accelerated amortization of the $5.9 million purchase premium on acquired FHLB advances as a result of the prepayment of those borrowings. The net interest margin for 2019, excluding the fair value marks, would have been 3.46%. For the year ended December 31, 2020, the income generated by the PPP program, net of its associated funding costs, was $19.0 million. For the year ended December 31, 2019, net interest income included $1.8 million in recovered interest income on acquired credit impaired loans.
Consolidated Average Balances, Yields and Rates
Year Ended December 31,
2021 2020 2019
(Dollars in thousands and tax-equivalent) Average
Balances Interest (1)
Annualized Average
Yield/Rate (2)
Average
Balances Interest (1)
Annualized Average
Yield/Rate (2)
Average
Balances Interest (1)
Annualized Average
Yield/Rate (2)
Assets
Commercial investor real estate loans $ 3,689,769 $ 152,977 4.15 % $ 3,210,527 $ 142,105 4.43 % $ 2,000,571 $ 99,410 4.97 %
Commercial owner-occupied real estate loans 1,661,015 76,463 4.60 1,560,223 73,655 4.72 1,239,289 60,581 4.89
Commercial AD&C loans 1,110,420 44,460 4.00 906,414 40,262 4.44 677,536 39,241 5.79
Commercial business loans 1,952,537 94,391 4.83 1,781,197 69,633 3.91 772,052 41,300 5.35
Total commercial loans 8,413,741 368,291 4.38 7,458,361 325,655 4.37 4,689,448 240,532 5.13
Residential mortgage loans 979,754 33,874 3.46 1,168,668 43,001 3.68 1,214,625 46,438 3.82
Residential construction loans 178,171 6,127 3.44 165,567 6,683 4.04 168,797 7,232 4.28
Consumer loans 463,200 16,689 3.60 524,897 20,356 3.88 496,199 24,391 4.92
Total residential and consumer loans 1,621,125 56,690 3.50 1,859,132 70,040 3.77 1,879,621 78,061 4.15
Total loans (3)
10,034,866 424,981 4.24 9,317,493 395,695 4.25 6,569,069 318,593 4.85
Loans held for sale 57,016 1,736 3.05 52,893 1,686 3.19 41,905 1,607 3.84
Taxable securities 1,017,268 16,118 1.58 1,106,315 22,482 2.03 768,521 22,873 2.98
Tax-advantaged securities 440,215 10,426 2.37 244,168 7,378 3.02 211,236 7,403 3.50
Total investment securities (4)
1,457,483 26,544 1.82 1,350,483 29,860 2.21 979,757 30,276 3.09
Interest-bearing deposits with banks 500,400 725 0.14 246,155 446 0.18 108,534 2,129 1.96
Federal funds sold 570 1 0.12 403 1 0.28 572 10 1.76
Total interest-earning assets 12,050,335 453,987 3.77 10,967,427 427,688 3.90 7,699,837 352,615 4.58
Less: allowance for credit losses (130,437) (128,793) (53,746)
Cash and due from banks 95,620 122,826 65,181
Premises and equipment, net 57,198 59,031 60,595
Other assets 745,486 754,605 595,272
Total assets $ 12,818,202 $ 11,775,096 $ 8,367,139
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 1,420,249 911 0.06 % $ 1,062,474 1,812 0.17 % $ 750,606 1,990 0.27 %
Regular savings deposits 482,331 235 0.05 374,196 269 0.07 329,158 415 0.13
Money market savings deposits 3,453,764 4,871 0.14 2,741,230 12,424 0.45 1,751,989 25,437 1.45
Time deposits 1,579,230 9,005 0.57 1,924,429 27,146 1.41 1,604,996 33,839 2.11
Total interest-bearing deposits 6,935,574 15,022 0.22 6,102,329 41,651 0.68 4,436,749 61,681 1.39
Federal funds purchased 15,154 13 0.08 367,240 1,515 0.41 18,018 440 2.44
Repurchase agreements 143,734 169 0.12 142,283 450 0.32 134,070 721 0.54
Advances from FHLB 111,311 2,649 2.38 545,652 6,593 1.21 645,587 16,578 2.57
Subordinated debentures 208,199 7,913 3.80 224,306 10,192 4.54 64,251 3,141 4.89
Total borrowings 478,398 10,744 2.25 1,279,481 18,750 1.47 861,926 20,880 2.42
Total interest-bearing liabilities 7,413,972 25,766 0.35 7,381,810 60,401 0.82 5,298,675 82,561 1.56
Noninterest-bearing demand deposits 3,728,249 2,880,294 1,830,008
Other liabilities 157,374 173,501 130,146
Stockholders' equity 1,518,607 1,339,491 1,108,310
Total liabilities and stockholders' equity $ 12,818,202 $ 11,775,096 $ 8,367,139
Tax equivalent net interest income and spread $ 428,221 3.42 % $ 367,287 3.08 % $ 270,054 3.02 %
Less: tax-equivalent adjustment 3,703 4,128 4,746
Net interest income $ 424,518 $ 363,159 $ 265,308
Interest income/earning assets 3.77 % 3.90 % 4.58 %
Interest expense/earning assets 0.21 % 0.55 % 1.07 %
Net interest margin 3.56 % 3.35 % 3.51 %
(1)Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 25.64% for 2021, and 25.54% for both 2020 and 2019. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $3.7 million, $4.1 million and $4.7 million in 2021, 2020 and 2019, respectively.
(2)The calculation of the respective yield or rate for each asset or liability category is based on the underlying interest accrual methodology for the individual products in accordance with their contractual terms.
(3)Non-accrual loans are included in the average balances.
(4)Available-for-sale investments are presented at amortized cost.
Effect of Volume and Rate Changes on Tax-Equivalent Net Interest Income
The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise net tax-equivalent interest income:
2021 vs. 2020
2020 vs. 2019
Increase
or (Decrease) Due to Change in Average*: Increase
or (Decrease) Due to Change in Average*:
(Dollars in thousands and tax equivalent) Volume Rate Volume Rate
Interest income from earning assets:
Commercial investor real estate loans $ 10,872 $ 20,269 $ (9,397) $ 42,695 $ 54,510 $ (11,815)
Commercial owner-occupied real estate loans 2,808 4,702 (1,894) 13,074 15,242 (2,168)
Commercial AD&C loans 4,198 8,453 (4,255) 1,021 11,428 (10,407)
Commercial business loans 24,758 7,184 17,574 28,333 41,933 (13,600)
Residential mortgage loans (9,127) (6,663) (2,464) (3,437) (1,746) (1,691)
Residential construction loans (556) 485 (1,041) (549) (135) (414)
Consumer loans (3,667) (2,272) (1,395) (4,035) 1,350 (5,385)
Loans held for sale 50 130 (80) 79 379 (300)
Taxable securities (6,364) (1,695) (4,669) (391) 8,236 (8,627)
Tax-exempt securities 3,048 4,907 (1,859) (25) 1,066 (1,091)
Interest-bearing deposits with banks 279 392 (113) (1,683) 1,260 (2,943)
Federal funds sold - - - (9) (2) (7)
Total tax-equivalent interest income 26,299 35,892 (9,593) 75,073 133,521 (58,448)
Interest expense on funding of earning assets:
Interest-bearing demand deposits (901) 492 (1,393) (178) 700 (878)
Regular savings deposits (34) 58 (92) (146) 58 (204)
Money market savings deposits (7,553) 2,587 (10,140) (13,013) 9,915 (22,928)
Time deposits (18,141) (4,198) (13,943) (6,693) 5,916 (12,609)
Federal funds purchased (1,502) (828) (674) 1,075 1,732 (657)
Repurchase agreements (281) 5 (286) (271) 42 (313)
Advances from FHLB (3,944) (7,546) 3,602 (9,985) (2,261) (7,724)
Subordinated debentures (2,279) (697) (1,582) 7,051 7,291 (240)
Total interest expense (34,635) (10,127) (24,508) (22,160) 23,393 (45,553)
Tax-equivalent net interest income $ 60,934 $ 46,019 $ 14,915 $ 97,233 $ 110,128 $ (12,895)
* Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.
Interest Income
2021 vs. 2020
The Company's total tax-equivalent interest income increased 6% during 2021 compared to the prior year due to a combined product of the full year's impact of the Revere acquisition completed in the second quarter of 2020, loan fees from the participation in the PPP program and the growth in the non-PPP commercial loan portfolios. The overall positive impact of these items on interest income was partially mitigated by a decline of 19% in interest income on the residential and consumer loan portfolio and an 11% decline in interest income on investment securities. Year-over-year, the average yield on the loan portfolio decreased by one basis point while the average yield on the investment securities decreased 39 basis points. Despite the declining average yields in 2021 on the majority of interest-earning assets, the positive impact from the $44.7 million in interest and fees received on PPP loans during 2021 contributed significantly to minimize the decline in the overall yield on the loan portfolio and softened the impact of the interest rate declines in the market on the total yield on interest-earning assets during 2021 compared to 2020. During 2021, total average balances of consumer loans and residential mortgage loans decreased, both reflecting the impact of the loan refinance and origination activity during the current year. The vast majority of mortgage loans originated during the year were sold in the secondary market while customers took advantage of the opportunity to eliminate their home equity lines and loans by including those balances in their refinanced mortgages. For the year ended December 31, 2021, the fair value amortization from the Revere acquisition reduced interest income $1.8 million compared to $0.6 million for the previous year.
2020 vs. 2019
The Company's total tax-equivalent interest income increased 21% during 2020, compared to 2019 driven by the Revere acquisition in the second quarter of 2020, as average loans and investments grew 42% and 38%, respectively. The average yield on loans decreased 60 basis points, while the average yield on investments decreased 88 basis points, both driven by the low interest rate environment that prevailed during 2020, a resultant effect of the pandemic. The increase in the average loan balances was the result of growth of the commercial loan portfolio. Consumer loans increased modestly while mortgage loans decreased, both reflecting the impact of the loan refinance and origination activity during 2020. The majority of mortgage loans originated during 2020 were sold in the secondary market. In addition, the Company's participation in the PPP program resulted in interest income of $20.1 million for the year ended December 31, 2020. Interest income for the year ended December 31, 2019, included $1.8 million in recovered interest income on acquired credit impaired loans.
Interest Expense
2021 vs. 2020
Interest expense decreased by $34.6 million or 57% in 2021 compared to 2020. The decrease in interest expense was driven by declining interest rates during the current year, in addition to the 63% reduction in average borrowings during the year. The decline in interest rates during 2021 compared to the prior year resulted in a 31 basis point decline in the average rate paid on money market accounts and an 84 basis point decline in the average rate paid on time deposits, while the average rate paid on borrowings rose 78 basis points. The combination of large average balance decreases in time deposits at lower average rates and borrowings at higher average rates provided an additional benefit to the overall rate decline in interest-bearing liabilities even as average money market, savings and demand deposit balances experienced significant growth. The increase in lower cost funding sources as average interest-bearing demand deposits increased 34% and regular savings deposits increased 29% during the year, contributed to a reduction in interest expense from the prior year. During the year, average noninterest-bearing deposits increased 29%, primarily from the funding provided to customers under the second round of the PPP program, which benefited the Company's overall funding costs and net interest margin. For the year ended December 31, 2021, the fair value amortization from the Revere acquisition reduced interest expense by $6.0 million compared to $13.3 million for the previous year.
2020 vs. 2019
Interest expense decreased by $22.2 million or 27% in 2020 compared to 2019. The decrease in interest expense was driven by declining interest rates during the year partially offset by the 39% increase in average interest-bearing liabilities resulting from the Revere acquisition. The significant decline in interest rates during 2020 resulted in a 100 basis point decline in the average rate paid on money market accounts while the average rate paid on time deposits decreased 70 basis points and the average rate paid on borrowings fell 95 basis points compared to 2019. For the year ended December 31, 2020, the Company's interest expense incurred for the use of Paycheck Protection Program Liquidity Facility ("PPPLF") as a result of its participation in the PPP program was $1.1 million. During 2020, average noninterest-bearing deposits increased 57% compared to 2019. The funding provided to customers under the PPP program contributed to the increase in noninterest-bearing deposits, which benefited the Company's overall funding costs and net interest margin.
Interest Rate Performance
2021 vs. 2020
The Company’s net interest margin increased to 3.56% for 2021 compared to 3.35% for 2020, while the net interest spread increased to 3.42% in 2021 compared to 3.08% in 2020. The increase in the spread was the result of the decrease in the rates paid on interest-bearing liabilities exceeding the decrease in the yields earned on interest-earning assets. The increase in the net interest margin from the prior year is the result of the decline in the rate paid on interest-bearing liabilities of 47 basis points exceeding the 13 basis point decline in the yield on interest-earning assets. Growth in both the average interest-earning assets and average interest-bearing liabilities mainly as a result of the PPP program, the reduction of borrowings and higher cost deposit products, in combination with yield and rate declines, resulted in interest expense decreasing 57% while tax-equivalent interest income increased 6% during the year. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for the current year would have been 3.52% compared to 3.23% for 2020.
2020 vs. 2019
The Company’s net interest margin decreased to 3.35% for 2020 compared to 3.51% for 2019 while the net interest spread increased to 3.08% in 2020 compared to 3.02% in 2019. The increase in the spread was the result of the decrease in the rates paid on interest-bearing liabilities exceeding the decrease in the yields earned on interest-earning assets. The decrease in the net interest margin in 2020 from 2019 is the result of the impact of the declining interest rate environment as the yield on interest-earning assets decreased 68 basis points while being partially offset by the 74 basis point decrease in the rate paid on interest-bearing liabilities. The growth of both interest-earning assets and interest-bearing liabilities as a result of the Revere acquisition, in combination with yield and rate declines, resulted in interest expense decreasing 27% while tax-equivalent interest income increased 21% during 2020. However, as a result of interest-earning asset growth exceeding the growth in interest-bearing liabilities, the declines in yields/rates resulted in the overall compression of the net interest margin in 2020. Excluding the impact of the amortization of the fair value marks derived from acquisitions, the net interest margin for 2020 would have been 3.23% compared to 3.46% for 2019.
Non-interest Income
Non-interest income amounts and trends are presented in the following table for the years indicated:
2021/2020
2021/2020
2020/2019
2020/2019
(Dollars in thousands) 2021 2020 2019 $ Change % Change $ Change % Change
Investment securities gains $ 212 $ 467 $ 77 $ (255) (54.6) % $ 390 506.5 %
Service charges on deposit accounts 8,241 7,066 9,692 1,175 16.6 (2,626) (27.1)
Mortgage banking activities 24,509 40,058 14,711 (15,549) (38.8) 25,347 172.3
Wealth management income 36,841 30,570 22,669 6,271 20.5 7,901 34.9
Insurance agency commissions 7,017 6,795 6,612 222 3.3 183 2.8
Income from bank owned life insurance 3,022 2,867 3,165 155 5.4 (298) (9.4)
Bank card fees 6,896 5,672 5,616 1,224 21.6 56 1.0
Letter of credit fees 910 710 389 200 28.2 321 82.5
Extension fees 811 1,967 1,287 (1,156) (58.8) 680 52.8
Prepayment penalty fees 3,216 961 404 2,255 234.7 557 137.9
Other income 10,380 5,583 6,700 4,797 85.9 (1,117) (16.7)
Total non-interest income $ 102,055 $ 102,716 $ 71,322 $ (661) (0.6) $ 31,394 44.0
2021 vs. 2020
Total non-interest income decreased 1% to $102.1 million for 2021, compared to $102.7 million for 2020. During the current year, increases in wealth management income, bank card fees and service charge income, and prepayment penalty fees, along with an increase other non-interest income, mitigated the impact of the decrease in income in mortgage banking activities.
Wealth management income is comprised of income from trust and estate services provided by the Bank and investment management fees earned by West Financial and RPJ, the Company’s investment management subsidiaries. Wealth management income grew 21% during 2021 from 2020. The growth in income was driven directly by the $927 million year-over-year growth in assets under
management. Investment management fees from West Financial and RPJ increased 25% and trust services fees, primarily recurring fiduciary and trust management fees, increased 13% compared to the prior year. Overall, total assets under management by trust and wealth management grew to $6.1 billion at December 31, 2021 compared to $5.2 billion at December 31, 2020. Service charges on deposits increased 17% in 2021 compared to the prior year, which reflected the impact of 2020's temporary suspension of certain service fees as well as lower transaction volume, both a resulting reaction to the pandemic. Insurance agency commissions for the year ended December 31, 2021 grew 3% compared to the prior year as a result of increased commercial and physician's professional liability insurance commission income. The Company invests in bank-owned life insurance ("BOLI") products in order to manage the cost of employee benefit plans. Income from BOLI increased 5% in 2021 compared to the prior year primarily as a result of the increase in BOLI investments, a result of the new policies added during the year and from the Revere acquisition. At December 31, 2021, the total carrying amount of BOLI increased to $147.5 million as compared to $126.9 million at December 31, 2020. These policies are diversified by carrier in accordance with defined policies and practices. The average tax-equivalent yield on these insurance contract assets declined to 2.91% for 2021 compared to 3.09% for the prior year due to the declining interest rate environment during the current year. Bank card fees grew 22% compared to the prior year as a result of increased transaction volume. The combination of credit-related fees increased $1.3 million year-over-year, driven by prepayment penalty fees associated with commercial loans. Other non-interest income also grew 86% compared to the prior year primarily as the result of the combination of the full payoff of a purchased credit deteriorated loan, credit related fees and activity-based contractual vendor incentives.
2020 vs. 2019
Total non-interest income increased 44% to $102.7 million for 2020, compared to $71.3 million for 2019. The year ended December 31, 2020, included gains on sales of investment securities of $0.5 million compared to $0.1 million in 2019. Additionally, non-interest income in 2019 included life insurance mortality proceeds of $0.6 million. The increase in non-interest income was driven by increases in income from mortgage banking activities, wealth management income and credit-related fees from customers. The combined increases of these activities more than exceeded the decline in deposit services fees.
Service charges on deposits increased 27% in 2020 compared to 2019 due to a decline in consumer activity and the Company's decision to temporarily waive certain transaction fees to ease the burden of the pandemic on customers. Wealth management income grew 35% during 2020 from 2019 driven primarily by the first quarter 2020 acquisition of RPJ. Trust services fees increased 3% compared to 2019, due to an increase in recurring fiduciary and trust management fees. Investment management fees from West Financial and RPJ increased 73% during 2020 compared to 2019. Overall total assets under management by trust and wealth management grew to $5.2 billion at December 31, 2020 compared to $3.3 billion at December 31, 2019. Insurance agency commissions for the year ended December 31, 2020 grew 3% compared to 2019 due to increased contingent income and growth in physician's professional liability insurance. Income from BOLI decreased 9% in 2020 compared to 2019 primarily as a result of the lack of mortality proceeds in 2020 compared to the $0.6 million in proceeds that were received in 2019. At December 31, 2020, the total carrying amount of BOLI investments increased to $126.9 million as compared to $113.2 million at December 31, 2019 as a result of the addition of policies held by Revere. The average tax-equivalent yield on these insurance contract assets declined to 3.09% for 2020 compared to 3.80% for 2019 due to the declining interest rate environment during 2020. Bank card fees remained level from 2019 due to diminished activity related to the impact of the pandemic. Credit related fees and other non-interest income comprised of commercial loan portfolio sourced fees and miscellaneous income increased 5% during 2020 compared to 2019 primarily as a result of fees related to the commercial portfolio.
Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the years indicated:
2021/2020 2021/2020 2020/2019 2020/2019
(Dollars in thousands) 2021 2020 2019 $ Change % Change $ Change % Change
Salaries and employee benefits $ 155,830 $ 134,471 $ 103,950 $ 21,359 15.9 % $ 30,521 29.4 %
Occupancy expense of premises 22,405 21,383 19,470 1,022 4.8 1,913 9.8
Equipment expenses 12,883 12,224 10,720 659 5.4 1,504 14.0
Marketing 4,730 4,281 4,456 449 10.5 (175) (3.9)
Outside data services 8,983 8,759 7,567 224 2.6 1,192 15.8
FDIC insurance 4,294 4,727 2,260 (433) (9.2) 2,467 109.2
Amortization of intangible assets 6,600 6,221 1,946 379 6.1 4,275 219.7
Merger and acquisition expense 45 25,174 1,312 (25,129) (99.8) 23,862 1,818.8
Professional fees and services 10,308 7,939 6,978 2,369 29.8 961 13.8
Postage and delivery 1,906 1,624 1,502 282 17.4 122 8.1
Communications 2,508 2,729 2,414 (221) (8.1) 315 13.0
Loss on FHLB redemption 9,117 5,928 - 3,189 53.8 5,928 -
Other expenses 20,861 20,322 16,510 539 2.7 3,812 23.1
Total non-interest expense $ 260,470 $ 255,782 $ 179,085 $ 4,688 1.8 $ 76,697 42.8
2021 vs. 2020
Non-interest expenses increased $4.7 million to $260.5 million in 2021 compared to $255.8 million in 2020. The current year included $9.1 million in prepayment penalties on FHLB borrowings compared to $5.9 million in prepayment penalties in the prior year. The prior year also included $25.2 million in merger and acquisition expense. Excluding the impact of these items resulted in a year-over-year growth rate in non-interest expense of 12%. This growth was driven by a combination of a full year's operational and compensation costs associated with the prior year acquisitions, staffing increases, and incentive compensation, in addition to increases in professional fees and services associated with certain strategic initiatives, intangible asset amortization, marketing and outside data services cost.
Salaries and employee benefits, the largest component of non-interest expenses, increased 16% in 2021 compared to the prior year, primarily in response to increased compensation costs associated with performance and production benchmarks, in addition to an increase in operational resulting from a full year of costs associated with the 2020 acquisitions and general staffing increases. The average number of full-time equivalent employees increased to 1,155 in 2021 compared to 1,080 for 2020. Benefit expense increased 26% during the current year due to a combination of increases in health insurance, pension cost, 401(k) plan contribution expense, stock compensation expense and FICA taxes as a result of the increased compensation expense.
Both occupancy and equipment expenses increased in 2021 compared to 2020, primarily due to increased depreciation expense driven by a full year's depreciation expense on the post-acquisition retained facilities, the closure of legacy branch facilities and increased software amortization. Marketing expense for 2021 increased by 10% compared to 2020 as a result of increased advertising initiatives during the current year. Outside data services expense increased 3% in 2021 compared to 2020 due to the increased cost of contractual services with volume-based components. FDIC insurance expense decreased 9% in 2021 compared to 2020 as a result of a reduction in the risk factors applied by the regulatory agency in the determination of the Company's premium. Amortization of intangibles increased from the prior year as a result of the inclusion of a full year's amortization of the various intangible assets recognized as part of the RPJ and Revere acquisitions. The 30% increase in professional fees and services is directly associated with the Company's strategic investments in technology for greater efficiency and data management. The loss on the redemption of the FHLB advances was the result of the early prepayment.
2020 vs. 2019
Non-interest expenses increased $76.7 million to $255.8 million in 2020 compared to $179.1 million in 2019. The operational impact of the Revere and RPJ acquisitions was included in 2020, in addition to $25.2 million in merger and acquisition expense compared to $1.9 million for 2019, and the $5.9 million loss on early redemption of acquired FHLB advances. The loss on the redemption was offset by the accelerated amortization of the purchase premium on the acquired FHLB advances, which is included in net interest
income. Excluding merger and acquisition expense and the loss on the FHLB redemption, non-interest expense rose 26%, primarily as a result operational costs associated with the Revere acquisition.
Salaries and employee benefits, the largest component of non-interest expenses, increased 29% in 2020 due principally to increased salary expense derived from the two acquisitions, commissions associated with the significant level of mortgage loan originations and incentive payments based on the achievement of volume or revenue targets. The average number of full-time equivalent employees increased to 1,080 in 2020 compared to 913 for 2019. Benefit expense increased 19% during 2020 due to an increase in the matching contribution expense for the employee 401(k) plan and FICA taxes on salaries, both as a result of the increased number of employees during 2020, in addition to increases in various other employee benefit programs.
Both occupancy and equipment expenses increased in 2020 compared to 2019, primarily due to an increase in rental and depreciation expense driven by the additional facilities from the Revere and RPJ acquisitions. This increase was net of the impact of the Company's consolidation of six redundant branches during the second half of 2020 as a result of the Revere acquisition. Equipment expenses also increased in 2020 compared to 2019, due to an increase in software costs. Marketing expense for 2020 decreased by 4% compared to 2019 as a result of decreased advertising initiatives. Outside data services expense increased 16% in 2020 compared to 2019 due to the increased cost of contractual services with volume-based components, in addition to the necessity of maintaining both the Company's and Revere's data systems for a portion of 2020 until the systems were fully integrated. FDIC insurance expense increased 109% in 2020 compared to 2019 as the result of the assessment credit received during 2019 due to the industry deposit insurance fund reaching a stipulated benchmark level. Merger and acquisition expense associated with the Revere acquisition totaled $25.2 million in 2020 compared to merger and acquisition expense of $1.9 million in 2019. Amortization of intangible assets increased in 2020 from 2019 as a result of the increase in the various intangible assets recognized as part of the Revere and RPJ acquisitions. The loss on the redemption of the FHLB advances was the result of the prepayment of the acquired advances. This loss was offset by the accelerated amortization of the $5.9 million purchase premium associated with those acquired advances and was is included in net interest income. The remaining other non-interest expenses increased in 2020 compared to 2019, primarily driven by the reserve for lending commitments, processing costs and legacy branch closing costs.
Income Taxes
The Company’s income tax expense in 2021 was $76.6 million, compared to $27.5 million in 2020 and $36.4 million in 2019. The resulting effective rates for each year were 24.6% for 2021, 22.1% for 2020 and 23.8% for 2019. The increase in the effective rate in 2021 was due to the 2020 application of a change in tax laws that expanded the time permitted to utilize previous net operating losses. The Company applied this change in the prior year to utilize the net operating losses acquired as part of the 2018 WashingtonFirst acquisition to realize a tax benefit of $1.8 million.
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 expenses 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 ratio better focuses attention on the operating performance of the Company over time than does a GAAP ratio, and is highly useful in comparing period-to-period operating performance of the Company’s core business operations. The non-GAAP efficiency ratio is used by management as part of its assessment of its performance in managing non-interest expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the non-GAAP efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.
In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income. Non-interest expenses used in the calculation of the non-GAAP efficiency ratio exclude merger and acquisition expense, the amortization of intangible assets, and other non-recurring expenses, such as early prepayment penalties on FHLB advances. Income for the non-GAAP ratio includes the favorable effect of tax-exempt income, and excludes realized investment securities gains and losses, which may vary widely from period to period without appreciably affecting operating expenses, and non-recurring gains. The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-interest expense and income amounts as shown on the face of the Consolidated Statements of Income. The GAAP and non-GAAP efficiency ratios are
reconciled and provided in the following table. The GAAP efficiency ratio was 49.47% in 2021 compared to 54.90% for the prior year. This improvement in the efficiency ratio is the result of the 13% growth in revenues exceeding the 2% growth in non-interest expense during the current year. The non-GAAP efficiency ratio improved to 46.17% in 2021, compared to 46.53% in the prior year, as a result of the 13% growth in non-GAAP revenue exceeding the 12% growth in non-GAAP non-interest expense.
The Company has also presented core earnings, core earnings per diluted share, core return on average assets and core return on average tangible common equity in order to present metrics that are more comparable to prior periods to provide an indication of the core performance of the Company year-over-year. Core earnings reflect net income exclusive of the provision/(credit) for credit losses, provision/(credit) for credit losses on unfunded loan commitments, merger and acquisition expense, amortization of intangible assets, loss on FHLB redemptions and investment securities gains, in each case net of tax. Average tangible common equity represents average stockholders’ equity adjusted for average goodwill and average intangible assets, net.
Reconciliation of Non-GAAP Financial Measures
Year ended December 31,
(Dollars in thousands) 2021 2020 2019 2018 2017
Efficiency ratio (GAAP):
Non-interest expense $ 260,470 $ 255,782 $ 179,085 $ 179,783 $ 129,099
Net interest income plus non-interest income $ 526,573 $ 465,875 $ 336,630 $ 321,494 $ 220,011
Efficiency ratio (GAAP) 49.47 % 54.90 % 53.20 % 55.92 % 58.68 %
Efficiency ratio (non-GAAP):
Non-interest expense $ 260,470 $ 255,782 $ 179,085 $ 179,783 $ 129,099
Less non-GAAP adjustments:
Amortization of intangible assets 6,600 6,221 1,946 2,162 101
Loss on FHLB redemption 9,117 5,928 - - 1,275
Merger and acquisition expense 45 25,174 1,312 11,766 4,252
Non-interest expense - as adjusted $ 244,708 $ 218,459 $ 175,827 $ 165,855 $ 123,471
Net interest income plus non-interest income $ 526,573 $ 465,875 $ 336,630 $ 321,494 $ 220,011
Plus non-GAAP adjustment:
Tax-equivalent income 3,703 4,128 4,746 4,715 7,459
Less non-GAAP adjustments:
Investment securities gains 212 467 77 190 1,273
Net interest income plus non-interest income - as adjusted $ 530,064 $ 469,536 $ 341,299 $ 326,019 $ 226,197
Efficiency ratio (non-GAAP) 46.17 % 46.53 % 51.52 % 50.87 % 54.59 %
GAAP and Non-GAAP Performance Ratios
Year ended December 31,
(Dollars in thousands) 2021 2020 2019 2018 2017
Core earnings (non-GAAP):
Net income (GAAP) $ 235,107 $ 96,953 $ 116,433 $ 100,864 $ 53,209
Plus/ (less) non-GAAP adjustments (net of tax):
Provision/ (credit) for credit losses (1)
(33,875) 63,789 3,460 6,665 1,800
Provision/ (credit) for credit losses on unfunded loan commitments (1)
(919) 1,173 - - -
Merger and acquisition expense (1)
33 18,745 969 8,692 2,570
Amortization of intangible assets (1)
4,908 4,632 1,438 1,597 61
Loss on FHLB redemption (1)
6,779 4,414 - - 771
Investment securities gains (1)
(158) (348) (57) (140) (770)
Core earnings (non-GAAP) $ 211,875 $ 189,358 $ 122,243 $ 117,678 $ 57,641
Core earnings per diluted common share (non-GAAP):
Weighted-average common shares outstanding - diluted (GAAP) 46,899,085 44,132,251 35,617,924 35,522,903 24,000,960
Earnings per diluted common share (GAAP) $ 4.98 $ 2.18 $ 3.25 $ 2.82 $ 2.20
Core earnings per diluted common share (non-GAAP) $ 4.52 $ 4.29 $ 3.43 $ 3.31 $ 2.40
Core return on average assets (non-GAAP):
Average assets (GAAP) $ 12,818,202 $ 11,775,096 $ 8,367,139 $ 7,965,514 $ 5,239,920
Return on average assets (GAAP) 1.83 % 0.82 % 1.39 % 1.27 % 1.02 %
Core return on average assets (non-GAAP) 1.65 % 1.61 % 1.46 % 1.48 % 1.10 %
Core return on average tangible common equity (non-GAAP):
Average total stockholders' equity (GAAP) $ 1,518,607 $ 1,339,491 $ 1,108,310 $ 1,024,795 $ 550,926
Average goodwill (370,223) (365,543) (347,149) (345,583) (85,768)
Average other intangible assets, net (29,403) (28,357) (8,873) (10,946) (633)
Average tangible common equity (non-GAAP) $ 1,118,981 $ 945,591 $ 752,288 $ 668,266 $ 464,525
Return on average tangible common equity (non-GAAP) 21.01 % 10.25 % 15.33 % 14.66 % 11.35 %
Core return on average tangible common equity (non-GAAP) 18.93 % 20.03 % 16.25 % 17.61 % 12.41 %
(1)Tax adjustments have been adjusted using the combined marginal federal and state rate of 25.64% for 2021, 25.54% both 2020, 26.13% for both 2019 and 2018, and 39.55% for 2017.
FINANCIAL CONDITION
The Company’s total assets decreased 2% to $12.6 billion at December 31, 2021 compared to $12.8 billion at December 31, 2020. During the year, excess liquidity resulting from deposit growth and PPP loan forgiveness was used to reduce borrowings as well as fund the loan growth that occurred in the fourth quarter of the current year.
Total loans at December 31, 2021 were $10.0 billion compared to $10.4 billion at December 31, 2020. At year-end 2021, investment securities had increased 7% to $1.5 billion compared to year end 2020. At December 31, 2021, total deposits were $10.6 billion compared to $10.0 billion at the end of 2020, a 6% increase during the period. Total borrowings were $313.8 million at December 31, 2021 compared to $1.1 billion at December 31, 2020.
Loans
A comparison of the loan portfolio for the years indicated is presented in the following table:
December 31,
2021 2020 Year-to-Year Change
(Dollars in thousands) Amount % Amount % $ Change % Change
Commercial real estate:
Commercial investor real estate $ 4,141,346 41.5 % $ 3,634,720 34.9 % $ 506,626 13.9 %
Commercial owner-occupied real estate 1,690,881 17.0 1,642,216 15.8 48,665 3.0
Commercial AD&C 1,088,094 10.9 1,050,973 10.1 37,121 3.5
Commercial business 1,481,834 14.9 2,267,548 21.8 (785,714) (34.7)
Total commercial loans 8,402,155 84.3 8,595,457 82.6 (193,302) (2.2)
Residential real estate:
Residential mortgage 937,570 9.4 1,105,179 10.6 (167,609) (15.2)
Residential construction 197,652 2.0 182,619 1.8 15,033 8.2
Consumer 429,714 4.3 517,254 5.0 (87,540) (16.9)
Total residential and consumer loans 1,564,936 15.7 1,805,052 17.4 (240,116) (13.3)
Total loans $ 9,967,091 100.0 % $ 10,400,509 100.0 % $ (433,418) (4.2)
Total loans declined by 4% to $10.0 billion at December 31, 2021, compared to $10.4 billion at December 31, 2020, driven by the reduction of $874.4 million in PPP loans. Excluding PPP loans, total loans at December 31, 2021 grew 5% to $9.8 billion as compared to $9.3 billion at December 31, 2020, as the commercial loan portfolio grew $681.1 million, while the residential mortgage and consumer loans declined $255.1 million due to run-off. The growth in the commercial portfolio, excluding PPP loans, occurred in all commercial portfolios led by the $506.6 million or 14% growth in the investor real estate commercial portfolio. The year-over-year decline in the mortgage loan portfolio resulted from the continuing sale of a majority of new mortgage loan production. In the second half of 2021, the Company generated $2.1 billion in new gross loan production of which $1.5 billion was funded, which more than offset $873.8 million in commercial loan run-off.
Loan Balances by Industry
Loan balances by industry for specific lending portfolios are presented in the following table:
December 31, 2021
Owner-Occupied Real Estate Commercial Business
(Dollars in thousands) Amount Amount Total Amount
Accommodation & Food Services $ 98,383 $ 114,829 $ 213,212
Administrative & Support 37,382 68,041 105,423
Agriculture & Forestry 5,844 2,740 8,584
Arts, Entertainment & Recreation 120,483 18,186 138,669
Construction 208,002 204,629 412,631
Educational Services 141,742 118,434 260,176
Finance & Insurance 25,493 46,375 71,868
Health Care & Social Assistance 198,867 110,054 308,921
Information 8,837 4,782 13,619
Management of Companies - 36,183 36,183
Manufacturing 67,791 44,817 112,608
Other Services 299,389 60,260 359,649
Professional, Scientific & Technical Services 114,825 208,872 323,697
Public Administration 8,036 5,665 13,701
Real Estate Rental & Leasing 52,516 277,283 329,799
Retail 197,581 41,447 239,028
Transportation & Warehousing 34,836 23,437 58,273
Utilities 2,231 922 3,153
Wholesale 68,643 94,878 163,521
Total loans $ 1,690,881 $ 1,481,834 $ 3,172,715
Loan Maturities and Interest Rate Sensitivity
Loan maturities and interest rate characteristics for loan portfolios are presented in the following table:
At December 31, 2021
Fixed Rate Loans Variable Rate Loans
(In thousands) In One Year or Less After One Year Through Five Years After Five Years Through Fifteen Years After Fifteen Years Total In One Year or Less After One Year Through Five Years After Five Years Through Fifteen Years After Fifteen Years Total
Commercial Real Estate:
Commercial investor R/E $ 290,018 $ 1,443,056 $ 1,280,248 $ - $ 3,013,322 $ 713,606 $ 387,272 $ 27,146 $ - $ 1,128,024
Commercial owner-occupied R/E 163,913 549,490 686,858 11,572 1,411,833 123,072 132,995 22,981 - 279,048
Commercial AD&C 55,429 43,421 47,654 180 146,684 915,416 14,926 11,068 - 941,410
Commercial business 347,538 267,967 24,373 437 640,315 739,981 36,849 23,419 41,270 841,519
Total commercial loans 856,898 2,303,934 2,039,133 12,189 5,212,154 2,492,075 572,042 84,614 41,270 3,190,001
Residential real estate:
Residential mortgage 45,837 111,611 121,415 34,353 313,216 256,863 283,162 67,754 16,575 624,354
Residential construction 8,476 25,812 - - 34,288 159,278 4,086 - - 163,364
Consumer 2,859 6,096 1,652 42 10,649 402,909 10,730 1,822 3,604 419,065
Total residential and consumer loans 57,172 143,519 123,067 34,395 358,153 819,050 297,978 69,576 20,179 1,206,783
Total loans $ 914,070 $ 2,447,453 $ 2,162,200 $ 46,584 $ 5,570,307 $ 3,311,125 $ 870,020 $ 154,190 $ 61,449 $ 4,396,784
Composition of Investment Securities
The composition of investment securities for the periods indicated is presented in the following table:
December 31,
2021 2020 Year-to-Year Change
(Dollars in thousands) Amount % Amount % $ Change % Change
Available-for-sale securities(1):
U.S. treasuries and government agencies $ 68,539 4.5 % $ 43,297 3.1 % $ 25,242 58.3 %
State and municipal 326,402 21.7 390,367 27.6 (63,965) (16.4)
Mortgage-backed and asset-backed(2)
1,070,955 71.1 904,432 64.0 166,523 18.4
Corporate debt - - 9,925 0.7 (9,925) (100.0)
Total available-for-sale securities(3)
1,465,896 97.3 1,348,021 95.4 117,875 8.7
Equity securities:
Federal Reserve Bank stock 34,097 2.3 38,650 2.7 (4,553) (11.8)
Federal Home Loan Bank of Atlanta stock 6,392 0.4 26,433 1.9 (20,041) (75.8)
Other equity securities 677 - 677 - - -
Total equity securities 41,166 2.7 65,760 4.6 (24,594) (37.4)
Total securities(3)
$ 1,507,062 100.0 % $ 1,413,781 100.0 % 93,281 6.6
(1)At estimated fair value.
(2)Issued by a U.S. Government Agency or secured by U.S. Government Agency collateral.
(3)The outstanding balance of no single issuer, except for U.S. Government Agency securities, exceeded ten percent of stockholders' equity at December 31, 2021 or 2020.
The investment portfolio consists primarily of U.S. Treasuries, U.S. Agency securities, U.S. Agency mortgage-backed and asset-backed securities and collateralized mortgage obligations and state and municipal securities. As the portfolio grew 7% during 2021, the composition of the portfolio migrated away from state and municipal securities with longer terms to shorter term U.S. treasuries and government agencies securities and mortgage and asset-backed securities to provide for greater reinvestment opportunities in anticipation of rising interest rates in 2022. In addition, floating term securities were also reduced to due to low yields and LIBOR indexes. As a result of the strategic migration, at December 31, 2021, mortgage and asset-backed securities comprised 71% of the investment portfolio compared to 64% at December 31, 2020.
At December 31, 2021, 96% of the investment portfolio was invested in Aa/AA or Aaa/AAA rated securities compared to 93% at December 31, 2020. The average duration of the investment portfolio was 4.3 years compared to 4.2 years at the end of the prior year. The composition and duration of the investment portfolio has resulted in a portfolio with low credit risk that is expected to provide the liquidity needed to meet lending and other funding demands. The portfolio is monitored on a continual basis with consideration given to interest rate trends and the structure of the yield curve and with constant assessment of economic projections and analysis.
Other Earning Assets
Residential mortgage loans held for sale decreased to $39.4 million at December 31, 2021 compared to $78.3 million as of December 31, 2020, due to the decrease in volume of originations as residential lending rates rose during the year and the decision to hold a larger percentage of production on the balance sheet to provide for renewed growth of the residential mortgage portfolio. Interest-bearing deposits with banks increased by $151.0 million to $354.1 million at December 31, 2021 compared to $203.1 million at December 31, 2020, primarily as a result of the cash received from the forgiveness of PPP loans.
Deposits
The composition of deposits for the periods indicated is presented in the following table:
December 31,
2021 2020 Year-to-Year Change
(Dollars in thousands) Amount % Amount % $ Change % Change
Noninterest-bearing deposits $ 3,779,630 35.6 % $ 3,325,547 33.1 % $ 454,083 13.7 %
Interest-bearing deposits:
Demand 1,604,714 15.1 1,292,164 12.9 312,550 24.2
Money market savings 3,415,663 32.1 3,339,645 33.3 76,018 2.3
Regular savings 533,862 5.0 418,051 4.2 115,811 27.7
Time deposits of less than $250,000 910,464 8.6 1,180,636 11.8 (270,172) (22.9)
Time deposits of $250,000 or more 380,398 3.6 477,026 4.7 (96,628) (20.3)
Total interest-bearing deposits 6,845,101 64.4 6,707,522 66.9 137,579 2.1
Total deposits $ 10,624,731 100.0 % $ 10,033,069 100.0 % $ 591,662 5.9
Deposits and Borrowings
Total deposits at December 31, 2021 were $10.6 billion compared to $10.0 billion at December 31, 2020, a 6% increase during the period. This growth was driven principally from impact of the PPP program and the growth in transaction relationships, while time deposits declined $366.8 million. The loan-to-deposit ratio declined to 94% at the end of 2021 compared to 104% the end of 2020 as a result of the balance sheet impact from PPP forgiveness as loans declined and deposits grew during the period. The deposit increase from year-end 2020 was driven primarily by increases of 14% in non-interest bearing demand, 24% in interest-bearing demand and 28% in regular savings categories, which more than offset the 22% decline in time deposits. A large portion of the demand deposit growth is the result of the funds from the PPP program, which were placed in deposit accounts at the Bank. A large portion of the liquidity from the deposit of PPP funds into accounts at the Bank provided funding for the complete liquidation of federal funds purchased and FHLB advances and the reduction of brokered time deposits during 2021 and resulted in lower interest expense during the year. At December 31, 2021, interest-bearing deposits represented 64% of total deposits with the remaining 36% in noninterest-bearing balances. At December 31, 2020, interest-bearing deposits represented 67% of total deposits, while non-interest bearing deposits represented 33%.
The total amount of deposits that exceeded the $250,000 insured limit provided by the FDIC was approximately $5.3 billion at December 31, 2021. This estimate is based on the determination of known deposit account relationships of each depositor and the insurance guidelines provided by the FDIC.
Total borrowings decreased 73% at December 31, 2021 compared to December 31, 2020. The primary cause of the year-over-year decrease in borrowings was driven by the previously mentioned reduction of federal funds purchased and FHLB advances. In addition, further reductions occurred in borrowings during 2021 as a result of full redemption of subordinated debt that was assumed in the Revere and WashingtonFirst acquisitions.
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. Stockholders’ equity at December 31, 2021 remained at $1.5 billion compared to December 31, 2020. During 2021, the net growth in capital from earnings, net of dividends, was significantly offset by the Company's repurchase of 2,350,000 shares of common stock resulting in a $107.3 million reduction in stockholders’ equity. The ratio of average equity to average assets was 11.85% for the year ended December 31, 2021, as compared to 11.38% for the year ended December 31, 2020.
Risk-Based Capital Ratios
Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as Risk-Based Capital guidelines. The actual regulatory ratios and required ratios for capital adequacy are summarized for the Company in the following table.
Ratios at December 31, Minimum
Regulatory Requirements
2021 2020
Tier 1 Leverage 9.26% 8.92% 4.00%
Common Equity Tier 1 Capital to risk-weighted assets 11.91% 10.58% 4.50%
Tier 1 Capital to risk-weighted assets 11.91% 10.58% 6.00%
Total Capital to risk-weighted assets 14.59% 13.93% 8.00%
Regulatory capital at December 31, 2021 was comprised of Tier 1 capital of $1.1 billion and total qualifying capital of $1.4 billion. As of December 31, 2021, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.
The minimum capital level requirements applicable to the Company and the Bank are: (1) a Tier 1 leverage ratio of 4%; (2) a common equity Tier 1 capital ratio of 4.5%; (3) a Tier 1 capital ratio of 6%; and (4) a total capital ratio of 8%. Covered financial institutions must also maintain 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 main drivers of the in the improvement in the ratios at December 31, 2021 from December 31, 2020 were the 2021 earnings, net of the repurchase program impact, coupled with the reduction in risk-weighted assets. During the year, the Company continued to elect to apply the provisions of the CECL deferral transition in the determination of its risk-based capital ratios. At December 31, 2021, the impact of the application of this deferral transition provided an additional $11.5 million in Tier 1 capital compared to $22.5 million at December 31, 2020, and resulted in raising the common equity Tier 1 ratio by 12 and 22 basis points, respectively.
Tangible Common Equity
Tangible common equity, tangible assets and tangible book value per common share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets from total stockholders’ equity and total assets. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding the Company's 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 at December 31, 2021, compared to December 31, 2020. At December 31, 2021, the ratio of tangible common equity to tangible assets increased to 9.21% compared to 8.61% at December 31, 2020. The increase in tangible common equity in 2021 from 2020 was primarily the result of the 2% decrease in tangible assets and the 5% growth in tangible common equity, net of the impact of the Company's stock repurchase program. Excluding PPP loans from tangible assets at December 31, 2021, the tangible common equity ratio would be 9.35%.
Non-GAAP Tangible Common Equity Ratios
A reconciliation of the non-GAAP ratio of tangible common equity to tangible assets and tangible book value per common share are provided in the following table.
December 31,
(Dollars in thousands, except per share data) 2021 2020 2019 2018 2017
Tangible common equity ratio:
Total stockholders' equity $ 1,519,679 $ 1,469,955 $ 1,132,974 $ 1,067,903 $ 563,816
Goodwill (370,223) (370,223) (347,149) (347,149) (85,768)
Other intangible assets, net (25,920) (32,521) (7,841) (9,788) (580)
Tangible common equity $ 1,123,536 $ 1,067,211 $ 777,984 $ 710,966 $ 477,468
Total assets $ 12,590,726 $ 12,798,429 $ 8,629,002 $ 8,243,272 $ 5,446,675
Goodwill (370,223) (370,223) (347,149) (347,149) (85,768)
Other intangible assets, net (25,920) (32,521) (7,841) (9,788) (580)
Tangible assets $ 12,194,583 $ 12,395,685 $ 8,274,012 $ 7,886,335 $ 5,360,327
Outstanding common shares 45,118,930 47,056,777 34,970,370 35,530,734 23,996,293
Tangible common equity ratio 9.21 % 8.61 % 9.40 % 9.02 % 8.91 %
Book value per common share $ 33.68 $ 31.24 $ 32.40 $ 30.06 $ 23.50
Tangible book value per common share $ 24.90 $ 22.68 $ 22.25 $ 20.01 $ 19.90
Credit Risk
The fundamental lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Residential mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and, for that reason, the Company has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.
Loans acquired as a part of an acquisition transaction that have evidence of more-than-insignificant credit deterioration since their origination are considered “purchased credit deteriorated” or “PCD” loans and are recorded at their initial fair values as of the acquisition date. The identification of loans that have experienced a more-than-insignificant deterioration in credit quality since their origination requires judgment and an assessment of a number of factors. For further discussion regarding the acquired loans, including PCD loans, refer to that section of Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration, accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include monitoring the credit quality of the portfolio, providing early identification of potential problem credits and proactive management of problem credits.
The Company recognizes a lending relationship as non-performing when either the loan becomes 90 days delinquent or as a result of factors, such as bankruptcy, interruption of cash flows, etc., considered at the monthly credit committee meeting. Classification as a non-accrual loan is based on a determination that the Company may not collect all principal and/or interest payments according to
contractual terms. When a loan is placed on non-accrual status all accrued but unpaid interest is reversed from interest income. Typically, all payments received on non-accrual loans are first applied to the remaining principal balance of the loans. Any additional recoveries are credited to the allowance up to the amount of all previous charge-offs.
The level of non-performing loans to total loans decreased to 0.49% at December 31, 2021 compared to 1.11% at December 31, 2020. Non-performing loans were $48.8 million at December 31, 2021 in comparison to $115.5 million at December 31, 2020. The reduction in non-performing loans over the prior year was driven by partial payoffs and eventual charge-offs of a few large borrowings within the hospitality sector with an aggregate balance of $32.9 million. These large relationships were collateral dependent and required no individual reserves due to sufficient values of their underlying collateral. Charged-off amounts of these credits did not exceed their associated established individual reserves. During 2021, non-accrual commercial business loans decreased $14.5 million, while non-accrual commercial real estate loans decreased $49.4 million. Combined residential and consumer non-accrual lending portfolio declined $2.4 million. These decreases were driven by net payments of $61.2 million during the current year.
While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs, Northern Virginia and Baltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the conditions being experienced in various business sectors of the economy on both a regional and national level. As noted, risks, uncertainties and various other factors related to the COVID-19 pandemic include the potential impact on the economy and the businesses of the Company's borrowers and their ability to remit contractual payments on their obligations to the Company in a timely manner. The current ability to predict the ultimate outcome or impact of the remedial actions and stimulus measures adopted by the government on the economic well-being of the Company's borrowers and the manifestations of all these factors including the future performance aspect of the credit portfolio remains uncertain.
The Company’s methodology for evaluating whether a loan shall be placed on non-accrual status begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring a specific allowance, the Company looks primarily to the value of the collateral (adjusted for estimated costs to sell) or projected cash flows generated by the operation of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as non-accrual.
Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:
•An internal evaluation is updated periodically to include borrower financial statements and/or cash flow projections.
•The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.
•Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.
•At the monthly credit committee meeting the loan may be downgraded and an individual 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 an individual 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 Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed into law in March 2020, provided financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. The CARES Act provided for extensions of up to 180 days in the delay of loan principal and/or interest payments for customers who are affected by the COVID-19 pandemic. These customers must meet certain criteria, such as they were in good standing and not more than 30 days past due prior to the pandemic, as well as other requirements noted in regulatory guidance. In some cases, customers received a second and third accommodation. The initial period to request payment accommodation expired on December 31, 2020. However, the Consolidation Appropriations Act, which amended CARES Act, extended the expiration date to January 1, 2022. Based on regulatory guidance, the Company did not classify the temporary COVID-19 loan modifications as TDRs, nor were the customers considered past due with regards to their deferred payments. Upon exiting the loan modification deferral program, the measurement of loan delinquency reverted to the provisions in effect prior to entry into the program.
At the height of and in response to the COVID-19 pandemic, the Company developed a set of guidelines to provide relief to qualified commercial, mortgage and consumer loans customers. These guidelines provided for deferment of certain loan payments of up to 180 days. Initial deferrals of 90 days were granted to qualified customers with the option to request further deferrals, each for an additional 90 days. Ultimately, since the inception of the deferral program, the Company granted payment modifications/deferrals on over 2,500 loans with an aggregate balance of $2.1 billion. At December 31, 2021, 38 loans with an aggregate balance of $7.6 million remain in deferral status. Currently, the vast majority of loans that had been granted modifications/deferrals have returned to their original payment plans without a significant impact on payment delinquencies.
The Company approved and funded over 8,500 PPP loans for a total of $1.6 billion during 2020 and 2021. Loans originated under the program are 100% guaranteed by the Small Business Administration under the CARES Act. In the latter part of 2020, the Company began accepting digital PPP forgiveness applications. At December 31, 2021, loans totaling $1.4 billion have been forgiven and an additional $52.0 million have been repaid by borrowers.
The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and/or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view the extension of a loan to be a satisfactory approach to resolving non-performing credits. On an exception basis, certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which are not affecting the performance of the credit or other identified weakness may be extended.
The Company typically sells a portion of its fixed-rate residential mortgage originations in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of nine to eighteen 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 believes that this reserve is appropriate.
Mortgage loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. At December 31, 2021, the amortized cost of the Company's mortgage loan servicing rights was $0.4 million compared to $0.6 million at December 31, 2020. The decline in the year-over-year balance was the result of the loan pay-offs. The Company did not incur any impairment losses during 2021.
The Company may periodically engage in whole loan sale transactions of its residential mortgage loans as a part its interest rate risk management strategy. The Company did not engage in any whole loan sales during 2021.
Analysis of Credit Risk
The following table presents information with respect to non-accrual loans, 90-day past due delinquencies and non-performing assets for the years indicated:
At December 31,
(Dollars in thousands) 2021 2020
Non-accrual loans:
Commercial real estate:
Commercial investor real estate $ 12,489 $ 45,227
Commercial owner-occupied real estate 9,306 11,561
Commercial AD&C 650 15,044
Commercial business 8,420 22,933
Residential real estate:
Residential mortgage 8,441 10,212
Residential construction 55 -
Consumer 6,725 7,384
Total non-accrual loans(1)
46,086 112,361
Loans 90 days past due:
Commercial real estate:
Commercial investor - 133
Commercial owner-occupied - -
Commercial AD&C - -
Commercial business - 161
Residential real estate:
Residential mortgage 557 480
Residential construction - -
Consumer - -
Total 90 days past due loans 557 774
Restructured loans (accruing) 2,167 2,317
Total non-performing loans(2)
48,810 115,452
Other real estate owned, net 1,034 1,455
Total non-performing assets $ 49,844 $ 116,907
Non-accrual loans to total loans 0.46 % 1.08 %
Non-performing loans to total loans 0.49 % 1.11 %
Non-performing assets to total assets 0.40 % 0.91 %
Allowance for credit losses to non-accrual loans 236.83 % 147.17 %
Allowance for credit losses to non-performing loans 223.61 % 143.23 %
(1)Gross interest income that would have been recorded in 2021 if non-accrual loans shown above had been current and in accordance with their original terms was $5.1 million. No interest income was accrued on these loans during the year while on non-accrual status. Please see Note 1 - Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of the Company’s policy for placing loans on non-accrual status.
(2)Performing loans considered potential problem loans, as defined and identified by management, amounted to $22.1 million at December 31, 2021. Although these are loans where known information about the borrowers' possible credit problems causes management to have concerns as to the borrowers' ability to comply with the loan repayment terms, most are current as to payment terms, well collateralized and are not believed to present significant risk of loss. Loans classified for regulatory purposes not included in either non-performing or potential problem loans consist only of "other loans especially mentioned" and do not, in management's opinion, represent or result from trends or uncertainties reasonably expected to materially impact future operating results, liquidity or capital resources, or represent material credits where known information about the borrowers' possible credit problems causes management to have doubts as to the borrowers' ability to comply with the loan repayment terms.
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 the “Allowance for Credit Losses” section in Note 1 - Significant Accounting Policies in the Notes to the Consolidated Financial Statements. The Company excludes accrued interest receivable 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 and assumptions, including consideration of current conditions and economic forecasts, which may be susceptible to significant volatility. The forecasted economic metrics with the greatest impact in order of magnitude were the expected level of business bankruptcies, the expected future unemployment rate and, to a lesser degree, the house price index. The most sensitive assumptions include the length of the forecast and reversion periods, forecast of economic variables and prepayment and curtailment speeds. The amount of expected losses can vary significantly from the amounts actually observed. Loans deemed uncollectible are charged-off against the allowance, while recoveries are credited to the allowance when received. Management adjusts the level of the allowance through the provision for credit losses in the Consolidated Statements of Income.
The provision for credit losses was a credit of $45.6 million in 2021 and a charge of $85.7 million in 2020. During the current year, the credit for the provision for credit losses, compared to the prior year's charge to the provision, reflects the impact of the continued improvement in forecasted economic metrics, notably the rate of unemployment, anticipated business bankruptcies and the housing price index. These decreases were partially offset by the significant loan growth that occurred in the fourth quarter of 2021 and qualitative factors applied in the determination of the allowance. The portion of the current year's $45.6 million credit to the provision that was the related to the improvement in the economic forecasts amounted to approximately $67.0 million, which was partially offset by the adjustments to qualitative factors related to the Company's exposure to certain higher risk industries in the total amount of approximately $19.6 million. The charge to the provision for credit losses for the same period in 2020 predominantly reflected the combined results of the impact of the deteriorated economic forecasts during the first half of 2020 by the negative projected impact of COVID-19 and the initial allowance recognized on acquired Revere non-purchased credit deteriorated loans. The portion of the $85.7 million provision for 2020 directly attributable to the significant deterioration in the economic forecast amounted to approximately $44.1 million. In addition, the initial allowance for credit losses on Revere’s acquired non-PCD loans was recognized through provision for credit losses in the amount of $17.5 million. The remainder of the 2020 provision reflected the impact of changes in interest rates, existing terms, qualitative factors, portfolio composition and portfolio maturities. The acquisition of Revere’s PCD loans resulted in an initial increase to the allowance for credit losses of $18.6 million, which did not affect the provision expense for 2020.
At December 31, 2021, the allowance for credit losses was $109.1 million as compared to $165.4 million at December 31, 2020. The allowance for credit losses as a percent of total loans was 1.10% and 1.59% at December 31, 2021 and December 31, 2020, respectively. The allowance for credit losses represented 224% of non-performing loans at December 31, 2021 as compared to 143% at December 31, 2020. At December 31, 2021 the allowance attributable to the commercial portfolio represented 1.20% of total commercial loans while the portion attributable to total combined consumer and mortgage loans was 0.55%, compared to 1.70% and 1.05%, respectively, at December 31, 2020. At the end of the current year, with respect to the total commercial portion of the allowance, 45% of this portion is allocated to the investor real estate loan portfolio, resulting in the ratio of the allowance for investor real estate loans to total investor real estate loans of 1.09%. A similar ratio with respect to AD&C loans was 1.87% and 1.56% for commercial business loans at the end of the current year. Excluding the PPP loans, which do not have an associated allowance, the allowance for credit losses as a percentage of total loans outstanding would be 1.12% and the ratio of the allowance for commercial business loans to total commercial business loans would be 1.78%.
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 the expected impact of certain qualitative factors not fully captured in the collective quantitative reserve, including 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 57% of the total allowance being attributable to the historical performance of the portfolio while 43% of the allowance is attributable to the collective qualitative factors applied to determine the allowance at December 31, 2021. At the end of the previous year, the utilization of the historical default and loss experience resulted in 84% of the total allowance being attributable to the historical performance of the portfolio while 16% of the allowance was attributable to the collective qualitative factors applied to determine the allowance. The decrease in the quantitative allocation of the allowance during the current year is a direct result of the continued improvement in the forecasted economic metrics, predominantly the projected decline in unemployment rate, applied in the determination of the allowance. The increase in the qualitative allocation of the allowance was the result of increased consideration of expected losses due to the concentration of portfolio risk in certain industries, in addition to the potential economic impact of a recession in the future.
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 internal risk ratings or Beacon Scores). Collective calculation methodologies use the Company’s historical default and loss experience adjusted for economic forecasts. The reasonable and supportable forecast period represents a two year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis.
Economic variables which have the most significant impact on the allowance include:
•unemployment rate;
•number of business bankruptcies; and
•house price index.
The collective quantified component of the allowance is supplemented by a qualitative component to address various risk characteristics of the Company’s loan portfolio including:
•trends in early delinquencies;
•changes in the risk profile related to large loans in the portfolio;
•concentrations of loans to specific industry segments;
•expected changes in economic conditions;
•changes in the Company’s credit administration and loan portfolio management processes; and
•the quality of the Company’s credit risk identification processes.
The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determined that foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the appraised value less estimated cost to sell. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s life. The balance of collateral-dependent loans individually assessed for the allowance was $33.5 million, with individual allowances of $6.6 million against those loans at December 31, 2021.
If an updated appraisal is received subsequent to the preliminary determination of an individual allowance or partial charge-off, and it is less than the initial appraisal used in the initial assessment, an additional individual allowance or charge-off is taken on the related credit. Partially charged-off loans are not written back up based on updated appraisals and always remain on non-accrual with any and all subsequent payments first applied to the remaining balance of the loan as principal reductions. No interest income is recognized on loans that have been partially charged-off.
A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the appropriateness of the collateral based on an internal evaluation. The Company’s policy is to strictly adhere to regulatory appraisal standards. If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether an individual allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve an individual allowance or charge-off between monthly credit committee meetings to ensure that there are no significant time lapses during this process. The Company's borrowers are concentrated in nine counties in Maryland, three counties in Virginia and in Washington D.C. Excluding the PPP loans, commercial and residential mortgages, including home equity loans and lines, represented 86% of total loans at December 31, 2021 and 88% of total loans at December 31, 2020. Certain loan terms may create concentrations of credit risk and increase the Company’s exposure to loss. These include terms that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans. The Company does not make loans that provide for negative amortization or option adjustable-rate mortgages.
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.
December 31,
(In thousands) 2021 2020
Commercial real estate: Amount % of loans to total loans Amount % of loans to total loans
Commercial investor real estate $ 45,289 41.5 % $ 57,404 34.9 %
Commercial owner-occupied real estate 11,687 17.0 20,061 15.8
Commercial AD&C 20,322 10.9 22,157 10.1
Commercial business 23,170 14.9 46,806 21.8
Total commercial 100,468 84.3 146,428 82.6
Residential real estate:
Residential mortgage 5,384 9.4 11,295 10.6
Residential construction 1,048 2.0 1,502 1.8
Consumer 2,245 4.3 6,142 5.0
Total residential and consumer 8,677 15.7 18,939 17.4
Total allowance $ 109,145 100.0 % $ 165,367 100.0 %
Summary of Credit Loss Experience
The following table presents the activity in the allowance for credit losses for the periods indicated:
Year Ended December 31,
(Dollars in thousands) 2021 2020
Balance, January 1 $ 165,367 $ 56,132
Initial allowance on PCD loans at adoption of ASC 326 - 2,762
Transition impact of adopting ASC 326 - 2,983
Initial allowance on Revere PCD loans - 18,628
Provision for credit losses (45,556) 85,669
Loan charge-offs:
Commercial real estate:
Commercial investor real estate (5,802) (411)
Commercial owner-occupied real estate (136) -
Commercial AD&C (2,007) -
Commercial business (4,069) (491)
Residential real estate:
Residential mortgage - (484)
Residential construction - -
Consumer (299) (433)
Total charge-offs (12,313) (1,819)
Loan recoveries:
Commercial real estate:
Commercial investor real estate 285 15
Commercial owner-occupied real estate - -
Commercial AD&C - -
Commercial business 565 702
Residential real estate:
Residential mortgage 410 105
Residential construction 5 6
Consumer 382 184
Total recoveries 1,647 1,012
Net charge-offs (10,666) (807)
Balance, period end $ 109,145 $ 165,367
Net charge-offs to average loans 0.11 % 0.01 %
Allowance to total loans 1.10 % 1.59 %
Market Risk Management
The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest 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 Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optional 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 money market deposit accounts are assumed to reprice at 40% to 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Bank’s net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.
The Company prepares a current base case and eight 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. Projected interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.
The Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists. If a measure of risk produced by the alternative simulations of the entire 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 - 100bp
- 200 bp - 300bp - 400bp
Policy Limit 23.50% 17.50% 15.00% 10.00% 10.00% 15.00% 17.50% 23.50%
December 31, 2021 8.61% 6.53% 4.80% 2.16% N/A N/A N/A N/A
December 31, 2020 3.94% 2.90% 2.14% 0.85% N/A N/A N/A N/A
As shown above, measures of net interest income at risk at December 31, 2021 had declined in every rising interest rate change scenario from December 31, 2020. All measures remained well within prescribed policy limits. As indicated in the table, in a rising interest rate environment, net interest income sensitivity increased compared to the prior year-end as a result of the increase in asset sensitivity. This increase was driven by the combined impact of an increase in interest-bearing deposits at banks and the significant reduction in borrowings at December 31, 2021 as compared to the prior year end.
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%
December 31, 2021 (10.29%) (6.18%) (2.16%) 0.05% N/A N/A N/A N/A
December 31, 2020 (10.98%) (6.27%) (1.90%) 0.33% N/A N/A N/A N/A
Overall, the measure of the economic value of equity ("EVE") at risk remained relatively stable from December 31, 2020 to December 31, 2021. The stability of EVE through all interest rate scenarios was the result of the positive impact from the growth in demand deposits, increased money market savings accounts and the significant reductions in borrowings being substantially mitigated by the growth in fixed rate loan portfolio and a reduction in the variable rate loan portfolio.
LIBOR Transition
The Company has certain loans, interest rate swap agreements and debt obligations whose interest rates are indexed to the London InterBank Offered Rate (LIBOR). On March 5, 2021, LIBOR’s regulator, the Financial Conduct Authority, and administrator, ICE Benchmark Administration, Limited, announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. In response to this timing, the Company has ceased utilizing LIBOR in the pricing of its offered credit products as of December 31, 2021. The Company has updated its systems and is able to offer products that utilize SOFR, AMERIBOR and other alternative reference rates. At December 31, 2021, the Company had approximately 1,200 loans totaling $1.6 billion indexed to LIBOR that will mature after June 30, 2023, of which 844 loans totaling $468.2 million are adjustable-rate mortgage loans. The Company is developing communication and transition plans to convert its LIBOR-based loans to alternative reference rates.
The Company currently has $175.0 million in fixed to floating rate subordinated debenture notes that bear a fixed rate through November 14, 2024. Beginning November 15, 2024, the interest rate was to shift to a floating rate based on three-month LIBOR plus 262 basis points through the remaining maturity or early redemption of the notes. The note indenture contains robust fallback language that allows for an appropriate alternative benchmark rate to be applied to determine the overall interest rate on the notes.
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. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs at December 31, 2021. Management considers core deposits, defined to include all deposits other than brokered and outsourced deposits and certain time deposits of $250 thousand or more, to be a relatively stable funding source. Core deposits equaled 85% of total interest-earning assets at December 31, 2021. In addition, loan payments, maturities, calls and pay downs of securities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements. 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.
In addition to factors discussed above that can affect liquidity, the Company’s growth, mortgage banking activities and changes in the liquidity of the investment portfolio due to fluctuations in interest rates are also taken into consideration. Under this approach, implemented by the Funds Management Subcommittee of ALCO under formal policy guidelines, the Company’s liquidity position is measured weekly, looking forward at thirty day intervals from 30 to 360 days. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Resulting projections as of December 31, 2021, provides an indication of liquidity versus requirements that the Company utilizes to determine how it will fund loans and other earning assets.
The Company has external sources of funds that can be drawn upon when required. The main sources of external liquidity are available lines of credit with the FHLB and the Federal Reserve Bank. Based on pledged collateral, the available line of credit with the FHLB totaled $3.9 billion with no outstanding borrowings against it as of December 31, 2021. The Company also had secured lines of credit available from the Federal Reserve Bank and correspondent banks of $509.4 million at December 31, 2021 collateralized by portfolio loans. In addition, the Company had unsecured lines of credit with correspondent banks of $1.3 billion at December 31, 2021
with no outstanding borrowings against these lines of credit. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at December 31, 2021.
Sandy Spring Bancorp, Inc., as a standalone entity (“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 stockholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve Bank, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of December 31, 2021, the Bank could have declared a dividend of $126.6 million to Bancorp. At December 31, 2021, Bancorp had liquid assets of $69.0 million.
The Company has various contractual obligations that affect its cash flows and liquidity. For information regarding material contractual obligations, please see Market Risk Management previously discussed, and Note 7 - Premises and Equipment, Note 8 - Leases, Note 11 - Borrowings, Note 14 - Pension, Profit Sharing and Other Employee Benefit Plans, Note 19 - Derivatives, Note 20 - Financial Instruments with Off-Balance Sheet Risk, and Note 22 - Fair Value in the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
With the exception of the Company’s obligations in connection with its irrevocable letters of credit and loan commitments, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. 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. Approval for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and risk assessments are considered when determining the amount and structure of credit arrangements. 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. For additional information on off-balance sheet arrangements, please see Note 20 - Financial Instruments with Off-Balance Sheet Risk and Note 11 - Borrowings in the Notes to the Consolidated Financial Statements, and Capital Management above.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required by this item is incorporated by reference to Part II, Item 7 of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal Control Over Financial Reporting
As part of the Company’s program to comply with Section 404 of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 (the “Assessment”). In making this Assessment, management used the control criteria framework of the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission published in its report entitled Internal Control- Integrated Framework (2013). Management’s Assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this assessment, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.
The attestation report by the Company’s independent registered public accounting firm, Ernst & Young LLP, on the Company’s internal control over financial reporting begins on the following page.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Sandy Spring Bancorp, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Sandy Spring Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Sandy Spring Bancorp, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of condition of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021 and the related notes and our report dated February 18, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, VA
February 18, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Sandy Spring Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of Sandy Spring Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 18, 2022 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Allowance for credit losses
Description of the Matter As of December 31, 2021, the Company’s loan portfolio totaled approximately $10.0 billion and the allowance for credit losses was $109.1 million. As described in Notes 1 and 6 to the consolidated financial statements, the Company estimates an allowance representing an amount, which, in management’s judgment, is appropriate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date. The Company’s methodology for estimating the allowance includes (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates, (2) collective qualitative factors that consider concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administration, and (3) individual allowances on certain collateral-dependent loans.
Auditing management’s estimate of the allowance involved a high degree of subjectivity due to the significant judgment required in determining the measurement of qualitative reserve related to concentrations of the loan portfolio. Management’s measurement of the qualitative reserve applied to the loan portfolio is highly judgmental and could have a significant effect on the allowance.
How We Addressed the Matter in our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company's controls over its allowance, including controls over the review of economic forecast data and data used to determine the measurement of the qualitative factor related to concentrations of the loan portfolio. Our tests of controls included observation of certain of management committee meetings, at which key management judgements are subjected to critical challenge.
To evaluate the appropriateness of the qualitative reserve, we tested the completeness and accuracy of data used in determining the qualitative reserve, including economic forecast data and internal data used to measure portfolio concentrations. We recalculated metrics used by management in the qualitative factor determination. In testing management’s measurement of the qualitative reserve, we reviewed management’s judgments about risk, such as risk in various portfolio concentrations and expected changes in economic forecasts and compared them to independently-obtained third party industry data and evaluated the corroborating or contrary evidence, as appropriate.
We also evaluated the overall allowance amount and whether the amount appropriately reflects lifetime expected losses in the loan portfolio as of the consolidated balance sheet date. For example, we compared the loss experience estimated by the allowance model during the year to the Company’s actual historical loss experience. We also compared certain of the Company’s allowance ratios to the ratios of the Company’s peers and evaluated trends in the allowance compared to relevant company-specific trends.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Tysons, VA
February 18, 2022
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands) December 31,
2021 December 31,
Assets
Cash and due from banks $ 65,630 $ 93,651
Federal funds sold 312 291
Interest-bearing deposits with banks 354,078 203,061
Cash and cash equivalents 420,020 297,003
Residential mortgage loans held for sale (at fair value) 39,409 78,294
Investments available-for-sale (at fair value) 1,465,896 1,348,021
Equity securities 41,166 65,760
Total loans 9,967,091 10,400,509
Less: allowance for credit losses (109,145) (165,367)
Net loans 9,857,946 10,235,142
Premises and equipment, net 59,685 57,720
Other real estate owned 1,034 1,455
Accrued interest receivable 34,349 46,431
Goodwill 370,223 370,223
Other intangible assets, net 25,920 32,521
Other assets 275,078 265,859
Total assets $ 12,590,726 $ 12,798,429
Liabilities
Noninterest-bearing deposits $ 3,779,630 $ 3,325,547
Interest-bearing deposits 6,845,101 6,707,522
Total deposits 10,624,731 10,033,069
Securities sold under retail repurchase agreements and federal funds purchased 141,086 543,157
Advances from FHLB - 379,075
Subordinated debt 172,712 227,088
Total borrowings 313,798 1,149,320
Accrued interest payable and other liabilities 132,518 146,085
Total liabilities 11,071,047 11,328,474
Stockholders' equity
Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding
45,118,930 and 47,056,777 at December 31, 2021 and 2020, respectively
45,119 47,057
Additional paid-in capital 751,072 846,922
Retained earnings 732,027 557,271
Accumulated other comprehensive income/ (loss) (8,539) 18,705
Total stockholders' equity 1,519,679 1,469,955
Total liabilities and stockholders' equity $ 12,590,726 $ 12,798,429
The accompanying notes are an integral part of these financial statements
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(Dollars in thousands, except per share data) 2021 2020 2019
Interest income:
Interest and fees on loans $ 423,152 $ 393,477 $ 316,550
Interest on loans held for sale 1,736 1,686 1,607
Interest on deposits with banks 725 446 2,129
Interest and dividends on investment securities:
Taxable for federal income taxes 16,118 22,136 21,739
Exempt from federal income taxes 8,552 5,814 5,834
Interest on federal funds sold 1 1 10
Total interest income 450,284 423,560 347,869
Interest expense:
Interest on deposits 15,022 41,651 61,681
Interest on retail repurchase agreements and federal funds purchased 182 1,965 1,161
Interest on advances from FHLB 2,649 6,593 16,578
Interest on subordinated debt 7,913 10,192 3,141
Total interest expense 25,766 60,401 82,561
Net interest income 424,518 363,159 265,308
Provision/ (credit) for credit losses (45,556) 85,669 4,684
Net interest income after provision/ (credit) for credit losses 470,074 277,490 260,624
Non-interest income:
Investment securities gains 212 467 77
Service charges on deposit accounts 8,241 7,066 9,692
Mortgage banking activities 24,509 40,058 14,711
Wealth management income 36,841 30,570 22,669
Insurance agency commissions 7,017 6,795 6,612
Income from bank owned life insurance 3,022 2,867 3,165
Bank card fees 6,896 5,672 5,616
Other income 15,317 9,221 8,780
Total non-interest income 102,055 102,716 71,322
Non-interest expense:
Salaries and employee benefits 155,830 134,471 103,950
Occupancy expense of premises 22,405 21,383 19,470
Equipment expenses 12,883 12,224 10,720
Marketing 4,730 4,281 4,456
Outside data services 8,983 8,759 7,567
FDIC insurance 4,294 4,727 2,260
Amortization of intangible assets 6,600 6,221 1,946
Merger and acquisition expense 45 25,174 1,312
Professional fees and services 10,308 7,939 6,978
Other expenses 34,392 30,603 20,426
Total non-interest expense 260,470 255,782 179,085
Income before income tax expense 311,659 124,424 152,861
Income tax expense 76,552 27,471 36,428
Net income $ 235,107 $ 96,953 $ 116,433
Net income per common share amounts:
Basic net income per common share $ 5.00 $ 2.19 $ 3.25
Diluted net income per common share $ 4.98 $ 2.18 $ 3.25
Dividends declared per share $ 1.28 $ 1.20 $ 1.18
The accompanying notes are an integral part of these financial statements
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(In thousands) 2021 2020 2019
Net income $ 235,107 $ 96,953 $ 116,433
Other comprehensive income/ (loss):
Investments available-for-sale:
Net change in unrealized gains/ (losses) on investments available-for-sale (38,104) 32,950 14,429
Related income tax expense/ (benefit) 9,751 (8,428) (3,742)
Net investment gains reclassified into earnings (212) (467) (77)
Related income tax expense 54 120 20
Net effect on other comprehensive income/ (loss) (28,511) 24,175 10,630
Defined benefit pension plan:
Net change of unrealized (gain)/ loss 1,687 (1,542) 1,175
Related income tax expense/ (benefit) (420) 404 (383)
Net effect on other comprehensive income/ (loss) 1,267 (1,138) 792
Total other comprehensive income/ (loss) (27,244) 23,037 11,422
Comprehensive income $ 207,863 $ 119,990 $ 127,855
The accompanying notes are an integral part of these financial statements
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
`
(Dollars in thousands, except per share data) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income/ (Loss) Total
Stockholders’
Equity
Balances at January 1, 2019 $ 35,531 $ 606,573 $ 441,553 $ (15,754) $ 1,067,903
Net income - - 116,433 - 116,433
Other comprehensive income, net of tax - - - 11,422 11,422
Total other comprehensive income 127,855
Common stock dividends $1.18 per share
- - (42,272) - (42,272)
Stock compensation expense - 3,042 - - 3,042
Common stock issued pursuant to:
Stock option plan - 15,080 shares
15 319 - - 334
Directors stock purchase plan - 867 shares
1 29 - - 30
Employee stock purchase plan - 37,091 shares
37 1,032 - - 1,069
Restricted stock vesting, net of tax withholding - 54,789 shares
54 (757) - - (703)
Repurchase of common stock - 668,191 shares
(668) (23,616) - - (24,284)
Balances at December 31, 2019 34,970 586,622 515,714 (4,332) 1,132,974
Net income - - 96,953 - 96,953
Other comprehensive income, net of tax - - - 23,037 23,037
Total other comprehensive income 119,990
Common stock dividends $1.20 per share
- - (53,175) - (53,175)
Stock compensation expense - 3,850 - - 3,850
Common stock issued pursuant to:
Revere Bank acquisition - 12,768,949 shares
12,769 276,320 - - 289,089
Stock option plan - 26,063 shares
27 289 - - 316
Conversion of Revere stock options - 395,298 options
- 3,611 - - 3,611
Employee stock purchase plan - 65,337 shares
65 1,616 - - 1,681
Restricted stock vesting, net of tax withholding - 46,386 shares
46 (504) - - (458)
Adoption of ASC 326 - Financial Instruments - Credit Losses - - (2,221) - (2,221)
Repurchase of common stock - 820,328 shares
(820) (24,882) - - (25,702)
Balances at December 31, 2020 47,057 846,922 557,271 18,705 1,469,955
Net income - - 235,107 - 235,107
Other comprehensive loss, net of tax - - - (27,244) (27,244)
Total other comprehensive income 207,863
Common stock dividends $1.28 per share
- - (60,351) - (60,351)
Stock compensation expense - 5,299 - - 5,299
Common stock issued pursuant to:
Stock option plan - 270,297 shares
270 3,424 - - 3,694
Employee stock purchase plan - 60,018 shares
60 2,004 - - 2,064
Restricted stock vesting, net of tax withholding - 81,838 shares
82 (1,659) - - (1,577)
Repurchase of common stock - 2,350,000 shares
(2,350) (104,918) - - (107,268)
Balances at December 31, 2021 $ 45,119 $ 751,072 $ 732,027 $ (8,539) $ 1,519,679
The accompanying notes are an integral part of these financial statements
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(Dollars in thousands) 2021 2020 2019
Operating activities:
Net income $ 235,107 $ 96,953 $ 116,433
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 14,522 19,873 13,398
Provision/ (credit) for credit losses (45,556) 85,669 4,684
Share based compensation expense 5,299 3,850 3,042
Deferred income tax / (benefit) 12,255 (29,568) 1,719
Origination of loans held for sale (1,385,664) (1,576,865) (887,216)
Proceeds from sales of loans held for sale 1,456,110 1,585,690 869,294
Gains on sales of loans held for sale (31,561) (33,418) (13,006)
Losses on sale of other real estate owned 241 32 173
Investment securities gains (212) (467) (77)
Loss on sales of premises and equipment - - 269
Tax (benefit)/ expense associated with share based compensation (1,850) (133) 92
Net (increase)/ decrease in accrued interest receivable 12,082 (15,499) 1,327
Net (increase)/ decrease other assets (35,498) 1,500 (3,664)
Net increase/ (decrease) accrued expenses and other liabilities (20,771) 1,704 (5,804)
Other, net 1,894 2,660 (721)
Net cash provided by operating activities 216,398 141,981 99,943
Investing activities:
Sales/ (purchases) of equity securities 24,594 (3,553) 21,586
Purchases of investments available-for-sale (933,491) (633,741) (326,604)
Proceeds from sales of investment available-for-sale 400,567 121,357 2,926
Proceeds from maturities, calls and principal payments of investments available-for-sale 369,678 441,672 199,652
Net (increase)/ decrease in loans 457,724 (1,174,467) (134,012)
Proceeds from the sales of other real estate owned 680 60 324
Cash paid for the acquisition of business activity of RPJ, net of cash acquired - (26,925) -
Cash acquired in the acquisition of business activity of Revere Bank, net of cash paid - 80,442 -
Expenditures for premises and equipment (11,491) (5,041) (5,148)
Net cash provided by/ (used in) investing activities 308,261 (1,200,196) (241,276)
Financing activities:
Net increase in deposits 595,942 1,270,328 525,439
Net increase/ (decrease) in in retail repurchase agreements and federal funds purchased (402,071) 329,552 (113,824)
Proceeds from advances from borrowings - 400,000 2,298,000
Repayment of advances from borrowings (379,075) (703,117) (2,457,834)
Retirement of subordinated debt (53,000) (10,310) -
Proceeds from issuance of common stock 5,758 1,997 1,433
Stock tendered for payment of withholding taxes (1,577) (458) (703)
Repurchase of Common Stock (107,268) (25,702) (24,284)
Dividends paid (60,351) (53,175) (42,272)
Net cash provided by/ (used in) financing activities (401,642) 1,209,115 185,955
Net increase in cash and cash equivalents 123,017 150,900 44,622
Cash and cash equivalents at beginning of year 297,003 146,103 101,481
Cash and cash equivalents at end of year $ 420,020 $ 297,003 $ 146,103
Supplemental Disclosures:
Interest payments $ 37,847 $ 62,637 $ 84,448
Income tax payments, net of refunds of $2,673 in 2021
71,908 56,430 33,795
Transfers from loans to other real estate owned 257 70 414
The accompanying notes are an integral part of these financial statements
SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Sandy Spring Bancorp, Inc. ("Sandy Spring" or, together with its subsidiaries, the "Company"), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”), which conducts a full-service commercial banking, mortgage banking and trust business. Services to individuals and businesses include accepting deposits, extending credit to buy real estate or equipment, consumer and commercial loans and lines of credit, general insurance, personal trust, and investment and wealth management services. The Company operates in central Maryland, Northern Virginia, and the greater Washington D.C. market. The Company offers investment and wealth management services through the Bank’s subsidiaries, West Financial Services ("West Financial") and Rembert Pendleton Jackson ("RPJ"). Insurance products are available to clients through Sandy Spring Insurance Corporation ("Sandy Spring Insurance"), and Neff & Associates, which are agencies of Sandy Spring Insurance.
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for financial information. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. The Company has evaluated subsequent events through the date of the issuance of its financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sandy Spring Bank and its subsidiaries, Sandy Spring Insurance, West Financial and RPJ. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. See Note 25 for more information on the Company's segments and consolidation.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, in addition to affecting the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for credit losses and the related allowance, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether available-for-sale debt securities with fair values less than amortized costs are impaired and require an allowance for credit losses, valuation of other real estate owned, valuation of share based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, the calculation of current and deferred income taxes, and the actuarial projections related to pension expense and the related liability.
Assets Under Management
Assets held for others under fiduciary and agency relationships are not assets of the Company or its subsidiaries and are not included in the accompanying Consolidated Statements of Condition. Trust department income and investment management fees are presented on an accrual basis.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits with banks (items with an original maturity of three months or less).
Revenue from Contracts with Customers
The Company’s revenue includes net interest income on financial instruments and non-interest income. Specific categories of revenue are presented in the Consolidated Statements of Income. Most of the Company’s revenue is not within the scope of Accounting Standard Codification (“ASC”) 606 - Revenue from Contracts with Customers. For revenue within the scope of ASC 606, the Company provides services to customers and has related performance obligations. The revenue from such services is recognized upon satisfaction of all contractual performance obligations. The following discusses key revenue streams within the scope of revenue recognition guidance.
Wealth Management Income
West Financial and RPJ provide comprehensive investment management and financial planning services. Wealth management income is comprised of income for providing trust, estate and investment management services. Trust services include acting as a trustee for corporate or personal trusts. Investment management services include investment management, record-keeping and reporting of security portfolios. Fees for these services are recognized based on a contractually-agreed fixed percentage applied to net assets under management at the end of each reporting period. The Company does not charge/recognize any performance-based fees.
Insurance Agency Commissions
Sandy Spring Insurance, a subsidiary of the Bank, performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated by a commission fee for placement of an insurance policy. Sandy Spring Insurance does not provide any captive management services or any claim handling services. Commission fees are set as a percentage of the premium for the insurance policy for which Sandy Spring Insurance is a producer. Sandy Spring Insurance recognizes revenue when the insurance policy has been contractually agreed to by the insurer and policyholder (at transaction date).
Service Charges on Deposit Accounts
Service charges on deposit accounts are earned on depository accounts for consumer and commercial account holders and include fees for account and overdraft services. Account services include fees for event-driven services and periodic account maintenance activities. An obligation for event-driven services is satisfied at the time of the event when service is delivered and revenue recognized as earned. Obligation for maintenance activities is satisfied over the course of each month and revenue is recognized at month end. The overdraft services obligation is satisfied at the time of the overdraft and revenue is recognized as earned.
Residential Mortgage Loans Held for Sale
The Company engages in sales of residential mortgage loans originated by the Bank. Loans held for sale are carried at fair value. Fair value is derived from secondary market quotations for similar instruments. The Company measures residential mortgage loans at fair value when the Company first recognizes the loan (i.e., the fair value option). Changes in fair value of these loans are recorded in earnings as a component of mortgage banking activities in non-interest income in the Consolidated Statements of Income. The Company's current practice is to sell the majority of such loans on a servicing released basis. Any retained servicing assets are amortized in proportion to their net servicing fee income over the life of the respective loans. Servicing assets are evaluated for impairment on a periodic basis.
Investments Available-for-Sale
Debt securities not classified as held-to-maturity or trading are classified as securities available-for-sale. Securities available-for-sale are acquired as part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk or other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses based on the difference between amortized cost and fair value, reported net of deferred tax, as accumulated other comprehensive income/ (loss), a separate component of stockholders' equity. The carrying values of securities available-for-sale are adjusted for premium amortization and discount accretion. Premium is amortized to the earliest call date and discount accreted to the maturity date using the effective interest method. Realized gains and losses on security sales or maturities, using the specific identification method, are included as a separate component of non-interest income. Related interest and dividends are included in interest income. Declines in the fair value of individual available-for-sale securities below their amortized cost due to credit-related factors are recognized as an allowance for credit losses. Credit-related factors affecting the determination of whether impairment has occurred include a downgrading of the security below investment grade by a rating agency or due to potential default, a significant deterioration in the financial condition of the issuer, increase in entity-specific credit spreads. Additionally, on any available-for-sale securities with unrealized losses, the Company evaluates its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Equity Securities
Equity securities include Federal Reserve Bank stock, Federal Home Loan Bank of Atlanta ("FHLB") stock and other equities that are considered restricted as to marketability and recorded at cost. As these securities do not have readily available market values, they are carried at cost and adjusted for any necessary impairments each reporting period.
Loan Financing Receivables
The Company’s financing receivables consist primarily of loans that are stated at their principal balance outstanding, net of any unearned income, acquisition fair value marks and deferred loan origination fees and costs. Interest income on loans is accrued at the contractual rate based on the principal balance outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Loans are considered past due or delinquent when the principal or interest due in accordance with the contractual terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Immaterial shortfalls in payment amounts do not necessarily result in a loan being considered delinquent or past due. If any payments are past due and subsequent payments are resumed without payment of the delinquent amount, the loan shall continue to be considered past due. Whenever any loan is reported delinquent on a principal or interest payment or portion thereof, the amount reported as delinquent is the outstanding principal balance of the loan.
Loans, except for consumer installment loans, are placed into non-accrual status when any portion of the loan principal or interest becomes 90 days past due. Management may determine that certain circumstances warrant earlier discontinuance of interest accruals on specific loans if an evaluation of other relevant factors (such as bankruptcy, interruption of cash flows, etc.) indicates collection of amounts contractually due is unlikely. These loans are considered, collectively, to be non-performing loans. Consumer installment loans that are not secured by real estate are not placed on non-accrual, but are charged down to their net realizable value when they are four months past due. Loans designated as non-accrual have all previously accrued but unpaid interest reversed. Interest income is not recognized on non-accrual loans. All payments received on non-accrual loans are applied using a cost-recovery method to reduce the outstanding principal balance until the loan returns to accrual status. Loans may be returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans considered to be TDRs are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured collateral-dependent loans are individually assessed for allowance for credit losses and may either be in accruing or non-accruing status. Non-accruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category if the borrower is no longer experiencing financial difficulty, a re-underwriting event took place, and the revised loan terms of the subsequent restructuring agreement are considered to be consistent with terms that can be obtained in the market for loans with comparable credit risk.
Allowance for Credit Losses
On January 1, 2020, the Company adopted the provisions of ASU No. 2016-13, Current Expected Credit Losses. The allowance for credit losses (“allowance” or “ACL”) represents an amount which, in management's judgment, reflects the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance is measured and recorded upon the initial recognition of a financial asset. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision or credit for credit losses, which is recorded as a current period expense.
Determination of the appropriateness of the allowance is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the allowance is reviewed periodically by the Risk Committee of the Board of Directors and formally approved quarterly by that same committee of the Board.
The Company’s methodology for estimating the allowance includes: (1) a collective quantified reserve that reflects the Company’s historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and the Company’s prepayment and curtailment rates; (2) collective qualitative factors that consider the expected impact of certain factors not fully captured in the collective quantified reserve, including concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations; and (3) individual allowances on collateral-dependent loans where borrowers are experiencing financial difficulty or when the Company determines that the foreclosure is probable. The Company excludes accrued interest from the measurement of the allowance as the Company has a non-accrual policy to reverse any accrued, uncollected interest income as loans are moved to non-accrual status.
Loans are pooled into segments based on the similar risk characteristics of the underlying borrowers, in addition to consideration of collateral type, industry and business purpose of the loans. Portfolio segments used to estimate the allowance are the same as portfolio segments used for general credit risk management purposes. Refer to Note 5 for more details on the Company’s portfolio segments.
The Company applies two calculation methodologies to estimate the collective quantified component of the allowance: discounted cash flows method and weighted average remaining life method. Allowance estimates on commercial acquisition, development and construction (“AD&C”) and residential construction segments are based on the weighted average remaining life method. Allowance estimates on all other portfolio segments are based on the discounted cash flows method. Segments utilizing the discounted cash flows method are further sub-segmented into risk level pools, determined either by risk rating for commercial loans or Beacon Scores ranges for residential and consumer loans. To better manage risk and reasonably determine the sufficiency of reserves, this segregation allows the Company to monitor the allowance component applicable to higher risk loans separate from the remainder of the portfolio. Collective calculation methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The reasonable and supportable forecast period represents a two-year economic outlook for the applicable economic variables. Following the end of the reasonable and supportable forecast period expected losses revert back to the historical mean over the next two years on a straight-line basis. Economic variables that have the most significant impact on the allowance include: unemployment rate, house price index and business bankruptcies. Contractual loan level cash flows within the discounted cash flows methodology are adjusted for the Company’s historical prepayment and curtailment rate experience.
The individual reserve assessment is applied to collateral dependent loans where borrowers are experiencing financial difficulty or when the Company determines that a foreclosure is probable. The determination of the fair value of the collateral depends on whether a repayment of the loan is expected to be from the sale or the operation of the collateral. When a repayment is expected from the operation of the collateral, the Company uses the present value of expected cash flows from the operation of the collateral as the fair value. When the repayment of the loan is expected from the sale of the collateral the fair value of the collateral is based on an observable market price or the collateral’s appraised value, less estimated costs to sell. Third party appraisals used in the individual reserve assessment are conducted at least annually with underlying assumptions that are reviewed by management. Third party appraisals may be obtained on a more frequent basis if deemed necessary. Internal evaluations of collateral value are conducted quarterly to ensure any further deterioration of the collateral value is recognized on a timely basis. During the individual reserve assessment, management also considers the potential future changes in the value of the collateral over the remainder of the loan’s remaining life. The Company may receive updated appraisals which contradict the preliminary determination of fair value used to establish an individual allowance on a loan. In these instances the individual allowance is adjusted to reflect the Company’s evaluation of the updated appraised fair value. In the event a loss was previously confirmed and the loan was charged down to the estimated fair value based on a previous appraisal, the balance of partially charged-off loans are not subsequently increased, but could be further decreased depending on the direction of the change in fair value. Payments on fully or partially charged-off loans are accounted for under the cost-recovery method. Under this method, all payments received are applied on a cash basis to reduce the entire outstanding principal balance, then to recognize a recovery of all previously charged-off amounts before any interest income may be recognized. Based on the individual reserve assessment, if the Company determines that the fair value of the collateral is less than the amortized cost basis of the loan, an individual allowance will be established measured as the difference between the fair value of the collateral
(less costs to sell) and the amortized cost basis of the loan. Once a loss has been confirmed, the loan is charged-down to its estimated fair value.
Large groups of smaller non-accrual homogeneous loans are not individually evaluated for allowance and include residential permanent and construction mortgages and consumer installment loans. These portfolios are reserved for on a collective basis using historical loss rates of similar loans over the weighted average life of each pool.
The Company reviews its unfunded commitments to determine if they are unconditionally cancellable by the Company. If the unfunded commitment is determined to not be unconditionally cancellable by the Company, a reserve for unfunded commitments is established. The reserve for unfunded commitments considers both the likelihood that the funding will occur and an estimate of expected credit losses over the life of the commitment.
Management believes it uses relevant information available to make determinations about the allowance and that it has established the existing allowance in accordance with GAAP. However, the determination of the allowance requires significant judgment, and estimates of expected lifetime losses in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize expected losses, future additions to the allowance may be necessary based on
changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.
Acquired Loans
Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (“PCD”) loans, or loans with no evidence of credit deterioration (“non-PCD”).
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. The Company uses a combination of individual and pooled review approaches to determine if acquired loans are PCD. At acquisition, the Company considers a number of factors to determine if an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration. These factors include:
•loans classified as non-accrual,
•loans with risk rating of special mention or worse (using the Company's risk rating scale),
•loans with multiple risk rating downgrades since origination,
•loans with evidence of being 60 days or more past due,
•loans previously modified in a troubled debt restructuring,
•loans that received an interest only or payment deferral modification, and
•loans in industries that show evidence of additional risk due to economic conditions.
The initial allowance related to PCD loans that share similar risk characteristics is established using a pooled approach. The Company uses either a discounted cash flow or weighted average remaining life method to determine the required level of the allowance. PCD loans that were classified as non-accrual as of the acquisition date and are collateral dependent are assessed for allowance on an individual basis.
For PCD loans, an initial allowance is established on the acquisition date and added to the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, the initial allowance on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.
Non-PCD loans are pooled into segments together with originated loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life, interest rate profile, market interest rate environment, payment schedules, risk ratings, probability of default and loss given default, and estimated prepayment rates. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization, computed using the straight-line method. Premises and equipment are depreciated over the useful lives of the assets, which generally range from 3 to 10 years for furniture, fixtures and equipment, 3 to 5 years for computer software and hardware, and 10 to 40 years for buildings and building improvements. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are included in non-interest expense.
Leases
The Company determines if an arrangement is a lease at inception. All of the Company’s leases are currently classified as operating leases and are included in other assets and other liabilities on the Company’s Consolidated Statements of Condition. Periodic operating lease costs are recorded in occupancy expenses of premises on the Company's Consolidated Statements of Income.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of the expected future lease payments over the remaining lease term. In determining the present value of future lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The operating ROU assets are adjusted for any lease payments made at or before the lease commencement date, initial direct costs, any lease incentives received and, for acquired leases, any favorable or unfavorable fair value adjustments. The present value of the lease liability may include the impact of options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options provided in the lease terms. Lease expense is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components, such as common area maintenance charges, are accounted for separately.
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of the Company’s reporting units be compared to the carrying amount of the reporting unit’s net assets, including goodwill. The Company’s reporting units were identified based upon an analysis of each of its individual operating segments. If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is required. If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be realized through a reduction of goodwill or the intangible and an offsetting charge to non-interest expense. Annually, the Company performs an impairment test of goodwill as of October 1 of each year. During the year, any triggering event that occurs may affect goodwill and could require an impairment assessment. Determining the fair value of a reporting unit requires the Company to use a degree of subjectivity. The Company's annual impairment test of goodwill and other intangible assets did not identify any impairment. Additionally, the Company determined that there were no triggering events and as a result no evidence of impairment between the annual impairment test and December 31, 2021.
Accounting guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company assesses qualitative factors on a quarterly basis. Based on the assessment of these qualitative factors, if it is determined that it is more likely than not that the fair value of a reporting unit is not less than the carrying value, then performing the impairment process is not necessary. However, if it is determined that it is more likely than not that the carrying value exceeds the fair value a quantified analysis is required to determine whether an impairment exists.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Other intangible assets have finite lives and are reviewed for impairment annually. These assets are amortized over their estimated useful lives either on a straight-line or sum-of-the-years basis over varying periods that initially did not exceed 15 years.
Other Real Estate Owned
OREO is comprised of properties acquired in partial or total satisfaction of problem loans. The properties are recorded at fair value less estimated costs of disposal, on the date acquired or on the date that the Company acquires effective control over the property. Gains or losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. During the holding period OREO continues to be measured at lower of cost or fair value less estimated costs of disposal, and any subsequent declines in value are expensed as incurred. Gains and losses realized from the sale of OREO, as well as valuation adjustments and expenses of operation are included in non-interest expense.
Derivative Financial Instruments
Derivative Loan Commitments
Mortgage loan commitments are derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Derivative loan commitments are recognized at fair value in the Consolidated Statements of Condition in other assets or other liabilities with changes in their fair values recorded as a component of mortgage banking activities in the Consolidated Statements of Income.
Mortgage loan commitments are issued to borrowers. Subsequent to commitment date, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time. In estimating fair value, a probability is assigned to a loan commitment based on an expectation that it will be exercised and the loan will be funded.
Forward Loan Sale Commitments
Loan sales agreements are evaluated to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Generally, best efforts contracts also meet the definition of derivative instruments after the loan to the borrower has closed. Accordingly, forward loan sale commitments that economically hedge the closed loan inventory are recognized at fair value in the Consolidated Statements of Condition in other assets or other liabilities with changes in their fair values recorded as a component of mortgage banking activities in the Consolidated Statements of Income. The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments.
Interest Rate Swap Agreements
The Company enters into interest rate swaps (“swaps”) with commercial loan customers to provide a facility to mitigate the fluctuations in the variable rate on the respective loans. These swaps are matched in exact offsetting terms to swaps that the Company enters into with an outside third party. The swaps are reported at fair value in other assets or other liabilities in the Consolidated Statements of Condition. The Company's swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other non-interest income in the Consolidated Statements of Income. Further discussion of the Company's financial derivatives is set forth in Note 19.
Off-Balance Sheet Credit Risk
The Company issues financial or standby letters of credit that represent conditional commitments to fund transactions by the Company, typically to guarantee performance of a customer to a third-party related to borrowing arrangements. The credit risk associated with issuing letters of credit is essentially the same as occurs when extending loan facilities to borrowers. The Company monitors the exposure to the letters of credit as part of its credit review process. Extensions of letters of credit, if any, would become part of the loan balance outstanding and would be evaluated in accordance with the Company’s credit policies. Potential exposure to loss for unfunded letters of credit if deemed necessary would be recorded in other liabilities in the Consolidated Statements of Condition.
In the ordinary course of business the Company originates and sells whole loans to a variety of investors. Mortgage loans sold are subject to representations and warranties made to the third-party purchasers regarding certain attributes. Subsequent to the sale, if a material underwriting deficiency or documentation defect is determined, the Company may be obligated to repurchase the mortgage loan or reimburse the investor for losses incurred if the deficiency or defect cannot be rectified within a specific period subsequent to discovery. The Company monitors the activity regarding the requirement to repurchase loans and the associated losses incurred. This information is applied to determine an estimated recourse reserve that is recorded in other liabilities in the Consolidated Statements of Condition.
Valuation of Long-Lived Assets
The Company reviews long-lived assets, including leases, and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the cost or the fair value, less costs to sell.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right or from providing more than a trivial benefit to the transferor) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through any agreement to repurchase or redeem them before their maturity or likely cause a holder to return those assets whether through unilateral ability or a price so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them. A participating interest must be in an entire financial asset and cannot represent an interest in a group of financial assets. Except for compensation paid for services performed, all cash flows from the asset are allocated to the participating interest holders in proportion to their share of ownership. Financial assets obtained or liabilities incurred in a sale are recognized and initially measured at fair value.
Advertising Costs
Advertising costs are expensed as incurred and included as marketing expense in non-interest expenses in the Consolidated Statements of Income.
Net Income per Common Share
The Company calculates earnings per common share under the two class method, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the dual class method. The Company has determined that its outstanding non-vested restricted stock awards are participating securities.
Under the two class method, basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding during the applicable period, which excludes outstanding participating securities. Diluted earnings per common share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of incremental stock options and restricted stock.
Income Taxes
Income tax expense is based on the results of operations, adjusted for permanent differences between items of income or expense reported in the financial statements and those reported for tax purposes. Deferred income tax assets and liabilities are determined using the liability method. Under the liability method, deferred income taxes are determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities and are measured at the enacted tax rates that will be in effect when these differences reverse. The effects of the enactment of the new tax law are accounted for under the existing authoritative guidance.
The Company’s policy is to recognize interest and penalties on income taxes in other non-interest expense in the Consolidated Statements of Income.
Adopted Accounting Pronouncements
In December 2019, FASB released ASU 2019-12 - Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing multiple exceptions to the general principals in Topic 740. The standard was effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this standard during the current year and it did not have a material impact on the Company’s Consolidated Financial Statements.
Pending Accounting Pronouncements
In March 2020, FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of LIBOR likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022, and can be adopted at any time during this period. The Company has not yet fully
adopted this standard. A cross-functional working group has been established to guide the Company’s transition from LIBOR to alternative reference rates. The Company has identified its products that are either directly or indirectly influenced by LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates. The Company is evaluating existing platforms and systems and preparing to offer new rates. The Company stopped originating any new loans referencing LIBOR during 2021. Currently, the Company does not expect that the adoption of this standard will have a material impact on its Consolidated Financial Statements.
NOTE 2 - ACQUISITION OF REVERE BANK
On April 1, 2020 (“Acquisition Date”), the Company completed the acquisition of Revere Bank (“Revere”), a Maryland chartered commercial bank, in accordance with the definitive agreement that was entered into on September 23, 2019 by and among the Company, the Bank and Revere. In connection with the completion of the merger, former Revere shareholders received 1.05 shares of Sandy Spring common stock for each share of Revere common stock they held. Based on the $22.64 per share closing price of Sandy Spring common stock on March 31, 2020, and including the fair value of options converted or cashed-out, the total transaction value was approximately $293.0 million. Upon completion of the acquisition, Sandy Spring shareholders owned approximately 74 percent of the combined company, and former Revere shareholders owned approximately 26 percent.
As of March 31, 2020, Revere, headquartered in Rockville, MD, had more than $2.8 billion in assets and operated 11 full-service community banking offices throughout the Washington D.C. metropolitan region.
The acquisition of Revere was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The provisional amount of goodwill recognized as of the Acquisition Date was approximately $0.8 million. After immaterial adjustments recorded during the fourth quarter of 2020, the provisional amount of goodwill recognized as of December 31, 2020 was $0.5 million. Management's final review of assets acquired and liabilities assumed did not result in additional adjustments during the first quarter of 2021, and goodwill was determined to be final as of March 31, 2021. The goodwill is not deductible for tax purposes.
The consideration paid for Revere’s common equity and outstanding stock options and the final fair values of acquired identifiable assets and assumed identifiable liabilities as of March 31, 2021 were as follows:
(Dollars in thousands, except per share data) March 31, 2021
Purchase price:
Fair value of common shares issued (12,768,949 shares) based on Sandy Spring's share price of $22.64
$ 289,089
Fair value of Revere stock options converted to Sandy Spring stock options 3,611
Cash paid for cashed-out Revere stock options 291
Cash for fractional shares 11
Total purchase price $ 293,002
Identifiable assets:
Cash and cash equivalents $ 80,744
Investments available-for-sale 180,752
Loans 2,502,244
Premises and equipment 3,443
Accrued interest receivable 7,651
Core deposit intangible asset 18,360
Other assets 53,162
Total identifiable assets $ 2,846,356
Identifiable liabilities:
Deposits $ 2,322,422
Borrowings 205,514
Other liabilities 25,933
Total identifiable liabilities $ 2,553,869
Fair value of net assets acquired including identifiable intangible assets 292,487
Goodwill $ 515
NOTE 3 - CASH AND DUE FROM BANKS
The Federal Reserve Act requires that banks maintain cash reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. At its option, the Company maintains additional balances to compensate for clearing and safekeeping services. The average balance maintained in 2021 was $491.9 million and in 2020 was $236.3 million.
NOTE 4 - INVESTMENTS
Investments available-for-sale
The amortized cost and estimated fair values of investments available-for-sale at December 31 are presented in the following table:
2021 2020
(In thousands) Amortized Cost Gross Unrealized
Gains Gross Unrealized
Losses Estimated Fair
Value Amortized Cost Gross Unrealized
Gains Gross Unrealized
Losses Estimated Fair
Value
U.S. treasuries and government agencies $ 68,487 $ 202 $ (150) $ 68,539 $ 42,750 $ 549 $ (2) $ 43,297
State and municipal 323,286 6,561 (3,445) 326,402 377,108 13,470 (211) 390,367
Mortgage-backed and asset-backed 1,074,577 8,203 (11,825) 1,070,955 881,201 24,078 (847) 904,432
Corporate debt - - - - 9,100 825 - 9,925
Total investments available-for-sale $ 1,466,350 $ 14,966 $ (15,420) $ 1,465,896 $ 1,310,159 $ 38,922 $ (1,060) $ 1,348,021
Any unrealized losses in the U.S. treasuries and government agencies, state and municipal, mortgage-backed and asset-backed investment securities at December 31, 2021 are due to changes in interest rates and not credit-related events. As such, no allowance for credit losses is required at December 31, 2021. Unrealized losses on investment securities are expected to recover over time as these securities approach maturity. The Company does not intend to sell, nor is it more likely than not that it will be required to sell, these
securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.
The mortgage-backed and asset-backed portfolio at December 31, 2021 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($364.4 million), GNMA, FNMA or FHLMC mortgage-backed securities ($652.0 million) and SBA asset-backed securities ($54.6 million).
Gross unrealized losses and fair values by length of time that individual available-for-sale securities have been in an unrealized loss position at December 31 are presented in the following tables:
December 31, 2021
Number
of
Securities Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. treasuries and government agencies 5 $ 49,695 $ 150 $ - $ - $ 49,695 $ 150
State and municipal 32 63,206 2,288 21,740 1,157 84,946 3,445
Mortgage-backed and asset-backed 104 665,813 10,145 37,857 1,680 703,670 11,825
Total 141 $ 778,714 $ 12,583 $ 59,597 $ 2,837 $ 838,311 $ 15,420
December 31, 2020
Number
of
Securities Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. treasuries and government agencies 2 $ 25,369 $ 2 $ - $ - $ 25,369 $ 2
State and municipal 8 22,753 211 - - 22,753 211
Mortgage-backed and asset-backed 24 44,746 154 76,879 693 121,625 847
Total 34 $ 92,868 $ 367 $ 76,879 $ 693 $ 169,747 $ 1,060
The Company has allocated mortgage-backed and asset-backed securities into the four maturity groupings reflected in the following table using the expected average life of the individual securities based on statistics provided by independent third-party industry sources. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.
The estimated fair values and amortized costs of debt securities available-for-sale by contractual maturity at December 31 are provided in the following table:
December 31, 2021 December 31, 2020
(In thousands) Fair Value Amortized Cost Fair Value Amortized Cost
U.S. treasuries and government agencies:
One year or less $ 12,029 $ 11,995 $ 33,963 $ 33,833
One to five years 56,510 56,492 9,334 8,917
Five to ten years - - - -
After ten years - - - -
State and municipal:
One year or less 12,821 12,709 16,581 16,458
One to five years 27,408 26,637 44,910 43,857
Five to ten years 42,960 42,661 59,059 56,130
After ten years 243,213 241,279 269,817 260,663
Mortgage-backed and asset-backed:
One year or less 9,272 9,239 1 1
One to five years 14,752 14,575 21,637 21,229
Five to ten years 388,918 390,569 74,142 72,481
After ten years 658,013 660,194 808,652 787,490
Corporate debt:
One year or less - - - -
One to five years - - 2,318 2,100
Five to ten years - - 7,607 7,000
After ten years - - - -
Total available-for-sale debt securities $ 1,465,896 $ 1,466,350 $ 1,348,021 $ 1,310,159
At December 31, 2021 and 2020, investments available-for-sale with a book value of $531.6 million and $465.7 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. government agency securities, exceeded ten percent of stockholders' equity at December 31, 2021 and 2020.
Equity securities
Other equity securities at the dates indicated are presented in the following table:
(In thousands) 2021 2020
Federal Reserve Bank stock $ 34,097 $ 38,650
Federal Home Loan Bank of Atlanta stock 6,392 26,433
Other equity securities 677 677
Total equity securities $ 41,166 $ 65,760
Investment securities gains
Gross realized gains and losses on all investments for the years ended December 31 are presented in the following table:
(In thousands) 2021 2020 2019
Gross realized gains from sales of investments available-for-sale $ 3,588 $ 1,297 $ 14
Gross realized losses from sales of investments available-for-sale (3,478) (1,068) (2)
Net gains from calls of investments available-for-sale 102 238 65
Net investment securities gains $ 212 $ 467 $ 77
NOTE 5 - LOANS
The 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.
Outstanding loan balances at December 31, 2021 and 2020 are net of unearned income, including net deferred loan fees of $14.3 million and $24.5 million, respectively. Net deferred loan fees at December 31, 2021, included $4.6 million in net fees related to the loans originated under the Paycheck Protection Program (“PPP”) compared to $21.2 million at the end of the prior year.
The loan portfolio segment balances at December 31 are presented in the following table:
(In thousands) 2021 2020
Commercial real estate:
Commercial investor real estate $ 4,141,346 $ 3,634,720
Commercial owner-occupied real estate 1,690,881 1,642,216
Commercial AD&C 1,088,094 1,050,973
Commercial business 1,481,834 2,267,548
Total commercial loans 8,402,155 8,595,457
Residential real estate:
Residential mortgage 937,570 1,105,179
Residential construction 197,652 182,619
Consumer 429,714 517,254
Total residential and consumer loans 1,564,936 1,805,052
Total loans $ 9,967,091 $ 10,400,509
The fair value of the financial assets acquired in the Revere acquisition as of the Acquisition Date included loans receivable with a gross amortized cost basis of $2.5 billion. As of the Acquisition Date, the Company identified $974.8 million of loans that were classified as PCD. An initial allowance for credit losses of $18.6 million was recorded through a gross-up adjustment to fair values of PCD loans. A fair value premium related to other factors totaled $4.5 million and amortizes to interest income over the remaining life of each loan. Total fair value of PCD loans as of the Acquisition Date was $960.7 million. Refer to Note 1 for more details on factors considered in the PCD assessment.
At the Acquisition Date, non-PCD loans totaled $1.5 billion and had a net fair value premium of $2.1 million, which amortizes to interest income over the remaining life of each loan. See Note 1 for more information on the Company’s accounting policy for acquired loans and Note 2 for more information on the Revere acquisition.
Portfolio Segments
The Company currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are:
•Commercial investor real estate loans - Commercial investor real estate loans consist of loans secured by nonowner-occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This commercial investor real estate category contains mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan.
•Commercial owner-occupied real estate loans - Commercial owner-occupied real estate loans consist of commercial mortgage loans secured by owner-occupied properties where an established banking relationship exists and involves a variety of property types to conduct the borrower’s operations. The decision to extend a loan is based upon the borrower’s financial health and the ability of the borrower and the business to repay. The primary source of repayment for this type of loan is the cash flow from the operations of the business.
•Commercial acquisition, development and construction loans - Commercial acquisition, development and construction loans are intended to finance the construction of commercial properties and include loans for the acquisition and development
of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of additional factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.
•Commercial business loans - Commercial loans are made to provide funds for equipment and general corporate needs. Repayment of a loan primarily comes from the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. Loans issued under the PPP are also included in this category, a substantial portion of which are expected to be forgiven by the Small Business Administration pursuant to the CARES Act.
•Residential mortgage loans - The residential mortgage loans category contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming.
•Residential construction loans - The Company makes residential construction loans generally to provide interim financing on residential property during the construction period. Borrowers are typically individuals who will ultimately occupy the single-family dwelling. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections.
•Consumer loans - This category of loans includes primarily home equity loans and lines, installment loans, personal lines of credit, and other loans. The home equity category consists mainly of revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes. Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.
Loans to Related Parties
Certain directors and executive officers have loan transactions with the Company. The following schedule summarizes changes in amounts of loans outstanding, both direct and indirect, to these persons during the periods indicated:
(In thousands) 2021 2020
Balance at January 1 $ 96,005 $ 51,367
Additions 7,040 46,846
Repayments (24,818) (2,208)
Balance at December 31 $ 78,227 $ 96,005
NOTE 6 - CREDIT QUALITY ASSESSMENT
Allowance for Credit Losses
Summary information on the allowance for credit loss activity for the years ended December 31 is provided in the following table:
(In thousands) 2021 2020 2019
Balance at beginning of year $ 165,367 $ 56,132 $ 53,486
Initial allowance on PCD loans at adoption of ASC 326 - 2,762 -
Transition impact of adopting ASC 326 - 2,983 -
Initial allowance on Revere PCD loans - 18,628 -
Provision/ (credit) for credit losses (45,556) 85,669 4,684
Loan charge-offs (12,313) (1,819) (2,668)
Loan recoveries 1,647 1,012 630
Net charge-offs (10,666) (807) (2,038)
Balance at period end $ 109,145 $ 165,367 $ 56,132
The following table provides summary information regarding collateral dependent loans individually evaluated for credit loss at the dates indicated:
(In thousands) 2021 2020
Collateral dependent loans individually evaluated for credit loss with an allowance $ 9,510 $ 20,717
Collateral dependent loans individually evaluated for credit loss without an allowance 24,024 77,001
Total individually evaluated collateral dependent loans $ 33,534 $ 97,718
Allowance for credit losses related to loans evaluated individually $ 6,593 $ 11,405
Allowance for credit losses related to loans evaluated collectively 102,552 153,962
Total allowance for credit losses $ 109,145 $ 165,367
The following tables provide information on the activity in the allowance for credit losses by the respective loan portfolio segment for the years ended December 31:
Commercial Real Estate Residential Real Estate
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer Total
Balance as of December 31, 2020
$ 57,404 $ 20,061 $ 22,157 $ 46,806 $ 11,295 $ 1,502 $ 6,142 $ 165,367
Provision/ (credit) (6,598) (8,238) 172 (20,132) (6,321) (459) (3,980) (45,556)
Charge-offs (5,802) (136) (2,007) (4,069) - - (299) (12,313)
Recoveries 285 - - 565 410 5 382 1,647
Net (charge-offs)/ recoveries (5,517) (136) (2,007) (3,504) 410 5 83 (10,666)
Balance at end of period $ 45,289 $ 11,687 $ 20,322 $ 23,170 $ 5,384 $ 1,048 $ 2,245 $ 109,145
Total loans $ 4,141,346 $ 1,690,881 $ 1,088,094 $ 1,481,834 $ 937,570 $ 197,652 $ 429,714 $ 9,967,091
Allowance for credit losses to total loans ratio 1.09 % 0.69 % 1.87 % 1.56 % 0.57 % 0.53 % 0.52 % 1.10 %
Average loans $ 3,689,769 $ 1,661,015 $ 1,110,420 $ 1,952,537 $ 979,754 $ 178,171 $ 463,200 $ 10,034,866
Net charge-offs/ (recoveries) to average loans 0.15 % 0.01 % 0.18 % 0.18 % (0.04) % - % (0.02) % 0.11 %
Balance of loans individually evaluated for credit loss $ 12,489 $ 9,306 $ 650 $ 9,033 $ 1,704 $ - $ 352 $ 33,534
Allowance related to loans evaluated individually $ 213 $ 79 $ 504 $ 5,797 $ - $ - $ - $ 6,593
Individual allowance to loans evaluated individually ratio 1.71 % 0.85 % 77.54 % 64.18 % - % - % - % 19.66 %
Balance of loans collectively evaluated for credit loss $ 4,128,857 $ 1,681,575 $ 1,087,444 $ 1,472,801 $ 935,866 $ 197,652 $ 429,362 $ 9,933,557
Allowance related to loans evaluated collectively $ 45,076 $ 11,608 $ 19,818 $ 17,373 $ 5,384 $ 1,048 $ 2,245 $ 102,552
Collective allowance to loans evaluated collectively ratio 1.09 % 0.69 % 1.82 % 1.18 % 0.58 % 0.53 % 0.52 % 1.03 %
Commercial Real Estate Residential Real Estate
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer Total
Balance as of December 31, 2019
$ 18,407 $ 6,884 $ 7,590 $ 11,395 $ 8,803 $ 967 $ 2,086 $ 56,132
Initial allowance on PCD loans at adoption of ASC 326 1,114 - - 1,549 - - 99 2,762
Transition impact of adopting ASC 326 (3,125) 387 2,576 2,988 (388) (275) 820 2,983
Initial allowance on Revere PCD loans 7,973 2,782 1,248 6,289 243 6 87 18,628
Provision 33,431 10,008 10,743 24,374 3,016 798 3,299 85,669
Charge-offs (411) - - (491) (484) - (433) (1,819)
Recoveries 15 - - 702 105 6 184 1,012
Net (charge-offs)/ recoveries (396) - - 211 (379) 6 (249) (807)
Balance at end of period $ 57,404 $ 20,061 $ 22,157 $ 46,806 $ 11,295 $ 1,502 $ 6,142 $ 165,367
Total loans $ 3,634,720 $ 1,642,216 $ 1,050,973 $ 2,267,548 $ 1,105,179 $ 182,619 $ 517,254 $ 10,400,509
Allowance for credit losses to total loans ratio 1.58 % 1.22 % 2.11 % 2.06 % 1.02 % 0.82 % 1.19 % 1.59 %
Average loans $ 3,210,527 $ 1,560,223 $ 906,414 $ 1,781,197 $ 1,168,668 $ 165,567 $ 524,897 $ 9,317,493
Net charge-offs/ (recoveries) to average loans 0.01 % - % - % (0.01) % 0.03 % - % 0.05 % 0.01 %
Balance of loans individually evaluated for credit loss $ 45,227 $ 11,561 $ 15,044 $ 23,648 $ 1,874 $ - $ 364 $ 97,718
Allowance related to loans evaluated individually $ 1,273 $ - $ 603 $ 9,529 $ - $ - $ - $ 11,405
Individual allowance to loans evaluated individually ratio 2.81 % - % 4.01 % 40.30 % - % - % - % 11.67 %
Balance of loans collectively evaluated for credit loss $ 3,589,493 $ 1,630,655 $ 1,035,929 $ 2,243,900 $ 1,103,305 $ 182,619 $ 516,890 $ 10,302,791
Allowance related to loans evaluated collectively $ 56,131 $ 20,061 $ 21,554 $ 37,277 $ 11,295 $ 1,502 $ 6,142 $ 153,962
Collective allowance to loans evaluated collectively ratio 1.56 % 1.23 % 2.08 % 1.66 % 1.02 % 0.82 % 1.19 % 1.49 %
The following table presents collateral dependent loans individually evaluated for credit losses with the associated allowances for credit losses by the applicable portfolio segment:
Commercial Real Estate Residential Real Estate Total
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential Mortgage Residential Construction Consumer
Loans individually evaluated for credit losses with an allowance:
Non-accruing $ 808 $ 79 $ 650 $ 4,849 $ - $ - $ - $ 6,386
Restructured accruing - - - 613 - - - 613
Restructured non-accruing 336 - - 2,175 - - - 2,511
Balance $ 1,144 $ 79 $ 650 $ 7,637 $ - $ - $ - $ 9,510
Allowance $ 213 $ 79 $ 504 $ 5,797 $ - $ - $ - $ 6,593
Loans individually evaluated for credit losses without an allowance:
Non-accruing $ 3,498 $ 4,775 $ - $ 434 $ - $ - $ - $ 8,707
Restructured accruing - - - - 1,554 - - 1,554
Restructured non-accruing 7,847 4,452 - 962 150 - 352 13,763
Balance $ 11,345 $ 9,227 $ - $ 1,396 $ 1,704 $ - $ 352 $ 24,024
Total individually evaluated loans:
Non-accruing $ 4,306 $ 4,854 $ 650 $ 5,283 $ - $ - $ - $ 15,093
Restructured accruing - - - 613 1,554 - - 2,167
Restructured non-accruing 8,183 4,452 - 3,137 150 - 352 16,274
Balance $ 12,489 $ 9,306 $ 650 $ 9,033 $ 1,704 $ - $ 352 $ 33,534
Unpaid contractual principal balance $ 12,857 $ 11,132 $ 695 $ 10,573 $ 2,778 $ - $ 364 $ 38,399
Commercial Real Estate Residential Real Estate Total
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential Mortgage Residential Construction Consumer
Loans individually evaluated for credit losses with an allowance:
Non-accruing $ 4,913 $ - $ 1,328 $ 11,178 $ - $ - $ - $ 17,419
Restructured accruing - - - 589 - - - 589
Restructured non-accruing 699 - - 2,010 - - - 2,709
Balance $ 5,612 $ - $ 1,328 $ 13,777 $ - $ - $ - $ 20,717
Allowance $ 1,273 $ - $ 603 $ 9,529 $ - $ - $ - $ 11,405
Loans individually evaluated for credit losses without an allowance:
Non-accruing $ 39,615 $ 9,315 $ 13,716 $ 9,118 $ - $ - $ - $ 71,764
Restructured accruing - - - 126 1,602 - - 1,728
Restructured non-accruing - 2,246 - 627 272 - 364 3,509
Balance $ 39,615 $ 11,561 $ 13,716 $ 9,871 $ 1,874 $ - $ 364 $ 77,001
Total individually evaluated loans:
Non-accruing $ 44,528 $ 9,315 $ 15,044 $ 20,296 $ - $ - $ - $ 89,183
Restructured accruing - - - 715 1,602 - - 2,317
Restructured non-accruing 699 2,246 - 2,637 272 - 364 6,218
Balance $ 45,227 $ 11,561 $ 15,044 $ 23,648 $ 1,874 $ - $ 364 $ 97,718
Unpaid contractual principal balance $ 49,920 $ 15,309 $ 16,040 $ 30,958 $ 3,225 $ - $ 364 $ 115,816
The following table presents average principal balance of total non-accrual loans and contractual interest due on non-accrual loans for the periods indicated below:
Commercial Real Estate Residential Real Estate Total
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential Mortgage Residential Construction Consumer
Average non-accrual loans for the period $ 31,590 $ 9,444 $ 9,236 $ 12,678 $ 9,439 $ 36 $ 7,369 $ 79,792
Contractual interest income due on non-accrual loans during the period $ 2,169 $ 555 $ 597 $ 1,096 $ 271 $ 2 $ 402 $ 5,092
Commercial Real Estate Residential Real Estate Total
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential Mortgage Residential Construction Consumer
Average non-accrual loans for the period $ 26,849 $ 6,605 $ 4,267 $ 16,532 $ 11,634 $ - $ 6,675 $ 72,562
Contractual interest income due on non-accrual loans during the period $ 6,547 $ 2,741 $ 4,505 $ 2,858 $ 918 $ - $ 732 $ 18,301
There was no interest income recognized on non-accrual loans during the year ended December 31, 2021. See Note 1 for additional information on the Company's policies for non-accrual loans. Loans designated as non-accrual have all previously accrued but unpaid interest reversed from interest income. During the year ended December 31, 2021, new loans placed on non-accrual status totaled $8.1 million and the related amount of reversed uncollected accrued interest was $0.2 million.
Credit Quality
The following tables provide information on the credit quality of the loan portfolio by segment at December 31 for the years indicated:
Commercial Real Estate Residential Real Estate
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer Total
Analysis of non-accrual loan activity:
Balance at beginning of period $ 45,227 $ 11,561 $ 15,044 $ 22,933 $ 10,212 $ - $ 7,384 $ 112,361
Loans placed on non-accrual 699 3,676 49 1,339 695 62 1,626 8,146
Non-accrual balances transferred to OREO - (257) - - - - - (257)
Non-accrual balances charged-off (5,803) (136) (2,007) (3,547) - - (100) (11,593)
Net payments or draws (26,813) (5,538) (12,436) (12,305) (2,406) (7) (1,725) (61,230)
Non-accrual loans brought current (821) - - - (60) - (460) (1,341)
Balance at end of period $ 12,489 $ 9,306 $ 650 $ 8,420 $ 8,441 $ 55 $ 6,725 $ 46,086
Commercial Real Estate Residential Real Estate
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer Total
Analysis of non-accrual loan activity:
Balance at beginning of period $ 8,437 $ 4,148 $ 829 $ 8,450 $ 12,661 $ - $ 4,107 $ 38,632
PCD loans designated as non-accrual (1)
9,544 - - 2,539 8 - 993 13,084
Loans placed on non-accrual 37,882 8,572 15,844 17,442 1,485 - 4,061 85,286
Non-accrual balances transferred to OREO - - - - (70) - - (70)
Non-accrual balances charged-off (411) - - (446) (416) - (121) (1,394)
Net payments or draws (10,225) (1,059) (1,629) (4,169) (2,598) - (1,521) (21,201)
Non-accrual loans brought current - (100) - (883) (858) - (135) (1,976)
Balance at end of period $ 45,227 $ 11,561 $ 15,044 $ 22,933 $ 10,212 $ - $ 7,384 $ 112,361
(1)Upon the adoption of the CECL standard, the Company transitioned from closed pool level accounting for PCI loans during the first quarter of 2020. Non-accrual loans are determined based on the individual loan level and aggregated for reporting.
Commercial Real Estate Residential Real Estate
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer
Total
Performing loans:
Current $ 4,127,009 $ 1,680,635 $ 1,085,642 $ 1,471,669 $ 919,199 $ 197,597 $ 419,558 $ 9,901,309
30-59 days 1,656 86 1,802 753 5,157 - 3,021 12,475
60-89 days 192 854 - 379 2,662 - 410 4,497
Total performing loans 4,128,857 1,681,575 1,087,444 1,472,801 927,018 197,597 422,989 9,918,281
Non-performing loans:
Non-accrual loans 12,489 9,306 650 8,420 8,441 55 6,725 46,086
Loans greater than 90 days past due - - - - 557 - - 557
Restructured loans - - - 613 1,554 - - 2,167
Total non-performing loans 12,489 9,306 650 9,033 10,552 55 6,725 48,810
Total loans $ 4,141,346 $ 1,690,881 $ 1,088,094 $ 1,481,834 $ 937,570 $ 197,652 $ 429,714 $ 9,967,091
Commercial Real Estate Residential Real Estate
(In thousands)
Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business Residential
Mortgage Residential
Construction Consumer Total
Performing loans:
Current $ 3,571,184 $ 1,624,265 $ 1,033,057 $ 2,238,617 $ 1,073,963 $ 182,557 $ 502,548 $ 10,226,191
30-59 days 14,046 6,390 29 4,859 16,213 - 5,275 46,812
60-89 days 4,130 - 2,843 263 2,709 62 2,047 12,054
Total performing loans 3,589,360 1,630,655 1,035,929 2,243,739 1,092,885 182,619 509,870 10,285,057
Non-performing loans:
Non-accrual loans 45,227 11,561 15,044 22,933 10,212 - 7,384 112,361
Loans greater than 90 days past due 133 - - 161 480 - - 774
Restructured loans - - - 715 1,602 - - 2,317
Total non-performing loans 45,360 11,561 15,044 23,809 12,294 - 7,384 115,452
Total loans $ 3,634,720 $ 1,642,216 $ 1,050,973 $ 2,267,548 $ 1,105,179 $ 182,619 $ 517,254 $ 10,400,509
The credit quality indicators for commercial loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented is based on the most recent credit review performed. These credit quality indicators are defined as follows:
Pass - A pass rated credit is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention - A special mention credit has potential weaknesses that deserve management’s close attention. If uncorrected, such weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard - A substandard loan is inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful - A loan that is classified as doubtful has all the weaknesses inherent in a loan classified as substandard with added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.
Loss - Loans classified as a loss are considered uncollectible and of such little value that their continuing to be carried as a loan is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.
The following tables provide information about credit quality indicators by the year of origination:
Term Loans by Origination Year Revolving
(In thousands) 2021 2020 2019 2018 2017 Prior Loans Total
Commercial Investor R/E:
Pass $ 1,391,969 $ 748,236 $ 616,761 $ 357,640 $ 328,327 $ 633,913 $ 19,239 $ 4,096,085
Special Mention 2,210 510 4,646 596 2,204 10,438 - 20,604
Substandard 807 336 4,308 8,568 10,064 574 - 24,657
Doubtful - - - - - - - -
Total $ 1,394,986 $ 749,082 $ 625,715 $ 366,804 $ 340,595 $ 644,925 $ 19,239 $ 4,141,346
Current period gross charge-offs $ - $ - $ - $ 903 $ 3,975 $ 924 $ - $ 5,802
Commercial Owner-Occupied R/E:
Pass $ 360,169 $ 254,350 $ 319,348 $ 178,416 $ 172,354 $ 363,685 $ 1,149 $ 1,649,471
Special Mention 156 1,476 4,388 9,035 4,456 9,106 - 28,617
Substandard 1,968 1,800 4,028 2,265 354 2,378 - 12,793
Doubtful - - - - - - - -
Total $ 362,293 $ 257,626 $ 327,764 $ 189,716 $ 177,164 $ 375,169 $ 1,149 $ 1,690,881
Current period gross charge-offs $ - $ - $ - $ 136 $ - $ - $ - $ 136
Commercial AD&C:
Pass $ 454,207 $ 226,332 $ 148,260 $ 87,934 $ 13,938 $ - $ 152,896 $ 1,083,567
Special Mention 2,888 - - - - - 989 3,877
Substandard 349 - 301 - - - - 650
Doubtful - - - - - - - -
Total $ 457,444 $ 226,332 $ 148,561 $ 87,934 $ 13,938 $ - $ 153,885 $ 1,088,094
Current period gross charge-offs $ - $ - $ - $ - $ 2,007 $ - $ - $ 2,007
Commercial Business:
Pass $ 403,871 $ 165,194 $ 137,069 $ 96,800 $ 55,100 $ 53,764 $ 533,893 $ 1,445,691
Special Mention 220 1,998 7,030 1,701 548 577 9,212 21,286
Substandard 3,777 3,262 2,609 797 811 2,065 1,536 14,857
Doubtful - - - - - - - -
Total $ 407,868 $ 170,454 $ 146,708 $ 99,298 $ 56,459 $ 56,406 $ 544,641 $ 1,481,834
Current period gross charge-offs $ - $ - $ 88 $ 1,674 $ 46 $ 2,236 $ 25 $ 4,069
Residential Mortgage:
Beacon score:
660-850 $ 246,612 $ 165,623 $ 46,925 $ 65,865 $ 102,628 $ 223,420 $ - $ 851,073
600-659 11,102 3,285 3,583 4,255 4,645 20,052 - 46,922
540-599 1,472 1,864 2,162 4,522 1,599 8,201 - 19,820
less than 540 452 4,293 1,575 1,829 2,079 9,527 - 19,755
Total $ 259,638 $ 175,065 $ 54,245 $ 76,471 $ 110,951 $ 261,200 $ - $ 937,570
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ -
Residential Construction:
Beacon score:
660-850 $ 134,335 $ 45,890 $ 8,063 $ 2,078 $ 1,347 $ 1,160 $ - $ 192,873
600-659 1,922 - 650 - - - - 2,572
540-599 - - - - - 462 - 462
less than 540 1,745 - - - - - - 1,745
Total $ 138,002 $ 45,890 $ 8,713 $ 2,078 $ 1,347 $ 1,622 $ - $ 197,652
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ -
Consumer:
Beacon score:
660-850 $ 3,179 $ 1,393 $ 3,130 $ 3,060 $ 1,648 $ 26,156 $ 350,466 $ 389,032
600-659 352 123 324 716 430 4,906 14,119 20,970
540-599 58 8 311 160 89 2,809 4,926 8,361
less than 540 88 58 536 544 98 3,101 6,926 11,351
Total $ 3,677 $ 1,582 $ 4,301 $ 4,480 $ 2,265 $ 36,972 $ 376,437 $ 429,714
Current period gross charge-offs $ - $ - $ 7 $ 2 $ - $ 106 $ 184 $ 299
Total loans $ 3,023,908 $ 1,626,031 $ 1,316,007 $ 826,781 $ 702,719 $ 1,376,294 $ 1,095,351 $ 9,967,091
Term Loans by Origination Year Revolving
(In thousands) 2020 2019 2018 2017 2016 Prior Loans Total
Commercial Investor R/E:
Pass $ 910,426 $ 763,214 $ 448,406 $ 448,698 $ 469,077 $ 498,384 $ 33,531 $ 3,571,736
Special Mention 11,044 - 4,879 833 269 27 - $ 17,052
Substandard 589 4,245 13,649 20,619 673 6,157 - $ 45,932
Doubtful - - - - - - - $ -
Total $ 922,059 $ 767,459 $ 466,934 $ 470,150 $ 470,019 $ 504,568 $ 33,531 $ 3,634,720
Current period gross charge-offs $ - $ 388 $ - $ - $ - $ 23 $ - $ 411
Commercial Owner-Occupied R/E:
Pass $ 285,310 $ 385,058 $ 234,578 $ 192,634 $ 204,925 $ 306,840 $ 1,664 $ 1,611,009
Special Mention 2,290 - 3,027 4,742 134 4,079 - $ 14,272
Substandard 1,610 4,335 2,065 465 219 8,009 - $ 16,703
Doubtful - - - - - 232 - $ 232
Total $ 289,210 $ 389,393 $ 239,670 $ 197,841 $ 205,278 $ 319,160 $ 1,664 $ 1,642,216
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial AD&C:
Pass $ 485,631 $ 261,537 $ 149,703 $ 50,192 $ 89 $ 2,357 $ 80,764 $ 1,030,273
Special Mention 1,711 - - - - - - $ 1,711
Substandard 1,439 891 - 13,816 2,843 - - $ 18,989
Doubtful - - - - - - - $ -
Total $ 488,781 $ 262,428 $ 149,703 $ 64,008 $ 2,932 $ 2,357 $ 80,764 $ 1,050,973
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial Business:
Pass $ 1,244,822 $ 208,682 $ 138,861 $ 86,830 $ 34,498 $ 81,760 $ 433,016 $ 2,228,469
Special Mention 1,929 1,382 1,119 708 309 621 4,319 $ 10,387
Substandard 2,914 4,564 3,519 1,631 2,745 3,456 1,829 $ 20,658
Doubtful 106 995 849 36 1,284 1,852 2,912 $ 8,034
Total $ 1,249,771 $ 215,623 $ 144,348 $ 89,205 $ 38,836 $ 87,689 $ 442,076 $ 2,267,548
Current period gross charge-offs $ - $ - $ 23 $ 160 $ 103 $ 205 $ - $ 491
Residential Mortgage:
Beacon score:
660-850 $ 229,033 $ 74,054 $ 138,824 $ 172,493 $ 129,701 $ 251,065 $ - $ 995,170
600-659 4,824 7,706 10,763 11,719 8,173 21,424 - $ 64,609
540-599 350 1,238 5,219 2,608 4,791 10,167 - $ 24,373
less than 540 2,702 2,108 3,576 2,150 892 9,599 - $ 21,027
Total $ 236,909 $ 85,106 $ 158,382 $ 188,970 $ 143,557 $ 292,255 $ - $ 1,105,179
Current period gross charge-offs $ - $ - $ - $ - $ 11 $ 473 $ - $ 484
Residential Construction:
Beacon score:
660-850 $ 112,604 $ 44,647 $ 14,543 $ 2,805 $ 1,693 $ - $ 172 $ 176,464
600-659 1,743 3,189 - - - - - $ 4,932
540-599 - - - - 369 - - $ 369
less than 540 854 - - - - - - $ 854
Total $ 115,201 $ 47,836 $ 14,543 $ 2,805 $ 2,062 $ - $ 172 $ 182,619
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ -
Consumer:
Beacon score:
660-850 $ 2,575 $ 4,609 $ 5,112 $ 2,110 $ 2,614 $ 24,444 $ 417,737 $ 459,201
600-659 374 445 334 428 467 5,401 21,052 $ 28,501
540-599 89 1,216 294 339 601 3,926 6,153 $ 12,618
less than 540 751 160 525 785 532 2,826 11,355 $ 16,934
Total $ 3,789 $ 6,430 $ 6,265 $ 3,662 $ 4,214 $ 36,597 $ 456,297 $ 517,254
Current period gross charge-offs $ - $ 13 $ 123 $ 8 $ 1 $ 140 $ 148 $ 433
Total loans $ 3,305,720 $ 1,774,275 $ 1,179,845 $ 1,016,641 $ 866,898 $ 1,242,626 $ 1,014,504 $ 10,400,509
The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:
For the Year Ended December 31, 2021
Commercial Real Estate
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business All Other
Loans Total
Troubled debt restructurings:
Restructured accruing $ - $ - $ - $ - $ - $ -
Restructured non-accruing 9,594 3,157 - 1,824 - 14,575
Balance $ 9,594 $ 3,157 $ - $ 1,824 $ - $ 14,575
Specific allowance $ - $ - $ - $ 461 $ - $ 461
Restructured and subsequently defaulted $ - $ - $ - $ - $ - $ -
For the Year Ended December 31, 2020
Commercial Real Estate
(In thousands) Commercial
Investor R/E Commercial
Owner-
Occupied R/E Commercial
AD&C Commercial
Business All Other
Loans Total
Troubled debt restructurings:
Restructured accruing $ - $ - $ - $ 380 $ 549 $ 929
Restructured non-accruing 723 930 - 1,951 - 3,604
Balance $ 723 $ 930 $ - $ 2,331 $ 549 $ 4,533
Specific allowance $ 65 $ - $ - $ 955 $ - $ 1,020
Restructured and subsequently defaulted $ - $ - $ - $ - $ - $ -
At December 31, 2021, TDR loans totaled $18.4 million, of which $2.2 million were accruing and $16.2 million were non-accruing. There were no commitments to lend additional funds on loans classified as TDRs as of December 31, 2021. TDR loans at December 31, 2020 totaled $8.5 million, of which $2.3 million were accruing and $6.2 million were non-accruing. Commitments to lend additional funds on TDR loans at December 31, 2020 were insignificant.
During the year ended December 31, 2021, the Company restructured $14.6 million in loans that were designated as TDRs. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the principal in the associated loan balances. TDR loans are subject to periodic credit reviews to determine the necessity and appropriateness of an individual credit loss allowance based on the collectability of the recorded investment in the TDR loan. Loans restructured during 2021 had individual reserves of $0.5 million at December 31, 2021. For the year ended December 31, 2020, the Company restructured $4.5 million in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan balances. Loans restructured during 2020 had specific reserves of $1.0 million at December 31, 2020.
For more information on the accounting policies for TDRs see Note 1.
Other Real Estate Owned
OREO totaled $1.0 million and $1.5 million at December 31, 2021 and 2020, respectively. There was one consumer mortgage loan secured by residential real estate property with the total amount of $0.1 million for which formal foreclosure proceedings were in process as of December 31, 2021.
NOTE 7 - PREMISES AND EQUIPMENT
Presented in the following table are the components of premises and equipment at December 31:
(In thousands) 2021 2020
Land $ 21,164 $ 13,262
Buildings and leasehold improvements 70,193 70,776
Equipment 48,889 49,614
Total premises and equipment 140,246 133,652
Less: accumulated depreciation and amortization (80,561) (75,932)
Net premises and equipment $ 59,685 $ 57,720
Depreciation and amortization expense for premises and equipment amounted to $7.9 million, $8.5 million, and $7.2 million for each of the years ended December 31, 2021, 2020 and 2019, respectively.
NOTE 8 - LEASES
The Company leases real estate properties for its network of bank branches, financial centers and corporate offices. All of the Company’s leases are currently classified as operating. Most lease agreements include one or more options to renew, with renewal terms that can extend the original lease term from one to twenty years or more. The Company does not receive sublease income from any of its leased real estate properties.
The following table provides information regarding the Company's leases as of the dates indicated:
Year Ended
2021 2020
Components of lease expense:
Operating lease cost (resulting from lease payments) $ 12,304 $ 12,453
Supplemental cash flow information related to leases:
Operating cash flows from operating leases $ 12,930 $ 13,571
ROU assets obtained in the exchange for lease liabilities due to:
New leases $ 803 $ 871
Acquisitions $ - $ 7,720
As of
December 31, 2021 December 31, 2020
Supplemental balance sheet information related to leases:
Operating lease ROU assets $ 57,872 $ 65,215
Operating lease liabilities $ 67,138 $ 74,982
Other information related to leases:
Weighted average remaining lease term of operating leases 9.0 years 9.5 years
Weighted average discount rate of operating leases 2.92 % 3.04 %
The Company added two locations from the acquisition of RPJ during the first quarter of 2020. The associated new ROU assets obtained in exchange for lease obligations totaled $0.3 million.
On April 1, 2020, in conjunction with the acquisition of Revere, the Company added 15 additional operating leases (at 12 locations). The associated new ROU assets of $7.4 million obtained in exchange for lease obligations of $8.7 million was recorded at the close of the acquisition. The ROU assets recorded at acquisition included $1.1 million for acquisition related unfavorable fair value marks and a tenant allowance of $0.2 million. During the three months ended June 30, 2020, subsequent to and resulting from the acquisition, the Company determined that due to market overlap and other synergies, the Company would more likely than not terminate seven of the acquired leases, comprised of six branch locations and one office space location. The decision resulted in an impairment charge of $2.3 million, which was recorded to merger and acquisition expense in the Consolidated Statements of Income during the second quarter of 2020. The Company estimated the fair value of the leases to be equal to the cash payments remaining between the impairment date and the anticipated abandonment date. There was no impairment charge recorded during 2021.
As of December 31, 2021, the maturities of the Company’s operating lease liabilities were as follows:
(In thousands) Amount
Maturity:
One year $ 11,493
Two years 11,484
Three years 9,580
Four years 7,758
Five years 6,924
Thereafter 30,571
Total undiscounted lease payments 77,810
Less: Present value discount (10,672)
Lease Liability $ 67,138
The Company recognized a lease liability of $0.9 million and ROU asset of $0.7 million for one operating lease that has not yet commenced operations at December 31, 2021, and is expected to commence operations during the first quarter of 2022. This ROU asset includes approximately $0.1 million of tenant allowance for improvements to the space. The Company does not have any lease arrangements with any of its related parties as of December 31, 2021.
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at December 31 in the following table:
2021 Weighted 2020 Weighted
Gross Net Average Gross Net Average
Carrying Accumulated Carrying Remaining Carrying Accumulated Carrying Remaining
(Dollars in thousands) Amount Amortization Amount Life Amount Amortization Amount Life
Amortizing intangible assets:
Core deposit intangibles $ 29,038 $ (12,624) $ 16,414 7.4 years $ 29,038 $ (7,969) $ 21,069 8.4 years
Other identifiable intangibles 13,906 (4,400) 9,506 9.7 years 13,906 (2,454) 11,452 10.7 years
Total amortizing intangible assets $ 42,944 $ (17,024) $ 25,920 $ 42,944 $ (10,423) $ 32,521
Goodwill $ 370,223 $ 370,223 $ 370,223 $ 370,223
The following table presents the net carrying amount of goodwill by segment for the periods indicated:
(In thousands)
Community
Banking Insurance Investment
Management Total
Balance December 31, 2019 $ 331,173 $ 6,788 $ 9,188 $ 347,149
Acquisition of Rembert Pendleton Jackson - - 22,559 22,559
Acquisition of Revere Bank 515 - - 515
Balance December 31, 2020 331,688 6,788 31,747 370,223
No Activity - - - -
Balance December 31, 2021 $ 331,688 $ 6,788 $ 31,747 $ 370,223
The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:
(In thousands) Amount
2022 $ 5,844
2023 5,089
2024 4,333
2025 3,567
2026 2,732
Thereafter 4,355
Total amortizing intangible assets $ 25,920
NOTE 10 - DEPOSITS
The following table presents the composition of deposits at December 31 for the years indicated:
(In thousands) 2021 2020
Noninterest-bearing deposits $ 3,779,630 $ 3,325,547
Interest-bearing deposits:
Demand 1,604,714 1,292,164
Money market savings 3,415,663 3,339,645
Regular savings 533,862 418,051
Time deposits of less than $250,000 910,464 1,180,636
Time deposits of $250,000 or more 380,398 477,026
Total interest-bearing deposits 6,845,101 6,707,522
Total deposits $ 10,624,731 $ 10,033,069
Demand deposit overdrafts reclassified as loan balances were $1.8 million and $13.1 million at December 31, 2021 and 2020, respectively. Overdraft charge-offs and recoveries are reflected in the allowance for credit losses.
The following table presents the maturity schedule for time deposits maturing within years ending December 31:
(In thousands) Amount
2022 $ 1,002,132
2023 165,131
2024 89,074
2025 16,464
2026 17,881
Thereafter 180
Total time deposits $ 1,290,862
The Company's time deposits of less than $250,000 represented 8.6% of total deposits and time deposits of $250,000 or more represented 3.6% of total deposits at December 31, 2021 and are presented by maturity in the following table:
Months to Maturity
(In thousands) 3 or Less Over 3 to 6 Over 6 to 12 Over 12 Total
Time deposits - less than $250,000 $ 277,975 $ 226,476 $ 215,245 $ 190,768 $ 910,464
Time deposits - $250,000 or more $ 88,510 $ 93,719 $ 100,207 $ 97,962 $ 380,398
Interest expense on time deposits of less than $250,000 amounted to $6.0 million, $16.5 million, and $20.8 million and interest expense on time deposits of $250,000 of more amounted to $3.0 million, $10.7 million, and $13.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Deposits received in the ordinary course of business from the directors and officers of the Company and their related interests amounted to $89.5 million and $73.4 million for the years ended December 31, 2021 and 2020, respectively.
NOTE 11 - BORROWINGS
Subordinated Debt
On November 5, 2019, the Company completed an offering of $175.0 million aggregate principal amount Fixed to Floating Rate Subordinated Notes due in 2029. The notes bear a fixed interest rate of 4.25% per year through November 14, 2024. Beginning November 15, 2024, the interest rate will become a floating rate equal to three-month LIBOR, or an alternative benchmark rate as determined pursuant to the terms of the indenture for the notes in the event LIBOR has been discontinued by November 15, 2024, plus 262 basis points through the remaining maturity or early redemption date of the notes. The interest will be paid in arrears semi-annually during the fixed rate period and quarterly during the floating rate period. The Company incurred $2.9 million of debt issuance costs which are being amortized through the contractual life of the debt. The entire amount of subordinated debt is considered Tier 2 capital under current regulatory guidelines.
In conjunction with the acquisition of WashingtonFirst Bankshares, Inc. ("WashingtonFirst"), the Company assumed $25.0 million in subordinated debt with an associated purchase premium at acquisition of $2.2 million. The premium was amortized over the contractual life of the obligation. The subordinated debt had a maturity of 10 years, maturing on October 15, 2025, and was non-callable through October 15, 2020. The subordinated debt held a fixed interest rate of 6.00% per annum through October 5, 2020 at which point the rate became variable at the three-month LIBOR plus 457 basis points payable quarterly. On July 15, 2021, the Company redeemed the entire outstanding principal balance of the WashingtonFirst subordinated debt.
In conjunction with the acquisition of Revere, the Company assumed $31.0 million in subordinated debt with an associated purchase premium at acquisition of $0.2 million, which was amortized through the call date. The subordinated debt had a 10-year term, maturing on September 30, 2026, and was non-callable until September 30, 2021. The subordinated debt had a fixed interest rate of 5.625% per annum, payable semi-annually, through September 30, 2021 at which point the interest rate reset quarterly to an amount equal to three month LIBOR plus 441 basis points. On September 30, 2021, the Company redeemed the entire outstanding principal balance of the Revere subordinated debt.
The Company assumed $10.3 million in callable junior subordinated debt securities with an associated purchase premium at acquisition of $0.1 million in conjunction with the acquisition of WashingtonFirst. During the first quarter of 2020, the Company redeemed all $10.3 million of the outstanding principal balance of the callable junior subordinated debt securities.
The following table provides information on subordinated debentures for the period indicated:
(In thousands) 2021 2020
Fixed to floating rate sub debt, 4.25%
$ 175,000 $ 175,000
WashingtonFirst sub debt - 25,000
Revere fixed to floating rate sub debt - 31,000
Total subordinated debt 175,000 231,000
Less: Subordinated debt held as investments by Sandy Spring - (3,000)
Add: Purchase accounting premium - 1,669
Less: Debt issuance costs (2,288) (2,581)
Net subordinated debt 172,712 227,088
Long-term borrowings $ 172,712 $ 227,088
Other Borrowings
Information relating to retail repurchase agreements and federal funds purchased is presented in the following table at and for the years ending December 31:
2021 2020
(Dollars in thousands) Amount Rate Amount Rate
End of period:
Retail repurchase agreements $ 141,086 0.12 % $ 153,157 0.11 %
Federal funds purchased - - 390,000 0.10
Average for the year:
Retail repurchase agreements $ 143,734 0.12 % $ 142,283 0.32 %
Federal funds purchased 15,154 0.08 367,240 0.41
Maximum month-end balance:
Retail repurchase agreements $ 154,413 $ 153,157
Federal funds purchased 60,000 921,289
The Company pledges U.S. Agencies securities, based upon their market values, as collateral for greater than 102.5% of the principal of its retail repurchase agreements.
At December 31, 2021, the Company had an available line of credit with the FHLB under which its borrowings are limited to $3.9 billion based on pledged collateral at prevailing market interest rates, with no outstanding borrowings against it. At December 31, 2020, lines of credit totaled $3.0 billion based on pledged collateral with $379.1 million borrowed against the line. During the year ended December 31, 2021, the Company early repaid $279.0 million of FHLB advances, resulting in a prepayment penalty of $9.1 million, which was recorded in other non-interest expense in the Consolidated Statements of Income.
Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $829.1 million, commercial real estate loans amounting to $3.1 billion, home equity lines of credit (“HELOC”) amounting to $224.4 million and multifamily loans amounting to $333.4 million at December 31, 2021 as collateral under the borrowing agreement with the FHLB. At December 31, 2020, the Company had pledged collateral of qualifying mortgage loans of $1.0 billion, commercial real estate loans of $2.8 billion, HELOC loans of $226.2 million and multifamily loans of $237.6 million under the FHLB borrowing agreement.
The Company also had secured lines of credit available from the Federal Reserve and correspondent banks of $509.4 million and $276.2 million at December 31, 2021 and 2020, respectively, collateralized by loans, with no borrowings outstanding at the end of either period. In addition, the Company had unsecured lines of credit with correspondent banks of $1.3 billion and $1.1 billion at
December 31, 2021 and 2020. Of the unsecured lines of credit available there were no outstanding borrowings at December 31, 2021 and $390.0 million outstanding borrowings at December 31, 2020.
At December 31, 2021, the Company did not have any borrowings outstanding under the Paycheck Protection Program Liquidity Facility ("PPPLF").
Advances from the FHLB and the respective maturity schedule at December 31 for the years indicated consisted of the following:
2021 2020
(Dollars in thousands) Amounts Weighted Average
Rate Amounts Weighted Average
Rate
Maturity:
One year $ - - % $ 230,243 2.39 %
Two years - - 76,332 2.37
Three years - - 72,500 3.12
Four years - - - -
Five years - - - -
After five years - - - -
Total advances from FHLB $ - - $ 379,075 2.52
NOTE 12 - STOCKHOLDERS’ EQUITY
The Company’s Articles of Incorporation authorize 100,000,000 shares of capital stock (par value $1.00 per share). Issued shares have been classified as common stock. The Articles of Incorporation provide that remaining unissued shares may later be designated as either common or preferred stock.
The Company maintains an employee stock purchase plan (the “Purchase Plan”) that enables employees to purchase up to $25,000 of Company common stock each year at a discount. The Purchase Plan, which was initially authorized on July 1, 2011, was amended and restated as of November 18, 2020. As part of the amendment and restatement, an additional 700,000 shares of common stock were reserved to be issued, which is in addition to the 300,000 shares of common stock authorized for purchase under the previous version of the Purchase Plan. Under the Purchase Plan, shares are purchased at 85% of the lower of the fair market value of the common stock on the offering date or the purchase date, as defined in the Purchase Plan. Contributions are made through monthly payroll deductions of not less than 1% or more than 10% of cash compensation paid in the month. The Purchase Plan is administered by a committee of at least three directors appointed by the board of directors. At December 31, 2021, there were 647,455 shares available for issuance under this Purchase Plan.
In December 2020, the Company's board of directors authorized a stock repurchase plan that permits the repurchase of up to 2,350,000 shares of common stock. During 2021, the Company repurchased and retired all 2,350,000 shares of common stock at an average price of $45.65 per share for a total cost of $107.3 million. Under the previous stock repurchase plan that was approved in 2018 and expired in December 2020, the Company was authorized to repurchase up to 1,800,000 shares. During 2020, the Company repurchased and retired 820,328 common shares for the total cost of $25.7 million. Cumulatively under the previous plan, as of December 31, 2020, the Company repurchased and retired 1,488,519 shares of its common stock at an average price of $33.58 per share for a total cumulative cost of $50.0 million.
The Company has a dividend reinvestment plan that is sponsored and administered by Computershare as independent agent, which enables current shareholders as well as first-time buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly through Computershare. Participants may reinvest cash dividends and make periodic supplemental cash payments to purchase additional shares.
Bank and bank holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restrictions on extensions of credit and transfers of assets between the Bank and the Company. At December 31, 2021, the
Bank could have paid additional dividends of $126.6 million to its parent company without regulatory approval. There were no loans outstanding between the Bank and the Company at December 31, 2021 and 2020, respectively.
NOTE 13 - SHARE BASED COMPENSATION
At December 31, 2021, the Company had two share based compensation plans in existence, the 2005 Omnibus Stock Plan (“Omnibus Stock Plan”) and the 2015 Omnibus Incentive Plan (“Omnibus Incentive Plan”). The Omnibus Stock Plan expired during the second quarter of 2015 but has outstanding options that may still be exercised. The Omnibus Incentive Plan is described in the following paragraph.
The Company’s Omnibus Incentive Plan was approved on May 6, 2015 and provides for the granting of incentive stock options, non-qualifying stock options, stock appreciation rights, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance share units ("PSUs") to selected directors and employees on a periodic basis at the discretion of the Company’s board of directors. The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, of which 794,433 shares are available for issuance at December 31, 2021, has a term of ten years, and is administered by a committee of at least three directors appointed by the board of directors. Awards of share-based compensation typically vest in equal increments either over three or five year vesting periods on the grant date anniversary. Settlement of share-based incentive awards is generally through the issuance of previously unissued shares of common stock. The Company discontinued issuing stock options in 2018.
The value associated with the grant of RSAs is determined by multiplying the fair market value of the Company's common stock on the grant date by the number of shares awarded. Employees have the right to vote the shares and receive cash or stock dividends for the unvested RSAs. Non-vested shares of restricted stock awards are considered participating securities that have an immaterial impact on the computation of earnings per share. Any non-vested shares are subject to forfeiture upon termination of employment. A portion of the total RSAs granted in 2019 were based on the relative market performance of the Company's stock with another portion based on the financial performance of the Company. Compensation expense for awards based on the market performance of the Company's stock is based on their fair value determined using a probability based Monte-Carlo simulation valuation model. The expense on those awards is recognized regardless of whether the criteria for vesting is achieved. Compensation expense related to the achievement of performance criteria is variable and based on the fair market value of the Company's common stock and an assessment of the probability of achieving specified metrics and is adjusted periodically. Ultimately, the number of awards that vest can range from zero to 150% of the grant amount based on the achievement level compared to the specified performance or market-based criteria.
PSUs may be granted annually and are subject to the Company's achievement of specified performance criteria over a three year period. The value of the PSU grant is determined by multiplying the fair market value of the Company's common stock on the grant date by the total initial number of shares awarded. A portion of the total PSUs granted in 2020 were based on the relative market performance of the Company's stock with another portion based on the financial performance of the Company. Compensation expense for awards based on the market performance of the Company's stock is based on their fair value determined using a probability based Monte-Carlo simulation valuation model. The expense on those awards is recognized regardless of whether the criteria for vesting is achieved. Compensation expense related to the achievement of specified performance criteria is variable and based on the fair market value of the Company's common stock and an assessment of the probability of achieving specified metrics and is adjusted periodically. Beginning in 2021, the PSU's granted annually are based on the Company's return on tangible common equity ("ROTCE") compared to a specified peer group's ROTCE over a three year period. The number of awards that vest can range from zero to 150% of the grant amount based on the achievement level compared to the specified performance or market-based criteria. Dividends that accrue during the vesting period are reinvested in dividend equivalent share units. PSUs and the related dividend equivalent share units are converted into shares of common stock at vesting. Upon qualifying employee retirement, shares can continue to vest through the initial grant period should the vesting criteria continue to be met. PSUs are not considered participating securities and do not impact the computation of earnings per share.
Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven to ten years from the date of grant depending on the terms of the grant agreement. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such options. The Company generally issues authorized but previously unissued shares to satisfy option exercises. Compensation expense is based on the fair value of the options using the following assumptions in the Black-Scholes binomial option-pricing model. The dividend yield is based on the estimated future dividend yields. The risk-free rate for periods within the
contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is generally based on historical volatility. The expected term of share options granted is generally derive from historical experience.
All stock compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option, restricted stock, restricted stock unit grants or performance share units. Compensation associated with the performance share units is variable in nature based on the probability of achieving specific criteria. Compensation expense of $5.3 million, $3.9 million, and $2.9 million was recognized for the years ended December 31, 2021, 2020 and 2019, respectively, related to the awards of stock options, restricted stock grants, restricted stock unit grants and performance share unit grants. The intrinsic value for the stock options exercised was $8.0 million, $0.4 million, and $0.2 million in the years ended December 31, 2021, 2020 and 2019, respectively. There was no unrecognized compensation cost related to stock options at December 31, 2021. The total of unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $8.2 million at December 31, 2021. That cost is expected to be recognized over a weighted average period of approximately 2.1 years.
During the year ended December 31, 2021, the Company granted 128,557 restricted shares, restricted stock units and performance share units under the Omnibus Incentive Plan, of which 32,728 units are subject to achievement of certain performance conditions measured over a three-year performance period and 95,829 are restricted shares or units subject to a three year vesting schedule.
A summary of share option activity for the period indicated is reflected in the following table:
Number
of
Common
Shares Weighted Average Exercise
Share Price Weighted Average Contractual Remaining Life (Years) Aggregate Intrinsic
Value
(in thousands)
Balance at January 1, 2021 430,038 $ 14.97 $ 6,828
Granted - $ -
Exercised (270,297) $ 13.67 $ 7,979
Forfeited - $ -
Expired - $ -
Balance at December 31, 2021 159,741 $ 17.18 2.4 years $ 5,264
Exercisable at December 31, 2021 159,741 $ 17.18 2.4 years $ 5,264
A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:
(In dollars, except share data): Number
of
Common
Shares Weighted Average Grant-Date Fair Value
Restricted stock at January 1, 2021 391,683 $ 29.50
Granted 128,557 $ 41.05
Vested (119,228) $ 31.48
Forfeited/ cancelled (10,492) $ 31.93
Restricted stock at December 31, 2021 390,520 $ 32.67
NOTE 14 - PENSION, PROFIT SHARING, AND OTHER EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a qualified, noncontributory, defined benefit pension plan (the “Pension Plan”) covering substantially all employees. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus future salary increases and additional years of service will no longer affect the defined benefit provided by the Pension Plan although additional vesting may continue to occur.
Several factors affect the net periodic benefit cost of the plan, including (1) the size and characteristics of the plan population, (2) the discount rate, (3) the expected long-term rate of return on plan assets and (4) other actuarial assumptions. Pension cost is directly related to the number of employees covered by the plan and other factors including salary, age, years of employment, and the terms of the plan. As a result of the plan freeze, the characteristics of the plan population should not have a materially different effect in future years. The discount rate is used to determine the present value of future benefit obligations. The discount rate is determined by matching the expected cash flows of the plan to a yield curve based on long term, high quality fixed income debt instruments available as of the measurement date, which is December 31 of each year. The discount rate is adjusted each year on the measurement date to reflect current market conditions. The expected long-term rate of return on plan assets is based on a number of factors that include expectations of market performance and the target asset allocation adopted in the plan investment policy. Should actual asset returns deviate from the projected returns, this can affect the benefit plan expense recognized in the financial statements.
The Company's funding policy is to contribute amounts to the Pension Plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the Pension Plan freeze. The Pension Plan invests primarily in a diversified portfolio of managed fixed income and equity funds.
The Pension Plan’s funded status at December 31 is as follows:
(In thousands) 2021 2020
Reconciliation of Projected Benefit Obligation:
Projected obligation at January 1 $ 52,426 $ 45,497
Interest cost 1,269 1,437
Actuarial (gain)/ loss (22) 290
Benefit payments (1,115) (1,470)
Increase/ (decrease) related to change in assumptions (2,040) 6,672
Settlement - lump sum payments (2,439) -
Projected obligation at December 31 48,079 52,426
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets at January 1 48,357 43,457
Actual return on plan assets (596) 6,370
Employer contributions 1,000 -
Benefit payments (1,115) (1,470)
Settlement - lump sum payments (2,439) -
Fair value of plan assets at December 31 $ 45,207 $ 48,357
Funded status at December 31 $ (2,872) $ (4,069)
Accumulated benefit obligation at December 31 $ 48,079 $ 52,426
Unrecognized net actuarial loss $ 11,030 $ 12,719
Net periodic pension cost not yet recognized $ 11,030 $ 12,719
Weighted average assumptions used to determine benefit obligations at December 31 are presented in the following table:
2021 2020 2019
Discount rate 2.80% 2.50% 3.25%
Rate of compensation increase N/A N/A N/A
The components of net periodic benefit cost for the years ended December 31 are presented in the following table:
(In thousands) 2021 2020 2019
Interest cost on projected benefit obligation $ 1,269 $ 1,437 $ 1,609
Expected return on plan assets (1,247) (1,821) (1,647)
Recognized net actuarial loss 909 874 1,059
Settlement charge 560 - -
Net periodic benefit cost $ 1,491 $ 490 $ 1,021
Components of the net periodic benefit cost are recorded in salaries and employee benefits expense in the Consolidated Statement of Income.
Weighted average assumptions used to determine net periodic benefit cost for years ended December 31 are presented in the following table:
2021 2020 2019
Discount rate 2.50% 3.25% 4.15%
Expected return on plan assets 3.25% 4.75% 5.00%
Rate of compensation increase N/A N/A N/A
The expected rate of return on assets of 3.25% reflects the Pension Plan’s predominant investment of assets in fixed income mutual funds and was developed as a weighted average rate based on the target asset allocation of the Plan. Key economic inputs used included future inflation, economic growth, and interest rate environment.
The following table reflects the components of the net unrecognized benefits costs that is reflected in accumulated other comprehensive income/ (loss) for the periods indicated. Additions/ reductions represent the change in the unrecognized actuarial gain/ loss during the period. Reclassifications represent the portion of the unrecognized benefits that are recognized each period as a component of the net periodic benefit cost.
(In thousands)
Unrecognized Net
Loss
Included in accumulated other comprehensive loss at January 1, 2019 $ 12,352
Reductions during the year (5,176)
Reclassifications due to recognition as net periodic pension cost (1,059)
Increase related to change in assumptions 5,060
Included in accumulated other comprehensive loss as of December 31, 2019 11,177
Reductions during the year (4,256)
Reclassifications due to recognition as net periodic pension cost (874)
Increase related to change in assumptions 6,672
Included in accumulated other comprehensive loss as of December 31, 2020 12,719
Additions during the year 1,842
Reclassifications due to recognition as net periodic pension cost (909)
Settlement charge (560)
Decrease related to change in assumptions (2,062)
Included in accumulated other comprehensive loss as of December 31, 2021 11,030
Applicable tax effect (2,827)
Included in accumulated other comprehensive loss net of tax effect at December 31, 2021 $ 8,203
Amount expected to be recognized as part of net periodic pension cost in the next fiscal year $ 674
There are no plan assets expected to be returned to the employer in the next twelve months.
The following items have not yet been recognized as a component of net periodic benefit cost at December 31:
(In thousands) 2021 2020 2019
Net actuarial loss $ 11,030 $ 12,719 $ 11,177
Net periodic benefit cost not yet recognized $ 11,030 $ 12,719 $ 11,177
Pension Plan Assets
The Company’s Pension Plan weighted average allocations at December 31 are presented in the following table:
2021 2020
Asset Category:
Equity Securities Mutual Funds 11.5 % 11.6 %
Fixed Income Mutual Funds 88.5 % 88.4 %
Total pension plan assets 100.0 % 100.0 %
The Company has a written investment policy approved by the board of directors that governs the investment of the defined benefit pension fund trust portfolio. The investment policy is designed to provide limits on risk that is undertaken by the investment managers both in terms of market volatility of the portfolio and the quality of the individual assets that are held in the portfolio. The investment
policy statement focuses on the following areas of concern: preservation of capital, diversification, risk tolerance, investment duration, rate of return, liquidity, and investment management costs.
The Company has constituted the Retirement Plans Investment Committee (“RPIC”) in part to monitor the investments of the Pension Plan as well as to recommend to executive management changes in the Investment Policy Statement which governs the Pension Plan’s investment operations. These recommendations include asset allocation changes based on a number of factors including the investment horizon for the Pension Plan. The Company uses outside third parties to advise RPIC on the Pension Plan’s investment matters.
Investment strategies and asset allocations are based on careful consideration of Pension Plan liabilities, the Pension Plan’s funded status and the Company’s financial condition. Investment performance and asset allocation are measured and monitored on an ongoing basis. Management allocates plan assets towards fixed income securities in order to align expected cash outflows with its funding source. This asset allocation has been set after taking into consideration the Pension Plan’s current frozen status and the possibility of partial plan terminations over the intermediate term. The Pension Plan’s asset allocation remained consistent during the current year.
Market volatility risk is controlled by limiting the asset allocation of the most volatile asset class, equities, to no more than 70% of the portfolio and by ensuring that there is sufficient liquidity to meet distribution requirements from the portfolio without disrupting long-term assets. Diversification of the equity portion of the portfolio is controlled by limiting the value of any initial acquisition so that it does not exceed 5% of the market value of the portfolio when purchased. The policy requires the sale of any portion of an equity position when its value exceeds 10% of the portfolio. Fixed income market volatility risk is managed by limiting the term of fixed income investments to five years. Fixed income investments must carry an “A” or better rating by a recognized credit rating agency. Corporate debt of a single issuer may not exceed 10% of the market value of the portfolio. The investment in derivative instruments such as “naked” call options, futures, commodities, and short selling is prohibited. Investment in equity index funds and the writing of “covered” call options (a conservative strategy to increase portfolio income) are permitted. Foreign currency-denominated debt instruments are not permitted. At December 31, 2021, management is of the opinion that there are no significant concentrations of risk in the assets of the plan with respect to any single entity, industry, country, commodity or investment fund that are not otherwise mitigated by the Federal Deposit Insurance Corporation ("FDIC") insurance available to the participants of the Pension Plan and collateral pledged for any such amount that may not be covered by FDIC insurance. Investment performance is measured against industry accepted benchmarks. The risk tolerance and asset allocation limitations imposed by the policy are consistent with attaining the rate of return assumptions used in the actuarial funding calculations. The RPIC committee meets quarterly to review the activities of the investment managers to ensure adherence with the Investment Policy Statement.
Fair Values
The fair values of the Company’s Pension Plan assets by asset category at December 31 are presented in the following tables:
(In thousands) Quoted Prices in Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Asset Category:
Mutual funds:
Large cap U.S. equity funds $ 2,231 $ 575 $ - $ 2,806
Small/Mid cap U.S. equity funds - 1,536 - 1,536
International equity funds 875 - - 875
Short-term fixed income funds 9,558 30,432 - 39,990
Total mutual funds 12,664 32,543 - 45,207
Total pension plan assets $ 12,664 $ 32,543 $ - $ 45,207
(In thousands) Quoted Prices In Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Asset Category:
Mutual funds:
Large cap U.S. equity funds $ 2,779 $ 543 $ - $ 3,322
Small/Mid cap U.S. equity funds - 1,124 - 1,124
International equity funds 1,183 - - 1,183
Short-term fixed income funds - 4,299 - 4,299
Fixed income funds 10,724 27,705 - 38,429
Total mutual funds 14,686 33,671 - 48,357
Total pension plan assets $ 14,686 $ 33,671 $ - 48,357
Contributions
The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of the plan assets in the current economy and, since the Pension Plan is currently frozen, the remaining investment horizon of the Pension Plan. After consideration of these factors, the Company made a $1.0 million contribution in 2021. Management continues to monitor the funding level of the Pension Plan and may make contributions as necessary during 2022.
Estimated Future Benefit Payments
Benefit payments, which reflect expected future service, as appropriate, that are expected to be paid for the years ending December 31 are presented in the following table:
(In thousands) Pension Benefits
2022 $ 3,210
2023 1,990
2024 3,240
2025 2,330
2026 3,160
Thereafter 14,540
Sandy Spring Bank 401(k) Plan
The Sandy Spring Bank 401(k) Plan (“the 401(k)”) is voluntary and covers all eligible employees after 90 days of service. The 401(k) provides that employees contributing to the 401(k) receive a matching contribution of 100% of the first 4% of compensation and 50% of the next 2% of compensation subject to employee contribution limitations. The Company matching contribution vests immediately. The 401(k) permits employees to purchase shares of the Company’s common stock with their 401(k) contributions, Company match, and other contributions under the 401(k). The Company’s matching contribution to the 401(k), which is included in salaries and employee benefits in non-interest expenses in the Consolidated Statements of Income, totaled $6.0 million, $5.3 million, and $4.1 million in 2021, 2020 and 2019, respectively.
Executive Incentive Retirement Plan
The Executive Incentive Retirement Plan ("Executive Plan") is a non-qualified deferred compensation defined contribution plan that provides for contributions to be made to the participants’ plan accounts based on the attainment of a level of financial performance compared to a selected group of peer banks. This level of performance is determined annually by the board of directors. Benefit costs related to the Executive Plan included in salaries and employee benefits in non-interest expenses in the Consolidated Statements of Income for 2021, 2020 and 2019 were $0.7 million, $0.6 million, and $0.5 million, respectively.
NOTE 15 - OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
Selected components of other non-interest income and other non-interest expense for the years ended December 31 are presented in the following table:
(In thousands) 2021 2020 2019
Letter of credit fees $ 910 $ 710 $ 389
Extension fees 811 1,967 1,287
Swap fee income 511 1,607 1,932
Prepayment penalty fees 3,216 961 404
Other income 9,869 3,976 4,768
Total other non-interest income $ 15,317 $ 9,221 $ 8,780
(In thousands) 2021 2020 2019
Postage and delivery $ 1,906 $ 1,624 $ 1,502
Communications 2,508 2,729 2,414
Loss on FHLB redemption 9,117 5,928 -
Mortgage processing expense, net 1,504 1,381 817
Online services 2,209 1,591 1,375
Provision for credit losses on unfunded loan commitments (1,236) 1,576 -
Franchise taxes 1,644 1,574 1,307
Insurance 1,586 1,311 1,113
Card transaction expense 1,183 1,083 1,031
Office supplies 742 912 957
Other expenses 13,229 10,894 9,910
Total other non-interest expense $ 34,392 $ 30,603 $ 20,426
NOTE 16 - INCOME TAXES
The following table provides the components of income tax expense for the years ended December 31:
(In thousands) 2021 2020 2019
Current income taxes:
Federal $ 48,445 $ 43,115 $ 28,404
State 15,850 13,785 6,598
Total current 64,295 56,900 35,002
Deferred income taxes:
Federal 9,634 (22,793) 234
State 2,623 (6,636) 1,192
Total deferred 12,257 (29,429) 1,426
Total income tax expense $ 76,552 $ 27,471 $ 36,428
The Company does not have uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits.
The Company is subject to U.S. federal income tax and income tax in various state jurisdictions. All tax years ending after December 31, 2017 are open to examination. The examination by the District of Columbia for the tax years 2017-2019 was finalized in 2021 with no adjustments.
Temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities, shown as the sum of the appropriate tax effect for each significant type of temporary difference, are presented in the following table at December 31 for the years indicated:
(In thousands) 2021 2020
Deferred tax assets:
Allowance for credit losses $ 27,980 $ 42,231
Lease liability 17,280 19,192
Employee benefits 7,740 6,108
Unrealized losses on pension plan 2,827 3,249
Deferred loan fees and costs 3,879 4,486
Equity based compensation 1,636 1,856
Unrealized losses on investments available-for-sale 121 -
Losses on other real estate owned 21 203
Other than temporary impairment 76 75
Loan and deposit premium/discount 553 1,081
Reserve for recourse loans 223 546
Net operating loss carryforward 2,023 1,475
Other 207 181
Gross deferred tax assets 64,566 80,683
Valuation allowance (2,137) (1,479)
Net deferred tax asset 62,429 79,204
Deferred tax liabilities:
Right of use asset (14,888) (16,693)
Unrealized gains on investments available-for-sale - (9,684)
Pension plan costs (2,092) (2,211)
Depreciation (2,552) (2,950)
Intangible assets (5,653) (6,894)
Bond accretion (78) (195)
Section 481 adjustments - (669)
Fair value acquisition adjustments (624) (555)
Other (626) (567)
Gross deferred tax liabilities (26,513) (40,418)
Net deferred tax asset $ 35,916 $ 38,786
The Company has approximately $29.9 million of state net operating loss carryover which begins to expire in 2032. The Company believes that it is more likely than not that the future benefit from the state net operating loss carryover will not be realized. As such, there is a valuation allowance on the deferred tax assets of the jurisdictions in which those net operating losses relate.
The reconcilements between the statutory federal income tax rate and the effective rate for the years ended December 31 are presented in the following table:
(Dollars in thousands) 2021 2020 2019
Amount Percentage of
Pre-Tax
Income Amount Percentage of
Pre-Tax
Income Amount Percentage of
Pre-Tax
Income
Income tax expense at federal statutory rate
$ 65,448 21.0 % $ 26,130 21.0 % $ 32,101 21.0 %
Increase/ (decrease) resulting from:
Tax exempt income, net (2,271) (0.7) (2,472) (2.0) (2,101) (1.4)
Bank-owned life insurance (602) (0.2) (567) (0.5) (665) (0.4)
State income taxes, net of federal income tax benefits 14,593 4.7 5,648 4.5 6,154 4.0
Federal tax law change - - (1,764) (1.4) - -
Other, net (616) (0.2) 496 0.5 939 0.6
Total income tax expense and rate $ 76,552 24.6 % $ 27,471 22.1 % $ 36,428 23.8 %
Under the CARES Act, which was enacted on March 27, 2020, net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 can be carried back five tax years preceding the tax year in which the loss originated. During the prior year, the Company utilized net operating losses acquired as a part of the 2018 WashingtonFirst acquisition. Following the passage of the CARES Act, the Company carried back WashingtonFirst's 2018 net operating loss to tax years 2013 through 2015. As a result, the Company recorded a tax benefit of $1.8 million for 2020 due to the federal statutory rates for the 2013, 2014 and 2015 tax years being higher than the 2018 tax year.
NOTE 17 - NET INCOME PER COMMON SHARE
The calculation of net income per common share for the years ended December 31 is presented in the following table:
(Dollars and amounts in thousands, except per share data) 2021 2020 2019
Net income $ 235,107 $ 96,953 $ 116,433
Less: Distributed and undistributed earnings allocated to participating securities (1,508) (783) (762)
Net income attributable to common shareholders $ 233,599 $ 96,170 $ 115,671
Total weighted average outstanding shares 46,995 44,312 35,797
Less: Weighted average participating securities (304) (365) (235)
Basic weighted average common shares 46,691 43,947 35,562
Dilutive weighted average common stock equivalents 208 185 56
Diluted weighted average common shares 46,899 44,132 35,618
Basic net income per common share $ 5.00 $ 2.19 $ 3.25
Diluted net income per common share $ 4.98 $ 2.18 $ 3.25
Anti-dilutive shares - 17 9
NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME/ (LOSS)
Comprehensive income/ (loss) is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements presented for the Company, non-owner changes are comprised of unrealized gains or losses on available-for-sale debt securities and any pension liability adjustments and do not have an impact on the Company’s net income. Realized gains and losses on available-for-sale debt securities and the amortization of net periodic benefit cost impact the Company's net income as discussed in the tables on the following page.
The following table presents the activity in net accumulated other comprehensive income/ (loss) for the periods indicated:
(In thousands) Unrealized Gains/
(Losses) on
Investments
Available-for-Sale Defined Benefit
Pension Plan Total
Balance at January 1, 2019 $ (6,630) $ (9,124) $ (15,754)
Period change, net of tax 10,630 792 11,422
Balance at December 31, 2019 4,000 (8,332) (4,332)
Period change, net of tax 24,175 (1,138) 23,037
Balance at December 31, 2020 28,175 (9,470) 18,705
Period change, net of tax (28,511) 1,267 (27,244)
Balance at December 31, 2021 $ (336) $ (8,203) $ (8,539)
The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income/ (loss) for the periods indicated:
Year Ended December 31,
(In thousands) 2021 2020 2019
Unrealized gains/ (losses) on investments available-for-sale:
Affected line item in the Consolidated Statements of Income:
Investment securities gains $ 212 $ 467 $ 77
Income before taxes 212 467 77
Tax expense (54) (120) (20)
Net income $ 158 $ 347 $ 57
Amortization of defined benefit pension plan items:
Affected line item in the Consolidated Statements of Income:
Recognized actuarial loss (1)
$ (909) $ (874) $ (1,059)
Settlement charge (1)
(560) - -
Income before taxes (1,469) (874) (1,059)
Tax benefit 376 223 277
Net loss $ (1,093) $ (651) $ (782)
(1)This amount is included in the computation of net periodic benefit cost, see Note 14.
NOTE 19 - DERIVATIVES
The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk. The swap positions are offset to minimize the potential impact on the Company’s financial statements. Credit risk exists if the borrower’s collateral or financial condition indicates that the underlying collateral or financial condition of the borrower makes it probable that amounts due will be uncollectible. Any amounts due to the Company will be expected to be collected from the borrower. Management reviews this credit exposure on a quarterly basis. At December 31, 2021 and 2020, all loans associated with the swap agreements were determined to be “pass” rated credits as provided by regulatory guidance and therefore no component of credit loss was factored into the valuation of the swaps.
A summary of the Company’s interest rate swaps at December 31 for the years indicated is included in the following table:
(Dollars in thousands) Notional Amount Estimated Fair Value Years to Maturity Receive
Rate Pay
Rate
Interest rate swap agreements:
Pay fixed/receive variable swaps $ 198,126 $ (5,880) 8.7 years 2.21 % 3.73 %
Pay variable/receive fixed swaps 198,126 5,880 8.7 years 3.73 % 2.21 %
Total swaps $ 396,252 $ - 8.7 years 2.97 % 2.97 %
(Dollars in thousands) Notional Amount Estimated Fair Value Years to Maturity Receive
Rate Pay
Rate
Interest rate swap agreements:
Pay fixed/receive variable swaps $ 160,261 $ (9,183) 8.7 years 2.39 % 3.72 %
Pay variable/receive fixed swaps 160,261 9,183 8.7 years 3.72 % 2.39 %
Total swaps $ 320,522 $ - 8.7 years 3.06 % 3.06 %
The estimated fair value of the swaps at December 31 for the periods indicated in the table above were recorded in other assets and other liabilities in the Consolidated Statements of Financial Condition. The associated net gains and losses on the swaps are recorded in other non-interest income in the Consolidated Statement of Income.
NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company has various outstanding credit commitments that are not reflected in the financial statements. These commitments are made to satisfy the financing needs of the Company's clients. The associated credit risk is controlled by subjecting such activity to the same credit and quality controls as exist for the Company's lending and investing activities. The commitments involve diverse business and consumer customers and are generally well collateralized. Collateral held varies, but may include residential real estate, commercial real estate, property and equipment, inventory and accounts receivable. Commitments do not necessarily represent future cash requirements as a portion of the commitments have some reduced likelihood of being exercised. Additionally, many of the commitments are subject to annual reviews, material change clauses or requirements for inspections prior to draw funding that could result in a curtailment of the funding commitments.
A summary of the financial instruments with off-balance sheet credit risk is as follows at December 31 for the years indicated:
(In thousands) 2021 2020
Commercial real estate development and construction $ 621,725 $ 871,290
Residential real estate-development and construction 885,806 94,096
Real estate-residential mortgage 54,072 335,288
Lines of credit, principally home equity and business lines 2,096,874 1,947,706
Standby letters of credit 70,642 71,777
Total commitments to extend credit and available credit lines $ 3,729,119 $ 3,320,157
As of December 31, 2021, the total reserve for unfunded commitments was $0.3 million as compared to $1.6 million at December 31, 2020, and is accounted for in other liabilities in the Consolidated Statements of Financial Condition. See Note 1 for more information on the accounting policy for the allowance for unfunded commitments.
NOTE 21 - LITIGATION
The Company and its subsidiaries are subject in the ordinary course of business to various pending or threatened legal proceedings in which claims for monetary damages are asserted. After consultation with legal counsel, management does not anticipate that the
ultimate liability, if any, arising out of currently pending legal proceedings will have a material adverse effect on the Company’s financial condition, operating results or liquidity.
NOTE 22 - FAIR VALUE
GAAP provides entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes in fair value must be recorded in earnings. The Company applies the fair value option on residential mortgage loans held for sale. The fair value option on residential mortgage loans allows the recognition of gains on sale of mortgage loans to more accurately reflect the timing and economics of the transaction.
The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below.
Basis of Fair Value Measurement:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, this could result in higher or lower measurements of the fair values.
Assets and Liabilities
Residential mortgage loans held for sale
Residential mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 in the fair value hierarchy.
Investments available-for-sale
U.S. treasuries and government agencies securities and mortgage-backed and asset-backed securities
Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms, and databases coupled with extensive quality control programs. Quality control evaluation processes use available market, credit and deal level information to support the evaluation of the security. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not adjust the quoted price for such securities. Such instruments are classified within Level 2 in the fair value hierarchy.
State and municipal securities
The Company primarily uses prices obtained from third-party pricing services to determine the fair value of state and municipal securities. The Company independently evaluates and corroborates the fair value received from pricing services through various methods and techniques, including references to dealer or other market quotes, by reviewing valuations of comparable instruments, and by comparing the prices realized on the sale of similar securities. Such securities are classified within Level 2 in the fair value hierarchy.
Corporate debt
The fair value of corporate debt is determined by utilizing a discounted cash flow valuation technique employed by a third-party valuation specialist. The third-party specialist uses assumptions related to yield, prepayment speed, conditional default rates and loss severity based on certain factors such as, credit worthiness of the counterparty, prevailing market rates, and analysis of similar securities. The Company evaluates the fair values provided by the third-party specialist for reasonableness and classifies them as level 3 in the fair value hierarchy.
Interest rate swap agreements
Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth the Company’s financial assets and liabilities at the December 31 for the years indicated that were accounted for or disclosed at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(In thousands) Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Assets
Residential mortgage loans held for sale (1)
$ - $ 39,409 $ - $ 39,409
Investments available-for-sale:
U.S. government agencies - 68,539 - 68,539
State and municipal - 326,402 - 326,402
Mortgage-backed and asset-backed - 1,070,955 - 1,070,955
Corporate debt - - - -
Total available-for-sale securities - 1,465,896 - 1,465,896
Interest rate swap agreements - 5,880 - 5,880
Total assets $ - $ 1,511,185 $ - $ 1,511,185
Liabilities
Interest rate swap agreements $ - $ (5,880) $ - $ (5,880)
Total liabilities $ - $ (5,880) $ - $ (5,880)
(1)The outstanding principal balance for residential loans held for sale as of December 31, 2021 was $38.2 million.
(In thousands) Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total
Assets
Residential mortgage loans held for sale (1)
$ - $ 78,294 $ - $ 78,294
Investments available-for-sale:
U.S. government agencies - 43,297 - 43,297
State and municipal - 390,367 - 390,367
Mortgage-backed and asset-backed - 904,432 - 904,432
Corporate debt - - 9,925 9,925
Total available-for-sale securities - 1,338,096 9,925 1,348,021
Interest rate swap agreements - 9,183 - 9,183
Total assets $ - $ 1,425,573 $ 9,925 $ 1,435,498
Liabilities
Interest rate swap agreements $ - $ (9,183) $ - $ (9,183)
Total liabilities $ - $ (9,183) $ - $ (9,183)
(1)The outstanding principal balance for residential loans held for sale as of December 31, 2020 was $75.5 million.
The fair value of investments transferred or that are purchased and placed in Level 3 is estimated by discounting the expected future cash flows using the current rates for investments with similar credit ratings and similar remaining maturities. Expected cash flows were projected based on contractual cash flows.
The following table provides activity of assets reported as Level 3 for the period indicated:
Significant
Unobservable
Inputs
(In thousands) (Level 3)
Investments available-for-sale:
Balance at January 1, 2021 $ 9,925
Transfer into Level 3 assets -
Additions of Level 3 assets -
Sales of Level 3 assets (9,925)
Balance at December 31, 2021 $ -
Assets Measured at Fair Value on a Non-recurring Basis
The following tables set forth the Company’s financial assets subject to fair value adjustments on a non-recurring basis at December 31 for the year indicated that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(In thousands) Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total Total Losses
Loans (1)
$ - $ - $ 404 $ 404 $ (1,353)
Other real estate owned - - 1,034 1,034 (81)
Total $ - $ - $ 1,438 $ 1,438 $ (1,434)
(1)Amounts represent the fair value of collateral for collateral dependent non-accrual loans allocated to the allowance for credit losses. Fair values are determined using actual market prices (Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).
(In thousands) Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total Total Losses
Loans (1)
$ - $ - $ 13,901 $ 13,901 $ (11,326)
Other real estate owned - - 1,455 1,455 (286)
Total $ - $ - $ 15,356 $ 15,356 $ (11,612)
(1)Amounts represent the fair value of collateral for collateral dependent non-accrual loans allocated to the allowance for credit losses. Fair values are determined using actual market prices (Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).
At December 31, 2021, loans totaling $33.5 million were written down to fair value of $26.9 million as a result of individual credit loss allowances of $6.6 million associated with the collateral dependent non-accrual loans which was included in the allowance for credit losses. Loans totaling $97.7 million were written down to fair value of $86.3 million at December 31, 2020 as a result of individual credit loss allowances of $11.4 million associated with the collateral dependent non-accrual loans.
Fair value of the collateral dependent loans is measured based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly, based on the factors identified above.
OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value, less cost of disposal. The estimated fair value for OREO included in Level 3 is determined by independent market based appraisals and other available market information, less cost of disposal, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial recognition, the Company records the OREO as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.
Fair Value of Financial Instruments
The Company discloses fair value information, based on the exit price notion, of financial instruments that are not measured at fair value in the financial statements. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.
Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates based on observable inputs (“Level 2”) or unobservable inputs (“Level 3”).
Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company. Management utilizes internal models used in asset liability management to determine the fair values disclosed below.
The carrying amounts and fair values of the Company’s financial instruments at December 31 for the year indicated are presented in the following table:
Fair Value Measurements
2021 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(In thousands) Carrying
Amount Estimated
Fair
Value
Financial assets:
Cash and cash equivalents $ 420,020 $ 420,020 $ 420,020 $ - $ -
Residential mortgage loans held for sale 39,409 39,409 - 39,409 -
Investments available-for-sale 1,465,896 1,465,896 - 1,465,896 -
Equity securities 41,166 41,166 41,166 - -
Loans, net of allowance 9,857,946 9,964,924 - - 9,964,924
Interest rate swap agreements 5,880 5,880 - 5,880 -
Accrued interest receivable 34,349 34,349 34,349 - -
Bank owned life insurance 147,528 147,528 - 147,528 -
Financial liabilities:
Time deposits $ 1,290,862 $ 1,292,598 $ - $ 1,292,598 $ -
Other deposits 9,333,869 9,333,869 9,333,869 - -
Securities sold under retail repurchase agreements and
federal funds purchased 141,086 141,086 - 141,086 -
Advances from FHLB - - - - -
Subordinated debt 172,712 175,780 - - 175,780
Interest rate swap agreements 5,880 5,880 - 5,880 -
Accrued interest payable 1,516 1,516 1,516 - -
Fair Value Measurements
2020 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(In thousands) Carrying
Amount Estimated
Fair
Value
Financial assets:
Cash and cash equivalents $ 297,003 $ 297,003 $ 297,003 $ - $ -
Residential mortgage loans held for sale 78,294 78,294 - 78,294 -
Investments available-for-sale 1,348,021 1,348,021 - 1,338,096 9,925
Equity securities 65,760 65,760 65,760 - -
Loans, net of allowance 10,235,142 10,336,355 - - 10,336,355
Interest rate swap agreements 9,183 9,183 - 9,183 -
Accrued interest receivable 46,431 46,431 46,431 - -
Bank owned life insurance 126,887 126,887 - 126,887 -
Financial liabilities:
Time deposits $ 1,657,662 $ 1,674,112 $ - $ 1,674,112 $ -
Other deposits 8,375,407 8,375,407 8,375,407 - -
Securities sold under retail repurchase agreements and
federal funds purchased 543,157 543,157 - 543,157 -
Advances from FHLB 379,075 390,593 - 390,593 -
Subordinated debt 227,088 227,512 - - 227,512
Interest rate swap agreements 9,183 9,183 - 9,183 -
Accrued interest payable 3,254 3,254 3,254 - -
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION
Financial statements for Sandy Spring Bancorp, Inc. (Parent Only) for the periods indicated are presented in the following tables:
Statements of Condition
December 31,
(In thousands) 2021 2020
Assets:
Cash and cash equivalents $ 69,038 $ 63,943
Investments available-for-sale (at fair value) - 9,925
Equity securities 568 568
Investment in subsidiary 1,620,432 1,589,483
Goodwill 1,292 1,292
Other assets 2,255 2,684
Total assets $ 1,693,585 $ 1,667,895
Liabilities:
Subordinated debt $ 172,712 $ 196,454
Accrued expenses and other liabilities 1,194 1,486
Total liabilities 173,906 197,940
Stockholders’ Equity:
Common stock 45,119 47,057
Additional paid in capital 751,072 846,922
Retained earnings 732,027 557,271
Accumulated other comprehensive income/ (loss) (8,539) 18,705
Total stockholders’ equity 1,519,679 1,469,955
Total liabilities and stockholders’ equity $ 1,693,585 $ 1,667,895
Statements of Income
Year Ended December 31,
(In thousands) 2021 2020 2019
Income:
Cash dividends from subsidiary $ 189,172 $ 74,410 $ 42,625
Other income 434 932 1,093
Total income 189,606 75,342 43,718
Expenses:
Interest 6,765 9,028 3,141
Other expenses 1,592 1,505 1,507
Total expenses 8,357 10,533 4,648
Income before income taxes and equity in undistributed income of subsidiary 181,249 64,809 39,070
Income tax benefit (1,563) (1,988) (734)
Income before equity in undistributed income of subsidiary 182,812 66,797 39,804
Equity in undistributed income of subsidiary 52,295 30,156 76,629
Net income $ 235,107 $ 96,953 $ 116,433
Statements of Cash Flows
Year Ended December 31,
(In thousands) 2021 2020 2019
Cash Flows from Operating Activities:
Net income $ 235,107 $ 96,953 $ 116,433
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income-subsidiary (52,295) (30,156) (76,629)
Share based compensation expense 5,299 3,850 3,042
Tax benefit from stock options exercised - 5 7
Other-net 4,133 (9,732) -
Net cash provided by operating activities 192,244 60,920 42,853
Cash Flows from Investing Activities:
Proceeds from sales of investment available-for-sale 9,099 310 -
Investment in subsidiary - - (85,000)
Net cash provided by/ (used in) investing activities 9,099 310 (85,000)
Cash Flows from Financing Activities:
Retirement of subordinated debt (32,810) (10,310) -
Proceeds from issuance of subordinated debt - - 175,000
Proceeds from issuance of common stock 5,758 1,997 1,433
Stock tendered for payment of withholding taxes (1,577) (458) (703)
Repurchase of common stock (107,268) (25,702) (24,284)
Dividends paid (60,351) (53,175) (42,272)
Net cash provided by/ (used in) financing activities (196,248) (87,648) 109,174
Net increase/ (decrease) in cash and cash equivalents 5,095 (26,418) 67,027
Cash and cash equivalents at beginning of year 63,943 90,361 23,334
Cash and cash equivalents at end of year $ 69,038 $ 63,943 $ 90,361
NOTE 24 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 2021 and 2020, the capital levels of the Company and the Bank substantially exceeded all applicable capital adequacy requirements.
As of December 31, 2021, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum Total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios at December 31 for the years indicated are presented in the following table:
Actual For Capital
Adequacy Purposes To be Well
Capitalized Under
Prompt Corrective
Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2021
Tier 1 Leverage:
Company $ 1,149,694 9.26 % $ 496,520 4.00 % N/A N/A
Sandy Spring Bank $ 1,251,739 10.09 % $ 496,171 4.00 % $ 620,214 5.00 %
Common Equity Tier 1 Capital to risk-
weighted assets:
Company $ 1,149,694 11.91 % $ 434,466 4.50 % N/A N/A
Sandy Spring Bank $ 1,251,739 12.98 % $ 433,889 4.50 % $ 626,729 6.50 %
Tier 1 Capital to risk-weighted assets:
Company $ 1,149,694 11.91 % $ 579,288 6.00 % N/A N/A
Sandy Spring Bank $ 1,251,739 12.98 % $ 578,519 6.00 % $ 771,358 8.00 %
Total Capital to risk-weighted assets:
Company $ 1,408,808 14.59 % $ 772,384 8.00 % N/A N/A
Sandy Spring Bank $ 1,335,853 13.85 % $ 771,358 8.00 % $ 964,198 10.00 %
As of December 31, 2020
Tier 1 Leverage:
Company $ 1,078,213 8.92 % $ 483,619 4.00 % N/A N/A
Sandy Spring Bank $ 1,199,570 9.93 % $ 483,175 4.00 % $ 603,969 5.00 %
Common Equity Tier 1 Capital to risk-
weighted assets:
Company $ 1,078,213 10.58 % $ 458,612 4.50 % N/A N/A
Sandy Spring Bank $ 1,199,570 11.79 % $ 457,920 4.50 % $ 661,441 6.50 %
Tier 1 Capital to risk-weighted assets:
Company $ 1,078,213 10.58 % $ 611,483 6.00 % N/A N/A
Sandy Spring Bank $ 1,199,570 11.79 % $ 610,561 6.00 % $ 814,081 8.00 %
Total Capital to risk-weighted assets:
Company $ 1,419,973 13.93 % $ 815,311 8.00 % N/A N/A
Sandy Spring Bank $ 1,347,102 13.24 % $ 814,081 8.00 % $ 1,017,601 10.00 %
NOTE 25 - SEGMENT REPORTING
Currently, the Company conducts business in three operating segments: Community Banking, Insurance and Investment Management. Each of the operating segments is a strategic business unit that offers different products and services. The Insurance and Investment Management segments were businesses that were acquired in separate transactions where management of the acquired business was retained. The accounting policies of the segments are the same as those of the Company. However, the segment data reflects inter-segment transactions and balances.
The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to both individuals and businesses. Parent company income and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment. Beginning on April 1, 2020, the Community Banking segment includes the impact from the Revere acquisition. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income fees and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment and other expenses. Non-cash charges associated with amortization of intangibles related to the acquired entities in the Community Banking segment totaled $4.7 million, $4.3 million and $1.7 million for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
The Insurance segment is conducted through Sandy Spring Insurance, a subsidiary of the Bank. Sandy Spring Insurance operates Sandy Spring Insurance, a general insurance agency located in Annapolis, Maryland, and Neff and Associates, located in Ocean City, Maryland. Major sources of revenue are insurance commissions from commercial lines, personal lines, and medical liability lines. Expenses include personnel, occupancy, support charges and other expenses. Non-cash charges associated with amortization of intangibles related to the acquired entities were immaterial for each of the years ended December 31, 2021, 2020 and 2019.
The Investment Management segment is conducted through West Financial and RPJ, subsidiaries of the Bank. These asset management and financial planning firms, located in McLean, Virginia and Falls Church, Virginia, respectively, provide comprehensive investment management and financial planning to individuals, families, small businesses and associations, including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial and RPJ had approximately $4.1 billion in combined assets under management. Major revenue sources include non-interest income earned on the above services. Expenses include personnel, occupancy, support charges and other expenses. Non-cash charges associated with amortization of intangibles related to the acquired entities were $1.9 million, $1.9 million, and $0.1 million for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
Information for the operating segments and reconciliation of the information to the consolidated financial statements for the years ended December 31 is presented in the following tables:
(In thousands) Community
Banking Insurance Investment
Management Inter-Segment
Elimination Total
Interest income $ 450,284 $ 2 $ 10 $ (12) $ 450,284
Interest expense 25,778 - - (12) 25,766
Provision for credit losses (45,556) - - - (45,556)
Non-interest income 80,077 7,011 22,378 (7,411) 102,055
Non-interest expenses 240,996 5,869 14,473 (868) 260,470
Income before income taxes 309,143 1,144 7,915 (6,543) 311,659
Income tax expense 74,036 339 2,177 - 76,552
Net income $ 235,107 $ 805 $ 5,738 $ (6,543) $ 235,107
Assets $ 12,590,176 $ 9,110 $ 59,099 $ (67,659) $ 12,590,726
(In thousands) Community
Banking Insurance Investment
Management Inter-Segment
Elimination Total
Interest income $ 423,560 $ 6 $ 7 $ (13) $ 423,560
Interest expense 60,414 - - (13) 60,401
Provision for credit losses 85,669 - - - 85,669
Non-interest income 78,940 6,810 17,831 (865) 102,716
Non-interest expenses 237,910 5,686 13,051 (865) 255,782
Income before income taxes 118,507 1,130 4,787 - 124,424
Income tax expense 25,907 313 1,251 - 27,471
Net income $ 92,600 $ 817 $ 3,536 $ - $ 96,953
Assets $ 12,800,537 $ 11,335 $ 57,768 $ (71,211) $ 12,798,429
(In thousands) Community
Banking Insurance Investment
Management Inter-Segment
Elimination Total
Interest income $ 347,867 $ 26 $ 13 $ (37) $ 347,869
Interest expense 82,598 - - (37) 82,561
Provision for credit losses 4,684 - - - 4,684
Non-interest income 55,042 6,621 10,326 (667) 71,322
Non-interest expenses 166,802 5,731 7,219 (667) 179,085
Income before income taxes 148,825 916 3,120 - 152,861
Income tax expense 35,350 258 820 - 36,428
Net income $ 113,475 $ 658 $ 2,300 $ - $ 116,433
Assets $ 8,624,590 $ 10,340 $ 16,424 $ (22,352) $ 8,629,002

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. CONTROLS AND PROCEDURES
Fourth Quarter 2021 Changes In Internal Controls Over Financial Reporting
No change occurred during the fourth quarter of 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure Controls and Procedures
As required by Securities and Exchange Commission rules, the Company’s management evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of December 31, 2021. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.
Management’s annual report on internal control over financial reporting is located on page 66 of this report.

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ITEM 9B. OTHER INFORMATION
Item 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under the captions “Proposal 1: Election of Directors,” “Corporate Governance,” “Delinquent Section 16(a) Reports,” “Proposals for the 2023 Annual Meeting of Shareholders,” and “Report of the Audit Committee” in the Proxy Statement is incorporated in this Report by reference. Information regarding executive officers is included under the caption “Information About Our Executive Officers” on page 15 of this Report.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. EXECUTIVE COMPENSATION
The information under the captions “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation Tables” and “CEO Pay Ratio” in the Proxy Statement is incorporated in this Report by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information under the caption “Stock Ownership Information” in the Proxy Statement is incorporated in this Report by reference. Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference from “Equity Compensation Plans” on page 33 of this Report.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information under the captions “Director Independence” and “Transactions with Related Persons” in the Proxy Statement is incorporated in this Report by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the captions “Audit and Non-Audit Fees” and “Audit Committee’s Preapproval Policies and Procedures” in the Proxy Statement is incorporated in this Report by reference.
PART IV.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following financial statements are filed as a part of this report:
Consolidated Statements of Condition at December 31, 2021 and 2020
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Notes to the Consolidated Financial Statements
Reports of Registered Public Accounting Firm
All financial statement schedules have been omitted, as the required information is either not applicable or included in the Consolidated Financial Statements or related Notes.
Exhibit No.
Description
Location
3.1.1
Articles of Incorporation of Sandy Spring Bancorp, Inc., as amended
Incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 1996, SEC File No. 0-19065
3.1.2
Articles of Amendment to the Articles of Incorporation of Sandy Spring Bancorp, Inc.
Incorporated by reference to Exhibit 3(b) to Form 10-K for the year ended December 31, 2011, SEC File No. 0-19065
3.1.3
Articles of Amendment to the Articles of Incorporation of Sandy Spring Bancorp, Inc.
Incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 2, 2018, SEC File No. 0-19065
3.2 Bylaws of Sandy Spring Bancorp, Inc.
Incorporated by reference to Exhibit 3.1 to Form 8-K filed on August 26, 2021, SEC File No. 0-19065
4.1 Description of Common Stock
Incorporated by reference to Exhibit 4.1.1 to Form 10-K for the year ended December 31, 2019, SEC File No. 0-19065
4.2.1 Subordinated Indenture, dated as of November 5, 2019, between Sandy Spring Bancorp, Inc. and Wilmington Trust, National Association, as Trustee
Incorporated by reference to Exhibit 4.1 to Form 8-K filed on November 5, 2019, SEC File No. 0-19065
4.2.2 First Supplemental Indenture, dated as of November 5, 2019, between Sandy Spring Bancorp, Inc. and Wilmington Trust, National Association, as Trustee
Incorporated by reference to Exhibit 4.2 to Form 8-K filed on November 5, 2019, SEC File No. 0-19065
Other instruments defining the rights of holders of long-term debt securities of Sandy Spring Bancorp, Inc. and its subsidiaries are omitted in accordance with Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Sandy Spring Bancorp, Inc. agrees to furnish copies of these instruments to the SEC upon request.
10.1*
Sandy Spring Bancorp, Inc. 2005 Omnibus Stock Plan
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 27, 2005, SEC File No. 0-19065
10.2.1*
Form of Director Fee Deferral Agreement, August 26, 1997, as amended
Incorporated by reference to Exhibit 10(h) to Form 10-K for the year ended December 31, 2003, SEC File No. 0-19065
10.2.2*
Form of Amendment to Directors’ Fee Deferral Agreement
Incorporated by reference to Exhibit 10(o) to Form 10-K for the year ended December 31, 2008, SEC File No. 0-19065
10.3*
Sandy Spring Bank Directors’ Deferred Fee Plan
Incorporated by reference to Exhibit 10(d) to Form 10-K for the year ended December 31, 2016, SEC File No. 0-19065
10.4.1*
Employment Agreement dated as of January 13, 2012, by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Philip J. Mantua
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on January 17, 2012, SEC File No. 0-19065
10.4.2*
Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Philip J. Mantua dated January 13, 2012
Incorporated by reference to Exhibit 10.2 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065
10.5.1*
Employment Agreement dated as of January 1, 2009, by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Daniel J. Schrider
Incorporated by reference to Exhibit 10(h) to Form 10-K for the year ended December 31, 2008, SEC File No. 0-19065
10.5.2*
Amendment to Employment Agreement between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Daniel J. Schrider dated January 1, 2009
Incorporated by reference to Exhibit 10.6.2 to Form 10-K for the year ended December 31, 2019, SEC File No. 0-19065
10.5.3*
Second Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Daniel J. Schrider dated January 1, 2009
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065
10.6.1*
Change in Control Agreement dated as of March 9, 2012, by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and R. Louis Caceres
Incorporated by reference to Exhibit 10(m) to Form 10-K for the year ended December 31, 2011, SEC File No. 0-19065
10.6.2*
Amendment to Change in Control Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and R. Louis Caceres dated March 9, 2012
Incorporated by reference to Exhibit 10.4 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065
10.7.1*
Employment Agreement dated as of January 13, 2012, by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Joseph J. O’Brien, Jr.
Incorporated by reference to Exhibit 10.2 to Form 8-K filed on January 17, 2012, SEC File No. 0-19065
10.7.2*
Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Joseph J. O’Brien, Jr. dated January 13, 2012
Incorporated by reference to Exhibit 10.3 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065
10.8*
Employment Agreement dated as of September 23, 2019 by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank and Kenneth C. Cook
Filed herewith
10.9*
Sandy Spring Bank Executive Incentive Retirement Plan
Incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended December 31, 2020, SEC File No. 0-19065
10.10*
Sandy Spring Bancorp, Inc. Employee Stock Purchase Plan, as Amended and Restated
Incorporated by reference to Appendix A of the Definitive Proxy Statement filed on October 7, 2020, SEC File No. 0-19065
10.11*
Sandy Spring Bancorp, Inc. 2015 Omnibus Incentive Plan
Incorporated by reference to Appendix A of the Definitive Proxy Statement filed on March 31, 2015, SEC File No. 0-19065
10.12* Form of Sandy Spring Bank Split Dollar Life Insurance Agreement
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 27, 2021, SEC File No. 0-19065
10.13* Sandy Spring Bank Non-Qualified Deferred Compensation Plan
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 28, 2021, SEC File No. 0-19065
21 Subsidiaries
Filed herewith
23 Consent of Independent Registered Public Accounting Firm
Filed herewith
31(a)
Rule 13a-14(a)/15d-14(a) Certification
Filed herewith
31(b)
Rule 13a-14(a)/15d-14(a) Certification
Filed herewith
32(a)
18 U.S.C. Section 1350 Certification
Filed herewith
32(b)
18 U.S.C. Section 1350 Certification
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Management Contract or Compensatory Plan or Arrangement filed pursuant to Item 15(b) of this Report.