Sandy Spring Bancorp(SASR) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited condensed consolidated financial statements and notes detail the Company's financial position and performance for Q2 2023 and FY 2022 Condensed Consolidated Statements of Condition - Unaudited Total assets and liabilities slightly increased from December 2022 to June 2023, driven by cash and interest-bearing deposits Condensed Consolidated Statements of Condition Summary | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Total assets | $13,994,545 | $13,833,119 | | Total liabilities | $12,455,513 | $12,349,351 | | Total stockholders' equity | $1,539,032 | $1,483,768 | | Cash and cash equivalents | $430,127 | $192,232 | | Total loans | $11,369,639 | $11,396,706 | | Total deposits | $10,958,922 | $10,953,421 | | Noninterest-bearing deposits | $3,079,896 | $3,673,300 | | Interest-bearing deposits | $7,879,026 | $7,280,121 | | Total borrowings | $1,345,014 | $1,242,172 | Condensed Consolidated Statements of Income - Unaudited Net income significantly decreased for Q2 and H1 2023 due to increased interest expense and lower non-interest income Condensed Consolidated Statements of Income Summary | Metric (in thousands, except per share) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest income | $158,150 | $113,909 | $309,497 | $219,945 | | Total interest expense | $67,679 | $7,959 | $121,724 | $12,544 | | Net interest income | $90,471 | $105,950 | $187,773 | $207,401 | | Provision/ (credit) for credit losses | $5,055 | $3,046 | $(16,481) | $4,681 | | Total non-interest income | $17,176 | $35,245 | $33,127 | $55,840 | | Total non-interest expense | $69,136 | $64,991 | $135,441 | $127,138 | | Income before income tax expense | $33,456 | $73,158 | $101,940 | $131,422 | | Income tax expense | $8,711 | $18,358 | $25,942 | $32,687 | | Net income | $24,745 | $54,800 | $75,998 | $98,735 | | Basic net income per common share | $0.55 | $1.21 | $1.69 | $2.18 | | Diluted net income per common share | $0.55 | $1.21 | $1.69 | $2.17 | | Dividends declared per share | $0.34 | $0.34 | $0.68 | $0.68 | Condensed Consolidated Statements of Comprehensive Income – Unaudited Comprehensive income decreased for Q2 2023 but significantly increased for H1, driven by available-for-sale investments Condensed Consolidated Statements of Comprehensive Income Summary | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $24,745 | $54,800 | $75,998 | $98,735 | | Net effect on other comprehensive income/ (loss) (AFS) | $(10,143) | $(28,924) | $5,347 | $(77,956) | | Net effect on other comprehensive income/ (loss) (HTM) | $341 | $597 | $643 | $(11,249) | | Net effect on other comprehensive income/ (loss) (Pension) | $168 | $145 | $336 | $291 | | Total other comprehensive income/ (loss) | $(9,634) | $(28,182) | $6,326 | $(88,914) | | Comprehensive income | $15,111 | $26,618 | $82,324 | $9,821 | Condensed Consolidated Statements of Changes in Stockholders' Equity – Unaudited Stockholders' equity increased from January to June 2023, driven by net income and positive comprehensive loss changes Stockholders' Equity Balances | Metric (in thousands) | Balances at January 1, 2023 | Balances at June 30, 2023 | | :-------------------- | :-------------------------- | :------------------------ | | Common Stock | $44,657 | $44,862 | | Additional Paid-In Capital | $734,273 | $737,740 | | Retained Earnings | $836,789 | $882,055 | | Accumulated Other Comprehensive Income/ (Loss) | $(131,951) | $(125,625) | | Total Stockholders' Equity | $1,483,768 | $1,539,032 | | Metric (in thousands) | Balances at January 1, 2022 | Balances at June 30, 2022 | | :-------------------- | :-------------------------- | :------------------------ | | Common Stock | $45,119 | $44,630 | | Additional Paid-In Capital | $751,072 | $730,285 | | Retained Earnings | $732,027 | $799,707 | | Accumulated Other Comprehensive Income/ (Loss) | $(8,539) | $(97,453) | | Total Stockholders' Equity | $1,519,679 | $1,477,169 | - Common stock dividends declared per share remained constant at $0.34 for the three months and $0.68 for the six months ended June 30, 2023 and 2022[8] - The Company repurchased 625,710 common shares for $25.0 million in 2022, but no shares were repurchased during the quarter ended June 30, 2023[10][11] Condensed Consolidated Statements of Cash Flows – Unaudited Operating cash flow increased for H1 2023, investing activities shifted to inflow, and financing activities decreased significantly Condensed Consolidated Statements of Cash Flows Summary | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $54,291 | $101,520 | | Net cash provided by/ (used in) investing activities | $105,692 | $(1,008,939) | | Net cash provided by financing activities | $77,912 | $708,678 | | Net increase/ (decrease) in cash and cash equivalents | $237,895 | $(198,741) | | Cash and cash equivalents at end of period | $430,127 | $221,279 | - The provision for credit losses was a credit of $16.481 million in 2023, compared to a charge of $4.681 million in 2022, significantly impacting operating cash flows[12] - Net (increase)/decrease in loans shifted from a decrease of $814.098 million in 2022 to an increase of $27.075 million in 2023, contributing to the change in investing activities[12] - Proceeds from FHLB advances increased significantly to $2,030,000 million in 2023 from $346,625 million in 2022, with corresponding repayments, impacting financing cash flows[12] Notes to the Condensed Consolidated Financial Statements Detailed notes cover accounting policies, financial instruments, credit quality, and fair value measurements NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES Outlines operations, basis of presentation, and accounting for loans, ACL, and leases, including ASU 2022-02 adoption - The Company adopted ASU 2022-02, 'Financial Instruments - Credit Losses (Topic 326)', effective January 1, 2023, which eliminated accounting guidance for Troubled Debt Restructurings (TDRs) and amended vintage disclosures, with no material impact on Consolidated Financial Statements[27][41] - The allowance for credit losses (ACL) reflects lifetime expected losses on outstanding loans, based on historical default and loss experience, adjusted for expected economic conditions (two-year forecast period, reverting to historical mean over two years), with key variables including unemployment rate, house price index, and business bankruptcies[28][33] - The Company adopted ASU 2020-04 on January 1, 2022, related to Reference Rate Reform, and continues to evaluate ASU 2021-01, neither of which is expected to have a material impact[43] NOTE 2 – INVESTMENTS Details the investment portfolio, showing decreased fair value of debt securities due to interest rate changes, not credit events Debt Securities Portfolio | Investment Category (in thousands) | June 30, 2023 Amortized Cost | June 30, 2023 Estimated Fair Value | December 31, 2022 Amortized Cost | December 31, 2022 Estimated Fair Value | | :--------------------------------- | :----------------------------- | :--------------------------------- | :------------------------------- | :------------------------------- | | Available-for-sale debt securities | $1,288,818 | $1,143,688 | $1,366,843 | $1,214,538 | | Held-to-maturity debt securities | $247,814 | $208,662 | $259,452 | $220,123 | | Total debt securities | $1,536,632 | $1,352,350 | $1,626,295 | $1,434,661 | - Unrealized losses on available-for-sale debt securities at June 30, 2023, are due to changes in interest rates, not credit-related events, and the Company does not intend to sell these securities and has sufficient liquidity to hold them to maturity[44] Other Investments | Other Investments (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Federal Reserve Bank stock | $38,961 | $38,873 | | Federal Home Loan Bank of Atlanta stock | $32,414 | $29,668 | | Other | $677 | $677 | | Total other investments, at cost | $72,052 | $69,218 | NOTE 3 – LOANS Breakdown of the loan portfolio shows stable total loans, with commercial loans decreasing and residential mortgages growing Loan Portfolio Segment Breakdown | Loan Portfolio Segment (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Commercial investor real estate | $5,131,210 | $5,130,094 | | Commercial owner-occupied real estate | $1,770,135 | $1,775,037 | | Commercial AD&C | $1,045,742 | $1,090,028 | | Commercial business | $1,423,614 | $1,455,885 | | Total commercial loans | $9,370,701 | $9,451,044 | | Residential mortgage | $1,385,743 | $1,287,933 | | Residential construction | $190,690 | $224,772 | | Consumer | $422,505 | $432,957 | | Total residential and consumer loans | $1,998,938 | $1,945,662 | | Total loans | $11,369,639 | $11,396,706 | - Commercial loans decreased slightly by $80.3 million, while residential and consumer loans increased by $53.3 million, primarily driven by residential mortgage growth[53] NOTE 4 – CREDIT QUALITY ASSESSMENT Details ACL, collateral-dependent loans, and credit quality indicators, showing decreased ACL and increased non-accrual loans Allowance for Credit Losses Activity | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $136,242 | $109,145 | | Provision/ (credit) for credit losses - loans | $(14,491) | $4,681 | | Net charge-offs | $(1,464) | $(156) | | Balance at period end | $120,287 | $113,670 | Collateral Dependent Loans and ACL | Collateral Dependent Loans (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------------- | :------------ | :---------------- | | Collateral dependent loans individually evaluated for credit loss with an allowance | $48,878 | $9,743 | | Total individually evaluated collateral dependent loans | $63,530 | $26,197 | | Allowance for credit losses related to loans evaluated individually | $16,224 | $6,902 | | Allowance for credit losses related to loans evaluated collectively | $104,063 | $129,340 | | Total allowance for credit losses - loans | $120,287 | $136,242 | Non-accrual Loan Activity | Non-accrual Loan Activity (in thousands) | Six Months Ended June 30, 2023 | Year Ended December 31, 2022 | | :--------------------------------------- | :----------------------------- | :--------------------------- | | Balance at beginning of period | $34,782 | $46,086 | | Loans placed on non-accrual | $28,990 | $12,130 | | Non-accrual balances charged-off | $(2,175) | $(860) | | Balance at end of period | $48,738 | $34,782 | Loan Modifications by Type | Loan Modifications (in thousands) | Interest rate reduction | Term extension | | :-------------------------------- | :---------------------- | :------------- | | Commercial Investor R/E | $28,340 | $553 | | Commercial Owner-Occupied R/E | — | $2,000 | | Commercial AD&C | — | $350 | | Commercial Business | — | $950 | | Total | $28,340 | $3,853 | - No loan modifications completed on or after January 1, 2023, for borrowers experiencing financial difficulty had a payment default during the six months ended June 30, 2023[75] NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill remained constant, while amortizing intangible assets decreased due to ongoing amortization Intangible Assets Summary | Intangible Asset (in thousands) | June 30, 2023 Net Carrying Amount | December 31, 2022 Net Carrying Amount | | :------------------------------ | :-------------------------------- | :------------------------------------ | | Core deposit intangibles | $10,552 | $12,344 | | Other identifiable intangibles | $6,728 | $7,511 | | Total amortizing intangible assets | $17,280 | $19,855 | | Goodwill | $363,436 | $363,436 | - The weighted average remaining life for core deposit intangibles is 6.0 years and for other identifiable intangibles is 8.2 years as of June 30, 2023[77] NOTE 6 – DEPOSITS Total deposits remained stable, but a significant shift occurred from noninterest-bearing to interest-bearing deposits Deposit Composition | Deposit Category (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------ | :------------ | :---------------- | | Noninterest-bearing deposits | $3,079,896 | $3,673,300 | | Interest-bearing deposits: | | | | Demand | $1,413,027 | $1,435,454 | | Money market savings | $2,918,253 | $3,213,045 | | Regular savings | $731,985 | $513,360 | | Time deposits of less than $250,000 | $2,293,858 | $1,644,645 | | Time deposits of $250,000 or more | $521,903 | $473,617 | | Total interest-bearing deposits | $7,879,026 | $7,280,121 | | Total deposits | $10,958,922 | $10,953,421 | - Noninterest-bearing deposits decreased by $593.4 million, while interest-bearing deposits increased by $598.9 million, with time deposits showing significant growth[79] NOTE 7 – BORROWINGS Total borrowings increased due to new Federal Reserve Bank borrowings and FHLB advances, offsetting reduced federal funds purchased Borrowings by Category | Borrowing Category (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Fixed to floating rate subordinated debt, 3.875% | $200,000 | $200,000 | | Fixed to floating rate subordinated debt, 4.25% | $175,000 | $175,000 | | Total subordinated debt | $375,000 | $375,000 | | Securities sold under retail repurchase agreements | $74,510 | $61,967 | | Federal funds purchased | — | $260,000 | | Federal Reserve Bank borrowings | $300,000 | — | | Advances from FHLB | $600,000 | $550,000 | - The Company had $300.0 million outstanding borrowings through the Federal Reserve's Bank Term Funding Program at June 30, 2023, with an additional $16.6 million available[84] - FHLB availability based on pledged collateral was $2.6 billion at June 30, 2023, with $600.0 million outstanding[85] NOTE 8 – STOCKHOLDERS' EQUITY No shares were repurchased in Q2 2023, with $25.0 million remaining available under the stock repurchase plan - The Company repurchased 625,710 common shares for $25.0 million in 2022 under a $50.0 million stock repurchase plan[88] - No common shares were repurchased during the quarter ended June 30, 2023, leaving $25.0 million available under the current authorization[88] NOTE 9 – SHARE BASED COMPENSATION Compensation expense decreased for H1 2023, with significant unrecognized costs remaining for restricted stock awards Share-Based Compensation Expense | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Compensation expense | $2,700 | $3,200 | $4,000 | $4,700 | - Unrecognized compensation cost related to restricted stock awards, restricted stock unit grants, and performance share unit grants was approximately $9.5 million as of June 30, 2023, expected to be recognized over a weighted average period of approximately 2.04 years[90] - During the six months ended June 30, 2023, the Company granted 276,252 restricted stock units and performance share units, but no stock options[91] NOTE 10 – PENSION PLAN The defined benefit pension plan was frozen and approved for termination, with asset distributions anticipated in Q3 2023 - The Company's defined benefit pension plan was approved for termination effective June 30, 2022, with asset distributions anticipated in the third quarter of 2023[96][98] Net Periodic Benefit Cost | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net periodic benefit cost | $290 | $169 | $580 | $337 | - No contributions were made to the Plan during the six months ended June 30, 2023[100] NOTE 11 – NET INCOME PER COMMON SHARE Both basic and diluted EPS decreased for Q2 and H1 2023, reflecting the overall decline in net income Net Income Per Common Share Calculation | Metric (in thousands, except per share) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to common shareholders | $24,712 | $54,606 | $75,821 | $98,259 | | Basic weighted average common shares | 44,833 | 45,024 | 44,756 | 45,082 | | Diluted weighted average common shares | 44,889 | 45,111 | 44,877 | 45,222 | | Basic net income per common share | $0.55 | $1.21 | $1.69 | $2.18 | | Diluted net income per common share | $0.55 | $1.21 | $1.69 | $2.17 | NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE LOSS The balance improved from a loss of $(131.951) million to $(125.625) million, driven by available-for-sale investments Accumulated Other Comprehensive Loss Activity | Metric (in thousands) | Balance at January 1, 2023 | Current period change in other comprehensive loss, net of tax | Balance at June 30, 2023 | | :-------------------- | :------------------------- | :---------------------------------------------------------- | :----------------------- | | Unrealized Gains/(Losses) on Debt Securities Available-for-Sale | $(113,513) | $5,347 | $(108,166) | | Defined Benefit Pension Plan | $(8,002) | $336 | $(7,666) | | Unrealized Losses on Debt Securities Transferred from Available-for-Sale to Held-to-Maturity | $(10,436) | $643 | $(9,793) | | Total | $(131,951) | $6,326 | $(125,625) | - Reclassification adjustments from accumulated other comprehensive income to earnings for the six months ended June 30, 2023, included amortization of unrealized losses on HTM debt securities and amortization of defined benefit pension plan items, with no impact from investment securities gains[104] NOTE 13 – LEASES Operating lease costs and cash flows remained stable, with new ROU assets and lease liabilities recognized Operating Lease Costs and Cash Flows | Metric (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :-------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $2,712 | $5,427 | | Operating cash flows from operating leases | $2,861 | $5,749 | | ROU assets obtained in exchange for lease liabilities (New leases) | — | $703 | Lease Information | Lease Information | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :---------------- | | Operating lease ROU assets | $50,397 | $48,910 | | Operating lease liabilities | $58,568 | $57,402 | | Weighted average remaining lease term | 8.3 years | 8.6 years | | Weighted average discount rate | 3.22% | 3.02% | NOTE 14 – DERIVATIVES Interest rate swap agreements are used for customer transactions, with slight decrease in notional value and fair values - The notional value of interest rate swaps outstanding was $334.5 million as of June 30, 2023, a slight decrease from $339.1 million at December 31, 2022[109] - Fair values of swap positions net to zero to minimize the potential impact on the Condensed Consolidated Financial Statements, carried as gross assets and liabilities[109] NOTE 15 – LITIGATION Management anticipates no material adverse effect on the Company's financial condition or results from ongoing legal proceedings - Management does not anticipate that the ultimate liability from pending or threatened legal proceedings will have a material adverse effect on the Company's financial condition, operating results, or liquidity[111] NOTE 16 – FAIR VALUE Fair value measurements for financial instruments are primarily Level 2, with details on collateral-dependent non-accrual loans Fair Value Measurements (Level 2) | Asset/Liability (in thousands) | June 30, 2023 Total Fair Value | Level 2 Fair Value | | :----------------------------- | :----------------------------- | :----------------- | | Residential mortgage loans held for sale | $21,476 | $21,476 | | Available-for-sale debt securities | $1,143,688 | $1,143,688 | | Interest rate swap agreements (assets) | $18,286 | $18,286 | | Interest rate swap agreements (liabilities) | $(18,286) | $(18,286) | - At June 30, 2023, non-accrual loans totaling $63.5 million had an estimated fair value of $47.3 million, resulting in individual credit loss allowances of $16.2 million[124] Fair Value of Loans and Subordinated Debt (Level 3) | Financial Instrument (in thousands) | June 30, 2023 Carrying Amount | June 30, 2023 Estimated Fair Value | June 30, 2023 Level 3 Fair Value | | :---------------------------------- | :---------------------------- | :--------------------------------- | :------------------------------- | | Loans, net of allowance | $11,249,352 | $10,467,917 | $10,467,917 | | Subordinated debt | $370,504 | $336,107 | $336,107 | Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Analyzes financial condition and results for Q2 and H1 2023, highlighting declining net income, stable balances, and strong capital Forward-Looking Statements Highlights forward-looking statements subject to risks and uncertainties, which the Company does not undertake to update - Forward-looking statements are subject to significant risks and uncertainties, including changes in economic conditions, consumer confidence, demand for financial services, credit losses, interest rate environment, regulatory compliance, and competitive pressures[134] - The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the report date, except as required by federal securities laws[135] The Company Sandy Spring Bancorp, Inc. is a bank holding company offering diverse financial services, with total assets of $14.0 billion - Sandy Spring Bancorp, Inc. is the bank holding company for Sandy Spring Bank, providing commercial banking, retail banking, mortgage services, and trust services[136][137] - The Bank offers wealth management services through West Financial Services, Inc. and SSB Wealth Management, Inc. (d/b/a Rembert Pendleton Jackson)[137] - Total assets at June 30, 2023, were $14.0 billion, compared to $13.8 billion at December 31, 2022[136] Current Quarter Financial Overview Q2 2023 net income decreased significantly due to lower net interest income, reduced non-interest income, and higher expenses Current Quarter Financial Performance Summary | Metric (in millions, except per share) | Q2 2023 | Q1 2023 | Q2 2022 | | :------------------------------------- | :------ | :------ | :------ | | Net income | $24.7 | $51.3 | $54.8 | | Diluted EPS | $0.55 | $1.14 | $1.21 | | Core earnings | $27.1 | $52.3 | $44.2 | | Core diluted EPS | $0.60 | $1.16 | $0.98 | - Net interest income for Q2 2023 declined 7% QoQ and 15% YoY, primarily due to interest expense growth outpacing interest income growth[142] Key Financial Ratios | Metric | Q2 2023 | Q1 2023 | Q2 2022 | | :----- | :------ | :------ | :------ | | Net interest margin | 2.73% | 2.99% | 3.49% | | Non-performing loans to total loans | 0.44% | 0.41% | 0.40% | | GAAP efficiency ratio | 64.22% | 58.55% | 46.03% | | Non-GAAP efficiency ratio | 60.68% | 56.87% | 49.79% | - Provision for credit losses was a charge of $4.5 million in Q2 2023, compared to a credit of $18.9 million in Q1 2023, mainly due to an individual reserve on a commercial real estate relationship and consumer loan charge-offs[142][143] Summary of Comparative Second Quarter Results Assets and loans increased year-over-year, deposits remained level, and net income declined significantly due to lower net interest income Comparative Financial Position | Metric (in billions) | June 30, 2023 | June 30, 2022 | | :------------------- | :------------ | :------------ | | Total assets | $14.0 | $13.3 | | Total loans | $11.4 | $10.8 | | Deposits | $11.0 | $11.0 | - Tangible common equity ratio increased to 8.51% at June 30, 2023, from 8.45% at June 30, 2022, driven by growth in retained earnings[146] Capital Ratios | Capital Ratio | June 30, 2023 | | :------------ | :------------ | | Total risk-based capital ratio | 14.60% | | Common equity tier 1 risk-based capital ratio | 10.65% | | Tier 1 risk-based capital ratio | 10.65% | | Tier 1 leverage ratio | 9.42% | - Net income for Q2 2023 was $24.7 million, down from $54.8 million in Q2 2022, primarily due to a $16.7 million gain on the sale of the insurance segment in the prior year and lower net interest income[149][150] Credit Quality Metrics | Credit Quality Metric | June 30, 2023 | June 30, 2022 | | :-------------------- | :------------ | :------------ | | Non-performing loans to total loans | 0.44% | 0.40% |\ | Allowance for credit losses to outstanding loans | 1.06% | 1.05% | | Allowance for credit losses to non-performing loans | 243% | 261% | Results of Operations (Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022) H1 2023 net income and core earnings declined due to increased interest expense, lower non-interest income, and higher expenses Six-Month Financial Performance Summary | Metric (in millions) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------- | :----------------------------- | :----------------------------- | | Net income | $76.0 | $98.7 | | Core earnings | $79.4 | $89.3 | | Pre-tax, pre-provision net income | $85.5 | $136.1 | Net Interest Income and Margin | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----- | :----------------------------- | :----------------------------- | | Net interest income (tax-equivalent) | $189.7 | $209.3 | | Net interest margin | 2.86% | 3.49% | | Average yield on earning assets | 4.69% | 3.70% | | Average rate paid on interest-bearing liabilities | 2.72% | 0.35% | Non-interest Income Breakdown | Non-interest Income (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | % Change | | :--------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Total non-interest income | $33,127 | $55,840 | $(22,713) | (40.7)% | | Gain on disposal of assets | — | $16,699 | $(16,699) | N/M | | Insurance agency commissions | — | $2,927 | $(2,927) | N/M | | Bank card fees | $865 | $3,478 | $(2,613) | (75.1)% | Non-interest Expense Breakdown | Non-interest Expense (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | % Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Total non-interest expense | $135,441 | $127,138 | $8,303 | 6.5% | | FDIC insurance | $4,513 | $2,062 | $2,451 | 118.9% | | Professional fees and services | $7,845 | $4,389 | $3,456 | 78.7% | Efficiency Ratios | Efficiency Ratio | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------- | :----------------------------- | :----------------------------- | | GAAP efficiency ratio | 61.31% | 48.30% | | Non-GAAP efficiency ratio | 58.73% | 49.57% | Results of Operations (Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022) Q2 2023 net income and core earnings significantly decreased due to increased interest expense, lower non-interest income, and rising expenses Three-Month Financial Performance Summary | Metric (in millions, except per share) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :------------------------------------- | :------------------------------- | :------------------------------- | | Net income | $24.7 | $54.8 | | Diluted EPS | $0.55 | $1.21 | | Core earnings | $27.1 | $44.2 | | Core diluted EPS | $0.60 | $0.98 | Net Interest Income and Margin | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :----- | :------------------------------- | :------------------------------- | | Net interest income | $90,471 | $105,950 | | Net interest margin | 2.73% | 3.49% | | Average yield on interest-earning assets | 4.75% | 3.75% | | Average rate paid on interest-bearing liabilities | 2.93% | 0.43% | Non-interest Income Breakdown | Non-interest Income (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | $ Change | % Change | | :--------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Total non-interest income | $17,176 | $35,245 | $(18,069) | (51.3)% | | Gain on disposal of assets | — | $16,699 | $(16,699) | N/M | | Bank card fees | $447 | $1,810 | $(1,363) | (75.3)% | Non-interest Expense Breakdown | Non-interest Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | $ Change | % Change | | :---------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Total non-interest expense | $69,136 | $64,991 | $4,145 | 6.4% | | Salaries and employee benefits | $40,931 | $39,550 | $1,381 | 3.5% | | FDIC insurance | $2,375 | $1,078 | $1,297 | 120.3% | | Professional fees and services | $4,161 | $2,372 | $1,789 | 75.4% | Efficiency Ratios | Efficiency Ratio | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | | GAAP efficiency ratio | 64.22% | 46.03% | | Non-GAAP efficiency ratio | 60.68% | 49.79% | FINANCIAL CONDITION Financial condition at June 30, 2023, shows increased assets, stable loans and deposits, and bolstered on-balance sheet liquidity Financial Position Overview | Metric (in billions) | June 30, 2023 | December 31, 2022 | | :------------------- | :------------ | :---------------- | | Total assets | $14.0 | $13.8 | | Total loans | $11.4 | $11.4 | | Total deposits | $11.0 | $11.0 | | Loan to deposit ratio | 103.7% | 104.0% | - Noninterest-bearing deposits declined 16.2%, while interest-bearing deposits increased 8.2%, driven by competitive high yields and growth in brokered time deposits[199][203] Investment Portfolio Summary | Investment Category (in thousands) | June 30, 2023 Amount | December 31, 2022 Amount | Period-to-Period Change % | | :--------------------------------- | :------------------- | :----------------------- | :------------------------ | | Total available-for-sale debt securities | $1,143,688 | $1,214,538 | (5.8)% | | Total held-to-maturity debt securities | $247,814 | $259,452 | (4.5)% | | Total securities | $1,463,554 | $1,543,208 | (5.2)% | - The duration of the investment portfolio decreased to 4.6 years at June 30, 2023, from 4.8 years at December 31, 2022[201] - Total borrowings increased by $102.8 million, with $300.0 million in Federal Reserve Bank's Bank Term Funding Program borrowings replacing $260.0 million in federal funds purchased[206] Credit Risk Non-performing loans increased, ACL decreased, and the provision for credit losses was a credit in H1 2023 due to an improving forecast Credit Quality Metrics | Credit Quality Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Total non-accrual loans | $48,738 | $34,782 | | Total 90 days past due loans | $721 | $1,002 | | Total non-performing loans | $49,459 | $39,359 | | Total non-performing assets | $50,070 | $40,004 | | Non-performing loans to total loans | 0.44% | 0.35% | | Allowance for credit losses to non-performing loans | 243.21% | 346.15% | Allowance for Credit Losses | Allowance for Credit Losses (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------------- | :------------ | :---------------- | | Balance, period end | $120,287 | $136,242 | | Allowance for credit losses on loans to loans | 1.06% | 1.20% | - The provision for credit losses was a credit of $16.5 million for the six months ended June 30, 2023, compared to a charge of $4.7 million for the same period in 2022, reflecting an improving regional forecast and strong loan portfolio performance[228] - The allowance attributable to the commercial portfolio was 1.16% of total commercial loans, and for consumer and mortgage loans was 0.59% at June 30, 2023[229] Market Risk Management Interest rate risk management uses simulation analysis, with NII at risk increasing and EVE at risk decreasing - Interest rate risk management aims to increase net interest income consistent with asset growth and minimize fluctuations in net interest income as a percentage of interest-earning assets[240] - The Company uses simulation analysis to measure NII at risk and EVE at risk from hypothetical changes in U.S. Treasury interest rates, with policy limits established by the board of directors[241][244] Net Interest Income (NII) at Risk | Change in Interest Rates | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | -300 bp | -400 bp | | :----------------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | NII at Risk (June 30, 2023) | 7.37% | 5.56% | 3.77% | 1.89% | (1.47%) | (3.04%) | (4.89%) | (6.35%) | | NII at Risk (December 31, 2022) | 1.87% | 1.58% | 1.29% | 0.75% | (0.89%) | (1.75%) | (2.66%) | (4.17%) | Economic Value of Equity (EVE) at Risk | Change in Interest Rates | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | -300 bp | -400 bp | | :----------------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | EVE at Risk (June 30, 2023) | (17.59%) | (12.97%) | (8.42%) | (4.07%) | 3.76% | 6.32% | 7.49% | 6.03% | | EVE at Risk (December 31, 2022) | (20.78%) | (15.84%) | (10.62%) | (5.32%) | 5.13% | 10.48% | 15.71% | 18.74% | Liquidity Management Robust liquidity management includes $4.4 billion in contingent liquidity, covering 132% of uninsured deposits - At June 30, 2023, contingent liquidity totaled $4.4 billion, or 132% of uninsured deposits, with an additional $1.0 billion in available federal funds, providing total coverage of 163% of uninsured deposits[253] - External liquidity sources include $2.6 billion in FHLB availability (with $600.0 million outstanding), $760.8 million in secured lines of credit at the Federal Reserve Bank (no borrowings outstanding), and $316.5 million in collateral under the BTF Program (with $300.0 million in borrowings outstanding)[254] - As of June 30, 2023, the Bank could have declared a dividend of up to $117.5 million to Bancorp, which had liquid assets of $83.6 million[255] Commitments to Extend Credit | Commitments to Extend Credit (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :---------------- | | Commercial real estate development and construction | $728,839 | $887,154 | | Residential real estate-development and construction | $687,972 | $798,607 | | Lines of credit, principally home equity and business lines | $2,486,317 | $2,397,533 | | Standby letters of credit | $74,333 | $77,424 | | Total commitments | $4,009,551 | $4,181,836 | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk disclosures are incorporated by reference from the "Financial Condition - Market Risk Management" section - Quantitative and qualitative disclosures about market risk are incorporated by reference from the "Financial Condition - Market Risk Management" section of Item 2[260] Item 4. CONTROLS AND PROCEDURES Disclosure controls were effective as of June 30, 2023, with no material changes to internal controls - The Company's disclosure controls and procedures were evaluated as effective as of June 30, 2023[261] - No material changes in internal controls over financial reporting occurred during the three months ended June 30, 2023[261] PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Management anticipates no material adverse effect on the Company's financial condition or results from routine legal proceedings - Management does not anticipate that the ultimate liability from legal proceedings will have a material adverse effect on the Company's financial condition, operating results, or liquidity[262] Item 1A. RISK FACTORS A new risk factor highlights potential increases in FDIC deposit insurance premiums and assessments - A new risk factor involves potential increases in FDIC deposit insurance premiums and assessments, including a proposed special assessment on banks with uninsured deposits over $5.0 billion[263] - At December 31, 2022, the Company's total reported uninsured deposits were $4.4 billion, below the proposed $5.0 billion threshold for the special assessment[263] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No shares were repurchased in Q2 2023, with $25.0 million remaining available under the repurchase plan - The Company repurchased 625,710 common shares for $25.0 million in 2022 under a $50.0 million stock repurchase plan[264] - No shares were repurchased during the quarter ended June 30, 2023, with $25.0 million remaining available under the authorization[264] Item 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities Item 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the Company Item 5. OTHER INFORMATION No directors or officers reported adoption or termination of Rule 10b5-1 trading arrangements in Q2 2023 - No directors or officers informed the Company of the adoption or termination of Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023[265] Item 6. EXHIBITS Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL taxonomy documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31(a), 31(b), 32(a), 32(b)) and various XBRL taxonomy extension documents (Exhibits 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[266] SIGNATURES The quarterly report was signed by the President/CEO and EVP/CFO on August 4, 2023 - The quarterly report was signed by Daniel J. Schrider, President and Chief Executive Officer, and Philip J. Mantua, Executive Vice President and Chief Financial Officer, on August 4, 2023[267]