EAGLE BANCORP INC 10-Q

Item 1 – Financial Statements (Unaudited) EAGLE BANCORP, INC. Consolidated Balance Sheets (Unaudited) (dollars in thousands, except per share data) September 30, 2021 December 31, 2020 Assets Cash and due from banks $ 8,806 $ 8,435 Federal funds sold 38,934 28,200 Interest bearing deposits with banks and other short-term investments 2,452,744 1,752,420 Investment securities (amortized cost of $ 1,789,416 and $ 1,129,255 and allowance for credit losses of $ 256 and $ 167 as of September 30, 2021 and December 31, 2020, respectively). 1,786,659 1,151,083 Federal Reserve and Federal Home Loan Bank stock 34,093 40,104 Loans held for sale 53,413 88,205 Loans 6,850,863 7,760,212 Less allowance for credit losses ( 82,906 ) ( 109,579 ) Loans, net 6,767,957 7,650,633 Premises and equipment, net 15,293 13,553 Operating lease right-of-use assets 30,080 25,237 Deferred income taxes 44,733 38,571 Bank owned life insurance 108,158 76,729 Goodwill and Intangible assets, net 105,103 105,114 Other real estate owned 5,135 4,987 Other assets 134,209 134,531 Total Assets $ 11,585,317 $ 11,117,802 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest bearing demand $ 2,836,418 $ 2,809,334 Interest bearing transaction 812,410 756,923 Savings and money market 5,268,157 4,645,186 Time, $ 100 thousand or more 347,937 546,173 Other time 403,566 431,587 Total deposits 9,668,488 9,189,203 Customer repurchase agreements 29,401 26,726 Other short-term borrowings 300,000 300,000 Long-term borrowings 69,639 268,077 Operating lease liabilities 34,345 28,022 Reserve for unfunded commitments 5,011 5,498 Other liabilities 146,736 59,384 Total Liabilities 10,253,620 9,876,910 Shareholders’ Equity Common stock, par value $ 0.01 per share; shares authorized 100,000,000 , shares issued and outstanding 31,947,458 and 31,779,663 , respectively 316 315 Additional paid in capital 432,479 427,016 Retained earnings 901,218 798,061 Accumulated other comprehensive (loss) income ( 2,316 ) 15,500 Total Shareholders’ Equity 1,331,697 1,240,892 Total Liabilities and Shareholders’ Equity $ 11,585,317 $ 11,117,802 See Notes to Consolidated Financial Statements. 3 EAGLE BANCORP, INC. Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest Income Interest and fees on loans $ 82,182 $ 89,296 $ 260,124 $ 278,979 Interest and dividends on investment securities 5,877 4,141 15,878 14,139 Interest on balances with other banks and short-term investments 1,083 384 2,239 2,104 Interest on federal funds sold 10 12 25 84 Total interest income 89,152 93,833 278,266 295,306 Interest Expense Interest on deposits 6,590 10,995 21,288 44,055 Interest on customer repurchase agreements 14 84 34 257 Interest on short-term borrowings 506 505 1,502 1,363 Interest on long-term borrowings 2,997 3,211 9,114 9,486 Total interest expense 10,107 14,795 31,938 55,161 Net Interest Income 79,045 79,038 246,328 240,145 (Credit) Provision for Credit Losses ( 8,203 ) 6,607 ( 14,409 ) 40,654 Provision for Unfunded Commitments 716 ( 2,078 ) ( 487 ) 974 Net Interest Income After (Credit) Provision For Credit Losses 86,532 74,509 261,224 198,517 Noninterest Income Service charges on deposits 1,204 1,061 3,303 3,428 Gain on sale of loans 3,332 12,226 11,988 16,249 Gain on sale of investment securities 1,519 115 2,058 1,650 Increase in the cash surrender value of bank owned life insurance 642 413 1,429 1,655 Other income 1,602 4,029 11,033 12,827 Total noninterest income 8,299 17,844 29,811 35,809 Noninterest Expense Salaries and employee benefits 22,145 19,388 63,790 54,289 Premises and equipment expenses 3,859 5,125 11,121 12,414 Marketing and advertising 1,013 928 2,879 3,117 Data processing 2,886 2,700 8,451 7,955 Legal, accounting and professional fees 2,021 3,097 8,523 14,064 FDIC insurance 1,549 2,152 5,586 5,556 Other expenses 2,902 3,525 9,506 11,759 Total noninterest expense 36,375 36,915 109,856 109,154 Income Before Income Tax Expense 58,456 55,438 181,179 125,172 Income Tax Expense 14,847 14,092 46,108 31,847 Net Income $ 43,609 $ 41,346 $ 135,071 $ 93,325 Earnings Per Common Share Basic $ 1.36 $ 1.28 $ 4.23 $ 2.88 Diluted $ 1.36 $ 1.28 $ 4.22 $ 2.88 See Notes to Consolidated Financial Statements. 4 EAGLE BANCORP, INC. Consolidated Statements of Comprehensive Income (Unaudited) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Income $ 43,609 $ 41,346 $ 135,071 $ 93,325 Other comprehensive income, net of tax: Unrealized gain (loss) on securities available for sale ( 5,703 ) ( 624 ) ( 16,666 ) 13,354 Reclassification adjustment for net gain included in net income ( 1,133 ) ( 86 ) ( 1,534 ) ( 1,231 ) Total unrealized gain (loss) on investment securities ( 6,836 ) ( 710 ) ( 18,200 ) 12,123 Unrealized gain (loss) on derivatives — 24 769 ( 1,324 ) Reclassification adjustment for amounts included in net income — 289 ( 385 ) 513 Total unrealized gain (loss) on derivatives — 313 384 ( 811 ) Other comprehensive income (loss) ( 6,836 ) ( 397 ) ( 17,816 ) 11,312 Comprehensive Income $ 36,773 $ 40,949 $ 117,255 $ 104,637 See Notes to Consolidated Financial Statements. EAGLE BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (dollars in thousands except share data) Accumulated Other Common Additional Paid Retained Comprehensive Shareholders' Shares Amount in Capital Earnings Income (Loss) Equity Balance July 1, 2021 31,961,573 $ 316 $ 431,103 $ 870,397 $ 4,520 $ 1,306,336 Net Income — — — 43,609 — 43,609 Other Comprehensive loss, net of tax — — — — ( 6,836 ) ( 6,836 ) Stock-based compensation expense — — 1,990 — — 1,990 Time based stock awards granted 250 — — — — — Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 2,756 ) — — — — — Issuance of common stock related to employee stock purchase plan — — — — — — Cash dividends declared ($ 0.40 per share) — — — ( 12,788 ) — ( 12,788 ) Common stock repurchased ( 11,609 ) ( 615 ) ( 615 ) Balance September 30, 2021 31,947,458 — $ 316 $ — $ 432,479 $ — $ 901,218 $ — $ ( 2,316 ) $ — $ 1,331,697 Balance July 1, 2020 32,224,756 $ 320 $ 440,934 $ 731,973 $ 14,668 $ 1,187,895 Net Income — — — 41,346 — 41,346 Other Comprehensive loss, net of tax — — — — ( 397 ) ( 397 ) Stock-based compensation expense — — 1,452 — — 1,452 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 3,297 ) — — — — — Time based stock awards granted — — — — — — Issuance of common stock related to employee stock purchase plan 7,177 — 206 — — 206 Cash dividends declared ($ 0.22 per share) — — — ( 7,100 ) — ( 7,100 ) Balance September 30, 2020 32,228,636 — $ 320 $ — $ 442,592 $ — $ 766,219 $ — $ 14,271 $ 1,223,402 5 Accumulated Other Common Additional Paid Retained Comprehensive Shareholders' Shares Amount in Capital Earnings Income (Loss) Equity Balance January 1, 2021 31,779,663 $ 315 $ 427,016 $ 798,061 $ 15,500 $ 1,240,892 Net Income — — — 135,071 — 135,071 Other comprehensive loss, net of tax — — — — ( 17,816 ) ( 17,816 ) Stock-based compensation expense — — 5,814 — — 5,814 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 23,755 ) 1 ( 1 ) — — — Vesting of performance based stock awards, net of shares withheld for payroll taxes 15,686 — — — — — Time based stock awards granted 179,172 — — — — — Issuance of common stock related to employee stock purchase plan 9,767 — 327 — — 327 Cash dividends declared ($ 1.00 per share) — — — ( 31,914 ) — ( 31,914 ) Common stock repurchased ( 13,075 ) — ( 677 ) — — ( 677 ) Balance September 30, 2021 31,947,458 $ 316 $ 432,479 $ 901,218 $ ( 2,316 ) $ 1,331,697 Balance January 1, 2020 33,241,496 $ 331 $ 482,286 $ 705,105 $ 2,959 $ 1,190,681 Net Income — — — 93,325 — 93,325 Cumulative effect adjustment due to the adoption of ASC 326, net of tax — — — ( 10,931 ) — ( 10,931 ) Other comprehensive income, net of tax — — — — 11,312 11,312 Stock-based compensation expense — — 3,874 — — 3,874 Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 28,218 ) — — — — — Vesting of performance based stock awards, net of shares withheld for payroll taxes 4,126 — — — — — — Time based stock awards granted 176,252 — — — — — Issuance of common stock related to employee stock purchase plan 17,821 — 589 — — 589 Cash dividends declared ($ 0.66 per share) — — — ( 21,280 ) — ( 21,280 ) Common stock repurchased ( 1,182,841 ) ( 11 ) ( 44,157 ) — ( 44,168 ) Balance September 30, 2020 32,228,636 $ 320 $ 442,592 $ 766,219 $ 14,271 $ 1,223,402 See Notes to Consolidated Financial Statements. 6 EAGLE BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2021 2020 Cash Flows From Operating Activities: Net Income $ 135,071 $ 93,325 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 14,409 ) 40,654 Provision for unfunded commitments ( 487 ) 974 Depreciation and amortization 4,795 3,515 Gains on sale of loans ( 11,988 ) ( 16,249 ) Gains on sale of GNMA loans — ( 2,443 ) Securities premium amortization (discount accretion), net 3,152 5,345 Origination of loans held for sale ( 929,090 ) ( 862,171 ) Proceeds from sale of loans held for sale 975,870 856,043 Net increase in cash surrender value of BOLI ( 1,429 ) ( 1,655 ) Deferred income tax (benefit) expense — ( 6,559 ) Net gain on sale of other real estate owned ( 148 ) ( 1,180 ) Net gain on sale of investment securities ( 2,058 ) ( 1,650 ) Stock-based compensation expense 5,814 3,874 Net tax benefits from stock compensation — 99 (Increase) decrease in other assets ( 29,667 ) ( 45,493 ) Increase (decrease) in other liabilities 89,348 41,156 Net cash provided by operating activities 224,774 107,585 Cash Flows From Investing Activities: Purchases of available-for-sale investment securities ( 1,059,189 ) ( 465,119 ) Proceeds from maturities of available-for-sale securities 233,366 208,264 Proceeds from sale/call of available-for-sale securities 164,569 130,265 Purchases of Federal Reserve and Federal Home Loan Bank stock ( 158 ) ( 9,116 ) Sale of Federal Reserve and Federal Home Loan Bank stock 6,169 4,250 Proceeds from sale of SBA PPP loans 170,154 — Net change in loans 727,021 ( 343,665 ) Net change in premises and equipment ( 4,973 ) ( 445 ) Net cash used in investing activities 236,959 ( 475,566 ) Cash Flows From Financing Activities: Increase in deposits 479,285 954,394 Net change in customer repurchase agreements 2,675 ( 6,687 ) Increase in short-term borrowings — 50,000 Proceeds from long-term borrowings — 50,293 Repayment of long-term borrowings ( 200,000 ) — Proceeds from issuance of common stock — — Proceeds from employee stock purchase plan 327 564 Common stock repurchased ( 677 ) ( 44,168 ) Cash dividends paid ( 31,914 ) ( 21,280 ) Net cash provided by financing activities 249,696 983,116 Net Decrease In Cash and Cash Equivalents 711,429 615,135 Cash and Cash Equivalents at Beginning of Period 1,789,055 241,973 Cash and Cash Equivalents at End of Period $ 2,500,484 $ 857,108 Supplemental Cash Flows Information: Interest paid $ 36,831 $ 59,011 Income taxes paid $ 42,986 $ 29,850 Non-Cash Investing Activities Initial recognition of operating lease right-of-use assets $ ( 10,168 ) $ 998 Transfers from loans to other real estate owned $ 148 $ 3,500 Change in fair value of cash flow hedges $ ( 516 ) $ — Change in fair value of investments $ 24,495 $ — See Notes to Consolidated Financial Statements. 7 EAGLE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”). Active subsidiaries include: EagleBank (the “Bank”), Eagle Insurance Services, LLC, Bethesda Leasing, LLC, and Landroval Municipal Finance, Inc., with all significant intercompany transactions eliminated. The Consolidated Financial Statements of the Company included herein are unaudited. The Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals that in the opinion of management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2020 were derived from audited Consolidated Financial Statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In addition to the “Critical Accounting Policies” described below, the Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation. Reclassifications had no effect on prior year net income or shareholders' equity. Nature of Operations The Company, through the Bank, conducts a full service community banking business, primarily in Northern Virginia, Suburban Maryland, and Washington, D.C. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans, the origination of small business loans, and the origination, securitization and sale of multifamily Federal Housing Administration (“FHA”) loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. The Bank offers its products and services through eighteen banking offices, five lending centers and various electronic capabilities, including remote deposit services and mobile banking services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance. Bethesda Leasing, a subsidiary of the Bank, holds title to repossessed real estate. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair value of financial instruments and the status of contingencies are particularly susceptible to significant change. Risks and Uncertainties The outbreak of COVID-19 in early 2020 adversely impacted a broad range of industries in which the Company’s customers operate. Vaccinations are readily available to those in the United States and in many other countries. Although management feels we're generally trending in a positive direction and strides have been made in the fight against COVID-19, we remain cautious given the potential for lingering effects of the pandemic, including vaccination efficacy against variants and the speed of vaccination adoption around the country, which could continue to impair some customers' ability to fulfill their financial obligations to the Company. The ongoing pandemic caused significant disruptions in the U.S. economy and disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material adverse impact on the Company’s employees and operations to date, COVID-19 could still potentially create business continuity or credit issues for the Company depending on how much longer the pandemic lasts. Some lingering uncertainty regarding the continued spread of COVID-19 (including new variants) remains. Congress, the President, and the Federal Reserve took several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act 8 is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other follow-up stimulus legislative (including the $1.9 trillion "American Rescue Package") and regulatory relief efforts have had a material impact on the Company’s operations. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. The response to control and manage COVID-19 has shown significant progress in many respects. If the response becomes unsuccessful as a result of vaccine efficacy against variants or delays in critical mass adoption of available vaccines, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware. Financial position and results of operations The Company’s interest income could be reduced due to COVID-1 9. In keeping with guidance from regulators, the Company has worked with COVID-19 affected borrowers throughout the pandemic to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. Although accommodations of this type have slowed significantly, at this time the Company is unable to project the full extent of the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods. Capital and liquidity While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios can be adversely impacted by credit losses. While we have adjusted our credit loss reserves in 2021 to reflect improving economic conditions, our reported and regulatory capital ratios could be further impacted by additional credit losses, if the economy experiences further volatility (either due to COVID-19 or otherwise). Additionally, on August 2, 2021, the Company redeemed $ 150 million in Fixed-to-Floating Subordinated Notes issued on July 26, 2016; discussed further below in Note 8—Long-Term Borrowings. The repayment of the Subordinated Debt reduced regulatory capital ratios at the Bank, but did not reduce regulatory capital ratios at the Company, with the exception of Total Capital to Risk Weighted Assets. The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for short term funding have recently been low. If funding costs were to become elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s customers to withdraw their funds faster than expected, the Company might become more reliant on volatile or more expensive sources of funding. Asset valuation The ongoing COVID-19 pandemic has caused and could continue to cause volatility and potential declines in the Company’s stock price. Goodwill is subject to impairment testing at the reporting unit level and must be conducted at least annually. The Company performs impairment testing during the fourth quarter of each year or when events or changes in circumstances indicate the assets might be impaired. Determining the fair value of a reporting unit under the goodwill impairment test is subjective and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. The Company determined that there were no triggering events and an impairment analysis was not performed as of September 30, 2021. Annual impairment testing of intangibles and goodwill as required by GAAP will be performed in the fourth quarter of 2021. 9 Business Continuity Plan The Company implemented a remote working strategy for many of its employees last year in response to the COVID-19 pandemic. The Company did not incur additional material costs related to its continued deployment of the remote working strategy. As of September 30, 2021, the Company did not identify any material operational or internal control risks, or challenges to its ability to maintain its systems and controls, in light of the measures the Company took to prevent the spread of COVID-19. As concerns over the most severe impacts of the pandemic have abated, the Company's non-branch personnel returned to work on a "hybrid" basis starting November 1, 2021. The hybrid workplace allows certain employees to work remotely a portion of the week, but provides that each department has at least 50% of its staff in the office each day. We have established general guidelines for returning to the workplace that include having employees maintain safe distances, staggered work schedules to limit the number of employees in a single location, more frequent cleaning of our facilities and other practices encouraging a safe working environment during this challenging time, including required COVID-19 training programs. The Company does not currently face any material resource constraint through the implementation of its business continuity plans. We are monitoring jurisdictional guidelines and will continue to respond as appropriate. Lending operations and accommodations to borrowers In response to the COVID-19 pandemic and consistent with regulatory guidance, we also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. As of September 30, 2021, we had ongoing temporary modifications on approximately 6 loans representing approximately $ 70 million (approximately 1.0 % of total loans) in outstanding balances, as compared to 36 loans representing approximately $ 72 million (approximately 0.9 % of total loans) at December 31, 2020. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as troubled debt restructurings ("TDRs"). Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. The Company actively participated in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”). The PPP loans originated by the Bank generally have two-year or five-year terms and earn interest at 1 % plus fees. The majority of these loans have been forgiven by the SBA in accordance with the terms of the program. As of September 30, 2021, PPP loans totaled $ 67.3 million through 109 business loans. The Company understands that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to provision additional allowance for credit loss through additional credit loss expense charges to earnings. We sold a total of approximately $ 170 million of PPP loans in the second quarter of 2021. Approximately $ 171 million in SBA principal was forgiven in the third quarter of 2021. Origination of new loans through the PPP has ceased, and the focus going forward will be on forgiveness. Credit The Company is working with customers directly affected by COVID-19. As a result of the current economic environment caused by the COVID-19 pandemic, the Company continues to engage in frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience increases in its required allowance for credit losses (“ACL”) and record provisions for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19, or related variants, are prolonged. Loans Loans held for investment are stated at the amount of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often 10 requested. The most common change in terms provided by the Company is an extension of an interest-only term. As of September 30, 2021, all performing TDRs were categorized as interest-only modifications. Refer to the subsection above "Lending operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs. A loan is considered past due when a contractually due payment has not been received by the contractual due date. We place a loan on nonaccrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed as a reduction of current period interest income. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Allowance for Credit Losses- Loans The ACL is an estimate of the expected credit losses in the loans held for investment portfolio. Accounting Standards Codification ("ASC") 326, "Financial Instruments--Credit Losses" requires lifetime expected credit losses to be immediately recognized when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Reserves on loans that do not share risk characteristics are evaluated on an individual basis (nonaccrual, TDR). Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes (the quarterly required regulatory report otherwise known as form FFIEC 041) and a loan-level probability of default (“PD”) / Loss Given Default (“LGD”) cash flow method with and using an exposure at default (“EAD”) model is applied. These historical loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level. The ACL also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. The Company uses regression analysis of historical internal and peer data (as Company loss data is insufficient) to determine suitable credit loss drivers to utilize when modeling lifetime PD and LGD. This analysis also determines how expected PD will be impacted by different forecasted levels of the loss drivers. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit. Any needed reserve is recorded in reserve for unfunded commitments (“RUC”) on the Consolidated Balance Sheets. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate on a straight-line basis over a twelve-month period. The Company uses a loan level PD/LGD cash flow method with an EAD model to estimate expected credit losses. In accordance with ASC 326, expected credit losses are measured on a collective (pooled) basis for financial assets with similar risk characteristics. The bank groups collectively assessed loans using a call report code. Some unique loan types, such as PPP loans, are grouped separately due to their specific risk characteristics. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on historical internal data. EAD is based on each instrument's underlying amortization schedule in order to estimate the bank's expected credit loss exposure at the time of the borrower's potential default. For our cash flow model, management utilizes and forecasts regional unemployment by using a national forecast and estimating a regional adjustment based on historical differences between the two as the loss driver over our reasonable and supportable period of 18 months and reverts back to a historical loss rate over twelve months on a straight-line basis over the loan's remaining maturity. In 2021, unemployment projections have started to recover from elevated levels experienced in 2020 as a result of the COVID-19 pandemic. Unemployment projections materially inform our CECL ("current expected credit loss") economic forecast and resulted in a reduction to our ACL during the nine months ended September 30, 2021. Management 11 leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. While our methodology in establishing the ACL attributes portions of the ACL and RUC to the separate loan pools or segments, the entire ACL and RUC is available to absorb credit losses expected in the total loan portfolio and total amount of unfunded credit commitments, respectively. Portfolio segments are used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. In addition to quantitative amounts as determined by our valuation models, we apply a qualitative factors overlay that incorporates trends and conditions and factors that the models may not fully capture in our judgement. These qualitative adjustments are evaluated quarterly to ensure these economic factor adjustments remain supportable and current. The following table presents a breakdown of the provision for credit losses included in our Consolidated Statements of Income for the applicable periods (in thousands): Three Months Ended Nine months ended (dollars in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Provision (credit) for credit losses- loans $ ( 8,326 ) $ 6,589 $ ( 14,498 ) $ 40,498 Provision (credit) for credit losses- AFS debt securities 123 18 89 156 Total provision (credit) for credit losses $ ( 8,203 ) $ 6,607 $ ( 14,409 ) $ 40,654 A summary of our primary portfolio segments is as follows: Commercial. The commercial loan portfolio comprises lines of credit and term loans for working capital, equipment, and other business assets across a variety of industries. These loans are used for general corporate purposes including financing working capital, internal growth, and acquisitions; and are generally secured by accounts receivable, inventory, equipment and other assets of our clients’ businesses. Paycheck Protection Program . The PPP portfolio comprises loans issued under the SBA’s Paycheck Protection Program to support small businesses impacted by the pandemic. PPP loans are approved subject to limited underwriting criteria following SBA guidelines, are unsecured, and are fully guaranteed as to principal and interest by the SBA. Income producing commercial real estate. Income producing commercial real estate loans comprise permanent and bridge financing provided to professional real estate owners/managers of commercial and residential real estate projects and properties who have a demonstrated record of past success with similar properties. Collateral properties include apartment buildings, office buildings, hotels, mixed-use buildings, retail, data centers, warehouse, and shopping centers. The primary source of repayment on these loans is generally expected to come from lease or operation of the real property collateral. Income producing commercial real estate loans are impacted by fluctuation in collateral values, as well as rental demand and rates. Owner occupied – commercial real estate. The owner occupied commercial real estate portfolio comprises permanent financing provided to operating companies and their related entities for the purchase or refinance of real property wherein their business operates. Collateral properties include industrial property, office buildings, religious facilities, mixed-use property, health care and educational facilities. Real Estate Mortgage – Residential . Real estate mortgage residential loans comprise consumer mortgages for the purpose of purchasing or refinancing first lien real estate loans secured by primary-residence, second-home, and rental residential real property. Construction – commercial and residential. The construction commercial and residential loan portfolio comprises of loans made to builders and developers of commercial and residential property, for both renovation, new construction, and development projects. Collateral properties include apartment buildings, mixed use property, residential condominiums, single and 1-4 residential property, and office buildings. The primary source of repayment on these loans is expected to come from the sale, permanent financing, or lease of the real property collateral. Construction loans are impacted by fluctuations in collateral values and the ability of the borrower or ultimate purchaser to obtain permanent financing. Construction – commercial and industrial ("C&I") (owner occupied) . The construction C&I (owner occupied) portfolio comprises loans to operating companies and their related entities for new construction or renovation of the real or 12 leased property in which they operate. Generally these loans contain provisions for conversion to an owner occupied commercial real estate or to a commercial loan after completion of construction. Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings. Home Equity . The home equity portfolio comprises consumer lines of credit and loans secured by subordinate liens on residential real property. Other Consumer. The other consumer portfolio comprises consumer purpose loans not secured by real property, including personal lines of credit and loans, overdraft lines, and vehicle loans. This category also includes other loan items such as overdrawn deposit accounts as well as loans and loan payments in process. The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Special mention loans are those that are currently protected by the sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. These loans have the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are inadequately protected by the sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual. Classified loans represent the sum of loans graded substandard and doubtful. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the allowance on collectively assessed and individually assessed loans as the collectability of classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored. The review of the appropriateness of the allowance is performed by executive management and presented to management committees, Credit Oversight Committee (which replaced Directors Loan Committee), the Audit Committee, and the Board of Directors. The committees' reports to the Board are part of the Board review on a quarterly basis of our consolidated financial statements. When management determines that foreclosure is probable, and for certain collateral-dependent loans where foreclosure is not considered probable, expected credit losses are based on the estimated fair value of the collateral adjusted for selling costs, when appropriate. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation that a loan will be in a trouble debt restructuring. We do not measure an ACL on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status. Collateral Dependent Financial Assets Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the 13 underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. Refer to the subsection above "Lendi ng operations and accommodations to borrowers" for a discussion on the impact of the CARES Act on TDRs. Allowance for Credit Losses - Available-for-Sale Debt Securities For Available for Sale ("AFS") debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. When evaluating whether credit loss exists, accounting guidance requires that the Company not consider the length of time that fair value has been less than amortized cost. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment. The majority of available-for-sale debt securities as of September 30, 2021 and December 31, 2020 were issued by U.S. agencies. However, as of September 30, 2021 and December 31, 2020, the allowance for credit losses on AFS securities was $ 256 thousand and $ 167 thousand, respectively, based on the Company's determination that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses. See Note 3 Investment Securities for more information. We have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheet. 14 These statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Other New Authoritative Accounting Guidance Accounting Standards Adopted in 2021 : ASU 2019-12 "Income Taxes (Topic 740)" ("ASU 2019-12") simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-12 became effective for us on January 1, 2021 and did not have a material impact on our consolidated financial statements. Accounting Standards Pending Adoption: ASU 2020-4, " Reference Rate Reform (Topic 848)" ("ASU 2020-4") provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/ costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-4 also provides numerous optional expedients for derivative accounting. ASU 2020-4 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-4 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We do not anticipate that the LIBOR transition or the application of this ASU will have material effects on the Company's business operations and consolidated financial statements. Note 2. Cash and Due from Banks The Company has deposits with other banks for derivative positions it holds, totaling $ 7.6 million at September 30, 2021 and $ 5.1 million at December 31, 2020, of which $ 3.2 million and $ 4.2 million, respectively, serve as collateral for those derivative positions. Additionally, the Bank maintains interest bearing balances with the Federal Home Loan Bank ("FHLB") of Atlanta and noninterest bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank. 15 Note 3. Investment Securities Available-for-Sale Amortized cost and estimated fair value of securities available-for-sale are summarized as follows: Gross Gross Allowance Estimated September 30, 2021 Amortized Unrealized Unrealized for Credit Fair (dollars in thousands) Cost Gains Losses Losses Value U.S. treasuries $ 24,838 $ 16 $ — $ — $ 24,854 U.S. agency securities 356,626 806 ( 3,726 ) — 353,706 Residential mortgage backed securities 1,206,867 8,151 ( 11,882 ) — 1,203,136 Municipal bonds 119,511 4,284 ( 629 ) ( 2 ) 123,164 Corporate bonds 81,376 783 ( 304 ) ( 254 ) 81,601 Other $ 198 — — — 198 $ 1,789,416 $ 14,040 $ ( 16,541 ) $ ( 256 ) $ 1,786,659 Gross Gross Estimated December 31, 2020 Amortized Unrealized Unrealized Allowance for Fair (dollars in thousands) Cost Gains Losses Credit Losses Value U.S. agency securities $ 181,087 $ 1,461 $ ( 627 ) $ — $ 181,921 Residential mortgage backed securities 811,328 14,506 ( 833 ) — 825,001 Municipal bonds 102,259 5,872 — ( 18 ) 108,113 Corporate bonds 34,383 1,624 ( 8 ) ( 149 ) 35,850 Other $ 198 — — — 198 $ 1,129,255 $ 23,463 $ ( 1,468 ) $ ( 167 ) $ 1,151,083 In addition, at September 30, 2021 and December 31, 2020 the Company held $ 34.1 million and $ 40.1 million, respectively, in equity securities in a combination of FRB and FHLB stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost. Accrued interest on available-for-sale securities totaled $ 4.5 million and $ 3.5 million at September 30, 2021 and December 31, 2020, respectively, and was included in other assets in the Consolidated Balance Sheets. Gross unrealized losses and fair value of available-for-sale securities for which an allowance for credit losses has not been recorded, by length of time that individual securities have been in a continuous unrealized loss position are as follows: Less than 12 Months 12 Months or Greater Total Estimated Estimated Estimated September 30, 2021 Number of Fair Unrealized Fair Unrealized Fair Unrealized (dollars in thousands) Securities Value Losses Value Losses Value Losses U. S. agency securities 45 $ 200,153 $ 3,135 $ 47,078 $ 591 $ 247,231 $ 3,726 Residential mortgage backed securities 109 769,073 10,332 48,869 1,550 817,942 11,882 Corporate bonds 6 26,699 304 — — 26,699 304 Municipal bonds 11 38,213 629 — — 38,213 629 171 $ 1,034,138 $ 14,400 $ 95,947 $ 2,141 $ 1,130,085 $ 16,541 16 Less than 12 Months 12 Months or Greater Total Estimated Estimated Estimated December 31, 2020 Number of Fair Unrealized Fair Unrealized Fair Unrealized (dollars in thousands) Securities Value Losses Value Losses Value Losses U. S. agency securities 28 $ 46,412 $ 67 $ 41,320 $ 560 $ 87,732 $ 627 Residential mortgage backed securities 35 170,178 782 6,419 51 176,597 833 Corporate bonds 3 5,764 8 — — 5,764 8 66 $ 222,354 $ 857 $ 47,739 $ 611 $ 270,093 $ 1,468 The majority of the AFS debt securities in an unrealized loss position as of September 30, 2021, consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. As of September 30, 2021, total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. However, as of September 30, 2021, the Company determined that part of the unrealized loss positions in AFS corporate and municipal securities could be the result of credit losses, and therefore, an allowance for credit losses of $ 256 thousand was recorded. The weighted average duration of debt securities, which comprise 99.9 % of total investment securitie s, is 4.8 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity. The amortized cost and estimated fair value of investments available-for-sale at September 30, 2021 and December 31, 2020 by contractual maturity are shown in the table below. Contractual maturities f or residential mortgage backed securities (“MBS”) are not shown as they may differ significantly from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 17 September 30, 2021 December 31, 2020 Amortized Estimated Amortized Estimated (dollars in thousands) Cost Fair Value Cost Fair Value U.S. treasuries After one year through five years $ 24,838 $ 24,854 $ — $ — U. S. agency securities maturing: One year or less 182,385 180,838 53,916 53,906 After one year through five years 97,969 98,179 110,083 110,777 Five years through ten years 76,272 74,689 17,087 17,240 Residential mortgage backed securities 1,206,867 1,203,136 811,328 825,001 Municipal bonds maturing: One year or less 3,909 3,962 4,329 4,348 After one year through five years 24,618 26,133 26,622 28,272 Five years through ten years 70,937 73,293 69,309 73,389 After ten years 20,047 19,778 2,000 2,121 Corporate bonds maturing: One year or less 13,928 14,148 5,218 5,220 After one year through five years 38,111 38,384 22,189 23,267 Five years through ten years 29,337 29,323 6,976 7,511 After ten years — — — — Other 198 198 198 198 Allowance for Credit Losses — ( 256 ) — ( 167 ) $ 1,789,416 $ 1,786,659 $ 1,129,255 $ 1,151,083 For the nine months ended September 30, 2021, gross realized gains on sales of investments securities were $ 2.1 million and there were $ 47 thousand gross realized losses on sales of investment securities. For the nine months ended September 30, 2020, gross realized gains on sales of investments securities were $ 1.7 million, and there were no gross realized losses on sales of investment securities. Proceeds from sales and calls of investment securities for the nine months ended September 30, 2021 were $ 164.6 million compared to $ 130.3 million for the same period in 2020. The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2021 and December 31, 2020 was $ 240.2 million and $ 268.4 million, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of September 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded ten percent of shareholders’ equity. Note 4. Mortgage Banking Derivatives As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. 18 Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. The Bank has mortgage banking derivative financial instruments that are included in other assets, and are related to its interest rate lock commitments. The notional value of the mortgage banking derivative financial instruments was $ 137.0 million a t September 30, 2021 and $ 367.7 million at December 31, 2020. The fair value of these mortgage banking derivative instruments was $ 1.6 million at September 30, 2021 and at $ 5.2 million at December 31, 2020. Included in gain on sale of loans for the three and nine months ended September 30, 2021 there was a $ 21 thousand net loss relating to mortgage banking derivative instruments as compared to a net loss of $ 145 thousand and $ 309 thousand for the three and nine months ended September 30, 2020, respectively. Note 5. Loans and Allowance for Credit Losses The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets. Loans, net of unamortized net deferred fees, at September 30, 2021 and December 31, 2020 are summarized by type as follows: September 30, 2021 December 31, 2020 (dollars in thousands) Amount % Amount % Commercial $ 1,289,215 19 % $ 1,437,433 19 % PPP loans 67,311 1 % 454,771 6 % Income producing - commercial real estate 3,337,303 49 % 3,687,000 47 % Owner occupied - commercial real estate 977,617 14 % 997,694 13 % Real estate mortgage - residential 76,259 1 % 76,592 1 % Construction - commercial and residential 824,133 12 % 873,261 11 % Construction - C&I (owner occupied) 222,366 3 % 158,905 2 % Home equity 55,527 1 % 73,167 1 % Other consumer 1,132 — 1,389 — Total loans 6,850,863 100 % 7,760,212 100 % Less: allowance for credit losses ( 82,906 ) ( 109,579 ) Net loans (1) $ 6,767,957 $ 7,650,633 ________________________________________ (1) Excludes accrued interest receivable of $ 40.0 million and $ 46.0 million at September 30, 2021 and December 31, 2020, respectively, which is recorded in other assets. Unamortized net deferred fees amounted to $ 22.7 million and $ 30.8 million at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Bank serviced $ 115 million and $ 124 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets. 19 Loan Origination / Risk Management Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level PD/LGD cash flow method using an EAD model is applied. The loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments. The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At September 30, 2021, owner occupied - commercial real estate and construction – C&I (owner occupied) represent approximately 17 % of the loan portfolio. At September 30, 2021, non-owner occupied commercial real estate and real estate construction represented approximately 61 % of the loan portfolio. The combined owner occupied and commercial real estate and construction loans represent approximately 78 % of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 80 % of all loans being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80 % and minimum cash flow debt service coverage of 1.15 to 1.0 . Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years . The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 19 % of the loan portfolio at September 30, 2021 and was generally variable or adjustable rate. Personal guarantees are generally required, but may be limited. Non-PPP SBA loans represent approximately 1 % of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential recourse to the SBA guarantees. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines. Approximately 1 % of the loan portfolio at September 30, 2021 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act and subsequent legislation) from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees. Approximately 1 % of the loan portfolio at September 30, 2021 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank. Approximately 1 % of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 21 months at September 30, 2021. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature. Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects. Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or 20 improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition. Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0 . As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels. Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years. The Company’s loan portfolio includes acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects. ADC loans amounted to $ 1.4 billion at September 30, 2021. A portion of the ADC portfolio, both speculative and non-speculative, includes loan-funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 57.5 % of the outstanding ADC loan portfolio at September 30, 2021. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate these inherent risks, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan-funded interest reserves. The following tables detail activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2021 and 2020. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. Allocation of a portion of the allowance to one category of loans does not restrict the use of the allowance to absorb losses in other categories. 21 Income Producing - Owner Occupied - Real Estate Construction - Commercial Commercial Mortgage - Commercial and Home Other (dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total Three Months Ended September 30, 2021 Allowance for credit losses: Balance at beginning of period $ 21,348 $ 45,970 $ 12,995 $ 882 $ 10,427 $ 897 $ 41 $ 92,560 Loans charged-off ( 1,999 ) — — — — — ( 1 ) ( 2,000 ) Recoveries of loans previously charged-off 81 97 — — 493 — 1 672 Net loans charged-off ( 1,918 ) — 97 — — — — — 493 — — — — ( 1,328 ) Provision for credit losses ( 2,503 ) ( 4,636 ) ( 1,050 ) 172 ( 179 ) ( 129 ) ( 1 ) ( 8,326 ) Ending balance $ 16,927 $ — $ 41,431 $ — $ 11,945 $ — $ 1,054 $ — $ 10,741 $ — $ 768 $ — $ 40 $ 82,906 Nine Months Ended September 30, 2021 Allowance for credit losses: Balance at beginning of period $ 26,569 $ 55,385 $ 14,000 $ 1,020 $ 11,529 $ 1,039 $ 37 $ 109,579 Loans charged-off ( 7,691 ) ( 5,216 ) — — ( 206 ) — ( 1 ) ( 13,114 ) Recoveries of loans previously charged-off 326 97 — — 499 17 939 Net loans (charged-off) recoveries ( 7,365 ) ( 5,119 ) — — 293 — 16 ( 12,175 ) Provision for credit losses- loans ( 2,277 ) ( 8,835 ) ( 2,055 ) 34 ( 1,081 ) ( 271 ) ( 13 ) ( 14,498 ) Ending balance $ 16,927 $ 41,431 $ 11,945 $ 1,054 $ 10,741 $ 768 $ 40 $ 82,906 As of September 30, 2021 Allowance for credit losses: Individually evaluated for impairment $ 3,198 $ 5,439 $ — $ 501 $ — $ 165 $ — $ 9,303 Collectively evaluated for impairment 13,729 35,992 11,945 553 10,741 603 40 73,603 Ending balance $ 16,927 $ 41,431 $ 11,945 $ 1,054 $ 10,741 $ 768 $ 40 $ 82,906 Three Months Ended September 30, 2020 Allowance for credit losses: Balance at beginning of period 28,078 51,863 12,341 1,550 13,808 1,112 44 108,796 Loans charged-off ( 187 ) ( 3,750 ) ( 20 ) — ( 1,179 ) ( 92 ) — ( 5,228 ) Recoveries of loans previously charged-off 45 — — — — — 13 58 Net loans (charged-off) recoveries ( 142 ) ( 3,750 ) — ( 20 ) — — — ( 1,179 ) — ( 92 ) — 13 ( 5,170 ) Provision for credit losses- loans ( 712 ) 7,327 769 321 ( 1,088 ) ( 13 ) ( 15 ) 6,589 Ending balance 27,224 55,440 13,090 — 1,871 — 11,541 — 1,007 — 42 110,215 Nine Months Ended September 30, 2020 Allowance for credit losses: Balance at beginning of period, prior to adoption of ASC 326 $ 18,832 $ 29,265 $ 5,838 $ 1,557 $ 17,485 $ 656 $ 25 $ 73,658 Impact of adopting ASC 326 892 11,230 4,674 ( 301 ) ( 6,143 ) 245 17 $ 10,614 Loans charged-off ( 7,332 ) ( 4,300 ) ( 20 ) — ( 2,947 ) ( 92 ) — ( 14,691 ) Recoveries of loans previously charged-off 116 — — — — — 20 136 Net loans (charged-off) recoveries ( 7,216 ) ( 4,300 ) ( 20 ) — ( 2,947 ) ( 92 ) 20 ( 14,555 ) Provision for credit losses- loans 14,716 19,245 2,598 615 3,146 198 ( 20 ) 40,498 Ending balance $ 27,224 $ 55,440 $ 13,090 $ 1,871 $ 11,541 $ 1,007 $ 42 $ 110,215 As of September 30, 2020 Allowance for credit losses: Individually evaluated for impairment $ 9,593 $ 5,999 $ 670 $ 1,148 $ 204 $ — $ 3 $ 17,617 Collectively evaluated for impairment 17,631 49,441 12,420 723 11,337 1,007 39 92,598 Ending balance $ 27,224 $ 55,440 $ 13,090 $ 1,871 $ 11,541 $ 1,007 $ 42 $ 110,215 We recorded a reversal of $ 8.2 million and a positive $ 6.6 million provision for credit losses (inclusive of the PCL on loans and AFS debt securities) for the three months ended September 30, 2021 and 2020, respectively, under CECL. We recorded a reversal of $ 14.4 million and a positive $ 40.7 million provision for credit losses for the nine months ended September 30, 2021 and 2020, respectively, under CECL. We recorded $ 1.3 million and $ 5.2 million in net charge-offs during 22 the three months ended September 30, 2021 and 2020, respectively. We also recorded $ 12.2 million and $ 14.6 million in net charge-offs during the nine months ended September 30, 2021 and 2020, respectively. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2021 and December 31, 2020: (dollars in thousands) Business/Other Assets Real Estate September 30, 2021 Commercial $ 3,281 $ 9,936 Income producing - commercial real estate 3,193 20,867 Owner occupied - commercial real estate — 1,593 Real estate mortgage - residential — 1,781 Construction - commercial and residential — — Home equity 190 366 Other consumer — — Total $ 6,664 $ 34,543 (dollars in thousands) Business/Other Assets Real Estate December 31, 2020 Commercial $ 11,326 $ 4,026 Income producing - commercial real estate 3,193 15,686 Owner occupied - commercial real estate — 23,159 Real estate mortgage - residential — 2,932 Construction - commercial and residential — 206 Home equity — 415 Other consumer — — Total $ 14,519 $ 46,424 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators inform an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment. The following are the definitions of the Company’s credit quality indicators: 23 Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. Watch: Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time. Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention. Classified: Classified (a) Substandard – Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined. Based on the most recent analysis performed, amortized cost basis of loans by risk category, class and year of origination is as follows: September 30, 2021 (dollars in thousands) Prior 2017 2018 2019 2020 2021 Total Commercial Pass 407,791 190,479 211,058 129,448 103,135 164,058 1,205,969 Watch 14,162 8,798 17,857 6,721 7,927 2,959 58,424 Special Mention 980 9,952 381 98 — — 11,411 Substandard 10,267 695 2,217 232 — — 13,411 Total 433,200 — 209,924 — 231,513 136,499 111,062 167,017 1,289,215 PPP loans Pass — — — — — — 32,381 34,930 67,311 Total — — — — — — 32,381 34,930 67,311 Income producing - commercial real estate Pass 708,822 287,984 610,727 514,416 418,980 306,458 2,847,387 Watch 66,069 73,753 — 43,739 34,859 — 218,420 Special Mention 101,687 — 42,244 51,969 — — 195,900 Substandard 61,542 — 8,512 5,542 — — 75,596 Total 938,120 — 361,737 — 661,483 615,666 453,839 306,458 3,337,303 Owner occupied - commercial real estate Pass 383,943 132,292 131,088 71,524 44,465 40,718 804,030 Watch 23,960 3,234 93,035 23,968 — — 144,197 Special Mention — — — 2,133 — — 2,133 Substandard 23,512 — — 3,745 — — 27,257 Total 431,415 — 135,526 — 224,123 101,370 44,465 40,718 977,617 24 Real estate mortgage - residential Pass 15,047 7,284 13,409 16,703 3,999 14,770 71,212 Watch 3,265 — — — — — 3,265 Substandard 1,698 — — 84 — — 1,782 Total 20,010 — 7,284 — 13,409 16,787 3,999 14,770 76,259 Construction - commercial and residential Pass 60,130 160,792 185,229 128,722 181,470 60,289 776,632 Watch 506 43,913 — 3,082 — — 47,501 Substandard — — — — — — Total 60,636 — 204,705 — 185,229 131,804 181,470 60,289 824,133 Construction - C&I (owner occupied) — Pass 21,522 52,731 23,581 30,809 57,911 647 187,201 Watch 685 396 3,254 15,112 15,718 — 35,165 Substandard — — — — — — — Total 22,207 — 53,127 — 26,835 45,921 73,629 647 222,366 Home Equity — Pass 25,402 5,832 1,782 2,644 9,443 8,943 54,046 Watch 879 — — — — — 879 Substandard 556 — — 46 — — 602 Total 26,837 — 5,832 — 1,782 2,690 9,443 8,943 55,527 Other Consumer — Pass 936 24 46 33 24 63 1,126 Substandard 6 — — — — — 6 Total 942 — 24 — 46 33 24 63 1,132 Total Recorded Investment $ 1,933,367 $ — $ 978,159 $ — $ 1,344,420 $ 1,050,770 $ 910,312 $ 633,835 6,850,863 December 31, 2020 (dollars in thousands) Prior 2016 2017 2018 2019 2020 Total Commercial Pass 323,660 111,886 249,541 211,551 164,166 227,095 1,287,899 Watch 31,903 5,315 19,145 21,013 7,740 7,979 93,095 Special Mention 4,969 1,692 8,969 3,385 5,599 2,169 26,783 Substandard 17,679 5,803 1,820 3,525 829 — 29,656 Total 378,211 124,696 279,475 239,474 178,334 237,243 1,437,433 PPP loans Pass — — — — — 454,771 454,771 Total — — — — — 454,771 454,771 Income producing - commercial real estate — Pass 560,915 347,946 397,953 622,276 643,388 512,387 3,084,865 Watch 152,367 62,912 91,636 89,852 44,555 34,195 475,517 Special Mention 213 — — — 51,969 — 52,182 Substandard 58,555 800 4,656 4,883 5,542 — 74,436 Total 772,050 411,658 494,245 717,011 745,454 546,582 3,687,000 Owner occupied - commercial real estate Pass 343,371 100,272 111,996 136,644 59,681 49,584 801,548 Watch 16,014 5,011 2,640 10,338 15,501 — 49,504 Special Mention 418 — — 83,110 19,091 — 102,619 Substandard 28,228 784 1,908 2,048 10,151 904 44,023 Total 388,031 106,067 116,544 232,140 104,424 50,488 997,694 Real estate mortgage - residential Pass 16,310 2,693 10,199 12,746 18,209 10,116 70,273 Watch 1,996 699 — 728 — — 3,423 Substandard 1,198 1,698 — — — — 2,896 25 Total 19,504 5,090 10,199 13,474 18,209 10,116 76,592 Construction - commercial and residential Pass 21,290 60,486 266,788 297,480 105,679 71,297 823,020 Watch 929 — 42,751 3,448 — — 47,128 Special Mention 12 — — 2,895 — — 2,907 Substandard — — 206 — — — 206 Total 22,231 60,486 309,745 303,823 105,679 71,297 873,261 Construction - C&I (owner occupied) Pass 8,278 10,476 6,637 30,340 22,209 40,101 118,041 Watch 3,573 — 2,118 4,935 — — 10,626 Special Mention 124 — — — 14,436 15,678 30,238 Total 11,975 10,476 8,755 35,275 36,645 55,779 158,905 Home Equity Pass 33,226 4,493 8,227 7,827 4,224 12,924 70,921 Watch 1,596 — — — — — 1,596 Substandard 603 — — — 47 — 650 Total 35,425 4,493 8,227 7,827 4,271 12,924 73,167 Other Consumer Pass 929 190 64 74 94 31 1,382 Substandard 7 — — — — — 7 Total 936 190 64 74 94 31 1,389 Total Recorded Investment $ 1,628,363 $ 723,156 $ 1,227,254 $ 1,549,098 $ 1,193,110 $ 1,439,231 $ 7,760,212 The Company’s credit quality indicators are generally updated annually; however, credits rated watch or below are reviewed more frequently. 26 Nonaccrual and Past Due Loans As part of the Company's comprehensive loan review process, management committees carefully evaluate loans that are past-due 30 days or more. The committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves. The table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of September 30, 2021 and December 31, 2020: Loans Loans Loans Total Recorded Current 30-59 Days 60-89 Days 90 Days or Total Past Investment in (dollars in thousands) Loans Past Due Past Due More Past Due Due Loans Nonaccrual Loans September 30, 2021 Commercial $ 1,276,100 $ 96 $ 872 $ — $ 968 $ 12,147 $ 1,289,215 PPP loans 64,004 3,307 — — 3,307 — 67,311 Income producing - commercial real estate 3,322,370 — — — — 14,933 3,337,303 Owner occupied - commercial real estate 972,632 579 2,813 — 3,392 1,593 977,617 Real estate mortgage - residential 74,241 — — — — 2,018 76,259 Construction - commercial and residential 821,051 — 3,082 — 3,082 — 824,133 Construction - C&I (owner occupied) 221,463 903 — — 903 — 222,366 Home equity 54,575 127 269 — 396 556 55,527 Other consumer 1,080 52 — — 52 — 1,132 Total $ 6,807,516 $ 5,064 $ 7,036 $ — $ 12,100 $ 31,247 $ 6,850,863 December 31, 2020 Commercial $ 1,394,244 $ 6,411 $ 21,426 $ — $ 27,837 $ 15,352 $ 1,437,433 PPP loans 454,771 — — — — — 454,771 Income producing - commercial real estate 3,616,207 — 51,913 — 51,913 18,880 3,687,000 Owner occupied - commercial real estate 960,364 10,630 3,542 — 14,172 23,158 997,694 Real estate mortgage – residential 72,231 1,430 — — 1,430 2,931 76,592 Construction - commercial and residential 869,723 2,992 340 — 3,332 206 873,261 Construction- C&I (owner occupied) 158,905 — — — — — 158,905 Home equity 67,732 467 4,552 — 5,019 416 73,167 Other consumer 1,367 21 1 — 22 — 1,389 Total $ 7,595,544 $ 21,951 $ 81,774 $ — $ 103,725 $ 60,943 $ 7,760,212 The following presents the nonaccrual loans as of September 30, 2021 and December 31, 2020: 27 September 30, 2021 Nonaccrual with Nonaccrual with Total No Allowance an Allowance Nonaccrual (dollars in thousands) for Credit Loss for Credit Loss Loans Commercial $ 7,113 $ 5,034 $ 12,147 Income producing - commercial real estate 4,620 10,313 14,933 Owner occupied - commercial real estate 1,593 — 1,593 Real estate mortgage - residential 84 1,934 2,018 Construction - commercial and residential — — — Home equity 366 190 556 Total (1)(2) $ 13,776 $ 17,471 $ 31,247 December 31, 2020 Nonaccrual with Nonaccrual with Total No Allowance an Allowance Nonaccrual (dollars in thousands) for Credit Loss for Credit Loss Loans Commercial $ 3,263 $ 12,089 $ 15,352 Income producing - commercial real estate 6,500 12,380 18,880 Owner occupied - commercial real estate 18,941 4,217 23,158 Real estate mortgage - residential 1,234 1,697 2,931 Construction - commercial and residential — 206 206 Home equity 416 — 416 Total (1)(2) $ 30,354 $ 30,589 $ 60,943 Note (1) Excludes TDRs that were performing under their restructured terms totaling $ 10.2 million at September 30, 2021 and $ 10.5 million at December 31, 2020. (2) Gross interest income of $ 1.4 million and $ 2.6 million would have been recorded for the nine months ended September 30, 2021 and September 30, 2020, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while $ 23 thousand and $ 282 thousand interest income was actually recorded on such loans for the nine months ended September 30, 2021 and 2020 respectively. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status. Modifications A modification of a loan constitutes a TDR when the borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. The most common change in terms provided by the Company is an extension of an interest-only term. As of September 30, 2021, all performing TDRs were categorized as interest-only modifications . Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. 28 In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days, which we extended for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. As of September 30, 2021, we had ongoing temporary modifications on approximately 6 loans representing approximately $ 70 million (approximately 1.0 % of total loans) in outstanding balances, as compared to 36 loans representing approximately $ 72 million (approximately 0.9 % of total loans) at December 31, 2020. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended September 30, 2021 and 2020. September 30, 2021 Income Owner Number Producing - Occupied - Construction - of Commercial Commercial Commercial (dollars in thousands) Contracts Commercial Real Estate Real Estate Real Estate Total Troubled debt restructurings Restructured accruing 5 $ 1,069 $ 9,126 $ — $ — $ 10,195 Restructured nonaccruing 2 — 6,342 — — 6,342 Total 7 $ 1,069 $ 15,468 $ — $ — $ 16,537 Specific allowance $ 146 $ 3,225 $ — $ — $ 3,371 Restructured and subsequently defaulted $ — $ 6,342 $ — $ — $ 6,342 September 30, 2020 Income Owner Number Producing - Occupied - Construction - of Commercial Commercial Commercial (dollars in thousands) Contracts Commercial Real Estate Real Estate Real Estate Total Troubled debt restructurings Restructured accruing 7 $ 1,297 $ 9,188 $ 37 $ — $ 10,522 Restructured nonaccruing 4 138 6,342 2,370 — 8,850 Total 11 $ 1,435 $ 15,530 $ 2,407 $ — $ 19,372 Specific allowance $ 227 $ 629 $ — $ — $ 856 Restructured and subsequently defaulted $ 138 $ 11,161 $ 2,370 $ — $ 13,669 The Company had seven TDRs at September 30, 2021 totaling approximately $ 16.5 million. Five of these loans totaling approximately $ 10.2 million are performing under their modified terms as of September 30, 2021. For the first nine months of 2021 there were no performing TDR loans that defaulted on their modified terms; in the first nine months of 2020, two performing TDR loans, with a balance of $ 6.3 million, defaulted on their modified terms and were placed on nonaccrual status. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual status. For the nine months ended September 30, 2021, one previously nonperforming restructured loan had its collateral sold and all principal collected along with partial collection of delinquent interest; in addition, one restructured loan purchased as part of the 2014 acquisition of Virginia Heritage Bank has now had its full carrying value collected, while additional payments will recover previously written off principal and interest, and one nonperforming restructured loan was charged off. No similar 29 transactions occurred during the three months ended September 30, 2021. During the nine months ended September 30, 2021 and 2020, no loans were re-underwritten and removed from TDR status. L oans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. For the nine months ended September 30, 2021 there were no loans modified in a TDR. For the nine months ended September 30, 2020 there were two loans modified in a TDR with a balance of $ 572 thousand. Note 6. Leases A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-2 “Leases” (Topic 842) and has adopted all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s Consolidated Balance Sheets. With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as a right-of-use (“ROU”) asset and a corresponding lease liability. As of September 30, 2021, the Company had $ 30.1 million of operating lease ROU assets and $ 34.3 million of operating lease liabilities on the Company’s Consolidated Balance Sheets. As of December 31, 2020, the Company had $ 25.2 million of operating lease ROU assets and $ 28.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheets. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets. The leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90 % probability that the Company will exercise the option. If these criteria are not met, the options are not included in ROU assets and lease liabilities. As of September 30, 2021, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. As of September 30, 2021, there was one lease that has been signed but did not yet commence as of the reporting date that created significant rights and obligations for the Company. The following table presents lease costs and other lease information. Three Months Ended Nine Months Ended (dollars in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Lease Cost Operating Lease Cost (Cost resulting from lease payments) $ 1,960 $ 2,248 $ 6,132 $ 6,253 Variable Lease Cost (Cost excluded from lease payments) 205 202 678 720 Sublease Income ( 117 ) ( 87 ) ( 291 ) ( 261 ) Net Lease Cost $ 2,048 $ 2,363 $ 6,519 $ 6,712 Operating Lease - Operating Cash Flows (Fixed Payments) $ 1,992 $ 2,229 $ 6,344 $ 6,648 September 30, 2021 December 31, 2020 Right-of-Use Assets - Operating Leases $ 30,080 $ 25,237 Weighted Average Lease Term - Operating Leases 6.22 yrs 6.20 yrs Weighted Average Discount Rate - Operating Leases 3.14 % 4.00 % 30 Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2021 were as follows: (dollars in thousands) Twelve Months Ended: September 30, 2022 $ 1,910 September 30, 2023 4,517 September 30, 2024 6,550 September 30, 2025 5,792 September 30, 2026 4,815 Thereafter 12,097 Total Future Minimum Lease Payments 35,681 Amounts Representing Interest ( 1,336 ) Present Value of Net Future Minimum Lease Payments $ 34,345 Note 7. Other Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Cash Flow Hedges of Interest Rate Risk The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments. For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company's sole designated cash flow hedge matured during April 2021. Thus, as of September 30, 2021 and December 31, 2020, the Company had zero and one , respectively, designated cash flow hedge interest rate swap transaction outstanding associated with the Company's variable rate deposits. Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives were reclassified to interest income/expense as interest payments were made/received on the Company’s variable-rate assets/liabilities. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 31 The Company entered into credit risk participation agreements ("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Credit-risk-related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, "Derivatives and Hedging." In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of September 30, 2021 and December 31, 2020. The Company has a minimum collateral posting threshold with its derivative counterparty. If the Company had breached any provisions under the agreement at September 30, 2021, it could have been required to settle its obligations under the agreement at the termination value. September 30, 2021 December 31, 2020 (dollars in thousands) Notional Amount Fair Value Balance Sheet Category Fair Value Balance Sheet Category Derivatives not designated as hedging instruments Interest rate product $ 239,248 $ 4,955 Other Assets $ 3,491 Other Assets Mortgage banking derivatives 137,223 1,575 Other Assets 5,213 Other Assets $ 376,471 $ 6,530 Other Assets $ 8,704 Other Assets Derivatives designated as hedging instruments Interest rate product $ — $ — Other Liabilities $ 516 Other Liabilities Derivatives not designated as hedging instruments Interest rate product $ 239,248 $ 5,110 Other Liabilities $ 3,653 Other Liabilities Other Contracts 26,542 63 Other Liabilities 118 Other Liabilities $ 265,790 $ 5,173 Other Liabilities $ 3,771 Other Liabilities Liability position on balance sheet $ 5,173 $ 4,287 Cash and other collateral $ 3,244 4,168 Net Derivative Amounts $ 1,929 $ 119 The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and nine months ended September 30, 2021 and 2020: 32 The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income Amount of Gain (Loss) Recognized Location of Gain or (Loss) Amount of Gain or (Loss) Recognized from Reclassified from Accumulated Derivatives in Subtopic in OCI on Derivative Accumulated Other OCI into Income 815-20 Hedging Three Months Ended September 30, Comprehensive Income into Three Months Ended September 30, Relationships (dollars in thousands) 2021 2020 Income 2021 2020 Derivatives in Cash Flow Hedging Relationships Interest Rate Products $ — $ 31 Interest Expense $ — $ ( 389 ) Total $ — $ 31 $ — $ ( 389 ) Location of Gain or (Loss) Amount of Gain or (Loss) Amount of Gain (Loss) Recognized Recognized from Reclassified from Accumulated Derivatives in Subtopic in OCI on Derivative Accumulated Other OCI into Income 815-20 Hedging Nine Months Ended September 30, Comprehensive Income into Nine Months Ended September 30, Relationships (dollars in thousands) 2021 2020 Income 2021 2020 Derivatives in Cash Flow Hedging Relationships Interest Rate Products $ 1 $ ( 1,517 ) Interest Expense $ ( 445 ) $ ( 755 ) Total $ 1 $ ( 1,517 ) $ ( 445 ) $ ( 755 ) The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020: The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Income Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (in 000's) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest Expense Interest Expense Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of fair value or cash flow hedges are recorded $ — $ ( 389 ) $ ( 445 ) $ ( 755 ) Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 Interest contracts Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ — $ ( 389 ) $ ( 445 ) $ ( 755 ) Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring $ — $ — $ — $ — Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component $ — $ ( 389 ) $ ( 445 ) $ ( 755 ) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component $ — $ — $ — $ — 33 Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Income Amount of Income (Loss) Recognized in Income on Location of Derivative Derivatives Not Designated as Hedging (Loss) Recognized in Three Months Ended September 30, Nine Months Ended September 30, Instruments under Subtopic 815-20 Income on Derivative 2021 2020 2021 2020 Interest Rate Products Other income / (expense) $ 277 $ ( 40 ) $ 261 $ ( 326 ) Mortgage banking derivatives Other income / (expense) 1,575 6,015 5,268 6,015 Other Contracts Other income / (expense) — ( 13 ) 44 ( 77 ) Total $ 1,852 $ 5,962 $ 5,573 $ 5,612 Note 8. Long-Term Borrowings The following table presents information related to the Company’s long-term borrowings as of September 30, 2021 and December 31, 2020. (dollars in thousands) September 30, 2021 December 31, 2020 Subordinated Notes, 5.75 % $ 70,000 $ 70,000 Subordinated Notes, 5.0 % — 150,000 FHLB Advance, 1.81 % — 50,000 Less: unamortized debt issuance costs ( 361 ) ( 1,923 ) Long-term borrowings $ 69,639 $ 268,077 On August 5, 2014, the Company completed the sale of $ 70.0 million of its 5.75 % subordinated notes, due September 1, 2024 (the “2024 Notes”). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $ 68.8 million, which includes $ 1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes. On July 26, 2016, the Company completed the sale of $ 150.0 million of its 5.00 % Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $ 147.4 million, which includes $ 2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes. The Company paid the 2026 Notes in full on August 2, 2021 and accelerated deferred financing costs of $ 1.3 million on that date. On February 26, 2020, the Bank borrowed $ 50 million dollars under its borrowing arrangement with the FHLB at a fixed rate of 1.81 % with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth. In the first quarter of 2021, we realized a net gain of $ 911 thousand on the cancellation of this debt. Note 9. Net Income per Common Share The calculation of net income per common share for the three and nine months ended September 30, 2021 and 2020 was as follows: 34 Three Months Ended September 30, Nine Months Ended September 30, (dollars and shares in thousands, except per share data) 2021 2020 2021 2020 Basic: Net income $ 43,609 $ 41,346 $ 135,071 $ 93,325 Average common shares outstanding 31,959 32,229 31,931 32,434 Basic net income per common share $ 1.36 $ 1.28 $ 4.23 $ 2.88 Diluted: Net income $ 43,609 $ 41,346 $ 135,071 $ 93,325 Average common shares outstanding 31,959 32,229 31,931 32,434 Adjustment for common share equivalents 72 22 62 24 Average common shares outstanding-diluted 32,031 32,251 31,993 32,458 Diluted net income per common share $ 1.36 $ 1.28 $ 4.22 $ 2.88 Anti-dilutive shares 3 26 3 26 Note 10. Other Comprehensive Income The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020. 35 (dollars in thousands) Before Tax Tax Effect Net of Tax Three Months Ended September 30, 2021 Net unrealized gain (loss) on securities available-for-sale $ ( 7,682 ) $ 1,979 $ ( 5,703 ) Less: Reclassification adjustment for net gains (losses) included in net income ( 1,519 ) 386 ( 1,133 ) Total unrealized gain (loss) ( 9,201 ) 2,365 ( 6,836 ) Net unrealized gain (loss) on derivatives — — — Less: Reclassification adjustment for gain (loss) included in net income — — — Total unrealized gain (loss) — — — Other Comprehensive Income (Loss) $ ( 9,201 ) $ 2,365 $ ( 6,836 ) Three Months Ended September 30, 2020 Net unrealized gain (loss) on securities available-for-sale $ ( 840 ) $ 216 $ ( 624 ) Less: Reclassification adjustment for net gains (losses) included in net income ( 115 ) 29 ( 86 ) Total unrealized gain (loss) ( 955 ) 245 ( 710 ) Net unrealized gain (loss) on derivatives 31 ( 7 ) 24 Less: Reclassification adjustment for gain (loss) included in net income 389 ( 100 ) 289 Total unrealized gain (loss) 420 ( 107 ) 313 Other Comprehensive Income (Loss) $ ( 535 ) $ 138 $ ( 397 ) Nine Months Ended September 30, 2021 Net unrealized gain (loss) on securities available-for-sale $ ( 22,437 ) $ 5,771 $ ( 16,666 ) Less: Reclassification adjustment for net gains (losses) included in net income ( 2,058 ) 524 ( 1,534 ) Total unrealized gain (loss) ( 24,495 ) 6,295 ( 18,200 ) Net unrealized loss on derivatives 1,033 ( 264 ) 769 Less: Reclassification adjustment for gain (loss) included in net income ( 517 ) 132 ( 385 ) Total unrealized gain (loss) 516 ( 132 ) 384 Other Comprehensive Income (Loss) $ ( 23,979 ) $ 6,163 $ ( 17,816 ) Nine Months Ended September 30, 2020 Net unrealized gain (loss) on securities available-for-sale $ 18,402 $ ( 5,048 ) $ 13,354 Less: Reclassification adjustment for net gains included in net income ( 1,650 ) 419 ( 1,231 ) Total unrealized gain (loss) 16,752 ( 4,629 ) 12,123 Net unrealized gain (loss) on derivatives ( 1,986 ) 662 ( 1,324 ) Less: Reclassification adjustment for gain included in net income 688 ( 175 ) 513 Total unrealized gain (loss) ( 1,298 ) 487 ( 811 ) Other Comprehensive Income (Loss) $ 15,454 $ ( 4,142 ) $ 11,312 The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2021 and 2020. 36 Securities Accumulated Other Available Comprehensive Income (dollars in thousands) For Sale Derivatives (Loss) Three Months Ended September 30, 2021 Balance at Beginning of Period $ 4,804 $ ( 284 ) $ 4,520 Other comprehensive income before reclassifications ( 5,703 ) — ( 5,703 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 1,133 ) — ( 1,133 ) Net other comprehensive income during period ( 6,836 ) — ( 6,836 ) Balance at End of Period $ ( 2,032 ) $ ( 284 ) $ ( 2,316 ) Securities Accumulated Other Available Comprehensive Income (dollars in thousands) For Sale Derivatives (Loss) Three Months Ended September 30, 2020 Balance at Beginning of Period $ 15,942 $ ( 1,274 ) $ 14,668 Other comprehensive income before reclassifications ( 624 ) 24 ( 600 ) Amounts reclassified from accumulated other comprehensive loss ( 86 ) 289 203 Net other comprehensive income during period ( 710 ) 313 ( 397 ) Balance at End of Period $ 15,232 $ ( 961 ) $ 14,271 Securities Accumulated Other Available Comprehensive Income (dollars in thousands) For Sale Derivatives (Loss) Nine Months Ended September 30, 2021 Balance at Beginning of Period $ 16,168 $ ( 668 ) $ 15,500 Other comprehensive income (loss) before reclassifications ( 16,666 ) 769 ( 15,897 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 1,534 ) ( 385 ) ( 1,919 ) Net other comprehensive income (loss) during period ( 18,200 ) 384 ( 17,816 ) Balance at End of Period $ ( 2,032 ) $ ( 284 ) $ ( 2,316 ) Securities Accumulated Other Available Comprehensive Income (dollars in thousands) For Sale Derivatives (Loss) Nine Months Ended September 30, 2020 Balance at Beginning of Period $ 3,109 $ ( 150 ) $ 2,959 Other comprehensive income (loss) before reclassifications 13,354 ( 1,324 ) 12,030 Amounts reclassified from accumulated other comprehensive loss ( 1,231 ) 513 ( 718 ) Net other comprehensive income (loss) during period 12,123 ( 811 ) 11,312 Balance at End of Period $ 15,232 $ ( 961 ) $ 14,271 The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020. 37 Amount Reclassified from Accumulated Other Affected Line Item in Details about Accumulated Other Comprehensive (Loss) Income the Statement Where Comprehensive Income Components Three Months Ended September 30, Net Income is Presented (dollars in thousands) 2021 2020 Realized gain on sale of investment securities $ 1,519 $ 115 Gain on sale of investment securities Interest income derivative deposits — ( 389 ) Interest income on deposits Income tax expense ( 386 ) 71 Income tax expense Total Reclassifications for the Period $ 1,133 $ ( 203 ) Net Income Amount Reclassified from Accumulated Other Affected Line Item in Details about Accumulated Other Comprehensive (Loss) Income the Statement Where Comprehensive Income Components Nine Months Ended September 30, Net Income is Presented (dollars in thousands) 2021 2020 Realized gain on sale of investment securities $ 2,058 $ 1,650 Gain on sale of investment securities Interest income derivative deposits 517 ( 688 ) Interest income on deposits Income tax expense ( 656 ) ( 244 ) Income tax expense Total Reclassifications for the Period $ 1,919 $ 718 Net Income Note 11. Fair Value Measurements The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets. Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. 38 Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020. Significant Significant Other Other Observable Unobservable Quoted Prices Inputs Inputs Total (dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value) September 30, 2021 Assets: Investment securities available-for-sale: U.S. treasuries $ — $ 24,854 $ — $ 24,854 U. S. agency securities — 353,706 — 353,706 Residential mortgage backed securities — 1,203,136 — 1,203,136 Municipal bonds — 123,164 — 123,164 Corporate bonds — 80,101 1,500 81,601 Loans held for sale — 53,413 — 53,413 Interest rate caps — 4,882 — 4,882 Mortgage banking derivatives — — 1,565 1,565 Total assets measured at fair value on a recurring basis as of September 30, 2021 $ — $ 1,843,256 $ 3,065 $ 1,846,321 Liabilities: Interest rate swap derivatives $ — $ — $ — $ — Derivative liability — 73 — 73 Interest rate caps — 5,037 — 5,037 Total liabilities measured at fair value on a recurring basis as of September 30, 2021 $ — $ 5,110 $ — $ 5,110 December 31, 2020 Assets: Investment securities available-for-sale: U. S. agency securities $ — $ 181,921 $ — $ 181,921 Residential mortgage backed securities — 825,001 — 825,001 Municipal bonds — 108,113 — 108,113 Corporate bonds — 34,350 1,500 35,850 Loans held for sale — 88,205 — 88,205 Interest rate caps — 3,413 — 3,413 Mortgage banking derivatives — — 5,213 5,213 Total assets measured at fair value on a recurring basis as of December 31, 2020 $ — $ 1,241,003 $ 6,713 $ 1,247,716 Liabilities: Interest rate swap derivatives $ — $ 516 $ — $ 516 Derivative liability — 118 — 118 Interest rate caps — 3,574 — 3,574 Total liabilities measured at fair value on a recurring basis as of December 31, 2020 $ — $ 4,208 $ — $ 4,208 39 Investment securities available-for-sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value. Loans held for sale : The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation. The following tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of September 30, 2021 and December 31, 2020. September 30, 2021 Aggregate Unpaid (dollars in thousands) Fair Value Principal Balance Difference Loans held for sale $ 53,413 $ 52,554 $ 859 December 31, 2020 Aggregate Unpaid (dollars in thousands) Fair Value Principal Balance Difference Loans held for sale $ 88,205 $ 86,551 $ 1,654 There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of September 30, 2021 or December 31, 2020. Interest rate swap derivatives: These derivative instruments consist of interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. Credit risk participation agreements : The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2. Interest rate caps: The Company entered into an interest rate cap agreement ("cap") with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the cap's strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the cap falls within Level 2. Mortgage banking derivatives for loans settled on a mandatory basis: The Company relied on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 40 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e. an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing. Mortgage banking derivative for loans settled best efforts basis : The significant unobservable input (Level 3) used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. An increase in the pull through ratio (i.e. higher percentage of loans are estimated to close) will increase the gain or loss. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in. The pull through rate is computed by the Company's secondary marketing consultant using historical data and the ratio is periodically reviewed by the Company for reasonableness. The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3): Investment Mortgage Banking (dollars in thousands) Securities Derivatives Total Assets: Beginning balance at January 1, 2021 $ 1,500 $ 5,213 $ 6,713 Realized gain (loss) included in earnings — ( 3,648 ) ( 3,648 ) Migrated to level 2 valuation — — — Ending balance at September 30, 2021 $ 1,500 $ 1,565 $ 3,065 Liabilities: Beginning balance at January 1, 2021 $ — $ — $ — Ending balance at September 30, 2021 $ — $ — $ — Investment Mortgage Banking (dollars in thousands) Securities Derivatives Total Assets: Beginning balance at January 1, 2020 $ 10,931 $ 280 $ 11,211 Realized (loss) gain included in earnings — 5,735 5,735 Migrated to level 2 valuation ( 9,233 ) — ( 9,233 ) Ending balance at September 30, 2020 $ 1,698 $ 6,015 $ 7,713 Liabilities: Beginning balance at January 1, 2020 $ — $ 66 $ 66 Realized gain included in earnings — ( 66 ) ( 66 ) Ending balance at September 30, 2020 $ — $ — $ — The investment securities classified as Level 3 consist of one corporate bond of a local banking company which is not publicly traded, and for which the carrying amount approximates fair value. For Level 3 assets measured at fair value on a recurring or nonrecurring basis as of September 30, 2021and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows: 41 September 30, 2021 December 31, 2020 (dollars in thousands) Valuation Technique Description Range Weighted Average (1) Fair Value Weighted Average (1) Fair Value Mortgage banking derivatives Pricing Model Pull Through Rate 84.2 % - 87.0 % 85.50 % $ 1,565 79.14 % $ 5,213 (1) Unobservable inputs for mortgage banking derivatives were weighted by loan amount. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets. At September 30, 2021, substantially all of the Company’s individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, individually evaluated loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. Other real estate owned : Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation. Assets measured at fair value on a nonrecurring basis are included in the table below: Significant Significant Other Other Observable Unobservable Quoted Prices Inputs Inputs Total (dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value) September 30, 2021 Commercial $ — $ — $ 10,019 $ 10,019 Income producing - commercial real estate — — 18,621 18,621 Owner occupied - commercial real estate — — 1,593 1,593 Real estate mortgage - residential — — 1,281 1,281 Construction - commercial and residential — — — — Home equity — — 391 391 Other consumer — — — — Other real estate owned — — 5,135 5,135 Total assets measured at fair value on a nonrecurring basis as of September 30, 2021 $ — $ — $ 37,040 $ 37,040 42 Significant Significant Other Other Observable Unobservable Quoted Prices Inputs Inputs Total (dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value) December 31, 2020 Commercial $ — $ — $ 9,285 $ 9,285 Income producing - commercial real estate — — 21,638 21,638 Owner occupied - commercial real estate — — 21,930 21,930 Real estate mortgage - residential — — 2,602 2,602 Construction - commercial and residential — — 103 103 Home equity — — 416 416 Other real estate owned — — 4,987 4,987 Total assets measured at fair value on a nonrecurring basis as of December 31, 2020 $ — $ — $ 60,961 $ 60,961 Fair Value of Financial Instruments The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. 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 quoted market price, if one exists. Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole. The estimated fair value of the Company’s financial instruments at September 30, 2021 and December 31, 2020 are as follows: 43 Fair Value Measurements Quoted Prices (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying (dollars in thousands) Value Fair Value September 30, 2021 Assets Cash and due from banks $ 8,806 $ 8,806 $ 8,806 $ — $ — Federal funds sold 38,934 38,934 — 38,934 — Interest bearing deposits with other banks 2,452,744 2,452,744 — 2,452,744 — Investment securities 1,786,659 1,786,659 — 1,785,159 1,500 Accrued interest receivable 40,028 40,028 — 40,028 — Loans held for sale 53,413 53,413 — 53,413 — Loans 6,767,957 6,624,261 — — 6,624,261 Annuity investment 14,206 14,206 — 14,206 — Mortgage banking derivatives 1,565 1,565 — — 1,565 Interest rate caps 4,882 4,882 — 4,882 — Liabilities Noninterest bearing deposits 2,836,418 2,836,418 — 2,836,418 — Interest bearing deposits 6,080,567 6,080,567 — 6,080,567 — Time deposits 751,503 761,212 — 761,212 — Customer repurchase agreements 29,401 29,401 — 29,401 — Borrowings 369,639 376,058 — 376,058 — Interest rate swap derivatives — — — — — Credit risk participation agreement 73 73 — 73 — Interest rate caps 5,037 5,037 — 5,037 — December 31, 2020 Assets Cash and due from banks $ 8,435 $ 8,435 $ 8,435 $ — $ — Federal funds sold 28,200 28,200 — 28,200 Interest bearing deposits with other banks 1,752,420 1,752,420 — 1,752,420 Investment securities 1,150,885 1,150,885 — 1,149,385 1,500 Accrued interest receivable 40,104 40,104 — 40,104 — Loans held for sale 88,205 88,205 — 88,205 — Loans 7,650,633 7,608,687 — — 7,608,687 Annuity investment 14,468 14,468 — 14,468 — Mortgage banking derivative 5,213 5,213 — — 5,213 Interest rate caps 3,413 3,413 — 3,413 — Liabilities Noninterest bearing deposits 2,809,334 2,809,334 — 2,809,334 — Interest bearing deposits 756,923 756,923 — 756,923 — Time deposits 977,760 993,500 — 993,500 — Customer repurchase agreements 26,726 26,726 — 26,726 — Borrowings 568,077 575,435 — 575,435 — Interest rate swap derivatives 516 516 — 516 — Credit risk participation agreements 118 118 — 118 — Interest rate caps 3,574 3,574 — 3,574 — - 44 Note 12 - Legal Contingencies There have been no material changes in the status of the legal proceedings previously disclosed in Part I, Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, except as follows. From time to time, the Company and its subsidiaries are involved in various legal proceedings incidental to their business in the ordinary course, including matters in which damages in various amounts are claimed. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such legal proceedings will have a material effect on the financial position of the Company. However, in light of the inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, on January 25, 2021, the Company entered into a settlement agreement with respect to a previously disclosed shareholder demand letter, covering substantially the same subject matters as the disclosed civil securities class action litigation pending in the SDNY. The letter demanded that the Board undertake an investigation into the Board’s and management’s alleged violations of law and alleged breaches of fiduciary duties, and take appropriate actions following such investigation. On October 4, 2021, the DC Superior Court approved the settlement and dismissed the derivative action complaint. The Company has already begun executing on the terms of the settlement, including the payment of agreed-upon fees and expenses (which were fully covered by the Company’s D&O insurance policy). In connection with the previously disclosed investigation by the SEC, the Company’s discussions with the Staff have progressed, and the Company continues to engage with the Staff, including senior Staff members, about a potential resolution or settlement of the Staff’s investigation with respect to the Company. The Company is hopeful that these discussions will lead to a timely resolution of the investigation as it relates to the Company and any current employees and directors on a mutually agreeable basis, but there can be no assurance that will be the case. There also can be no assurance that this would result in resolution of any charges against former employees or directors, given the Staff’s ongoing review of the factual record. Any agreements reached by the Company with the Staff would be subject to approval by the Commission, and there can be no assurance that it would be approved. We are unable to predict the outcome of the investigation or these discussions or whether any potential resolution would have a material impact on the Company. The Company is also continuing discussions with the Staff of the Federal Reserve Board about a potential resolution or settlement of its investigation with respect to the Company. With respect to the other investigations described above, we are unable to predict their duration, scope or outcome. As previously disclosed, the Company maintains director and officer insurance policies (“D&O Insurance Policies”) that provide coverage for the legal defense costs related to certain of the above-described investigations and litigations. When claims are covered by D&O Insurance Policies, the Company records a corresponding receivable against the incurred legal defense cost expense subject to coverage under the D&O Insurance Policies and then eliminates the receivable and expense when the claim is paid. Subject to any new developments to the above-described investigations and litigations that may occur over the next few months, the Company currently believes there is a possibility that the applicable D&O Insurance Policies may be exhausted as early as the fourth quarter of this year. Once the D&O Insurance Policies are exhausted, the Company will be responsible for paying the defense costs associated with the above-described investigations and litigations for itself and on behalf of any current and former Officers and Directors entitled to indemnification from the Company. Since the commencement of the above-described matters in 2018 through September 30, 2021, the Company’s D&O Insurance carriers have advanced defense cost claims to the Company and its current and former directors and officers in an aggregate of approximately $ 10 million, excluding the cost of settlements. Because this aggregate amount does not reflect total expenses incurred and includes costs related to certain proceedings that have since settled, this number is not intended to be and should not be used as an estimate of defense costs going forward. The Company cannot predict with any certainty the amount of defense costs that the Company may incur in the future in connection with currently ongoing and any potential future investigations and legal proceedings, as they are dependent on various factors, many of which are outside of the Company’s control. 45