What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-10 compared with 2021-11-09 · 434 added, 675 removed, 819 unchanged (58% of the section changed)

Item 1 – Financial Statements (Unaudited)

Item 1 – Financial Statements

EAGLE BANCORP, INC.

1 unchanged sentence

(dollars in thousands, except per share data)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Cash and due from banks $ 12,140 $ 12,886

1 unchanged sentence

Interest-bearing deposits with banks and other short-term investments 682,883 1,680,945

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).

Investment securities available-for-sale (amortized cost of $ 1,873,491 and $ 2,642,667 , respectively, and allowance for credit losses of $ 18 and $ 620 , respectively).

1,775,633 2,623,408

Investment securities held-to-maturity, net of allowance for credit losses of $817 and $ 0 (fair value of $ 1,144,505 and $ 0 , respectively)

Federal Reserve and Federal Home Loan Bank stock 29,026 34,153

1 unchanged sentence

Loans 7,113,807 7,065,598

Less allowance for credit losses ( 82,906 ) ( 109,579 )

allowance for credit losses ( 71,505 ) ( 74,965 )

Loans, net 7,042,302 6,990,633

3 unchanged sentences

Bank-owned life insurance 109,415 108,789

Goodwill and Intangible assets, net 105,103 105,114

Goodwill and other intangible assets, net 104,241 105,793

Other real estate owned 1,635 1,635

5 unchanged sentences

Savings and money market 5,047,548 5,197,247

Time, $ 100 thousand or more

347,937 546,173

Other time 403,566 431,587

Time 698,519 729,082

Total deposits 9,586,259 9,981,540

11 unchanged sentences

Retained earnings 963,140 930,061

Accumulated other comprehensive (loss) income ( 2,316 ) 15,500

Accumulated other comprehensive loss ( 121,724 ) ( 14,242 )

Total Shareholders' Equity 1,279,554 1,350,775

4 unchanged sentences

(dollars in thousands, except per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Interest Income

7 unchanged sentences

Interest on customer repurchase agreements 13 11

Interest on short-term borrowings 506 505 1,502 1,363

Interest on other short-term borrowings 460 495

Interest on long-term borrowings 1,037 3,138

1 unchanged sentence

Net Interest Income 80,452 82,651

(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

Reversal of Credit Losses ( 2,787 ) ( 2,350 )

Reversal of Credit Losses for Unfunded Commitments ( 11 ) ( 442 )

Net Interest Income After Reversal of Credit Losses 83,250 85,443

Noninterest Income

1 unchanged sentence

Gain on sale of loans 1,492 5,178

Gain on sale of investment securities 1,519 115 2,058 1,650

Net (loss) gain on sale of investment securities ( 25 ) 221

Increase in the cash surrender value of bank-owned life insurance 626 389

18 unchanged sentences

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(dollars in thousands)

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Net Income $ 45,744 $ 43,469

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

Other Comprehensive (Loss) Income, Net of Tax:

Unrealized loss on securities available-for-sale ( 58,406 ) ( 17,617 )

Reclassification adjustment for loss (gain) included in net income 19 ( 166 )

Total unrealized loss on investment securities available-for-sale ( 58,387 ) ( 17,783 )

Unrealized loss on securities transferred to held-to-maturity (1)

Unrealized gain on derivatives — 573

Reclassification adjustment for gain included in net income — ( 288 )

Total unrealized gain on derivatives — 285

Other comprehensive loss ( 107,482 ) ( 17,498 )

Comprehensive (Loss) Income $ ( 61,738 ) $ 25,971

(1) Represents unamortized accumulated other comprehensive loss on securities transferred to held-to-maturity status.

See Notes to Consolidated Financial Statements.

2 unchanged sentences

(dollars in thousands except share data)

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

Common Additional Paid Retained Comprehensive Shareholders'

Shares Amount in Capital Earnings Income (Loss) Equity

Additional Other

Common Paid-in Retained Comprehensive Shareholders'

Shares Amount Capital Earnings Income (Loss) Equity

Balance January 1, 2022 31,950,092 $ 316 $ 434,640 $ 930,061 $ ( 14,242 ) $ 1,350,775

2 unchanged sentences

Stock-based compensation expense — — 2,966 — — 2,966

Issuance of common stock related to options exercised, net of shares withheld for payroll taxes 1,789 — 19 — — 19

Vesting of time-based stock awards issued at date of grant, net of shares withheld for payroll taxes ( 62,228 ) 2 ( 2 ) — — —

3 unchanged sentences

Cash dividends declared ($ 0.40 per share) — — — ( 12,665 ) — ( 12,665 )

— — — ( 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 March 31, 2022 32,079,474 $ 318 $ 437,820 $ 963,140 $ ( 121,724 ) $ 1,279,554

Balance January 1, 2021 31,779,663 $ 315 $ 427,016 $ 798,061 $ 15,500 $ 1,240,892

Net Income — — — 43,469 — 43,469

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

Other comprehensive loss, net of tax — — — — ( 17,498 ) ( 17,498 )

Stock-based compensation expense — — 1,825 — — 1,825

4 unchanged sentences

Cash dividends declared ($ 0.25 per share) — — — ( 7,932 ) — ( 7,932 )

— — — ( 21,280 ) — ( 21,280 )

Common stock repurchased ( 1,466 ) — ( 62 ) — — ( 62 )

Balance September 30, 2020 32,228,636 $ 320 $ 442,592 $ 766,219 $ 14,271 $ 1,223,402

Balance March 31, 2021 31,960,379 $ 316 $ 428,917 $ 833,598 $ ( 1,998 ) $ 1,260,833

See Notes to Consolidated Financial Statements.

2 unchanged sentences

(dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows From Operating Activities:

1 unchanged sentence

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

Reversal of credit losses ( 2,787 ) ( 2,350 )

Reversal of credit losses for unfunded commitments ( 11 ) ( 442 )

Depreciation and amortization 843 1,078

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

Gain on sale of loans ( 1,492 ) ( 5,178 )

Gain on mortgage servicing rights ( 930 ) ( 140 )

Securities (discount accretion) premium amortization, net 2,660 2,705

Origination of loans held for sale ( 114,699 ) ( 432,372 )

1 unchanged sentence

Net increase in cash surrender value of BOLI ( 626 ) ( 389 )

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 )

Net loss (gain) on sale of investment securities 25 ( 221 )

Stock-based compensation expense 2,966 1,825

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 tax expense from stock-based compensation 1,609 144

Increase in other assets ( 3,960 ) ( 777 )

(Decrease) increase in other liabilities ( 6,395 ) 20,346

Net Cash Provided by Operating Activities 60,852 11,257

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

Investment securities available-for-sale:

Purchases ( 311,705 ) ( 347,787 )

Proceeds from maturities 83,050 85,116

Proceeds from sale/call 6,225 28,505

Investment securities held-to-maturity:

Purchases ( 237,036 ) —

Proceeds from maturities 5,548 —

Purchases of Federal Reserve and Federal Home Loan Bank stock ( 60 ) ( 43 )

Sale of Federal Reserve and Federal Home Loan Bank stock 5,186 6,169

Proceeds from sale of SBA PPP loans 170,154 —

Net change in loans 727,021 ( 343,665 )

Net (increase) decrease in loans ( 48,667 ) 228,275

Net change in premises and equipment ( 269 ) ( 2,397 )

1 unchanged sentence

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

(Decrease) increase in deposits ( 395,281 ) 9,641

Increase (decrease) in customer repurchase agreements 4,375 ( 6,665 )

Decrease in short-term borrowings ( 150,000 ) —

Repayment of long-term borrowings — ( 50,000 )

1 unchanged sentence

Proceeds from employee stock purchase plan 197 —

Proceeds from exercise of equity compensation plans 19 —

Common stock repurchased — ( 62 )

Tax equivalent shares withheld on exercise of stock-based compensation plans ( 1,609 ) —

Cash dividends paid ( 12,665 ) ( 7,932 )

Net cash provided by financing activities 249,696 983,116

Net Cash Used in Financing Activities ( 554,964 ) ( 54,879 )

Net Decrease in Cash and Cash Equivalents ( 991,840 ) ( 45,784 )

4 unchanged sentences

Income taxes paid $ — $ —

Non-Cash Investing Activities

Non-Cash Operating Activities

Initial recognition of operating lease right-of-use assets $ — $ 7,339

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 $ —

Non-Cash Investing Activities

Transfers of investment securities from available-for-sale to held-to-maturity $ 922,795 $ —

See Notes to Consolidated Financial Statements.

2 unchanged sentences

Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation and 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 "Parent") and its subsidiaries (together with the Parent.

the "Company"), with all significant intercompany transactions eliminated.

EagleBank (the "Bank"), a Maryland chartered commercial bank, is the Company's principal subsidiary.

The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America ("GAAP") and to general practices in the banking industry.

The Consolidated Financial Statements and accompanying notes of the Company included herein are unaudited.

The Consolidated Balance Sheet as of December 31, 2021 was derived from the audited Consolidated Balance Sheet as of that date.

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").

Certain information and note disclosures normally included in financial statements prepared in accordance with 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, 2021.

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.

Certain reclassifications have been made to 2021 amounts previously reported to conform to the 2022 presentation.

Reclassifications had no effect on net income nor shareholders' equity.

Nature of Operations

3 unchanged sentences

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.

The Bank offers its products and services through seventeen banking offices, five lending centers and various digital 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

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.

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.

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.

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 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

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.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes.

Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Investment Securities

The Company recognizes acquired securities on the trade date.

Investment securities comprise debt securities, which are classified depending on the Company's intent and ability to hold the securities to maturity.

Debt securities are classified as available-for-sale when management may have the intent to sell them prior to maturity.

Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Premiums and discounts on investment securities held-to-maturity, like available-for-sale securities, are amortized or accreted to the earlier of call or maturity based on expected lives, which include prepayment adjustments and call optionality.

The Company separately evaluates its investment securities held-to-maturity for any credit losses.

The Company pools like securities and calculates expected credit losses through an estimate based on a security's credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets.

If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis of the security to estimate any credit losses.

The Company excludes accrued interest receivable from the balance of amortized cost on its investment securities held-to-maturity as it would be written off in the event that an allowance for credit losses would be required.

Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity

Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at amortized cost, net of unrealized gain or loss reported in accumulated other comprehensive income (loss) at the date of transfer.

The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities.

Such amounts are amortized over the remaining life of the security.

Loans held for investment are stated at the principal amount outstanding, net of unamortized deferred costs and fees.

Interest income on loans is recognized at the contractual rate on the principal amounts outstanding.

Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized on the interest method over the term of the loan.

Past due loans are placed 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.

Generally, this conclusion is reached when a loan is 90 days past due.

When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed through 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.

2 unchanged sentences

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 allowance for credit losses - loans ("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 that an estimate of current and expected credit losses ("CECL") be immediately recognized and reevaluated over the contractual life of the financial asset.

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).

Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis (e.g., nonaccrual loans, TDRs).

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 remainder of the portfolio, representing all loans not evaluated individually for impairment, is segregated by call report codes and a loan-level probability of default ("PD") / Loss Given Default ("LGD") cash flow method is applied using an exposure at default ("EAD") model.

These historical 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 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.

A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and 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.

2 unchanged sentences

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.

leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period.

Unemployment projections materially inform our CECL economic forecast and resulted in a reduction to our ACL during the three months ended March 31, 2022.

Management 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:

2 unchanged sentences

and are generally secured by accounts receivable, inventory, equipment and other assets of our clients' businesses.

Paycheck Protection Program .

Paycheck Protection Program ("PPP") .

The PPP portfolio comprises loans issued under the SBA's Paycheck Protection Program to support small businesses impacted by the pandemic.

11 unchanged sentences

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.

The construction commercial and residential loan portfolio comprises 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.

2 unchanged sentences

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

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.

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 leased property in which they operate.

Generally these loans contain provisions for conversion to an owner occupied commercial real estate loan or to a commercial loan after completion of construction.

Collateral properties include industrial, healthcare, religious facilities, restaurants, and office buildings.

4 unchanged sentences

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.

23 unchanged sentences

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

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.

6 unchanged sentences

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.

The Company utilizes ASC 326 to evaluate its available-for-sale ("AFS") debt security portfolio for expected credit losses.

For 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.

1 unchanged sentence

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.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL 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 ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The entire amount of an impairment loss is recognized in earnings only when:

6 unchanged sentences

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.

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.

8 unchanged sentences

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.

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 March 31,

(dollars in thousands) 2022 2021

Provision for (reversal of) credit losses- loans $ ( 3,001 ) $ ( 2,261 )

Provision for (reversal of) credit losses- HTM debt securities 817 —

Provision for (reversal of) credit losses- AFS debt securities ( 603 ) ( 89 )

Total $ ( 2,787 ) $ ( 2,350 )

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, 2021.

1 unchanged sentence

Accounting Standards Adopted in 2022 :

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.

2020-06, " Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity " ("ASU 2020-06") simplifies accounting for convertible instruments by removing major separation models required under current U.S.

Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features.

ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it.

ASU 2020-06 also simplifies the diluted earnings per share (EPS) calculation in certain areas.

In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency.

For public business entities, excluding smaller reporting companies, the amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.

ASU 2020-06 did not have a material impact on the Company's 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.

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.

5 unchanged sentences

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.

2022-02, " Financial Instruments—Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures " ("ASU 2022-02") eliminates the accounting guidance for troubled debt restructurings ("TDRs") while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan.

Additionally, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases.

For entities that have adopted ASC 326, the amendments in the ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.

The impact of ASU 2022-02 should be applied prospectively, or, for the recognition and measurement of TDRs, with a modified retrospective transition method.

We are currently in the process of evaluating this guidance.

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.

Investment Securities Available-for-Sale

Amortized cost and estimated fair value of securities available-for-sale are summarized as follows:

The Company has deposits with other banks for derivative positions it holds, totaling $ 4.1 million at March 31, 2022 and $ 6.3 million at December 31, 2021.

At March 31, 2022, the Company was entitled to receive collateral totaling $ 10.1 million.

At December 31, 2021, the Company was required to post $ 2.4 million of cash collateral with its counterparties.

See Note 6 for additional information.

Additionally, the Bank maintains interest-bearing balances with the Federal Home Loan Bank of Atlanta ("FHLB") and noninterest-bearing balances with domestic correspondent banks to cover associated costs for services they provide to the Bank.

Investment Securities

The amortized cost and estimated fair value of the Company's available-for-sale and held-to-maturity securities are summarized as follows:

Gross Gross Allowance Estimated

September 30, 2021 Amortized Unrealized Unrealized for Credit Fair

Amortized Unrealized Unrealized for Credit Fair

(dollars in thousands) Cost Gains Losses Losses Value

treasuries $ 24,838 $ 16 $ — $ — $ 24,854

March 31, 2022

Investment securities available-for-sale:

treasury bonds $ 49,718 $ — $ ( 2,225 ) $ — $ 47,493

agency securities 744,404 106 ( 37,957 ) — 706,553

2 unchanged sentences

Corporate bonds 2,000 — — ( 17 ) 1,983

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

Total securities available-for-sale $ 1,873,491 $ 643 $ ( 98,483 ) $ ( 18 ) $ 1,775,633

Gross Gross Estimated Allowance

Amortized Unrecognized Unrecognized Fair for Credit

(dollars in thousands) Cost Gains Losses Value Losses

March 31, 2022

Investment securities held-to-maturity:

Residential mortgage-backed securities $ 886,526 $ — $ ( 8,910 ) $ 877,616 $ —

Municipal bonds 128,926 — ( 552 ) 128,374 ( 16 )

Corporate bonds 138,764 — ( 249 ) 138,515 ( 801 )

Total securities held-to-maturity $ 1,154,216 $ — $ ( 9,711 ) $ 1,144,505 $ ( 817 )

Gross Gross Allowance Estimated

Amortized Unrealized Unrealized for Credit Fair

(dollars in thousands) Cost Gains Losses Losses Value

December 31, 2021

Investment securities available-for-sale:

treasury bonds $ 49,693 $ 22 $ ( 257 ) $ — $ 49,458

agency securities 629,273 736 ( 7,622 ) — 622,387

2 unchanged sentences

Corporate bonds 129,012 648 ( 584 ) ( 617 ) 128,459

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:

Total $ 2,642,667 $ 10,968 $ ( 29,607 ) $ ( 620 ) $ 2,623,408

In addition, at March 31, 2022 and December 31, 2021 the Company held $ 29.0 million and $ 34.2 million, respectively, in equity securities in a combination of FRB and FHLB stocks, which were required to be held for regulatory purposes and which were not marketable, and therefore are carried at cost.

The Company reassessed classification of certain investments in the first quarter of 2022 and, effective March 31, 2022, it transferred a total of $ 1.1 billion of residential mortgage-backed securities, municipal bonds and corporate bonds from available-for-sale to held-to-maturity securities, including $ 237.0 million of securities acquired in the first quarter of 2022 for which its intention to hold to maturity was finalized.

At the time of transfer, the Company reversed the allowance for credit losses associated with the available-for-sale securities through provision for credit losses.

The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income.

The related unrealized loss totaling $ 66.2 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities.

No gain or loss was recorded at the time of transfer.

Subsequent to transfer, the allowance for credit losses on these securities was evaluated under the accounting policy for held-to-maturity securities.

Accrued interest receivable on available-for-sale securities totaled $ 4.5 million and $ 6.0 million at March 31, 2022 and December 31, 2021, respectively, and accrued interest receivable on held-to-maturity securities totaled $ 4.1 million at March 31, 2022.

The accrued interest on investment securities is excluded from the amortized cost of the securities and is reported in other assets in the Consolidated Balance Sheets.

Gross unrealized losses and fair value of available-for-sale securities, by length of time that individual securities have been in a continuous unrealized loss position are as follows:

Less Than 12 Months

1 unchanged sentence

Estimated Estimated Estimated

September 30, 2021 Number of Fair Unrealized Fair Unrealized Fair Unrealized

Number of Fair Unrealized Fair Unrealized Fair Unrealized

(dollars in thousands) Securities Value Losses Value Losses Value Losses

March 31, 2022

treasury bonds 2 $ 47,492 $ 2,225 $ — $ — $ 47,492 $ 2,225

agency securities 80 469,018 22,925 194,355 15,032 663,373 37,957

Residential mortgage-backed securities 146 812,079 43,414 159,548 14,681 971,627 58,095

Corporate bonds 6 26,699 304 — — 26,699 304

Municipal bonds 1 8,879 206 — — 8,879 206

229 $ 1,337,468 $ 68,770 $ 353,903 $ 29,713 $ 1,691,371 $ 98,483

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

December 31, 2021

treasury bond 1 $ 24,593 $ 257 $ — $ — $ 24,593 $ 257

agency securities 64 452,966 6,256 68,977 1,366 521,943 7,622

Residential mortgage-backed securities 153 1,327,519 16,841 108,061 3,956 1,435,580 20,797

Municipal bonds 8 20,181 347 — — 20,181 347

Corporate bonds 13 66,051 584 — — 66,051 584

239 $ 1,891,310 $ 24,285 $ 177,038 $ 5,322 $ 2,068,348 $ 29,607

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.

Unrealized losses at March 31, 2022 were generally attributable to changes in market interest rates and interest spread relationships since the investment securities were originally purchased, and not due to the credit quality concerns on the investment securities.

However, as of March 31, 2022, the Company determined that certain of the unrealized loss positions in available-for-sale & held-to-maturity corporate and municipal bonds were evidence of expected credit losses, and therefore, an allowance for credit losses of $ 18 thousand was recorded for AFS securities and $ 817 thousand for HTM securities.

The weighted average duration of debt securities, which comprise 100.0 % of total investment securitie s, is 4.9 years.

1 unchanged sentence

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.

September 30, 2021 December 31, 2020

The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities at March 31, 2022 and December 31, 2021 by contractual maturity are shown in the table below.

Contractual maturities for residential mortgage-backed securities ("MBS") are excluded 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.

March 31, 2022 December 31, 2021

Amortized Estimated Amortized Estimated

(dollars in thousands) Cost Fair Value Cost Fair Value

After one year through five years $ 24,838 $ 24,854 $ — $ —

(dollars in thousands) Cost (1)

Fair Value Cost Fair Value

Investment securities available-for-sale

treasury bonds (after one year through five years) $ 49,718 $ 47,492 $ 49,693 $ 49,458

agency securities maturing:

1 unchanged sentence

After one year through five years 168,414 160,927 131,918 140,785

Five years through ten years 76,272 74,689 17,087 17,240

After five years through ten years 54,937 51,033 71,758 60,255

Residential mortgage-backed securities 1,062,085 1,004,425 1,692,773 1,677,673

2 unchanged sentences

After one year through five years 1,403 1,486 25,457 26,816

Five years through ten years 70,937 73,293 69,309 73,389

After five years through ten years 9,084 8,879 97,945 99,960

After ten years — — 13,708 13,797

2 unchanged sentences

After one year through five years — — 54,630 54,833

Five years through ten years 29,337 29,323 6,976 7,511

After five years through ten years 2,000 2,000 55,458 55,252

Allowance for credit losses — ( 18 ) — ( 620 )

1,873,491 1,775,633 2,642,667 2,623,408

Investment securities held-to-maturity

Residential mortgage-backed securities 886,526 877,616 — —

Municipal bonds maturing:

After one year through five years 35,460 35,460 — —

After five years through ten years 76,633 76,410 — —

After ten years 16,833 16,502 — —

Other 198 198 198 198

Corporate bonds maturing:

One year or less 18,492 18,492 — —

After one year through five years 82,943 82,696 — —

After five years through ten years 37,329 37,329 — —

Allowance for credit losses ( 817 ) — — —

1,153,399 1,144,505 — —

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.

$ 3,026,890 $ 2,920,138 $ 2,642,667 $ 2,623,408

(1) Amortized cost for investment securities held-to-maturity is presented net of the allowance for credit losses.

For the three months ended March 31, 2022, net realized losses on sales of investments securities were $ 25 thousand on sales of investment securities.

For the three months ended March 31, 2021, net realized gains on sales of investments securities were $ 221 thousand.

The Company received proceeds of $ 6.2 million and $ 28.5 million for the three months ended March 31, 2022 and 2021, respectively, on sales and calls of securities.

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 March 31, 2022 and December 31, 2021 was $ 251.0 million and $ 261.0 million, respectively, which were well in excess of required amounts in order to operationally provide significant reserve amounts for new business.

As of March 31, 2022 and December 31, 2021, 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.

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.

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.

Loans and Allowance for Credit Losses

2 unchanged sentences

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 %

Loans, net of unamortized net deferred fees, at March 31, 2022 and December 31, 2021 are summarized by type as follows:

March 31, 2022 December 31, 2021

(dollars in thousands, except amounts in the footnote) Amount % Amount %

Commercial $ 1,377,615 19 % $ 1,354,317 19 %

11 unchanged sentences

$ 7,042,302 $ 6,990,633

________________________________________

(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.

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.

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.

(1) Excludes accrued interest receivable of $ 36.9 million and $ 38.6 million at March 31, 2022 and December 31, 2021, respectively, which were recorded in other assets on the Consolidated Balance Sheets.

Unamortized net deferred fees amounted to $ 23.7 million and $ 26.9 million at March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, the Bank serviced $ 339.5 million and $ 351.1 million , respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets.

Real estate 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.

4 unchanged sentences

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

improvement of residential zoned real properties, including the creation of housing.

1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or 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.

13 unchanged sentences

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.

ADC loans amounted to $ 1.5 billion at March 31, 2022.

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.

ADC loans that provide for the use of interest reserves represent approximately 57.2 % of the outstanding ADC loan portfolio at March 31, 2022.

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:

12 unchanged sentences

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.

If a project has performed as expected, it is 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 months ended March 31, 2022 and 2021.

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.

3 unchanged sentences

(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Allowance for credit losses:

3 unchanged sentences

Net loans charged-off ( 460 ) — — — — — 1 ( 459 )

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

Provision for (reversal of) credit losses ( 1,069 ) 906 ( 1,631 ) ( 68 ) ( 1,126 ) ( 7 ) ( 6 ) ( 3,001 )

Ending balance $ 12,946 $ 39,193 $ 10,515 $ 381 $ 7,973 $ 467 $ 30 $ 71,505

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Allowance for credit losses:

2 unchanged sentences

Recoveries of loans previously charged-off 96 — — — — — 13 109

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

Net loans (charged-off) recovered ( 4,054 ) ( 1,000 ) — — ( 206 ) — 12 ( 5,248 )

Provision for (reversal of) credit losses 1,186 ( 2,875 ) 315 ( 101 ) ( 640 ) ( 132 ) ( 14 ) ( 2,261 )

Ending balance 23,701 51,510 14,315 919 10,683 907 35 102,070

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

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

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(dollars in thousands) Business/Other Assets Real Estate Business/Other Assets Real Estate

Commercial $ 2,222 $ 6,784 $ 3,098 $ 6,821

PPP loans 106 — 1,365 —

Income-producing - commercial real estate 3,120 19,316 3,193 19,378

3 unchanged sentences

Home equity — 365 — 366

Other consumer — —

Total $ 5,448 $ 28,196 $ 7,656 $ 31,479

24 unchanged sentences

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

The Company's credit quality indicators are generally updated annually, and;

however , credits rated watch or below are reviewed more frequently.

Based on the most recent analysis performed, amortized cost basis of loans by risk category, class and year of origination are as follows:

March 31, 2022 (dollars in thousands) Prior 2018 2019 2020 2021 2022 Revolving Loans Amort.

Cost Basis Revolving Loans Convert.

to Term Total

Pass 219,550 98,054 86,957 76,823 243,084 14,286 573,964 216 1,312,934

4 unchanged sentences

Pass — — — 6,587 29,051 — — — 35,638

Substandard — — — 106 — — — — 106

Total — — — 6,693 29,051 — — — 35,744

8 unchanged sentences

Watch 23,557 11,708 6,789 — — — 13,571 — 55,625

Special Mention — — — 2,133 — — 2,133

Substandard 19,721 — — — — — — — 19,721

8 unchanged sentences

Watch 44,417 — — — — — — — 44,417

Substandard — — — — — —

Total 101,495 112,990 86,863 180,491 98,376 73,655 129,231 — 783,101

2 unchanged sentences

Watch 1,059 3,254 — — — — — — 4,313

Substandard — — — — — — —

Total 15,278 10,645 44,884 62,084 779 — 6,612 — 140,282

Home Equity —

Pass 2,081 — — 101 547 — 50,011 1,597 54,337

4 unchanged sentences

Pass 338 — — — — — 853 — 1,191

Watch — — — — — — 50 — 50

Substandard — — — — — — 5 — 5

1 unchanged sentence

Total Recorded Investment $ 2,190,041 $ 992,905 $ 860,566 $ 729,147 $ 1,130,292 $ 162,697 $ 1,045,977 $ 2,182 7,113,807

December 31, 2020 (dollars in thousands) Prior 2016 2017 2018 2019 2020 Total

December 31, 2021 (dollars in thousands) Prior 2017 2018 2019 2020 2021 Revolving Loans Amort.

Cost Basis Revolving Loans Convert.

to Term Total

Pass $ 180,877 $ 58,693 $ 103,058 $ 90,874 $ 87,515 $ 211,563 $ 549,055 $ 6,023 $ 1,287,658

4 unchanged sentences

Pass — — — — 16,840 32,900 — — 49,740

Substandard — — — — 1,365 — — — 1,365

Total — — — — 18,205 32,900 — — 51,105

19 unchanged sentences

Watch 506 43,918 — — — — — — — 44,424

Special Mention 12 — — 2,895 — — 2,907

Substandard — — — 3,093 — — — — — 3,093

3 unchanged sentences

Watch 680 390 3,255 — — — — — — 4,325

Special Mention 124 — — — 14,436 15,678 30,238

Total 20,390 2,144 28,418 39,803 61,408 768 6,648 — 159,579

8 unchanged sentences

Total Recorded Investment $ 1,457,032 $ 806,647 $ 1,009,864 $ 933,401 $ 749,261 $ 1,071,249 $ 1,026,653 $ 11,491 $ 7,065,598

The Company’s credit quality indicators are generally updated annually;

however, credits rated watch or below are reviewed more frequently.

Nonaccrual and Past Due Loans

3 unchanged sentences

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:

The table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of March 31, 2022 and December 31, 2021:

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

30-59 Days 60-89 Days 90 Days or Total Past Current Nonaccrual Investment in

(dollars in thousands) Past Due Past Due More Past Due Due Loans Loans Loans Loans

March 31, 2022

Commercial $ 2,368 $ 853 $ — $ 3,221 $ 1,366,403 $ 7,991 $ 1,377,615

19 unchanged sentences

Total $ 5,051 $ 20,792 $ — $ 25,843 $ 7,010,547 $ 29,208 $ 7,065,598

The following presents the nonaccrual loans as of September 30, 2021 and December 31, 2020:

September 30, 2021

The following presents the nonaccrual loans as of March 31, 2022 and December 31, 2021:

Nonaccrual with Nonaccrual with Total

1 unchanged sentence

(dollars in thousands) for Credit Loss for Credit Loss Loans

March 31, 2022

Commercial $ 5,546 $ 2,445 $ 7,991

PPP loans (1)

Income producing - commercial real estate 3,869 9,462 13,331

1 unchanged sentence

Real estate mortgage - residential 1,698 228 1,926

Construction - commercial and residential — — —

Home equity 365 — 365

1 unchanged sentence

December 31, 2021

Nonaccrual with Nonaccrual with Total

No Allowance an Allowance Nonaccrual

(dollars in thousands) for Credit Loss for Credit Loss Loans

Commercial $ 5,806 $ 3,070 $ 8,876

PPP loans (1)

1,365 — 1,365

Income producing - commercial real estate 3,920 9,536 13,456

4 unchanged sentences

$ 16,371 $ 12,837 $ 29,208

(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.

(1) The CARES Act created the PPP, a program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans are intended to guarantee payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

(2) Excludes TDRs that were performing under their restructured terms totaling $ 10.1 million and $ 10.2 million at March 31, 2022 and December 31, 2021, respectively.

(3) Gross interest income of $ 325 thousand and approximately $ 800 thousand would have been recorded for the three months ended March 31, 2022 and 2021, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while no interest income was actually recorded on such loans for the three months ended March 31, 2022 and 2021 respectively.

See Note 1 to the Consolidated Financial Statements for a description of the Company's policy for placing loans on nonaccrual status.

4 unchanged sentences

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 .

Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.

Construction loans modified in a TDR may also involve extending the interest-only payment period.

As of March 31, 2022 and December 31, 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.

An allowance for 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.

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.

In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complied 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 allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain borrowers, 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.

Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e.

2 unchanged sentences

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

Number Producing - Occupied - Construction -

of Commercial Commercial Commercial

(dollars in thousands) Contracts Commercial Real Estate Real Estate Real Estate Total

As of March 31, 2022, substantially all of the borrowers granted deferrals under this program have returned to regular payment status.

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the three months ended March 31, 2022 and 2021.

Number Producing -

of Commercial

(dollars in thousands) Loans Commercial Real Estate Total

Three Months Ended March 31, 2022

Troubled debt restructurings

2 unchanged sentences

Total 7 $ 1,016 $ 15,447 $ 16,463

Specific allowance $ 146 $ 3,225 $ — $ — $ 3,371

Individually-evaluated allowance $ 170 $ 2,285 $ 2,455

Restructured and subsequently defaulted $ — $ 6,342 $ 6,342

September 30, 2020

Number Producing - Occupied - Construction -

of Commercial Commercial Commercial

(dollars in thousands) Contracts Commercial Real Estate Real Estate Real Estate Total

Three Months Ended March 31, 2021

Troubled debt restructurings

2 unchanged sentences

Total 8 $ 1,258 $ 15,513 $ 16,771

Specific allowance $ 227 $ 629 $ — $ — $ 856

Individually-evaluated allowance $ 547 $ 2,976 $ 3,523

Restructured and subsequently defaulted $ 101 $ 6,342 $ 6,443

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.

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 Company had seven TDRs at March 31, 2022 totaling approximately $ 16.5 million.

Five of these loans totaling approximately $ 10.1 million were performing under their modified terms as of March 31, 2022.

For the first three months of 2022 there were two performing TDR loans that defaulted on their modified terms.

For the first three months of 2021, one performing TDR loan, with a balance of $ 101 thousand, defaulted on its modified terms and was placed on nonaccrual status.

For the three months ended March 31, 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 zero nonperforming restructured loan was charged off.

No similar transactions occurred during the three months ended March 31, 2022.

Commercial and consumer loans 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 loss.

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.

The Company accounts for leases in accordance with ASC Topic 842.

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.

Substantially all of the leases in which the Company is the lessee comprise real estate property for branch offices, ATM locations, and corporate office space.

Substantially all of our leases are classified as operating leases.

With the adoption of ASC 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 March 31, 2022 and December 31, 2021, the Company had $ 29.0 million and $ 30.6 million of operating lease ROU assets, respectively, and $ 33.9 million and $ 35.5 million of operating lease liabilities, respectively, 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.

1 unchanged sentence

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.

As of March 31, 2022, 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.

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

Three Months Ended

(dollars in thousands) March 31, 2022 March 31, 2021

Operating lease cost (cost resulting from lease payments) $ 1,840 $ 2,159

3 unchanged sentences

Operating lease - operating cash flows (fixed payments) $ 1,820 $ 2,304

September 30, 2021 December 31, 2020

Right-of-Use Assets - Operating Leases $ 30,080 $ 25,237

March 31, 2022 December 31, 2021

Operating lease right-of-use assets $ 28,969 $ 30,555

Operating lease liabilities $ 33,935 $ 35,501

Weighted average lease term - operating leases 6.12 yrs 6.26 yrs

Weighted average discount rate - operating leases 3.01 % 3.05 %

Future minimum payments for operating leases with initial or remaining terms of more than one year as of September 30, 2021 were as follows:

Future minimum payments for operating leases with initial or remaining terms of more than one year as of March 31, 2022 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

March 31, 2023 $ 5,411

March 31, 2024 7,037

March 31, 2025 6,293

March 31, 2026 5,331

March 31, 2027 4,186

Thereafter 8,407

2 unchanged sentences

Present value of net future minimum lease payments $ 33,935

Other Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions.

1 unchanged sentence

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.

Mortgage Banking Derivatives

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 MBS.

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.

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.

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 gain on sale of loans for the three months ended March 31, 2022 included a $ 266 thousand net loss relating to mortgage banking derivative instruments.

No net loss was recorded for the three months ended March 31, 2021.

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.

The Company's objective in using interest rate derivatives designated as cash flow hedges under ASC 815 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.

2 unchanged sentences

The Company's intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.

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.

Fair Value Measurements.

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.

1 unchanged sentence

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.

Thus, as of March 31, 2022 and December 31, 2021, the Company had no designated cash flow hedge interest rate swap transactions 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.

16 unchanged sentences

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 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 March 31, 2022 and December 31, 2021.

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

If the Company had breached any provisions under the agreement at March 31, 2022, it could have been required to settle its obligations under the agreement at the termination value.

March 31, 2022 December 31, 2021

(dollars in thousands) Notional

Amount Fair Value Balance Sheet

Category Fair Value Balance Sheet

Derivatives not designated as hedging instruments

Category Notional

Amount Fair Value Balance Sheet

Derivatives not designated as hedging instruments in an asset position

Interest rate product $ 283,889 $ 10,357 Other assets $ 272,825 $ 5,273 Other assets

1 unchanged sentence

$ 308,168 $ 10,566 Other assets $ 329,156 $ 5,909 Other assets

Derivatives designated as hedging instruments

Interest rate product $ — $ — Other Liabilities $ 516 Other Liabilities

Derivatives not designated as hedging instruments

Derivatives not designated as hedging instruments in a liability position

Interest rate product $ 283,889 9,911 Other liabilities 272,825 5,223 Other liabilities

Other Contracts 26,542 63 Other Liabilities 118 Other Liabilities

Credit risk participation agreements 26,290 17 Other liabilities 26,417 47 Other liabilities

$ 310,179 9,928 Other liabilities $ 299,242 5,270 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:

Cash and other collateral posted 2,270 2,930

Net derivatives in a liability position $ 7,658 $ 2,340

The table below presents the pre-tax net gains (losses) of the Company's designated cash flow hedges for the three months ended March 31, 2022 and 2021:

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

Amount of Gain or (Loss)

Amount of Gain (Loss) Recognized Reclassified from Accumulated

Derivatives in Subtopic in OCI on Derivatives Location of Gain or (Loss) Recognized from OCI into Net Income

815-20 Hedging Relationships Three Months Ended March 31, Accumulated Other Comprehensive Income into Three Months Ended March 31,

(dollars in thousands) 2022 2021 Net Income 2022 2021

Derivatives in Cash Flow Hedging Relationships

Interest Rate Products $ — $ ( 844 ) Interest Expense $ — $ ( 385 )

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 table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of Income for the three months ended March 31, 2022 and 2021:

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 )

Amount of Gain or (Loss) Recognized in Interest

Expense on Fair Value and Cash Flow

Hedging Relationships

Three Months Ended March 31,

(dollars in thousands) 2022 2021

Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded $ — $ ( 384 )

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20

1 unchanged sentence

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income $ — $ ( 384 )

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 $ — $ ( 384 )

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component $ — $ — $ — $ —

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 )

Effect of Derivatives Not Designated as Hedging Instruments in the Consolidated Statements of Income

Amount of Income (Loss) Recognized

in Income on Derivatives

Derivatives not Designated as Hedging Instruments under Location of (Loss) Recognized in Three Months Ended March 31,

Subtopic 815-20 Income on Derivatives 2022 2021

Interest rate products Other income / (Other expense) $ 250 $ 283

Mortgage banking derivatives Other income / (Other expense) 209 2,514

Other contracts Other income / (Other expense) — 40

Total $ 459 $ 2,837

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

The following table presents information related to the Company's long-term borrowings as of March 31, 2022 and December 31, 2021.

(dollars in thousands) March 31, 2022 December 31, 2021

Subordinated Notes, 5.75 %

$ 70,000 $ 70,000

Subordinated Notes, 5.0 %

FHLB Advance, 1.81 %

unamortized debt issuance costs ( 299 ) ( 330 )

Long-term borrowings $ 69,639 $ 268,077

Total $ 69,701 $ 69,670

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.

The net proceeds were approximately $ 68.8 million, which included $ 1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.

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:

Three Months Ended September 30, Nine Months Ended September 30,

The calculation of net income per common share for the three months ended March 31, 2022 and 2021 was as follows:

Three Months Ended March 31,

(dollars and shares in thousands, except per share data) 2022 2021

8 unchanged sentences

Anti-dilutive shares — 4

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.

(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 )

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 — — —

Reclassification adjustment for gain (loss) included in net income — — —

Total unrealized gain (loss) — — —

Other Comprehensive Income (Loss)

Three Months Ended September 30, 2020

Net unrealized gain (loss) on securities available-for-sale $ ( 840 ) $ 216 $ ( 624 )

Reclassification adjustment for net gains (losses) included in net income ( 115 ) 29 ( 86 )

Total unrealized gain (loss) ( 955 ) 245 ( 710 )

The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2022 and 2021.

(dollars in thousands) Before Tax Tax Effect Net of Tax

Three Months Ended March 31, 2022

Net unrealized (loss) gain on securities available-for-sale $ ( 79,227 ) $ 20,821 $ ( 58,406 )

Reclassification adjustment for net loss (gain) included in net income 25 ( 6 ) 19

Total unrealized (loss) gain ( 79,202 ) 20,815 ( 58,387 )

Net unrealized (loss) on securities transferred to held-to-maturity (1) ( 66,193 ) 17,098 ( 49,095 )

Other comprehensive (loss) income $ ( 145,395 ) $ 37,913 $ ( 107,482 )

Three Months Ended March 31, 2021

Net unrealized (loss) gain on securities available-for-sale $ ( 23,713 ) $ 6,096 $ ( 17,617 )

reclassification adjustment for net (gain) loss included in net income ( 221 ) 55 ( 166 )

Total unrealized (loss) gain ( 23,934 ) 6,151 ( 17,783 )

Net unrealized gain (loss) on derivatives 767 ( 194 ) 573

1 unchanged sentence

Total unrealized gain (loss) 383 ( 98 ) 285

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 )

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

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

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 )

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.

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Three Months Ended September 30, 2021

Other comprehensive (loss) income $ ( 23,551 ) $ 6,053 $ ( 17,498 )

(1) Represents unamortized AOCI on securities transferred to held-to-maturity status.

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2022 and 2021.

Securities Securities Accumulated Other

Available Held to Comprehensive

(dollars in thousands) For Sale Maturity Derivatives Income (Loss)

Three Months Ended March 31, 2022

Balance at beginning of period $ ( 13,958 ) $ — $ ( 284 ) $ ( 14,242 )

Other comprehensive income before reclassifications ( 5,703 ) — ( 5,703 )

Other comprehensive loss before reclassifications ( 58,406 ) ( 49,095 ) — (107,501)

Amounts reclassified from accumulated other comprehensive income (loss) 19 — — 19

Net other comprehensive income during period ( 6,836 ) — ( 6,836 )

Net other comprehensive loss during period ( 58,387 ) ( 49,095 ) — ( 107,482 )

Balance at end of period $ ( 72,345 ) $ ( 49,095 ) $ ( 284 ) $ ( 121,724 )

Securities Accumulated Other

Available Comprehensive Income

(dollars in thousands) For Sale Derivatives (Loss)

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Balance at beginning of period $ 16,168 $ — $ ( 668 ) $ 15,500

Other comprehensive income before reclassifications ( 17,617 ) — 573 ( 17,044 )

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) ( 166 ) — ( 288 ) ( 454 )

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

Net other comprehensive (loss) income during period ( 17,783 ) — 285 ( 17,498 )

Balance at end of period $ ( 1,615 ) $ — $ ( 383 ) $ ( 1,998 )

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.

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

The following tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021.

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

Accumulated Other

Details about Accumulated Other Comprehensive (Loss) Income Affected Line Item in

Comprehensive Income Components Three Months Ended March 31, the Statement Where

(dollars in thousands) 2022 2021 Net Income is Presented

Realized gain on sale of investment securities $ ( 25 ) $ 221 Net (loss) gain on sale of investment securities

Interest income derivative deposits — 384 Interest on balances with other banks and short-term investments

Income tax benefit (expense) 6 ( 151 ) Income tax expense

Total reclassifications for the periods $ ( 19 ) $ 454

Fair Value Measurements

17 unchanged sentences

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.

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.

Significant Significant

2 unchanged sentences

(dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value)

September 30, 2021

March 31, 2022

Investment securities available-for-sale:

treasuries $ — $ 24,854 $ — $ 24,854

U.S treasury bonds $ — $ 47,492 $ — $ 47,492

agency securities — 706,554 — 706,554

5 unchanged sentences

Mortgage banking derivatives — — 209 209

Total assets measured at fair value on a recurring basis as of September 30, 2021 $ — $ 1,843,256 $ 3,065 $ 1,846,321

Interest rate swap derivatives $ — $ — $ — $ —

Derivative liability — 73 — 73

Total assets measured at fair value on a recurring basis as of March 31, 2022 $ — $ 1,811,494 $ 209 $ 1,811,703

Credit risk participation agreements $ — $ 17 $ — $ 17

Interest rate caps — 9,911 — 9,911

Total liabilities measured at fair value on a recurring basis as of September 30, 2021 $ — $ 5,110 $ — $ 5,110

Total liabilities measured at fair value on a recurring basis as of March 31, 2022 $ — $ 9,928 $ — $ 9,928

December 31, 2021

Investment securities available-for-sale:

treasury bonds $ — $ 49,458 $ — $ 49,458

agency securities — 622,387 — 622,387

6 unchanged sentences

Total assets measured at fair value on a recurring basis as of December 31, 2021 $ — $ 2,663,823 $ 12,636 $ 2,676,459

Interest rate swap derivatives $ — $ 516 $ — $ 516

Derivative liability — 118 — 118

Credit risk participation agreements $ — $ 47 $ — $ 47

Interest rate caps — 5,147 — 5,147

15 unchanged sentences

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

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 March 31, 2022 and December 31, 2021.

Aggregate Unpaid

(dollars in thousands) Fair Value Principal Balance Difference

March 31, 2022

Loans held for sale $ 25,504 $ 25,304 $ 200

December 31, 2021

Aggregate Unpaid

(dollars in thousands) Fair Value Principal Balance Difference

Loans held for sale $ 47,218 $ 46,623 $ 595

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.

There were no residential mortgage loans held for sale that were 90 or more days past due or on nonaccrual status as of March 31, 2022 or December 31, 2021.

Credit risk participation agreements :

9 unchanged sentences

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

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 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.

7 unchanged sentences

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

The following is a reconciliation of activity for assets measured at fair value based on Significant Other Unobservable Inputs (Level 3):

Securities Mortgage Banking

(dollars in thousands) Available-for-Sale Derivatives Total

Beginning balance at January 1, 2022 $ 12,000 $ 636 $ 12,636

Realized gain (loss) included in earnings — ( 427 ) ( 427 )

Migrated to level 2 valuation — — —

Ending balance at September 30, 2021 $ 1,500 $ 1,565 $ 3,065

Beginning balance at January 1, 2021 $ — $ — $ —

Ending balance at September 30, 2021 $ — $ — $ —

Investment Mortgage Banking

(dollars in thousands) Securities Derivatives Total

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

Transferred from available-for-sale to held-to-maturity ( 12,000 ) — ( 12,000 )

Ending balance at March 31, 2022 $ — $ 209 $ 209

Securities Mortgage Banking

(dollars in thousands) Available-for-Sale Derivatives Total

Beginning balance at January 1, 2021 $ 1,500 $ 5,213 $ 6,713

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:

September 30, 2021

Realized loss included in earnings — ( 4,577 ) ( 4,577 )

Reclass Level 2 to Level 3 12,000 — 12,000

Principal redemption ( 1,500 ) — ( 1,500 )

Ending balance at December 31, 2021 $ 12,000 $ 636 $ 12,636

The investment securities available-for-sale 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 March 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2022

December 31, 2021

6 unchanged sentences

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.

At March 31, 2022, 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, i.e.

those that are collateral dependent, 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.

8 unchanged sentences

(dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value)

September 30, 2021

March 31, 2022

Collateral dependent loans

Commercial $ — $ — $ 7,755 $ 7,755

PPP loans — — 106 106

Income producing - commercial real estate — — 15,749 15,749

1 unchanged sentence

Real estate mortgage - residential — — 1,698 1,698

Construction - commercial and residential — — — —

Home equity — — 365 365

Other consumer — — — —

Other real estate owned — — 1,635 1,635

Total assets measured at fair value on a nonrecurring basis as of September 30, 2021 $ — $ — $ 37,040 $ 37,040

Significant Significant

Observable Unobservable

Quoted Prices Inputs Inputs Total

(dollars in thousands) (Level 1) (Level 2) (Level 3) (Fair Value)

Total assets measured at fair value on a nonrecurring basis as of March 31, 2022 $ — $ — $ 27,341 $ 27,341

December 31, 2021

Collateral dependent loans

Commercial $ — $ — $ 8,121 $ 8,121

PPP loans — — 1,365 1,365

Income producing - commercial real estate — — 17,415 17,415

13 unchanged sentences

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:

The estimated fair value of the Company's financial instruments at March 31, 2022 and December 31, 2021 are as follows:

Fair Value Measurements

1 unchanged sentence

(dollars in thousands) Value Fair Value

September 30, 2021

March 31, 2022

Cash and due from banks $ 12,140 $ 12,140 $ 12,140 $ — $ —

1 unchanged sentence

Interest bearing deposits with other banks $ 682,883 $ 682,883 $ — $ 682,883 $ —

Investment securities 1,786,659 1,786,659 — 1,785,159 1,500

Accrued interest receivable 40,028 40,028 — 40,028 —

Investment securities available-for-sale $ 1,775,633 $ 1,775,633 $ — $ 1,775,633 $ —

Investment securities held-to-maturity 1,153,399 1,144,505 $ — 1,132,421 12,084

Federal Reserve and Federal Home Loan Bank stock $ 29,026 $ 29,026 $ — $ 29,026 $ —

Loans held for sale $ 25,504 $ 25,504 $ — $ 25,504 $ —

8 unchanged sentences

Borrowings $ 219,701 $ 223,094 $ — $ 223,094 $ —

Interest rate swap derivatives — — — — —

Credit risk participation agreement $ 17 $ 17 $ — $ 17 $ —

5 unchanged sentences

Investment securities $ 2,623,408 $ 2,623,408 $ — $ 2,611,408 $ 12,000

Accrued interest receivable 40,104 40,104 — 40,104 —

Federal Reserve and Federal Home Loan Bank stock $ 34,153 $ 34,153 $ — $ 34,153 $ —

Loans held for sale $ 47,218 $ 47,218 $ — $ 47,218 $ —

Loans $ 7,065,598 $ 6,930,929 $ — $ — $ 6,930,929

Annuity investment 14,468 14,468 — 14,468 —

Mortgage banking derivative $ 636 $ 636 $ — $ — $ 636

5 unchanged sentences

Borrowings $ 369,670 $ 374,326 $ — $ 374,326 $ —

Interest rate swap derivatives 516 516 — 516 —

Credit risk participation agreements $ 47 $ 47 $ — $ 47 $ —

1 unchanged sentence

Note 11 - 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.

There have been no material changes in the status of the legal proceedings previously disclosed in Part II, Item 8, "Note 21 - Commitments and Contingent Liabilities" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021, 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.

1 unchanged sentence

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).

As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, on February 10, 2022, the United States District Court for the Southern District of New York (the "SDNY") approved the settlement agreement of a putative class action lawsuit filed against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer.

The settlement included a total payment by the Company of $ 7.5 million in exchange for the release of all of the defendants from all alleged claims in the class action suit, without any admission or concession of wrongdoing by the Company or the other defendants.

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.

5 unchanged sentences

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.

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 and those discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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.

Since the commencement of the above-described matters in 2018 through March 31, 2022, the Company's D&O Insurance carriers have advanced a number defense cost claims to the Company and its current and former directors and officers.

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.

Note 12 - Subsequent Events

The Company has evaluated subsequent events through the filing of this report and determined that there have not been any events that have occurred that would require adjustments to or disclosures in the Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements