INDEPENDENT BANK CORP 10-Q

Item 1. Financial Statements INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS (Unaudited—Dollars in thousands) September 30 2021 December 31 2020 Assets Cash and due from banks $ 138,148 $ 169,460 Interest-earning deposits with banks 1,869,683 1,127,176 Securities Trading 3,504 2,838 Equity 22,794 22,107 Available for sale (amortized cost $ 1,425,392 and $ 395,453 ) 1,427,210 412,860 Held to maturity (fair value $ 875,306 and $ 752,177 ) 865,249 724,512 Total securities 2,318,757 1,162,317 Loans held for sale (at fair value) 33,553 58,104 Loans Commercial and industrial 1,640,709 2,103,152 Commercial real estate 4,221,259 4,173,927 Commercial construction 515,415 553,929 Small business 184,138 175,023 Residential real estate 1,222,849 1,296,183 Home equity - first position 592,564 633,142 Home equity - subordinate positions 407,904 435,648 Other consumer 23,175 21,862 Total loans 8,808,013 9,392,866 Less: allowance for credit losses ( 92,246 ) ( 113,392 ) Net loans 8,715,767 9,279,474 Federal Home Loan Bank stock 8,666 10,250 Bank premises and equipment, net 123,528 116,393 Goodwill 506,206 506,206 Other intangible assets 19,055 23,107 Cash surrender value of life insurance policies 244,573 200,525 Other assets 555,375 551,289 Total assets $ 14,533,311 $ 13,204,301 Liabilities and Stockholders' Equity Deposits Noninterest-bearing demand deposits $ 4,590,492 $ 3,762,306 Savings and interest checking accounts 4,484,208 4,047,332 Money market 2,399,878 2,232,903 Time certificates of deposit of $ 100,000 and over 412,129 525,424 Other time certificates of deposits 373,433 425,205 Total deposits 12,260,140 10,993,170 Borrowings Federal Home Loan Bank borrowings 25,675 35,740 Long-term borrowings (less unamortized debt issuance costs of $ 0 and $ 40 ) 18,750 32,773 4 Table of Contents Junior subordinated debentures (less unamortized debt issuance costs of $ 35 and $ 37 ) 62,853 62,851 Subordinated debentures (less unamortized debt issuance costs of $ 233 and $ 304 ) 49,767 49,696 Total borrowings 157,045 181,060 Other liabilities 360,172 327,386 Total liabilities 12,777,357 11,501,616 Commitments and contingencies — — Stockholders' equity Preferred stock, $ 0.01 par value, authorized: 1,000,000 shares, outstanding: none — — Common stock, $ 0.01 par value, authorized: 75,000,000 shares, issued and outstanding: 33,043,812 shares at September 30, 2021 and 32,965,692 shares at December 31, 2020 (includes 135,485 and 135,205 shares of unvested participating restricted stock awards, respectively) 329 328 Value of shares held in rabbi trust at cost: 84,207 shares at September 30, 2021 and 84,126 shares at December 31, 2020 ( 3,157 ) ( 3,066 ) Deferred compensation and other retirement benefit obligations 3,157 3,066 Additional paid in capital 949,316 945,638 Retained earnings 787,742 716,024 Accumulated other comprehensive income, net of tax 18,567 40,695 Total stockholders’ equity 1,755,954 1,702,685 Total liabilities and stockholders' equity $ 14,533,311 $ 13,204,301 The accompanying condensed notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited—Dollars in thousands, except per share data) Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Interest income Interest and fees on loans $ 84,212 $ 90,112 $ 265,409 $ 280,768 Taxable interest and dividends on securities 7,792 7,218 21,603 23,006 Nontaxable interest and dividends on securities 4 9 14 27 Interest on loans held for sale 193 326 675 917 Interest on federal funds sold and short-term investments 815 254 1,654 546 Total interest and dividend income 93,016 97,919 289,355 305,264 Interest expense Interest on deposits 1,633 5,432 6,361 23,351 Interest on borrowings 1,292 1,604 3,965 5,628 Total interest expense 2,925 7,036 10,326 28,979 Net interest income 90,091 90,883 279,029 276,285 Provision for credit losses ( 10,000 ) 7,500 ( 17,500 ) 52,500 Net interest income after provision for credit losses 100,091 83,383 296,529 223,785 Noninterest income Deposit account fees 4,298 3,428 11,704 11,227 Interchange and ATM fees 3,441 3,044 9,229 13,154 Investment management 9,174 7,571 26,350 21,696 Mortgage banking income 2,825 7,704 11,270 13,570 Increase in cash surrender value of life insurance policies 1,596 1,314 4,508 3,902 Gain on life insurance benefits — — 258 692 Loan level derivative income 586 2,457 875 8,918 Unrealized gain on equity securities — 308 723 1,694 Other noninterest income 4,537 3,521 11,753 9,119 Total noninterest income 26,457 29,347 76,670 83,972 Noninterest expenses Salaries and employee benefits 42,235 38,409 124,759 113,027 Occupancy and equipment expenses 8,564 9,273 26,543 27,863 Data processing and facilities management 1,673 1,567 5,024 4,684 FDIC assessment 980 1,034 2,805 1,537 Advertising 884 1,215 2,949 3,107 Consulting expense 1,560 1,305 5,443 4,244 Amortization of intangible assets 1,310 1,449 4,037 4,704 Debit card expense 1,347 1,105 3,693 3,312 Loss on termination of derivatives — 684 — 684 Merger and acquisition expense 1,943 — 3,674 — Software maintenance 2,018 1,753 5,903 5,218 Other noninterest expenses 9,905 8,864 30,573 31,725 Total noninterest expenses 72,419 66,658 215,403 200,105 Income before income taxes 54,129 46,072 157,796 107,652 Provision for income taxes 14,122 11,199 38,506 21,126 Net income $ 40,007 $ 34,873 $ 119,290 $ 86,526 Basic earnings per share $ 1.21 $ 1.06 $ 3.61 $ 2.59 Diluted earnings per share $ 1.21 $ 1.06 $ 3.61 $ 2.59 Weighted average common shares (basic) 33,043,716 32,951,918 33,024,386 33,358,879 Common share equivalents 15,554 24,758 18,238 27,871 Weighted average common shares (diluted) 33,059,270 32,976,676 33,042,624 33,386,750 Cash dividends declared per common share $ 0.48 $ 0.46 $ 1.44 $ 1.38 The accompanying condensed notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited—Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Net income $ 40,007 $ 34,873 $ 119,290 $ 86,526 Other comprehensive income (loss), net of tax Net change in fair value of securities available for sale ( 7,897 ) ( 709 ) ( 11,878 ) 10,333 Net change in fair value of cash flow hedges ( 3,383 ) ( 2,729 ) ( 11,559 ) 20,452 Net change in other comprehensive income for defined benefit postretirement plans 280 225 1,309 ( 322 ) Total other comprehensive income (loss) ( 11,000 ) ( 3,213 ) ( 22,128 ) 30,463 Total comprehensive income $ 29,007 $ 31,660 $ 97,162 $ 116,989 The accompanying condensed notes are an integral part of these unaudited consolidated financial statements. 7 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Three Months Ended September 30, 2021 and 2020 (Unaudited—Dollars in thousands, except per share data) Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation Obligation Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income Total Balance June 30, 2021 33,037,859 $ 329 $ ( 3,116 ) $ 3,116 $ 948,130 $ 763,596 $ 29,567 $ 1,741,622 Net income — — — — — 40,007 — 40,007 Other comprehensive loss — — — — — — ( 11,000 ) ( 11,000 ) Common dividend declared ($ 0.48 per share) — — — — — ( 15,861 ) — ( 15,861 ) Stock based compensation — — — — 707 — — 707 Restricted stock awards issued, net of awards surrendered ( 763 ) — — — ( 3 ) — — ( 3 ) Shares issued under direct stock purchase plan 6,716 — — — 482 — — 482 Deferred compensation and other retirement benefit obligations — — ( 41 ) 41 — — — — Balance September 30, 2021 33,043,812 $ 329 $ ( 3,157 ) $ 3,157 $ 949,316 $ 787,742 $ 18,567 $ 1,755,954 Balance June 30, 2020 32,942,110 $ 328 $ ( 4,649 ) $ 4,649 $ 942,685 $ 676,834 $ 51,845 $ 1,671,692 Net income — — — — — 34,873 — 34,873 Other comprehensive income — — — — — — ( 3,213 ) ( 3,213 ) Common dividend declared ($ 0.46 per share) — — — — — ( 15,161 ) — ( 15,161 ) Proceeds from exercise of stock options, net of cash paid 5,000 — — — 140 — — 140 Stock based compensation — — — — 868 — — 868 Restricted stock awards issued, net of awards surrendered ( 43 ) — — — ( 3 ) — — ( 3 ) Shares issued under direct stock purchase plan 8,480 — — — 528 — — 528 Deferred compensation and other retirement benefit obligations — — ( 63 ) 63 — — — — Balance September 30, 2020 32,955,547 $ 328 $ ( 4,712 ) $ 4,712 $ 944,218 $ 696,546 $ 48,632 $ 1,689,724 8 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Nine Months Ended September 30, 2021 and 2020 (Unaudited—Dollars in thousands, except per share data) Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation Obligation Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance December 31, 2020 32,965,692 $ 328 $ ( 3,066 ) $ 3,066 $ 945,638 $ 716,024 $ 40,695 $ 1,702,685 Net income — — — — — 119,290 — 119,290 Other comprehensive loss — — — — — — ( 22,128 ) ( 22,128 ) Common dividend declared ($ 1.44 per share) — — — — — ( 47,572 ) — ( 47,572 ) Proceeds from exercise of stock options, net of cash paid 4,744 — — — ( 57 ) — — ( 57 ) Stock based compensation — — — — 3,467 — — 3,467 Restricted stock awards issued, net of awards surrendered 53,795 1 — — ( 1,247 ) — — ( 1,246 ) Shares issued under direct stock purchase plan 19,581 — — — 1,515 — — 1,515 Deferred compensation and other retirement benefit obligations — — ( 91 ) 91 — — — — Balance September 30, 2021 33,043,812 $ 329 $ ( 3,157 ) $ 3,157 $ 949,316 $ 787,742 $ 18,567 $ 1,755,954 Balance December 31, 2019 34,377,388 $ 342 $ ( 4,735 ) $ 4,735 $ 1,035,450 $ 654,182 $ 18,169 $ 1,708,143 Cumulative effect accounting adjustment (1) — — — — — 1,553 — 1,553 Net income — — — — — 86,526 — 86,526 Other comprehensive income — — — — — — 30,463 30,463 Common dividend declared ($ 1.38 per share) — — — — — ( 45,715 ) — ( 45,715 ) Proceeds from exercise of stock options, net of cash paid 5,873 — — — 114 — — 114 Stock based compensation — — — — 3,297 — — 3,297 Restricted stock awards issued, net of awards surrendered 49,249 1 — — ( 1,187 ) — — ( 1,186 ) Shares issued under direct stock purchase plan 23,037 — — — 1,620 — — 1,620 Shares repurchased under share repurchase program ( 1,500,000 ) ( 15 ) — — ( 95,076 ) — — ( 95,091 ) Deferred compensation and other retirement benefit obligations — — 23 ( 23 ) — — — — Balance September 30, 2020 32,955,547 $ 328 $ ( 4,712 ) $ 4,712 $ 944,218 $ 696,546 $ 48,632 $ 1,689,724 (1) Represents adjustment needed to reflect the cumulative impact on retained earnings pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment presented includes $ 1.1 million ($ 817,000 , net of tax) attributable to the change in accounting methodology for estimating the allowance for credit losses and $ 1.0 million ($ 736,000 , net of tax) related to the reserve for unfunded commitments resulting from the Company's adoption of the standard. Amount shown in the table above is presented net of tax. The accompanying condensed notes are an integral part of these unaudited consolidated financial statements. 9 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited—Dollars in thousands) Nine Months Ended September 30 2021 2020 Cash flow from operating activities Net income $ 119,290 $ 86,526 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 24,586 21,071 Change in unamortized net loan costs and premiums ( 22,566 ) ( 9,406 ) Provision for credit losses ( 17,500 ) 52,500 Deferred income tax expense 271 2,802 Net (gain) loss on equity securities ( 695 ) 107 Net loss on bank premises and equipment 32 363 Loss on termination of derivatives — 684 Realized gain on sale leaseback transaction ( 433 ) ( 433 ) Stock based compensation 3,467 3,297 Increase in cash surrender value of life insurance policies ( 4,508 ) ( 3,902 ) Gain on life insurance benefits ( 258 ) ( 692 ) Operating lease payments ( 8,993 ) ( 8,899 ) Operating lease termination payments ( 4,750 ) — Change in fair value on loans held for sale 1,534 ( 1,252 ) Net change in: Trading assets ( 666 ) ( 433 ) Loans held for sale 23,017 ( 20,154 ) Other assets 16,700 ( 200,520 ) Other liabilities 28,267 89,164 Total adjustments 37,505 ( 75,703 ) Net cash provided by operating activities 156,795 10,823 Cash flows used in investing activities Proceeds from sales of equity securities 1,164 — Purchases of equity securities ( 1,522 ) ( 331 ) Proceeds from maturities and principal repayments of securities available for sale 75,442 74,898 Purchases of securities available for sale ( 1,106,079 ) ( 58,704 ) Proceeds from maturities and principal repayments of securities held to maturity 199,304 176,841 Purchases of securities held to maturity ( 340,713 ) ( 95,017 ) Net redemption (purchases) of Federal Home Loan Bank stock 1,584 ( 666 ) Investments in low income housing projects ( 19,236 ) ( 15,586 ) Purchases of life insurance policies ( 40,116 ) ( 116 ) Proceeds from life insurance policies 576 2,629 Net decrease (increase) in loans 603,773 ( 525,626 ) Purchases of bank premises and equipment ( 16,114 ) ( 8,283 ) Proceeds from the sale of bank premises and equipment 78 283 Payments on early termination of hedging relationship — ( 684 ) Net cash used in investing activities ( 641,859 ) ( 450,362 ) Cash flows provided by financing activities 10 Table of Contents Net decrease in time deposits ( 165,052 ) ( 336,289 ) Net increase in other deposits 1,432,037 2,040,615 Net advances of short-term Federal Home Loan Bank borrowings — 55,000 Repayments of long-term Federal Home Loan Bank borrowings ( 10,000 ) ( 25,000 ) Repayments of long-term debt, net of issuance costs ( 14,063 ) ( 37,500 ) Net payments for exercise of stock options ( 57 ) 114 Restricted stock awards issued, net of awards surrendered ( 1,246 ) ( 1,186 ) Proceeds from shares issued under direct stock purchase plan 1,515 1,620 Payments for shares repurchased under share repurchase program — ( 95,091 ) Common dividends paid ( 46,875 ) ( 45,681 ) Net cash provided by financing activities 1,196,259 1,556,602 Net increase in cash and cash equivalents 711,195 1,117,063 Cash and cash equivalents at beginning of year 1,296,636 150,974 Cash and cash equivalents at end of period $ 2,007,831 $ 1,268,037 Supplemental schedule of noncash activities Net increase in capital commitments relating to low income housing project investments $ 34,127 $ 28,027 Right-of-use assets obtained in exchange for new lease obligations $ 5,888 $ 7,693 The accompanying condensed notes are an integral part of these unaudited consolidated financial statements. 11 Table of Contents CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907. As announced on April 22, 2021, the Company has signed a definitive merger agreement under which the Company will acquire Meridian Bancorp, Inc. (“Meridian”), with the Company as the surviving entity, and East Boston Savings Bank will merge with and into Rockland trust. The Company anticipates the merger to close during the fourth quarter of 2021. All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current year’s presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other interim period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the "2020 Form 10-K"). NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 848 "Reference Rate Reform" Update No. 2020-04. Update No. 2020-04 was issued in March 2020 to provide optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022. FASB ASC Topic 848 "Reference Rate Reform" Update No. 2021-01 was subsequently issued in January 2021 and expanded application of the optional expedients to derivative transactions affected by the discounting transition. The Company has not yet adopted the amendments in these updates, but has established a working group to guide the Company’s transition from LIBOR and has begun efforts to transition off the LIBOR index consistent with industry timelines. The working group has identified its products that utilize LIBOR and has implemented fallback language to facilitate the transition to alternative rates. The Company is also evaluating existing platforms and systems as well as alternative indices in its preparation to offer new products tied to the alternative indices. 12 Table of Contents NOTE 3 - SECURITIES Trading Securities The Company had trading securities of $ 3.5 million and $ 2.8 million as of September 30, 2021 and December 31, 2020, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualified 401(k) Restoration Plan and Non-qualified Deferred Compensation Plan. Equity Securities The Company had equity securities of $ 22.8 million and $ 22.1 million as of September 30, 2021 and December 31, 2020, respectively. These securities consist primarily of mutual funds held in a rabbi trust and will be used for future payments associated with the Company’s supplemental executive retirement plans. The following table represents a summary of the gains and losses recognized within non-interest income and non-interest expense within the consolidated statements of income that relate to equity securities for the periods indicated: Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Dollars in thousands Net gains (losses) recognized during the period on equity securities $ ( 169 ) $ 308 695 ( 107 ) Less: net gains recognized during the period on equity securities sold during the period 50 — 191 6 Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date $ ( 219 ) $ 308 $ 504 $ ( 113 ) Available for Sale Securities The following table summarizes the amortized cost, allowance for credit losses, and fair value of available for sale securities and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: September 30, 2021 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value (Dollars in thousands) Available for sale securities U.S. government agency securities $ 217,613 $ 1,511 $ ( 1,779 ) $ — $ 217,345 $ 22,476 $ 1,640 $ — $ — $ 24,116 U.S. treasury securities 774,492 — ( 4,490 ) — 770,002 — — — — — Agency mortgage-backed securities 294,387 6,120 ( 3,288 ) — 297,219 224,293 9,337 ( 1 ) — 233,629 Agency collateralized mortgage obligations 85,076 1,933 ( 522 ) — 86,487 88,687 3,083 ( 87 ) — 91,683 State, county, and municipal securities 276 12 — — 288 790 17 — — 807 Single issuer trust preferred securities issued by banks 489 2 — — 491 489 — ( 1 ) — 488 Pooled trust preferred securities issued by banks and insurers 1,341 — ( 331 ) — 1,010 1,429 — ( 373 ) — 1,056 Small business administration pooled securities 51,718 2,650 — — 54,368 57,289 3,792 — — 61,081 Total available for sale securities $ 1,425,392 $ 12,228 $ ( 10,410 ) $ — $ 1,427,210 $ 395,453 $ 17,869 $ ( 462 ) $ — $ 412,860 The Company did not record a provision for estimated credit losses on any available for sale securities during the three and nine months ended September 30, 2021 and 2020. Excluded from the table above is accrued interest on available for sale securities of $ 3.3 million and $ 1.2 million as of September 30, 2021 and December 31, 2020, respectively, which is included within other assets on the consolidated balance sheets. Additionally, the Company did not record any write-offs of accrued interest income on available for sale securities during the three and nine months ended September 30, 2021 and 2020. 13 Table of Contents Furthermore, no securities held by the Company were delinquent on contractual payments nor were any securities placed on non-accrual status as of September 30, 2021 and December 31, 2020. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of securities available for sale during the three or nine months ended September 30, 2021 and 2020, and therefore no gains or losses were realized during the periods presented. The following tables show the gross unrealized losses and fair value of the Company’s available for sale securities in an unrealized loss position, and for which the Company has not recorded a provision for credit losses, as of the dated indicated. These available for sale securities are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position: September 30, 2021 Less than 12 months 12 months or longer Total # of holdings Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousands) U.S. government agency securities 5 $ 138,262 $ ( 1,779 ) $ — $ — $ 138,262 $ ( 1,779 ) U.S. treasury securities 16 770,002 ( 4,490 ) — — 770,002 ( 4,490 ) Agency mortgage-backed securities 9 131,548 ( 3,287 ) 304 ( 1 ) 131,852 ( 3,288 ) Agency collateralized mortgage obligations 1 22,994 ( 522 ) — — 22,994 ( 522 ) Pooled trust preferred securities issued by banks and insurers 1 — — 1,010 ( 331 ) 1,010 ( 331 ) Total impaired available for sale securities 32 $ 1,062,806 $ ( 10,078 ) $ 1,314 $ ( 332 ) $ 1,064,120 $ ( 10,410 ) December 31, 2020 Less than 12 months 12 months or longer Total # of holdings Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousands) Agency mortgage-backed securities 3 $ 437 $ ( 1 ) $ — $ — $ 437 $ ( 1 ) Agency collateralized mortgage obligations 2 23,323 ( 87 ) — — 23,323 ( 87 ) Single issuer trust preferred securities issued by banks and insurers 1 488 ( 1 ) — — 488 ( 1 ) Pooled trust preferred securities issued by banks and insurers 1 — — 1,056 ( 373 ) 1,056 ( 373 ) Total impaired available for sale securities 7 $ 24,248 $ ( 89 ) $ 1,056 $ ( 373 ) $ 25,304 $ ( 462 ) The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell each security before the recovery of its amortized cost basis. In addition, management does not believe that any of the securities are impaired due to reasons of credit quality. As a result, the Company did not recognize a provision for credit losses on these investments during the three and nine months ended September 30, 2021 and 2020. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations. As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category were as follows at September 30, 2021: • U.S. Government Agency Securities, U.S. Treasury Securities, Agency Mortgage-Backed Securities and Agency Collateralized Mortgage Obligations: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies. 14 Table of Contents • Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments. Held to Maturity Securities The following table summarizes the amortized cost, fair value and allowance for credit losses of held to maturity securities and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: September 30, 2021 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value (Dollars in thousands) U.S. government agency securities $ 33,422 $ — $ ( 127 ) $ — $ 33,295 $ — $ — $ — $ — $ — U.S. treasury securities 3,007 17 — — 3,024 4,017 60 — — 4,077 Agency mortgage-backed securities 352,483 10,911 ( 2,781 ) — 360,613 356,085 18,036 — — 374,121 Agency collateralized mortgage obligations 451,151 5,089 ( 4,202 ) — 452,038 335,993 8,466 ( 340 ) — 344,119 Single issuer trust preferred securities issued by banks 1,500 8 — — 1,508 1,500 — ( 2 ) — 1,498 Small business administration pooled securities 23,686 1,142 — — 24,828 26,917 1,445 — — 28,362 Total held to maturity securities $ 865,249 $ 17,167 $ ( 7,110 ) $ — $ 875,306 $ 724,512 $ 28,007 $ ( 342 ) $ — $ 752,177 The Company did not record a provision for estimated credit losses on any held to maturity securities during the three and nine months ended September 30, 2021 and 2020. Excluded from the table above is accrued interest on held to maturity securities of $ 2.2 million and $ 1.5 million as of September 30, 2021 and December 31, 2020, respectively, which is included within other assets on the consolidated balance sheets. Additionally, the Company did not record any write-offs of accrued interest income on held to maturity securities during the three and nine months ended September 30, 2021 and 2020. Furthermore, no securities held by the Company were delinquent on contractual payments nor were any securities placed on non-accrual status as of September 30, 2021 and December 31, 2020. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of held to maturity securities during the three and nine months ended September 30, 2021 and 2020, and therefore no gains or losses were realized during the periods presented. The Company monitors the credit quality of held to maturity securities through the use of credit ratings. Credit ratings are monitored by the Company on at least a quarterly basis. As of September 30, 2021, all held to maturity securities held by the Company were rated investment grade or higher. 15 Table of Contents The actual maturities of certain available for sale or held to maturity securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of available for sale and held to maturity securities as of September 30, 2021 is presented below: Due in one year or less Due after one year to five years Due after five to ten years Due after ten years Total Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value (Dollars in thousands) Available for sale securities U.S. government agency securities $ 10,000 $ 10,066 $ 31,422 $ 31,275 $ 176,191 $ 176,004 $ — $ — $ 217,613 $ 217,345 U.S. treasury securities — — 541,282 538,755 233,210 231,247 — — 774,492 770,002 Agency mortgage-backed securities 2,273 2,292 81,194 83,434 88,655 87,152 122,265 124,341 294,387 297,219 Agency collateralized mortgage obligations — — — — — — 85,076 86,487 85,076 86,487 State, county, and municipal securities 85 85 — — 191 203 — — 276 288 Single issuer trust preferred securities issued by banks — — — — — — 489 491 489 491 Pooled trust preferred securities issued by banks and insurers — — — — — — 1,341 1,010 1,341 1,010 Small business administration pooled securities — — — — — — 51,718 54,368 51,718 54,368 Total available for sale securities $ 12,358 $ 12,443 $ 653,898 $ 653,464 $ 498,247 $ 494,606 $ 260,889 $ 266,697 $ 1,425,392 $ 1,427,210 Held to maturity securities U.S. government agency securities $ — $ — $ 33,422 $ 33,295 $ — $ — $ — $ — $ 33,422 $ 33,295 U.S. treasury securities 3,007 3,024 — — — — — — 3,007 3,024 Agency mortgage-backed securities — — 3,482 3,677 125,204 125,407 223,797 231,529 352,483 360,613 Agency collateralized mortgage obligations — — — — — — 451,151 452,038 451,151 452,038 Single issuer trust preferred securities issued by banks — — — — 1,500 1,508 — — 1,500 1,508 Small business administration pooled securities — — — — — — 23,686 24,828 23,686 24,828 Total held to maturity securities $ 3,007 $ 3,024 $ 36,904 $ 36,972 $ 126,704 $ 126,915 $ 698,634 $ 708,395 $ 865,249 $ 875,306 Total $ 15,365 $ 15,467 $ 690,802 $ 690,436 $ 624,951 $ 621,521 $ 959,523 $ 975,092 $ 2,290,641 $ 2,302,516 Included in the table above are $ 3.2 million of callable securities at September 30, 2021. The carrying value of securities pledged to secure public funds, trust deposits, and for other purposes, as required or permitted by law, was $ 678.4 million and $ 419.6 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated stockholders’ equity. 16 Table of Contents NOTE 4 - LOANS, ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY Loans Held for Investment and Allowance for Credit Losses The following table summarizes the change in allowance for credit losses by loan category, and bifurcates the amount of loans allocated to each loan category for the period indicated: 17 Table of Contents Three Months Ended September 30, 2021 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 17,032 $ 44,325 $ 4,865 $ 3,612 $ 12,014 $ 20,087 $ 422 $ 102,357 Charge-offs ( 1 ) — — ( 83 ) — — ( 248 ) ( 332 ) Recoveries 1 — — 50 — 49 121 221 Provision for credit loss expense ( 1,018 ) ( 6,527 ) ( 397 ) 88 ( 967 ) ( 1,268 ) 89 ( 10,000 ) Ending balance (1) $ 16,014 $ 37,798 $ 4,468 $ 3,667 $ 11,047 $ 18,868 $ 384 $ 92,246 Three Months Ended September 30, 2020 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 25,662 $ 36,956 $ 4,501 $ 4,561 $ 15,046 $ 24,860 $ 590 $ 112,176 Charge-offs ( 185 ) ( 3,885 ) — ( 49 ) — — ( 185 ) ( 4,304 ) Recoveries 1 9 — 2 1 21 219 253 Provision for credit loss expense 2,741 6,306 709 79 ( 884 ) ( 1,309 ) ( 142 ) 7,500 Ending balance (1) $ 28,219 $ 39,386 $ 5,210 $ 4,593 $ 14,163 $ 23,572 $ 482 $ 115,625 Nine Months Ended September 30, 2021 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 21,086 $ 45,009 $ 5,397 $ 5,095 $ 14,275 $ 22,060 $ 470 $ 113,392 Charge-offs ( 3,474 ) — — ( 184 ) — ( 69 ) ( 772 ) ( 4,499 ) Recoveries 100 57 — 65 1 107 523 853 Provision for credit loss expense ( 1,698 ) ( 7,268 ) ( 929 ) ( 1,309 ) ( 3,229 ) ( 3,230 ) 163 ( 17,500 ) Ending balance (1) $ 16,014 $ 37,798 $ 4,468 $ 3,667 $ 11,047 $ 18,868 $ 384 $ 92,246 Nine Months Ended September 30, 2020 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance, pre adoption of ASU 2016-13 $ 17,594 $ 32,935 $ 6,053 $ 1,746 $ 3,440 $ 5,576 $ 396 $ 67,740 Cumulative effect accounting adjustment (2) ( 1,984 ) ( 13,048 ) ( 3,652 ) 495 9,828 7,012 212 ( 1,137 ) Cumulative effect accounting adjustment (3) 49 337 — — 423 319 29 1,157 Charge-offs ( 185 ) ( 3,885 ) — ( 194 ) — ( 142 ) ( 1,342 ) ( 5,748 ) Recoveries 47 9 — 8 2 174 873 1,113 Provision for credit loss expense 12,698 23,038 2,809 2,538 470 10,633 314 52,500 Ending balance (1) $ 28,219 $ 39,386 $ 5,210 $ 4,593 $ 14,163 $ 23,572 $ 482 $ 115,625 18 Table of Contents (1) Balances of accrued interest receivable excluded from amortized cost and the calculation of allowance for credit losses amounted to $ 29.1 million and $ 36.7 million as of September 30, 2021 and September 30, 2020, respectively. (2) Represents adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $ 1.1 million decrease to the allowance attributable to the change in accounting methodology for estimating the allowance for credit losses resulting from the Company's adoption of the standard. (3) Represents adjustment needed to reflect the day one reclassification of the Company's PCI loan balances to PCD and the associated gross-up, pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $ 1.2 million increase to the allowance resulting from the day one reclassification. The balance of allowance for credit losses of $ 92.2 million as of September 30, 2021 represents a decrease of $ 10.1 million, or 9.9 %, compared to June 30, 2021. The decrease in the allowance was primarily driven by a release of the provision for credit losses of $ 10.0 million recorded during the quarter, reflecting improvements in expected overall macro-economic forecast assumptions and continued strong asset quality metrics, along with lower loan levels. While management is unable to know with certainty the direct, indirect, and future impacts of the COVID-19 pandemic, it is expected that the pandemic could have a significant adverse impact on future losses across a broad range of loan segments. As such, the allowance for credit losses at September 30, 2021 continues to reflect increased reserve allocations to loan segments that are considered to have elevated loss exposure associated with the COVID-19 pandemic, in addition to other economic uncertainties, including labor and supply shortages, as well as inflationary factors. These loan segments primarily include commercial relationships within industries that have been subject to mandated closures and capacity limits that have impeded and could potentially impede the borrowers’ ability to make loan payments, including loans in the following industry sections: Accommodations, Food Services, Retail Trade, Other Services (excluding Public Administration), and Arts, Entertainment and Recreation. In addition to these industry exposures, additional risk of loss was attributable to non-owner occupied real estate borrowers with significant retail tenant exposure, as well as home equity loans within a junior lien position. Leveraging actual historical loss given default (LGD) rates combined with stressing of assumptions over probability of default rates over these higher risk segments, qualitative adjustments were made to the initially model-driven calculated loss reserves. For the purpose of estimating the allowance for credit losses, management segregated the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the characteristics unique to each loan category include: Commercial Portfolio • Commercial and Industrial : Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant and equipment, or real estate, if applicable. Repayment sources consist of primarily, operating cash flow, and secondarily, liquidation of assets. • Commercial Real Estate : Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of, primarily, cash flow from operating leases and rents and, secondarily, liquidation of assets. • Commercial Construction : Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include residential land development, 1-4 family, condominium, and multi-family home construction, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of sale or lease of units, operating cash flows or liquidation of other assets. • Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable. Repayment sources consist primarily of operating cash flows and, secondarily, liquidation of assets. For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests in the borrowing entities. 19 Table of Contents Consumer Portfolio • Residential Real Estate : Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. Residential mortgage loans also include loans to construct owner-occupied 1-4 family residential properties. • Home Equity : Home equity loans and credit lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes. Each home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The majority of home equity lines of credit have a variable rate and are billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the then outstanding principal balance plus all accrued interest over a predetermined repayment period, as set forth in the note. Additionally, the Company has the option of renewing each line of credit for additional draw periods. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines. • Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. These loans may be secured or unsecured. Credit Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as adversely risk-rated, delinquent, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point credit risk-rating system, which assigns a risk-grade to each loan obligation based on a number of quantitative and qualitative factors associated with a commercial or small business loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-rating categories for the commercial portfolio are defined as follows: • Pass: Risk-rating “1” through “6” comprises of loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective. • Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned. • Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loans may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation. • Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. 20 Table of Contents • Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted. The Company utilizes a comprehensive, continuous strategy for evaluating and monitoring commercial credit quality. Initially, credit quality is determined at loan origination and is re-evaluated when subsequent actions, such as renewals, modifications or reviews, occur. Actively managed commercial borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by experienced credit professionals, while continuous portfolio monitoring techniques are employed to evaluate changes in credit quality for smaller loan relationships. Any changes in credit quality are reflected in risk-rating changes. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis. Commercial loan modifications granted by the Company allowing payment deferrals for qualifying borrowers in accordance with the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") were assessed for potential downgrades of risk ratings. For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. As a result, for this portfolio the Company utilizes a pass/default risk-rating system, based on an age analysis (i.e., days past due) associated with each consumer loan. Under this structure, consumer loans less than 90 days past due are assigned a "pass" rating, while any consumer loans 90 days or more past due are assigned a "default" rating. Consumer loan modifications granted by the Company allowing payment deferrals for qualifying borrowers in accordance with the CARES Act were not categorized as delinquent loans. The following table details the amortized cost balances of the Company's loan portfolios, presented by credit quality indicator and origination year as of the dates indicated below: 21 Table of Contents September 30, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Revolving converted to Term Total (1) (Dollars in thousands) Commercial and industrial Pass (2) $ 590,532 $ 185,706 $ 97,095 $ 74,381 $ 15,175 $ 16,731 $ 605,718 $ 66 $ 1,585,404 Potential weakness 1,338 9,035 3,286 1,672 980 1,632 10,262 — 28,205 Definite weakness - loss unlikely 16,597 332 793 1,034 2,678 214 5,452 — 27,100 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial and industrial $ 608,467 $ 195,073 $ 101,174 $ 77,087 $ 18,833 $ 18,577 $ 621,432 $ 66 $ 1,640,709 Commercial real estate Pass $ 699,565 $ 1,019,453 $ 606,645 $ 347,874 $ 442,306 $ 794,263 $ 17,068 $ — $ 3,927,174 Potential weakness 22,106 29,091 51,976 14,628 21,350 82,655 13,615 — 235,421 Definite weakness - loss unlikely 9,331 16,336 3,399 13,657 9,762 6,179 — — 58,664 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial real estate $ 731,002 $ 1,064,880 $ 662,020 $ 376,159 $ 473,418 $ 883,097 $ 30,683 $ — $ 4,221,259 Commercial construction Pass $ 127,945 $ 216,573 $ 82,559 $ 22,851 $ 22,873 $ 6,505 $ 16,424 $ 2,134 $ 497,864 Potential weakness — 12,991 — — — — — — 12,991 Definite weakness - loss unlikely — 4,560 — — — — — — 4,560 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial construction $ 127,945 $ 234,124 $ 82,559 $ 22,851 $ 22,873 $ 6,505 $ 16,424 $ 2,134 $ 515,415 Small business Pass $ 40,736 $ 38,804 $ 22,075 $ 14,241 $ 10,675 $ 21,809 $ 32,679 $ — $ 181,019 Potential weakness 14 — 383 200 5 174 627 — 1,403 Definite weakness - loss unlikely 138 637 41 26 10 284 580 — 1,716 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total small business $ 40,888 $ 39,441 $ 22,499 $ 14,467 $ 10,690 $ 22,267 $ 33,886 $ — $ 184,138 Residential real estate Pass $ 277,949 $ 184,974 $ 92,723 $ 97,915 $ 102,581 $ 463,397 $ — $ — $ 1,219,539 Default — 123 — 1,024 — 2,163 — — 3,310 Total residential real estate $ 277,949 $ 185,097 $ 92,723 $ 98,939 $ 102,581 $ 465,560 $ — $ — $ 1,222,849 Home equity Pass $ 58,897 $ 68,629 $ 42,083 $ 37,644 $ 41,792 $ 117,488 $ 628,575 $ 3,575 $ 998,683 Default — — — — — 33 1,717 35 1,785 Total home equity $ 58,897 $ 68,629 $ 42,083 $ 37,644 $ 41,792 $ 117,521 $ 630,292 $ 3,610 $ 1,000,468 Other consumer Pass $ 307 $ 347 $ 244 $ 78 $ 500 $ 5,338 $ 16,359 $ — $ 23,173 Default — — — — — — 2 — 2 Total other consumer $ 307 $ 347 $ 244 $ 78 $ 500 $ 5,338 $ 16,361 $ — $ 23,175 Total $ 1,845,455 $ 1,787,591 $ 1,003,302 $ 627,225 $ 670,687 $ 1,518,865 $ 1,349,078 $ 5,810 $ 8,808,013 22 Table of Contents September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Revolving converted to Term Total (1) (Dollars in thousands) Commercial and industrial Pass (2) $ 1,012,974 $ 153,137 $ 107,318 $ 34,826 $ 23,065 $ 22,334 $ 601,937 $ 2,577 $ 1,958,168 Potential weakness 2,560 2,302 7,833 4,573 1,219 318 15,248 50 34,103 Definite weakness - loss unlikely 2,732 1,553 22,748 5,500 2,483 1,419 33,496 — 69,931 Partial loss probable — — — — — 143 — — 143 Definite loss — — — — — — — — — Total commercial and industrial $ 1,018,266 $ 156,992 $ 137,899 $ 44,899 $ 26,767 $ 24,214 $ 650,681 $ 2,627 $ 2,062,345 Commercial real estate Pass $ 753,415 $ 859,548 $ 512,371 $ 587,345 $ 399,442 $ 751,629 $ 39,998 $ 16,341 $ 3,920,089 Potential weakness 20,639 15,957 20,313 7,941 27,253 47,875 — — 139,978 Definite weakness - loss unlikely 4,261 2,265 10,092 21,081 2,170 6,605 — — 46,474 Partial loss probable — — 18,923 — — — — — 18,923 Definite loss — — — — — — — — — Total commercial real estate $ 778,315 $ 877,770 $ 561,699 $ 616,367 $ 428,865 $ 806,109 $ 39,998 $ 16,341 $ 4,125,464 Commercial construction Pass $ 182,291 $ 196,420 $ 73,298 $ 66,406 $ — $ 6,750 $ 31,372 $ 1,077 $ 557,614 Potential weakness — 9,352 5,037 — — — 328 — 14,717 Definite weakness - loss unlikely — — 1,003 — — — — — 1,003 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial construction $ 182,291 $ 205,772 $ 79,338 $ 66,406 $ — $ 6,750 $ 31,700 $ 1,077 $ 573,334 Small business Pass $ 27,457 $ 28,766 $ 20,806 $ 14,627 $ 14,528 $ 22,644 $ 34,569 $ — $ 163,397 Potential weakness — 10 16 10 755 232 736 — 1,759 Definite weakness - loss unlikely 184 408 78 170 98 723 786 — 2,447 Partial loss probable — — — — — — 29 — 29 Definite loss — — — — — — — — — Total small business $ 27,641 $ 29,184 $ 20,900 $ 14,807 $ 15,381 $ 23,599 $ 36,120 $ — $ 167,632 Residential real estate Pass $ 131,691 $ 167,901 $ 187,194 $ 168,048 $ 241,638 $ 449,219 $ — $ — $ 1,345,691 Default 728 — 760 235 167 4,724 — — 6,614 Total residential real estate $ 132,419 $ 167,901 $ 187,954 $ 168,283 $ 241,805 $ 453,943 $ — $ — $ 1,352,305 Home equity Pass $ 60,274 $ 66,238 $ 59,534 $ 59,387 $ 44,817 $ 122,397 $ 681,784 $ 4,057 $ 1,098,488 Default — — — — — 455 2,044 67 2,566 Total home equity $ 60,274 $ 66,238 $ 59,534 $ 59,387 $ 44,817 $ 122,852 $ 683,828 $ 4,124 $ 1,101,054 Other consumer Pass $ 679 $ 450 $ 209 $ 739 $ 696 $ 7,737 $ 12,493 $ — $ 23,003 Default — — — 20 — 34 2 — 56 Total other consumer $ 679 $ 450 $ 209 $ 759 $ 696 $ 7,771 $ 12,495 $ — $ 23,059 23 Table of Contents Total $ 2,199,885 $ 1,504,307 $ 1,047,533 $ 970,908 $ 758,331 $ 1,445,238 $ 1,454,822 $ 24,169 $ 9,405,193 (1) Loan origination dates in the tables above reflect the original origination date, or the date of a material modification of a previously originated loan. (2) Loans originated as part of the Paycheck Protection Program ("PPP") established by the CARES Act are included within commercial and industrial under the 2021 and 2020 vintage year and "pass" category as these loans are 100% guaranteed by the U.S. Government. Outstanding PPP loans totaled $ 383.6 million as of September 30, 2021, including $ 16.3 million and $ 367.3 million originated in 2020 and 2021, respectively, while outstanding PPP loans as of September 30, 2020 totaled $ 811.7 million . For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) scores and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a regular basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential real estate and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios at the dates indicated below: September 30 2021 December 31 2020 Residential real estate portfolio FICO score (re-scored)(1) 750 749 LTV (re-valued)(2) 55.4 % 57.4 % Home equity portfolio FICO score (re-scored)(1) 773 771 LTV (re-valued)(2)(3) 43.3 % 46.0 % (1) The average FICO scores at September 30, 2021 are based upon rescores from September 2021, as available for previously originated loans, or origination score data for loans booked in September 2021. The average FICO scores at December 31, 2020 were based upon rescores available from December 2020, as available for previously originated loans, or origination score data for loans booked in December 2020. (2) The combined LTV ratios for September 30, 2021 are based upon updated automated valuations as of August 2021, when available, and/or the most current valuation data available. The combined LTV ratios for December 31, 2020 were based upon updated automated valuations as of November 2020, when available, and/or the most current valuation data available as of such date. The updated automated valuations provide new information on loans that may be available since the previous valuation was obtained. If no new information is available, the valuation will default to the previously obtained data or most recent appraisal. (3) For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines. Unfunded Commitments Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. At September 30, 2021 and December 31, 2020, the Company's estimated reserve for unfunded commitments amounted to $ 1.3 million and $ 1.2 million, respectively. Asset Quality The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of collection specialists and the Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. The Company also may use discretion regarding other loans 90 days or more delinquent if the loan is well secured and/or in process of collection. In response to the COVID-19 pandemic, the Company has granted loan modifications to allow deferral of payments for borrowers negatively impacted by the pandemic. The balance of loans with active deferrals as of September 30, 2021 and December 31, 2020 was $ 222.9 million and $ 173.6 million, respectively. The majority of these loans with active deferrals as of September 30, 2021 continue to be characterized as current loans. In accordance with regulatory guidance, these modifications are not considered to be troubled debt restructures ("TDRs") if they were performing as of December 31, 2019. Additionally, a majority of these modified loans are characterized as current and therefore are not impacting nonaccrual or delinquency totals as of September 30, 2021 and December 31, 2020. The Company does, however, consider all active deferrals when estimating loss reserves. As loans reach their deferral maturity date, consideration of TDR and delinquency status will resume in accordance with the Company's accounting policy. 24 Table of Contents The following table shows information regarding nonaccrual loans as of the dates indicated: Nonaccrual Balances September 30, 2021 December 31, 2020 With Allowance for Credit Losses Without Allowance for Credit Losses Total With Allowance for Credit Losses Without Allowance for Credit Losses Total (Dollars in thousands) Commercial and industrial $ 3,468 $ 15,807 $ 19,275 $ 3,804 $ 30,925 $ 34,729 Commercial real estate 8,541 3,247 11,788 10,195 — 10,195 Small business 46 — 46 815 10 825 Residential real estate 6,486 4,386 10,872 10,935 4,593 15,528 Home equity 3,746 — 3,746 5,427 — 5,427 Other consumer 83 — 83 156 — 156 Total nonaccrual loans (1) $ 22,370 $ 23,440 $ 45,810 $ 31,332 $ 35,528 $ 66,860 (1) Included in these amounts were $ 21.1 million and $ 22.2 million of nonaccruing TDRs at September 30, 2021 and December 31, 2020, respectively. It is the Company's policy to reverse any accrued interest when a loan is put on nonaccrual status, and, as such, the Company did not record any interest income on nonaccrual loans during the nine months ended September 30, 2021 and September 30, 2020. In accordance with government moratorium orders established in response to the COVID-19 pandemic, new foreclosures pursued by the Company were on hold through August 31, 2021, at which point such orders were lifted. The following table shows information regarding foreclosed residential real estate property at the dates indicated: September 30, 2021 December 31, 2020 (Dollars in thousands) Foreclosed residential real estate property held by the creditor $ — $ — Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure $ 1,215 $ 1,750 The following tables show the age analysis of past due financing receivables as of the dates indicated: September 30, 2021 30-59 days 60-89 days 90 days or more Total Past Due Total Financing Receivables Amortized Cost >90 Days and Accruing Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Current (Dollars in thousands) Loan Portfolio Commercial and industrial 2 $ 343 1 $ 87 — $ — 3 $ 430 $ 1,640,279 $ 1,640,709 $ — Commercial real estate 6 5,142 1 487 5 3,674 12 9,303 4,211,956 4,221,259 — Commercial construction — — — — — — — — 515,415 515,415 — Small business 8 243 2 35 5 27 15 305 183,833 184,138 — Residential real estate 13 2,037 2 848 22 2,822 37 5,707 1,217,142 1,222,849 — Home equity 9 479 5 218 24 1,784 38 2,481 997,987 1,000,468 — Other consumer (1) 230 109 12 32 3 2 245 143 23,032 23,175 — Total 268 $ 8,353 23 $ 1,707 59 $ 8,309 350 $ 18,369 $ 8,789,644 $ 8,808,013 $ — 25 Table of Contents December 31, 2020 30-59 days 60-89 days 90 days or more Total Past Due Total Financing Receivables Recorded Investment >90 Days and Accruing Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Current (Dollars in thousands) Loan Portfolio Commercial and industrial 2 $ 318 1 $ 672 8 $ 785 11 $ 1,775 $ 2,101,377 $ 2,103,152 $ — Commercial real estate 3 409 — — 4 515 7 924 4,173,003 4,173,927 — Commercial construction — — 2 2,794 — — 2 2,794 551,135 553,929 — Small business 14 421 6 273 4 59 24 753 174,270 175,023 — Residential real estate 12 2,150 8 5,507 27 3,648 47 11,305 1,284,878 1,296,183 — Home equity 10 733 5 203 33 2,633 48 3,569 1,065,221 1,068,790 — Other consumer (1) 260 137 3 1 6 138 269 276 21,586 21,862 1 Total 301 $ 4,168 25 $ 9,450 82 $ 7,778 408 $ 21,396 $ 9,371,470 $ 9,392,866 $ 1 (1) Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances. Troubled Debt Restructurings In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated: September 30, 2021 December 31, 2020 (Dollars in thousands) TDRs on accrual status $ 15,950 $ 16,983 TDRs on nonaccrual 21,104 22,209 Total TDRs $ 37,054 $ 39,192 Additional commitments to lend to a borrower who has been a party to a TDR $ 352 $ 263 The Company’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months subsequent to being modified before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential real estate loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized. 26 Table of Contents The following table shows the TDRs which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (Dollars in thousands) Troubled debt restructurings Commercial and industrial — $ — $ — 1 $ 14,148 $ 14,148 Commercial real estate — — — 5 3,964 3,964 Small business — — — 2 189 189 Total (1) — $ — $ — 8 $ 18,301 $ 18,301 Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (Dollars in thousands) Troubled debt restructurings Commercial and industrial 2 $ 83 $ 83 5 $ 391 $ 391 Commercial real estate 3 744 744 8 2,518 2,518 Small business — — — 2 112 88 Residential real estate — — — 2 559 642 Total (1) 5 $ 827 $ 827 17 $ 3,580 $ 3,639 (1) The pre-modification and post-modification balances represent the legal principal balance of the loan. Activity presented in the tables above includes no modifications on existing TDRs during the three months ended September 30, 2021, $ 14.3 million of modifications on existing TDRs during the nine months ended September 30, 2021, and $ 83,000 and $ 1.5 million of modifications on existing TDRs during the three and nine months ended September 30, 2020, respectively. The following table shows the Company’s post-modification balance of TDRs listed by type of modification for the periods indicated: Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 (Dollars in thousands) Adjusted interest rate — 218 $ — $ 822 Combination rate and maturity — — 14,148 — Court ordered concession — — — 25 Extended maturity — 609 4,153 2,792 Total — 827 $ 18,301 $ 3,639 27 Table of Contents The Company considers a loan to have defaulted when it reaches 90 days past due. There was one commercial real estate loan modified during the preceding twelve months with a recorded investment of $ 3.2 million, which subsequently defaulted during the nine month period ended September 30, 2021. There were no defaults on such loans modified during the prior twelve months for the three and nine month periods ended September 30, 2020, respectively. The Company determines the amount of allowance on TDRs in accordance with CECL methodology using a discounted cash flow approach, or a fair value of collateral approach if the loan is determined to be individually evaluated. NOTE 5 - STOCK BASED COMPENSATION During the nine months ended September 30, 2021, the Company had the following activity related to stock based compensation: Time Vested Restricted Stock Awards The Company made the following awards of time vested restricted stock: Date Shares Granted Plan Grant Date Fair Value Per Share Vesting Period 2/18/2021 49,550 2005 Employee Stock Plan $ 81.84 Ratably over 5 years from grant date 5/25/2021 7,680 2018 Non-Employee Director Stock Plan $ 78.18 Shares vested immediately 9/1/2021 640 2018 Non-Employee Director Stock Plan $ 76.78 Shares vested immediately Performance-Based Restricted Stock Awards On February 18, 2021, the Company granted 18,900 performance-based restricted stock awards to certain executive level employees. These performance-based restricted stock awards were issued from the 2005 Employee Stock Plan and were determined to have a grant date fair value per share of $ 81.84 . The number of shares to be vested are contingent upon the Company's attainment of certain performance criteria to be measured at the end of a three year performance period, ending December 31, 2023. The awards will vest upon the earlier of the date on which it is determined if the performance goal is achieved subsequent to the performance period or March 31, 2024. On March 12, 2021, the performance-based restricted stock awards that were awarded on February 15, 2018 vested at 85 % of the maximum target shares awarded, or 13,005 shares. 28 Table of Contents NOTE 6 - DERIVATIVE AND HEDGING ACTIVITIES The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives, foreign exchange contracts and risk participation agreements to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company's financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship. The Company does not enter into proprietary trading positions for any derivatives. The Company is subject to over-the-counter derivative clearing requirements which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House ("CME"). This clearing house requires the Company to post initial and variation margin to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. Interest Rate Positions The Company may utilize various interest rate derivatives as hedging instruments against interest rate risk associated with the Company’s borrowings and loan portfolios. An interest rate derivative is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. 29 Table of Contents The following tables reflect the Company's derivative positions as of the dates indicated below for interest rate derivatives which qualify as cash flow hedges for accounting purposes: September 30, 2021 Weighted Average Rate Notional Amount Average Maturity Current Rate Received Pay Fixed Swap Rate Fair Value (in thousands) (in years) (in thousands) Interest rate swaps on borrowings $ 75,000 0.43 0.12 % 1.53 % $ ( 593 ) Current Rate Paid Receive Fixed Swap Rate Interest rate swaps on loans 550,000 2.83 0.08 % 2.16 % 18,016 Current Rate Paid Receive Fixed Swap Rate Cap - Floor Interest rate collars on loans 400,000 1.91 0.08 % 2.73 % - 2.20 % 13,971 Total $ 1,025,000 $ 31,394 December 31, 2020 Weighted Average Rate Notional Amount Average Maturity Current Rate Received Pay Fixed Swap Rate Fair Value (in thousands) (in years) (in thousands) Interest rate swaps on borrowings $ 75,000 1.18 0.22 % 1.53 % $ ( 1,341 ) Current Rate Paid Receive Fixed Swap Rate Interest rate swaps on loans 450,000 2.66 0.15 % 2.37 % 27,021 Current Rate Paid Receive Fixed Swap Rate Cap - Floor Interest rate collars on loans 400,000 2.66 0.15 % 2.73 % - 2.20 % 21,764 Total $ 925,000 $ 47,444 The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is 7.5 years. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income ("OCI"), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $ 19.0 million (pre-tax) to be reclassified as an increase to interest income and $ 509,000 (pre-tax) to be reclassified as an increase to interest expense, from OCI related to the Company’s cash flow hedges in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2021. The Company had no fair value hedges as of September 30, 2021 or December 31, 2020. 30 Table of Contents Customer Related Positions Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. Derivatives with dealer counterparties are then either cleared through a clearinghouse or settled directly with a single counterparty. The commercial customer derivative program allows the Company to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. The amounts relating to the notional principal amount are not actually exchanged. Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions. The amounts relating to the notional principal amount are exchanged. The Company has entered into risk participation agreements with other dealer banks in commercial loan agreements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. 31 Table of Contents The following table reflects the Company’s customer related derivative positions as of the dates indicated below for those derivatives not designated as hedging: Notional Amount Maturing Number of Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value September 30, 2021 (Dollars in thousands) Loan level swaps Receive fixed, pay variable 293 $ 30,047 $ 148,874 $ 129,939 $ 288,580 $ 980,166 $ 1,577,606 $ 67,126 Pay fixed, receive variable 293 30,047 148,874 129,939 288,580 980,166 1,577,606 ( 67,122 ) Foreign exchange contracts Buys foreign currency, sells U.S. currency 45 148,253 6,087 — — — 154,340 ( 5,529 ) Buys U.S. currency, sells foreign currency 45 148,253 6,087 — — — 154,340 5,530 Risk participation agreements Participation out 11 — 2,645 — 31,719 67,767 102,131 236 Participation in 7 18,450 23,375 16,768 — 8,372 66,965 ( 64 ) Notional Amount Maturing Number of Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value December 31, 2020 (Dollars in thousands) Loan level swaps Receive fixed, pay variable 322 $ 102,999 $ 76,487 $ 149,265 $ 147,422 $ 1,222,557 $ 1,698,730 $ 127,226 Pay fixed, receive variable 313 102,999 76,487 149,265 147,422 1,222,557 1,698,730 ( 127,216 ) Foreign exchange contracts Buys foreign currency, sells U.S. currency 33 87,557 5,300 — — — 92,857 ( 4,214 ) Buys U.S. currency, sells foreign currency 33 87,557 5,300 — — — 92,857 4,224 Risk participation agreements Participation out 12 6,721 — 2,675 7,307 93,378 110,081 512 Participation in 8 — 30,649 29,072 — 15,844 75,565 ( 118 ) (1) The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements. 32 Table of Contents Mortgage Derivatives The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans may be sold subsequently in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded within mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The fair value of loans held for sale decreased by $ 75,000 and increased by $ 413,000 for the three month periods ended September 30, 2021 and 2020, respectively. The fair value of loans held for sale decreased by $ 1.5 million and increased by $ 1.3 million for the nine month periods ended September 30, 2021 and 2020, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities ("TBAs"). Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions will impact the ultimate effectiveness of any hedging strategies. With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a "pair-off" fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally, the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally, the Company sells TBA securities by entering into derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments. With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments. The aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income was $ 4.9 million and $ 10.0 million for the three month periods ended September 30, 2021 and 2020, respectively, and $ 17.2 million and $ 20.7 million for the nine months ended September 30, 2021 and 2020, respectively. Balance Sheet Offsetting The Company does not offset fair value amounts recognized for derivative instruments. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company's financial statements are not equal and offsetting. 33 Table of Contents The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet and the potential effect of netting arrangements on its financial position, at the dates indicated: Asset Derivatives (1) Liability Derivatives (2) Fair Value at Fair Value at Fair Value at Fair Value at September 30 2021 December 31 2020 September 30 2021 December 31 2020 (Dollars in thousands) Derivatives designated as hedges Interest rate derivatives $ 32,380 (3) $ 48,786 (3) $ 986 (4) $ 1,342 (4) Derivatives not designated as hedges Customer Related Positions Loan level derivatives 76,552 (3) 127,228 (3) 76,548 (4) 127,218 (4) Foreign exchange contracts 5,531 4,359 5,530 4,349 Risk participation agreements 236 513 64 119 Mortgage Derivatives Interest rate lock commitments 1,202 6,513 — — Forward sale loan commitments — — 22 1 Forward sale hedge commitments 457 — — 1,035 Total derivatives not designated as hedges 83,978 138,613 82,164 132,722 Total 116,358 187,399 83,150 134,064 Netting Adjustments (5) ( 4,808 ) 23 6,454 16,105 Net Derivatives on the Balance Sheet 111,550 187,422 76,696 117,959 Financial instruments (6) 36,914 48,786 36,914 48,786 Cash collateral pledged (received) — — 33,249 62,460 Net Derivative Amounts $ 74,636 $ 138,636 $ 6,533 $ 6,713 (1) All asset derivatives are located in other assets on the balance sheet. (2) All liability derivatives are located in other liabilities on the balance sheet. (3) Approximately $ 1.2 million and $ 1.6 million of accrued interest receivable is included in the fair value of the interest rate and loan level asset derivatives, respectively, as of September 30, 2021. Accrued interest receivable of approximately $ 1.2 million and $ 2.0 million is included in the fair value of the interest rate and loan level asset derivatives, respectively, as of December 31, 2020. (4) Approximately $ 60,000 and $ 1.6 million of accrued interest payable is included in the fair value of the interest rate and loan level liability derivatives, respectively, as of September 30, 2021. Accrued interest payable of approximately $ 81,000 and $ 2.0 million is included in the fair value of the interest rate and loan level derivative liabilities, respectively, as of December 31, 2020. (5) Netting adjustments represent the amounts recorded to convert derivative assets and liabilities cleared through CME from a gross basis to a net basis, inclusive of the variation margin payments, in accordance with applicable accounting guidance. As displayed in the table above, derivatives that cleared through the CME were either in a net asset position or a net liability position as of September 30, 2021. (6) Reflects offsetting derivative positions with the same counterparty that are not netted on the balance sheet. 34 Table of Contents The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated: Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 (Dollars in thousands) Derivatives designated as hedges Gain (loss) in OCI on derivatives (effective portion), net of tax $ ( 3,383 ) $ ( 2,729 ) $ ( 11,559 ) $ 20,452 Gain reclassified from OCI into interest income or interest expense (effective portion) $ 4,791 $ 4,339 $ 13,869 $ 9,901 Loss reclassified from OCI into noninterest expense (loss on termination) $ — $ ( 684 ) $ — $ ( 684 ) Interest expense $ — $ — $ — $ — Other expense — — — — Total $ — $ — $ — $ — Derivatives not designated as hedges Changes in fair value of customer related positions Other income $ 54 $ 21 $ 137 $ 46 Other expense ( 80 ) ( 28 ) ( 374 ) ( 52 ) Changes in fair value of mortgage derivatives Mortgage banking income ( 213 ) 2,027 ( 3,840 ) 4,653 Total $ ( 239 ) $ 2,020 $ ( 4,077 ) $ 4,647 The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was $ 35.9 million and $ 79.8 million at September 30, 2021 and December 31, 2020, respectively. Although none of the contingency provisions have applied as of September 30, 2021 and December 31, 2020, the Company has posted collateral to offset the net liability exposure with institutional counterparties. By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company's credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company's Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote. The Company's exposure relating to institutional counterparties was $ 37.1 million and $ 48.8 million at September 30, 2021 and December 31, 2020, respectively. The Company’s exposure relating to customer counterparties was approximately $ 71.8 million and $ 127.2 million at September 30, 2021 and December 31, 2020, respectively. Credit exposure may be reduced by the value of collateral pledged by the counterparty. NOTE 7 - FAIR VALUE MEASUREMENTS Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the assumptions applied by the Company when determining fair value reflect those that the Company determines market participants would use to price the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received if the asset were to be sold or that would be or paid if the liability were to be transferred in an orderly market transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When determining fair value, the Company considers pricing information and other inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and other inputs 35 Table of Contents may be reduced for certain instruments, or not available at all. The unavailability or reduced availability of pricing or other input information could cause an instrument to be reclassified from one level to another. The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below: Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation Techniques There have been no changes in the valuation techniques used during the nine months ended September 30, 2021. Securities Trading and Equity Securities These equity securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied. U.S. Government Agency and U.S. Treasury Securities Fair value is estimated using either multi-dimensional spread tables or benchmarks. The inputs used include benchmark yields, reported trades, and broker/dealer quotes. These securities are classified as Level 2. Agency Mortgage-Backed Securities Fair value is estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities are categorized as Level 2. Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities The valuation model for these securities is volatility-driven and ratings based, and uses multi-dimensional spread tables. The inputs used include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. State, County, and Municipal Securities The fair value is estimated using a valuation matrix with inputs including bond interest rate tables, recent transactions, and yield relationships. These securities are categorized as Level 2. Single and Pooled Issuer Trust Preferred Securities The fair value of trust preferred securities, including pooled and single issuer preferred securities, is estimated using external pricing models, discounted cash flow methodologies or similar techniques. The inputs used in these valuations include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. 36 Table of Contents Loans Held for Sale The Company has elected the fair value option to account for originated closed loans intended for sale. The fair value is measured on an individual loan basis using quoted market prices and when not available, comparable market value or discounted cash flow analysis may be utilized. These assets are typically classified as Level 2. Derivative Instruments Derivatives The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilizes. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate derivatives and risk participation agreements may also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2021 and December 31, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are properly classified as Level 2. Mortgage Derivatives The fair value of mortgage derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy. Individually Assessed Collateral Dependent Loans In accordance with the CECL standard, expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. The inputs used in the appraisals of the collateral are not always observable, and in such cases the loans may be classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. Other Real Estate Owned and Other Foreclosed Assets Other Real Estate Owned ("OREO") and Other Foreclosed Assets are valued at the lower of cost or fair value of the property, less estimated costs to sell. The fair values are generally estimated based upon recent appraisal values of the property less costs to sell the property. Certain inputs used in appraisals are not always observable, and therefore OREO and Other Foreclosed Assets may be classified as Level 3 within the fair value hierarchy. Goodwill and Other Intangible Assets Goodwill and other intangible assets are subject to impairment testing. The Company conducts an annual impairment test of goodwill in the third quarter of each year, or more frequently if necessary. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. To estimate the fair value of goodwill and, if necessary, other intangible assets, the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and a discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3. 37 Table of Contents Assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows as of the dates indicated: Fair Value Measurements at Reporting Date Using Balance Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 (Dollars in thousands) Recurring fair value measurements Assets Trading securities $ 3,504 $ 3,504 $ — $ — Equity securities 22,794 22,794 — — Securities available for sale U.S. government agency securities 217,345 — 217,345 — U.S. treasury securities 770,002 — 770,002 — Agency mortgage-backed securities 297,219 — 297,219 — Agency collateralized mortgage obligations 86,487 — 86,487 — State, county, and municipal securities 288 — 288 — Single issuer trust preferred securities issued by banks and insurers 491 — 491 — Pooled trust preferred securities issued by banks and insurers 1,010 — 1,010 — Small business administration pooled securities 54,368 — 54,368 — Loans held for sale 33,553 — 33,553 — Derivative instruments 116,358 — 116,358 — Liabilities Derivative instruments 83,150 — 83,150 — Total recurring fair value measurements $ 1,520,269 $ 26,298 $ 1,493,971 $ — Nonrecurring fair value measurements Assets Individually assessed collateral dependent loans (1) $ 34,799 $ — $ — $ 34,799 Total nonrecurring fair value measurements $ 34,799 $ — $ — $ 34,799 38 Table of Contents Fair Value Measurements at Reporting Date Using Balance Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 (Dollars in thousands) Recurring fair value measurements Assets Trading securities $ 2,838 $ 2,838 $ — $ — Equity securities 22,107 22,107 — — Securities available for sale U.S. government agency securities 24,116 — 24,116 — Agency mortgage-backed securities 233,629 — 233,629 — Agency collateralized mortgage obligations 91,683 — 91,683 — State, county, and municipal securities 807 — 807 — Single issuer trust preferred securities issued by banks and insurers 488 — 488 — Pooled trust preferred securities issued by banks and insurers 1,056 — 1,056 — Small business administration pooled securities 61,081 — 61,081 — Loans held for sale 58,104 — 58,104 — Derivative instruments 187,399 — 187,399 — Liabilities Derivative instruments 134,064 — 134,064 — Total recurring fair value measurements $ 549,244 $ 24,945 $ 524,299 $ — Nonrecurring fair value measurements: Assets Individually assessed collateral dependent loans (1) $ 31,510 $ — $ — $ 31,510 Total nonrecurring fair value measurements $ 31,510 $ — $ — $ 31,510 (1) The fair value of individually assessed collateral dependent loans is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary. 39 Table of Contents The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated: Fair Value Measurements at Reporting Date Using Carrying Value Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 (Dollars in thousands) Financial assets Securities held to maturity (a) U.S. government agency securities $ 33,422 $ 33,295 $ — $ 33,295 $ — U.S. treasury securities $ 3,007 $ 3,024 $ — $ 3,024 $ — Agency mortgage-backed securities 352,483 360,613 — 360,613 — Agency collateralized mortgage obligations 451,151 452,038 — 452,038 — Single issuer trust preferred securities issued by banks 1,500 1,508 — 1,508 — Small business administration pooled securities 23,686 24,828 — 24,828 — Loans, net of allowance for credit losses (b) 8,680,968 8,663,615 — — 8,663,615 Federal Home Loan Bank stock (c) 8,666 8,666 — 8,666 — Cash surrender value of life insurance policies (d) 244,573 244,573 — 244,573 — Financial liabilities Deposit liabilities, other than time deposits (e) $ 11,474,578 $ 11,474,578 $ — $ 11,474,578 $ — Time certificates of deposits (f) 785,562 786,514 — 786,514 — Federal Home Loan Bank borrowings (f) 25,675 25,679 — 25,679 — Long-term borrowings (f) 18,750 18,571 — 18,571 — Junior subordinated debentures (g) 62,853 68,098 — 68,098 — Subordinated debentures (f) 49,767 46,403 — — 46,403 40 Table of Contents Fair Value Measurements at Reporting Date Using Carrying Value Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 (Dollars in thousands) Financial assets Securities held to maturity (a) U.S. treasury securities $ 4,017 $ 4,077 $ — $ 4,077 $ — Agency mortgage-backed securities 356,085 374,121 — 374,121 — Agency collateralized mortgage obligations 335,993 344,119 — 344,119 — Single issuer trust preferred securities issued by banks 1,500 1,498 — 1,498 — Small business administration pooled securities 26,917 28,362 — 28,362 — Loans, net of allowance for credit losses (b) 9,247,964 9,253,381 — — 9,253,381 Federal Home Loan Bank stock (c) 10,250 10,250 — 10,250 — Cash surrender value of life insurance policies (d) 200,525 200,525 — 200,525 — Financial liabilities Deposit liabilities, other than time deposits (e) $ 10,042,541 $ 10,042,541 $ — $ 10,042,541 $ — Time certificates of deposits (f) 950,629 955,598 — 955,598 — Federal Home Loan Bank borrowings (f) 35,740 35,885 — 35,885 — Long-term borrowings (f) 32,773 32,033 — 32,033 — Junior subordinated debentures (g) 62,851 70,238 — 70,238 — Subordinated debentures (f) 49,696 46,486 — — 46,486 (a) The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analysis. (b) Fair value of loans is measured using the exit price valuation method, determined primarily by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows, while incorporating liquidity and credit assumptions. Additionally, this amount excludes individually assessed collateral dependent loans, which are deemed to be marked to fair value on a nonrecurring basis. (c) Federal Home Loan Bank stock has no quoted market value and is carried at cost; therefore the carrying amount approximates fair value. (d) Cash surrender value of life insurance policies is recorded at its cash surrender value (or the amount that can be realized upon surrender of the policy), therefore, carrying amount approximates fair value. (e) Fair value of demand deposits, savings and interest checking accounts and money market deposits is the amount payable on demand at the reporting date. (f) Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities. (g) Fair value was determined based upon market prices of securities with similar terms and maturities. This summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described. The Company considers its current use of financial instruments to be the highest and best use of the instruments. 41 Table of Contents NOTE 8 - REVENUE RECOGNITION A portion of the Company's noninterest income is derived from contracts with customers, and as such, the revenue recognized depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance. To ensure its alignment with this core principle, the Company measures revenue and the timing of recognition by applying the following five steps: 1. Identify the contract(s) with customers 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when (or as) the entity satisfies a performance obligation The Company has disaggregated its revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents the revenue streams that the Company has disaggregated as of the periods indicated: Three Months Ended Nine Months Ended September 30 2021 September 30 2020 September 30 2021 September 30 2020 (Dollars in thousands) Deposit account fees (inclusive of cash management fees) $ 4,298 $ 3,428 $ 11,704 $ 11,227 Interchange fees 2,223 2,025 6,267 10,665 ATM fees 817 708 2,177 1,872 Investment management - wealth management and advisory services 8,147 6,997 23,576 20,113 Investment management - retail investments and insurance revenue 1,027 574 2,774 1,583 Merchant processing income 365 330 1,024 1,000 Credit card income 334 216 883 550 Other noninterest income 1,362 905 3,732 2,651 Total noninterest income in-scope of ASC 606 18,573 15,183 52,137 49,661 Total noninterest income out-of-scope of ASC 606 7,884 14,164 24,533 34,311 Total noninterest income $ 26,457 $ 29,347 $ 76,670 $ 83,972 In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and service requirements are generally explicitly identified in the associated contracts. Additional information related to each of the revenue streams is further noted below. Deposit Account Fees The Company offers various deposit account products to its customers governed by specific deposit agreements applicable to either personal customers or business customers. These agreements identify the general conditions and obligations of both parties, and include standard information regarding deposit account related fees. Deposit account services include providing access to deposit accounts as well as access to the various deposit transactional services of the Company. These transactional services are primarily those that are identified in the standard fee schedule, and include, but are not limited to, services such as overdraft protection, wire transfer, and check collection. Revenue is recognized in conjunction with the various services being provided. For example, the Company may assess monthly fixed service fees associated with the customer having access to a deposit account, which can vary depending on the account type and daily account balance. In addition, the Company may also assess separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company considers its performance obligations to be met concurrently with providing the account access or completing the requested deposit transaction. 42 Table of Contents Cash Management Cash management services are a subset of the deposit account fees revenue stream. These services primarily include ACH transaction processing, positive pay and remote deposit services. These services are also governed by separate agreements entered into with the customer. The fee arrangement for these services is structured to assess fees under one of two scenarios, either a per transaction fee arrangement or an earnings credit analysis arrangement. Under the per transaction fee arrangement, fixed fees are assessed concurrently with customers executing the transactions, and as such, the Company considers its performance obligations to be met concurrently with completing the requested transaction. Under the earnings credit analysis arrangement, the Company provides a monthly earnings credit to the customer that is negotiated and determined based on various factors. The credit is then available to absorb the per transaction fees that are assessed on the customer's deposit account activity for the month. Any amount of the transactional fees in excess of the earnings credit is recognized as revenue in that month. Interchange Fees The Company earns interchange revenue from its issuance of credit and debit cards granted through its membership in various card payment networks. The Company provides credit cards and debit cards to its customers which are authorized and settled through these payment networks, and in exchange, the Company earns revenue as determined by each payment network's interchange program. The revenue is recognized concurrently with the settlement of card transactions within each network. ATM Fees The Company deploys automated teller machines (ATMs) as part of its overall branch network. Certain transactions performed at the ATMs require customers to acknowledge and pay a fee for the requested service. Certain ATM fees are disclosed in the deposit account agreement fee schedules, whereas those assessed to non-Rockland Trust deposit holders are solely determined during the transaction at the machine. The ATM fee is a fixed dollar per transaction amount, and as such, is recognized concurrently with the overall daily processing and settlement of the ATM activity. Investment Management - Wealth Management and Advisory Services The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services and other special services quoted at the client's request. The asset management and/or custody fees are based upon a percentage of the monthly valuation of the principal assets in the customer's account, whereas fees for additional or special services are fixed in nature and are charged as services are rendered. As the fees are dependent on assets under management, which are susceptible to market factors outside of the Company's control, this variable consideration is constrained and therefore no revenue is estimated at contract initiation. As such, all revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided. Due to the fact that payments are primarily made subsequent to the valuation period, the Company records a receivable for revenue earned but not received. The following table provides the amount of investment management revenue earned but not received as of the dates indicated: September 30, 2021 December 31, 2020 (Dollars in thousands) Receivables, included in other assets $ 5,292 $ 4,636 Investment Management - Retail Investments and Insurance Revenue The Company offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance products through registered representatives who are both employed by the Company and licensed and contracted with various broker general agents to offer these products to the Company’s customer base. As such, the Company performs these services as an agent and earns a fixed commission on the sales of these products and services. To a lesser degree, production bonus commissions can also be earned based upon the Company meeting certain volume thresholds. 43 Table of Contents In general, the Company recognizes commission revenue at the point of sale, and for certain insurance products, may also earn and recognize annual residual commissions commensurate with annual premiums being paid. Merchant Processing Income The Company refers customers to third party merchant processing partners in exchange for commission and fee income. The income earned is comprised of multiple components, including a fixed referral fee per each referred customer, a rebate amount determined primarily as a percentage of net revenue earned by the third party from services provided to each referred customer, and overall production bonus commissions if certain new account production thresholds are met. Merchant processing income is recognized in conjunction with either completing the referral to earn the fixed fee amount or as the merchant activity is processed to derive the Company's rebate and/or production bonus amounts. Credit Card Income The Company provides consumer and business credit card solutions to its customers by soliciting new accounts on behalf of a third party credit card provider in exchange for a fee. The income earned is comprised of new account incentive payments as well as a percentage of interchange income earned by the third party provider offering the consumer and business purpose revolving credit accounts. The credit card income is recognized in conjunction with the establishment of each new credit card member or as the interchange is earned by the third party in connection with net purchase transactions made by the credit card member. Other Noninterest Income The Company earns various types of other noninterest income that fall within the scope of the new revenue recognition rules, and have been aggregated into one general revenue stream in the table noted above. This amount includes, but is not limited to, the following types of revenue with customers: Safe Deposit Rent The Company rents out the use of safe deposit boxes to its customers, which can be accessed when the bank is open for business. The safe deposit box rental fee is paid upfront and is recognized as revenue ratably over the annual term of the contract. 1031 Exchange Fee Revenue The Company provides like-kind exchange services pursuant to Section 1031 of the Internal Revenue Code. Fee income is recognized in conjunction with completing the exchange transactions. Foreign Currency The Company earns fee income associated with various transactions related to foreign currency product offerings, including foreign currency bank notes and drafts and foreign currency wires. The majority of this income is derived from commissions earned related to customers executing the above mentioned foreign currency transactions through arrangements with third party correspondents. 44 Table of Contents NOTE 9 - OTHER COMPREHENSIVE INCOME (LOSS) The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the periods indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss): Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Pre Tax Amount Tax (Expense) Benefit After Tax Amount Pre Tax Amount Tax (Expense) Benefit After Tax Amount (Dollars in thousands) Change in fair value of securities available for sale $ ( 10,337 ) $ 2,440 $ ( 7,897 ) $ ( 15,589 ) $ 3,711 $ ( 11,878 ) Less: net security losses reclassified into other noninterest expense — — — — — — Net change in fair value of securities available for sale ( 10,337 ) 2,440 ( 7,897 ) ( 15,589 ) 3,711 ( 11,878 ) Change in fair value of cash flow hedges 84 ( 23 ) 61 ( 2,214 ) 624 ( 1,590 ) Less: net cash flow hedge gains reclassified into interest income or interest expense 4,791 ( 1,347 ) 3,444 13,869 ( 3,900 ) 9,969 Net change in fair value of cash flow hedges ( 4,707 ) 1,324 ( 3,383 ) ( 16,083 ) 4,524 ( 11,559 ) Net unamortized gain related to defined benefit pension and other postretirement adjustments arising during the period — — — 653 ( 184 ) 469 Amortization of net actuarial losses 346 ( 97 ) 249 1,037 ( 291 ) 746 Amortization of net prior service costs 44 ( 13 ) 31 131 ( 37 ) 94 Net change in other comprehensive income for defined benefit postretirement plans (1) 390 ( 110 ) 280 1,821 ( 512 ) 1,309 Total other comprehensive loss $ ( 14,654 ) $ 3,654 $ ( 11,000 ) $ ( 29,851 ) $ 7,723 $ ( 22,128 ) 45 Table of Contents Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Pre Tax Amount Tax (Expense) Benefit After Tax Amount Pre Tax Amount Tax (Expense) Benefit After Tax Amount (Dollars in thousands) Change in fair value of securities available for sale $ ( 857 ) $ 148 $ ( 709 ) $ 13,598 $ ( 3,265 ) $ 10,333 Less: net security losses reclassified into other noninterest expense — — — — — — Net change in fair value of securities available for sale ( 857 ) 148 ( 709 ) 13,598 ( 3,265 ) 10,333 Change in fair value of cash flow hedges ( 143 ) 41 ( 102 ) 37,674 ( 10,597 ) 27,077 Less: net cash flow hedge gains reclassified into interest income or interest expense 4,339 ( 1,220 ) 3,119 9,901 ( 2,784 ) 7,117 Less: loss on termination of hedge reclassified into noninterest expense ( 684 ) 192 ( 492 ) ( 684 ) 192 ( 492 ) Net change in fair value of cash flow hedges ( 3,798 ) 1,069 ( 2,729 ) 28,457 ( 8,005 ) 20,452 Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period ( 2 ) 1 ( 1 ) ( 1,392 ) 392 ( 1,000 ) Amortization of net actuarial losses 245 ( 69 ) 176 736 ( 207 ) 529 Amortization of net prior service costs 69 ( 19 ) 50 207 ( 58 ) 149 Net change in other comprehensive income for defined benefit postretirement plans (1) 312 ( 87 ) 225 ( 449 ) 127 ( 322 ) Total other comprehensive income (loss) $ ( 4,343 ) $ 1,130 $ ( 3,213 ) $ 41,606 $ ( 11,143 ) $ 30,463 (1) The amortization of prior service costs is included in the computation of net periodic pension cost as disclosed in Note 15 "Employee Benefit Plans" within the Notes to the Consolidated Financial Statements included in Item 8 of the Company's 2020 Form 10-K. Information on the Company’s accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the dates indicated: Unrealized Gain (Loss) on Securities Unrealized Gain (Loss) on Cash Flow Hedge Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income (Loss) (Dollars in thousands) 2021 Beginning balance: January 1, 2021 $ 13,255 $ 33,276 $ ( 5,836 ) $ 40,695 Net change in other comprehensive income (loss) ( 11,878 ) ( 11,559 ) 1,309 ( 22,128 ) Ending balance: September 30, 2021 $ 1,377 $ 21,717 $ ( 4,527 ) $ 18,567 2020 Beginning balance: January 1, 2020 $ 4,398 $ 16,479 $ ( 2,708 ) $ 18,169 Net change in other comprehensive income (loss) 10,333 20,452 ( 322 ) 30,463 Ending balance: September 30, 2020 $ 14,731 $ 36,931 $ ( 3,030 ) $ 48,632 NOTE 10 - COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Company enters into various transactions to meet the financing needs of its customers, which, in accordance with GAAP, are not included in its consolidated balance sheets. These transactions include commitments to extend credit and standby letters of credit, and loan exposures with recourse, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. 46 Table of Contents The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of these commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company has certain loan exposures for which there is recourse. These loan relationships could require the Company to repurchase or cover certain losses per agreements for certain loans that are either sold or referred to third parties. Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. The fees collected in connection with the issuance of standby letters of credit are representative of the fair value of the Company's obligation undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, fees collected in connection with the issuance of standby letters of credit are deferred. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement. The deferred standby letter of credit fees represent the fair value of the Company's potential obligations under the standby letter of credit guarantees. The following table summarizes the above financial instruments at the dates indicated: September 30, 2021 December 31, 2020 (Dollars in thousands) Commitments to extend credit $ 3,591,456 $ 3,301,692 Standby letters of credit 20,081 20,686 Deferred standby letter of credit fees 146 164 Loan exposures with recourse 208,833 303,265 Lease Commitments The Company leases office space, space for ATM locations, and certain branch locations under noncancellable operating leases. Se veral of these leases contain renewal options to extend lease terms for a period of 3 to 10 years. During the fourth quarter of 2020, the Company recognized $ 4.8 million in lease termination costs associated with two branch closure decisions. These termination fees were paid by the Company during the second quarter of 2021. There has been no significant change in the future minimum lease payments payable by the Company since December 31, 2020. See the Company's 2020 Form 10-K for information regarding leases and other commitments. Other Contingencies At September 30, 2021, the Bank was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations. Historically, the Bank was required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston, however the reserve requirement was reduced to zero by the Federal Reserve during the first quarter of 2020 in response to the COVID-19 pandemic, and as such, there was no reserve requirement at September 30, 2021 or at December 31, 2020. 47 Table of Contents NOTE 11 - LOW INCOME HOUSING PROJECT INVESTMENTS The Company has invested in low income housing projects that generate Low Income Housing Tax Credits (“LIHTC”) which provide the Company with tax credits and operating loss tax benefits over a period of approximately 15 years. None of the original investment is expected to be repaid. The following table presents certain information related to the Company's investments in low income housing projects as of the dates indicated: September 30 2021 December 31 2020 (Dollars in thousands) Original investment value $ 162,879 $ 128,752 Current recorded investment 121,992 97,435 Unfunded liability obligation 74,157 49,586 Tax credits and benefits 14,251 (1) 9,404 Discrete tax adjustment 1,572 (2) n/a Adjusted tax credits and benefits 15,823 9,404 Amortization of investments 12,437 (1) 7,552 Net income tax benefit 3,386 (1) 1,852 (1) Amounts shown represent the estimated full year impact for the year ended December 31 , 2021. (2) Discrete adjustment recognized for difference in actual benefits as reported on Schedule K-1 versus estimated benefits for the year ended December 31, 2020. NOTE 12 - SUBSEQUENT EVENTS On October 29, 2021, the Company sold one large commercial and industrial loan relationship, the aggregate balance of which totaled $ 15.8 million as of September 30, 2021 and was included within non-performing assets. The Company expects to recognize a gain of approximately $ 2.5 million based on proceeds from the sale.