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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2021
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________.
Commission File Number 001-35750

First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)

Indiana |  | 20-3489991
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
11201 USA Parkway Fishers, IN |  | 46037
(Address of Principal Executive Offices) |  | (Zip Code)

| (317) 532-7900 |
| (Registrant’s Telephone Number, Including Area Code) |

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbols |  | Name of each exchange on which registered
Common Stock, without par value |  | INBK |  | The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2029 |  | INBKZ |  | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨ | Accelerated Filer þ
Non-accelerated Filer ¨ | Smaller Reporting Company ☑
Emerging growth company ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of November 5, 2021, the registrant had 9,854,153 shares of common stock issued and outstanding.

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “attempt,” “believe,” “can,” “continue,” “could,” “effort,” “estimate,” “expect,” “intend,” “likely,” “may,” “objective,” “optimistic,” “pending,” “plan,” “position,” “potential,” “preliminary,” “remain,” “should,” “will,” “would” or other similar expressions. Such statements are not a guarantee of future performance or results, are based on information available at the time the statements are made and are subject to certain risks and uncertainties including: the continued or potential effects of the COVID-19 global pandemic and related variants and mutations and other adverse public health developments on the economy, our business and operations and the business and operations of our vendors and customers; general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to continue originating and grow our commercial real estate, commercial and industrial, public finance, U.S. Small Business Administration (“SBA”), healthcare finance and franchise finance loan portfolios, which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; delays in completing our pending merger with First Century Bancorp, the failure to obtain necessary regulatory approvals and shareholder approvals or to satisfy any of the other conditions to the merger on a timely basis or at all, the possibility that the anticipated benefits of the merger are not realized when expected or at all, corporate strategies or objectives, including the impact of certain actions and initiatives, anticipated trends in our business, regulatory developments, estimated synergies, cost savings and financial benefits of completed transactions, growth strategies, and the inability to realize cost savings or improved revenues or to implement integration plans and other consequences associated with the proposed merger; execution of future acquisition, reorganization or disposition transactions, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
i

PART I
ITEM 1. FINANCIAL STATEMENTS
First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)

|  | September 30, 2021 |  | December 31, 2020
|  | (Unaudited) |  |
Assets |  |  |  |
Cash and due from banks |  | $ | 4,932 |  |  | $ | 7,367 |
Interest-bearing deposits |  | 402,583 |  |  | 412,439 |
Total cash and cash equivalents |  | 407,515 |  |  | 419,806 |
Securities available-for-sale, at fair value (amortized cost of $635,978 and $497,004 in 2021 and 2020, respectively) |  | 634,007 |  |  | 497,628 |
Securities held-to-maturity, at amortized cost (fair value of $64,337 and $69,452 in 2021 and 2020, respectively) |  | 62,129 |  |  | 68,223 |
Loans held-for-sale (includes $19,181 and $26,341 at fair value in 2021 and 2020, respectively) |  | 43,970 |  |  | 39,584 |
Loans |  | 2,936,148 |  |  | 3,059,231 |
Allowance for loan losses |  | (28,000) |  |  | (29,484) |
Net loans |  | 2,908,148 |  |  | 3,029,747 |
Accrued interest receivable |  | 14,866 |  |  | 17,416 |
Federal Home Loan Bank of Indianapolis stock |  | 25,650 |  |  | 25,650 |
Cash surrender value of bank-owned life insurance |  | 38,660 |  |  | 37,952 |
Premises and equipment, net |  | 52,700 |  |  | 37,590 |
Goodwill |  | 4,687 |  |  | 4,687 |
Servicing asset, at fair value |  | 4,412 |  |  | 3,569 |
Other real estate owned |  | 1,188 |  |  | — |
Accrued income and other assets |  | 54,360 |  |  | 64,304 |
Total assets |  | $ | 4,252,292 |  |  | $ | 4,246,156 |
Liabilities and Shareholders’ Equity |  |  |  |
Liabilities |  |  |  |
Noninterest-bearing deposits |  | $ | 110,117 |  |  | $ | 96,753 |
Interest-bearing deposits |  | 3,114,478 |  |  | 3,174,132 |
Total deposits |  | 3,224,595 |  |  | 3,270,885 |
Advances from Federal Home Loan Bank |  | 514,920 |  |  | 514,916 |
Subordinated debt, net of unamortized debt issuance costs of $2,844 and $2,397 in 2021 and 2020, respectively |  | 104,156 |  |  | 79,603 |
Accrued interest payable |  | 1,568 |  |  | 1,439 |
Accrued expenses and other liabilities |  | 36,611 |  |  | 48,369 |
Total liabilities |  | 3,881,850 |  |  | 3,915,212 |
Commitments and Contingencies |  |  |  |
Shareholders’ Equity |  |  |  |
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none |  | — |  |  | — |
Voting common stock, no par value; 45,000,000 shares authorized; 9,854,153 and 9,800,569 shares issued and outstanding in 2021 and 2020, respectively |  | 223,059 |  |  | 221,408 |
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none |  | — |  |  | — |
Retained earnings |  | 160,551 |  |  | 126,732 |
Accumulated other comprehensive loss |  | (13,168) |  |  | (17,196) |
Total shareholders’ equity |  | 370,442 |  |  | 330,944 |
Total liabilities and shareholders’ equity |  | $ | 4,252,292 |  |  | $ | 4,246,156 |

See Notes to Condensed Consolidated Financial Statements
1

First Internet Bancorp
Condensed Consolidated Statements of Income – Unaudited
(Amounts in thousands except share and per share data)

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Interest Income |  |  |  |  |  |  |  |
Loans |  | $ | 30,126 |  |  | $ | 29,560 |  |  | $ | 91,846 |  |  | $ | 89,698 |
Securities – taxable |  | 2,297 |  |  | 2,240 |  |  | 5,997 |  |  | 9,135 |
Securities – non-taxable |  | 241 |  |  | 381 |  |  | 781 |  |  | 1,410 |
Other earning assets |  | 370 |  |  | 569 |  |  | 1,067 |  |  | 2,973 |
Total interest income |  | 33,034 |  |  | 32,750 |  |  | 99,691 |  |  | 103,216 |
Interest Expense |  |  |  |  |  |  |  |
Deposits |  | 7,090 |  |  | 12,428 |  |  | 23,423 |  |  | 45,399 |
Other borrowed funds |  | 5,025 |  |  | 4,090 |  |  | 13,217 |  |  | 12,141 |
Total interest expense |  | 12,115 |  |  | 16,518 |  |  | 36,640 |  |  | 57,540 |
Net Interest Income |  | 20,919 |  |  | 16,232 |  |  | 63,051 |  |  | 45,676 |
(Benefit) Provision for Loan Losses |  | (29) |  |  | 2,509 |  |  | $ | 1,268 |  |  | 6,461 |
Net Interest Income After Provision for Loan Losses |  | 20,948 |  |  | 13,723 |  |  | 61,783 |  |  | 39,215 |
Noninterest Income |  |  |  |  |  |  |  |
Service charges and fees |  | 276 |  |  | 224 |  |  | 822 |  |  | 618 |
Loan servicing revenue |  | 511 |  |  | 274 |  |  | 1,390 |  |  | 780 |
Loan servicing asset revaluation |  | (274) |  |  | (103) |  |  | (669) |  |  | (372) |
Mortgage banking activities |  | 3,850 |  |  | 9,630 |  |  | 12,274 |  |  | 16,706 |
Gain on sale of loans |  | 2,719 |  |  | 2,033 |  |  | 7,461 |  |  | 4,596 |
Gain on sale of securities |  | — |  |  | 98 |  |  | — |  |  | 139 |
Gain on sale of premises and equipment |  | — |  |  | — |  |  | 2,523 |  |  | — |
Other |  | 731 |  |  | 339 |  |  | 1,349 |  |  | 1,212 |
Total noninterest income |  | 7,813 |  |  | 12,495 |  |  | 25,150 |  |  | 23,679 |
Noninterest Expense |  |  |  |  |  |  |  |
Salaries and employee benefits |  | 9,316 |  |  | 9,533 |  |  | 28,040 |  |  | 25,096 |
Marketing, advertising and promotion |  | 813 |  |  | 426 |  |  | 2,365 |  |  | 1,212 |
Consulting and professional services |  | 728 |  |  | 614 |  |  | 2,792 |  |  | 2,723 |
Data processing |  | 380 |  |  | 388 |  |  | 1,224 |  |  | 1,102 |
Loan expenses |  | 383 |  |  | 408 |  |  | 1,458 |  |  | 1,406 |
Premises and equipment |  | 1,687 |  |  | 1,568 |  |  | 4,875 |  |  | 4,795 |
Deposit insurance premium |  | 230 |  |  | 440 |  |  | 930 |  |  | 1,360 |
Write-down of other real estate owned |  | — |  |  | 2,065 |  |  | — |  |  | 2,065 |
Other |  | 914 |  |  | 970 |  |  | 3,159 |  |  | 3,383 |
Total noninterest expense |  | 14,451 |  |  | 16,412 |  |  | 44,843 |  |  | 43,142 |
Income Before Income Taxes |  | 14,310 |  |  | 9,806 |  |  | 42,090 |  |  | 19,752 |
Income Tax Provision |  | 2,220 |  |  | 1,395 |  |  | $ | 6,454 |  |  | 1,390 |
Net Income |  | $ | 12,090 |  |  | $ | 8,411 |  |  | $ | 35,636 |  |  | $ | 18,362 |
Income Per Share of Common Stock |  |  |  |  |  |  |  |
Basic |  | $ | 1.22 |  |  | $ | 0.86 |  |  | $ | 3.59 |  |  | $ | 1.87 |
Diluted |  | $ | 1.21 |  |  | $ | 0.86 |  |  | $ | 3.57 |  |  | $ | 1.87 |
Weighted-Average Number of Common Shares Outstanding |  |  |  |  |  |  |  |
Basic |  | 9,936,237 |  |  | 9,773,175 |  |  | 9,922,877 |  |  | 9,825,683 |
Diluted |  | 9,988,102 |  |  | 9,773,224 |  |  | 9,974,071 |  |  | 9,827,182 |
Dividends Declared Per Share |  | $ | 0.06 |  |  | $ | 0.06 |  |  | $ | 0.18 |  |  | $ | 0.18 |

See Notes to Condensed Consolidated Financial Statements
2

First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Income – Unaudited
(Amounts in thousands)

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Net income |  | $ | 12,090 |  |  | $ | 8,411 |  |  | $ | 35,636 |  |  | $ | 18,362 |
Other comprehensive (loss) income |  |  |  |  |  |  |  |
Net unrealized holding (losses) gains on securities available-for-sale recorded within other comprehensive (loss) income before income tax |  | (1,789) |  |  | 1,386 |  |  | (2,596) |  |  | 6,187 |
Reclassification adjustment for gains realized |  | — |  |  | (98) |  |  | — |  |  | (139) |
Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax |  | 1,439 |  |  | 1,514 |  |  | 7,665 |  |  | (12,453) |
Other comprehensive (loss) income before income tax |  | (350) |  |  | 2,802 |  |  | 5,069 |  |  | (6,405) |
Income tax (benefit) provision |  | (93) |  |  | 754 |  |  | 1,041 |  |  | (1,506) |
Other comprehensive (loss) income |  | (257) |  |  | 2,048 |  |  | 4,028 |  |  | (4,899) |
Comprehensive income |  | $ | 11,833 |  |  | $ | 10,459 |  |  | $ | 39,664 |  |  | $ | 13,463 |

See Notes to Condensed Consolidated Financial Statements
First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 2021 and 2020
(Amounts in thousands except per share data)

|  | Voting and Nonvoting Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
Balance, January 1, 2021 |  | $ | 221,408 |  |  | $ | 126,732 |  |  | $ | (17,196) |  |  | $ | 330,944 |
Net income |  | — |  |  | 35,636 |  |  | — |  |  | 35,636 |
Other comprehensive income |  | — |  |  | — |  |  | 4,028 |  |  | 4,028 |
Dividends declared ($0.18 per share) |  | — |  |  | (1,817) |  |  | — |  |  | (1,817) |
Recognition of the fair value of share-based compensation |  | 1,830 |  |  | — |  |  | — |  |  | 1,830 |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units |  | 16 |  |  | — |  |  | — |  |  | 16 |
Common stock redeemed for the net settlement of share-based awards |  | (195) |  |  | — |  |  | — |  |  | (195) |
Balance, September 30, 2021 |  | $ | 223,059 |  |  | $ | 160,551 |  |  | $ | (13,168) |  |  | $ | 370,442 |
Balance, January 1, 2020 |  | $ | 219,423 |  |  | $ | 99,681 |  |  | $ | (14,191) |  |  | $ | 304,913 |
Net income |  | — |  |  | 18,362 |  |  | — |  |  | 18,362 |
Other comprehensive loss |  | — |  |  | — |  |  | (4,899) |  |  | (4,899) |
Dividends declared ($0.18 per share) |  | — |  |  | (1,802) |  |  | — |  |  | (1,802) |
Recognition of the fair value of share-based compensation |  | 1,600 |  |  | — |  |  | — |  |  | 1,600 |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units |  | 21 |  |  | — |  |  | — |  |  | 21 |
Common stock redeemed for the net settlement of share-based awards |  | (93) |  |  | — |  |  | — |  |  | (93) |
Balance, September 30, 2020 |  | $ | 220,951 |  |  | $ | 116,241 |  |  | $ | (19,090) |  |  | $ | 318,102 |

See Notes to Condensed Consolidated Financial Statements
3

First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Three Months Ended September 30, 2021 and 2020
(Amounts in thousands except per share data)

|  | Voting and Nonvoting Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Total Shareholders’ Equity
Balance, July 1, 2021 |  | $ | 222,486 |  |  | $ | 149,066 |  |  | $ | (12,911) |  |  | $ | 358,641 |
Net income |  | — |  |  | 12,090 |  |  | — |  |  | 12,090 |
Other comprehensive loss |  | — |  |  | — |  |  | (257) |  |  | (257) |
Dividends declared ($0.06 per share) |  | — |  |  | (605) |  |  | — |  |  | (605) |
Recognition of the fair value of share-based compensation |  | 568 |  |  | — |  |  | — |  |  | 568 |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units |  | 5 |  |  | — |  |  | — |  |  | 5 |
Balance, September 30, 2021 |  | $ | 223,059 |  |  | $ | 160,551 |  |  | $ | (13,168) |  |  | $ | 370,442 |
Balance, July 1, 2020 |  | $ | 220,418 |  |  | $ | 108,431 |  |  | $ | (21,138) |  |  | $ | 307,711 |
Net income |  | — |  |  | 8,411 |  |  | — |  |  | 8,411 |
Other comprehensive income |  | — |  |  | — |  |  | 2,048 |  |  | 2,048 |
Dividends declared ($0.06 per share) |  | — |  |  | (601) |  |  | — |  |  | (601) |
Recognition of the fair value of share-based compensation |  | 527 |  |  | — |  |  | — |  |  | 527 |
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units |  | 6 |  |  | — |  |  | — |  |  | 6 |
Balance, September 30, 2020 |  | $ | 220,951 |  |  | $ | 116,241 |  |  | $ | (19,090) |  |  | $ | 318,102 |

4

First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)

|  | Nine Months Ended September 30,
|  | 2021 |  | 2020
Operating Activities |  |  |  |
Net income |  | $ | 35,636 |  |  | $ | 18,362 |
Adjustments to reconcile net income to net cash used in operating activities: |  |  |  |
Depreciation and amortization |  | 6,649 |  |  | 5,699 |
Increase in cash surrender value of bank-owned life insurance |  | (708) |  |  | (712) |
Provision for loan losses |  | 1,268 |  |  | 6,461 |
Share-based compensation expense |  | 1,830 |  |  | 1,600 |
Write-down of other real estate owned |  | — |  |  | 2,065 |
Loss on sale of available-for-sale securities |  | — |  |  | (139) |
Loans originated for sale |  | (645,620) |  |  | (431,384) |
Proceeds from sale of loans |  | 662,390 |  |  | 429,284 |
Gain on loans sold |  | (23,522) |  |  | (19,544) |
Decrease in fair value of loans held-for-sale |  | 854 |  |  | 116 |
Loss on derivatives |  | 1,870 |  |  | (1,974) |
Settlement of derivatives |  | (1,859) |  |  | (46,109) |
Loan servicing asset revaluation |  | 669 |  |  | (337) |
Net change in accrued income and other assets |  | 3,114 |  |  | 491 |
Net change in accrued expenses and other liabilities |  | 372 |  |  | 1,098 |
Net cash provided by (used in) operating activities |  | 42,943 |  |  | (35,023) |
Investing Activities |  |  |  |
Net loan activity, excluding purchases |  | 156,670 |  |  | 2,284 |
Maturities and calls of securities available-for-sale |  | 129,183 |  |  | 142,432 |
Proceeds from sale of securities available-for-sale |  | — |  |  | 893 |
Purchase of securities available-for-sale |  | (272,845) |  |  | (119,263) |
Maturities and calls of securities held-to-maturity |  | 6,000 |  |  | — |
Purchase of securities held-to-maturity |  | — |  |  | (2,000) |
Net proceeds from sale of premises and equipment |  | 8,116 |  |  | — |
Purchase of premises and equipment |  | (22,467) |  |  | (18,571) |
Loans purchased |  | (37,527) |  |  | (260,841) |
Net proceeds from sale of portfolio loans |  | — |  |  | 234,619 |
Other investing activities |  | 2,264 |  |  | — |
Net cash used in investing activities |  | (30,606) |  |  | (20,447) |
Financing Activities |  |  |  |
Net (decrease) increase in deposits |  | (46,290) |  |  | 218,428 |
Cash dividends paid |  | (1,802) |  |  | (1,773) |
Repayment of subordinated debt |  | (35,000) |  |  | — |
Net proceeds from issuance of subordinated debt |  | 58,658 |  |  | — |
Proceeds from advances from Federal Home Loan Bank |  | 110,000 |  |  | 330,000 |
Repayment of advances from Federal Home Loan Bank |  | (110,000) |  |  | (330,000) |
Other, net |  | (194) |  |  | (93) |
Net cash (used in) provided by financing activities |  | (24,628) |  |  | 216,562 |
Net (Decrease) Increase in Cash and Cash Equivalents |  | (12,291) |  |  | 161,092 |
Cash and Cash Equivalents, Beginning of Period |  | 419,806 |  |  | 327,361 |
Cash and Cash Equivalents, End of Period |  | $ | 407,515 |  |  | $ | 488,453 |
Supplemental Disclosures |  |  |  |
Cash paid during the period for interest |  | 36,511 |  |  | 60,058 |
Cash paid during the period for taxes |  | 4,995 |  |  | 2,516 |
Loans transferred to other real estate owned |  | 1,188 |  |  | — |
Loans transferred to held-for-sale from portfolio |  | — |  |  | 185,797 |
Cash dividends declared, paid in subsequent period |  | 591 |  |  | 588 |
Securities purchased during the period, settled in subsequent period |  | — |  |  | 5,547 |
Transfer of available-for-sale municipal securities to held-to-maturity municipal securities |  | — |  |  | 4,479 |

See Notes to Condensed Consolidated Financial Statements
5

First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other period. The September 30, 2021 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2020.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, valuation of the servicing asset and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.
The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.
Certain reclassifications have been made to the 2020 financial statements to conform to the presentation of the 2021 financial statements. These reclassifications had no effect on net income.
Revision of Previously Issued Financial Statements
The Company has revised amounts reported in previously issued notes to financial statements for the periods presented in this Quarterly Report on Form 10-Q due to immaterial clerical errors. The clerical errors caused the fair value associated with interest rate swap liabilities to be understated in the notes to financial statements for the period ended December 31, 2020 and had no impact on the consolidated balance sheet, income statement or statement of cash flows. The Company evaluated the impact of the clerical errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the clerical errors were not material to the previously issued financial statements and disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020.
6

Note 2: Earnings Per Share
Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.
The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and nine months ended September 30, 2021 and 2020.

(dollars in thousands, except per share data) |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Basic earnings per share |  |  |  |  |  |  |  |
Net income |  | $ | 12,090 |  |  | $ | 8,411 |  |  | $ | 35,636 |  |  | $ | 18,362 |
Weighted-average common shares |  | 9,936,237 |  |  | 9,773,175 |  |  | 9,922,877 |  |  | 9,825,683 |
Basic earnings per common share |  | $ | 1.22 |  |  | $ | 0.86 |  |  | $ | 3.59 |  |  | $ | 1.87 |
Diluted earnings per share |  |  |  |  |  |  |  |
Net income |  | $ | 12,090 |  |  | $ | 8,411 |  |  | $ | 35,636 |  |  | $ | 18,362 |
Weighted-average common shares |  | 9,936,237 |  |  | 9,773,175 |  |  | 9,922,877 |  |  | 9,825,683 |
Dilutive effect of equity compensation |  | 51,865 |  |  | 49 |  |  | 51,194 |  |  | 1,499 |
Weighted-average common and incremental shares |  | 9,988,102 |  |  | 9,773,224 |  |  | 9,974,071 |  |  | 9,827,182 |
Diluted earnings per common share (1) |  | $ | 1.21 |  |  | $ | 0.86 |  |  | $ | 3.57 |  |  | $ | 1.87 |

(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 0 and 28 for the three and nine months ended September 30, 2021, respectively, and 55,309 and 38,212 for the three and nine months ended September 30, 2020, respectively.
Note 3: Securities
The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2021 and December 31, 2020.

|  | September 30, 2021
|  | Amortized |  | Gross Unrealized |  | Fair
(in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies |  | $ | 53,380 |  |  | $ | 234 |  |  | $ | (1,159) |  |  | $ | 52,455 |
Municipal securities |  | 76,528 |  |  | 1,086 |  |  | (164) |  |  | 77,450 |
Agency mortgage-backed securities |  | 432,613 |  |  | 2,364 |  |  | (5,092) |  |  | 429,885 |
Private label mortgage-backed securities |  | 19,997 |  |  | 238 |  |  | — |  |  | 20,235 |
Asset-backed securities |  | 5,000 |  |  | 5 |  |  | — |  |  | 5,005 |
Corporate securities |  | 48,460 |  |  | 965 |  |  | (448) |  |  | 48,977 |
Total available-for-sale |  | $ | 635,978 |  |  | $ | 4,892 |  |  | $ | (6,863) |  |  | $ | 634,007 |

|  | September 30, 2021
|  | Amortized |  | Gross Unrealized |  | Fair
(in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Securities held-to-maturity |  |  |  |  |  |  |  |
Municipal securities |  | $ | 14,538 |  |  | $ | 781 |  |  | $ | — |  |  | $ | 15,319 |
Corporate securities |  | 47,591 |  |  | 1,427 |  |  | — |  |  | 49,018 |
Total held-to-maturity |  | $ | 62,129 |  |  | $ | 2,208 |  |  | $ | — |  |  | $ | 64,337 |

7

|  | December 31, 2020
|  | Amortized |  | Gross Unrealized |  | Fair
(in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies |  | $ | 61,765 |  |  | $ | 432 |  |  | $ | (1,652) |  |  | $ | 60,545 |
Municipal securities |  | 82,757 |  |  | 463 |  |  | (731) |  |  | 82,489 |
Agency mortgage-backed securities |  | 241,795 |  |  | 4,591 |  |  | (2,465) |  |  | 243,921 |
Private label mortgage-backed securities |  | 57,268 |  |  | 850 |  |  | (2) |  |  | 58,116 |
Asset-backed securities |  | 5,000 |  |  | — |  |  | (39) |  |  | 4,961 |
Corporate securities |  | 48,419 |  |  | 771 |  |  | (1,594) |  |  | 47,596 |
Total available-for-sale |  | $ | 497,004 |  |  | $ | 7,107 |  |  | $ | (6,483) |  |  | $ | 497,628 |

|  | December 31, 2020
|  | Amortized |  | Gross Unrealized |  | Fair
(in thousands) |  | Cost |  | Gains |  | Losses |  | Value
Securities held-to-maturity |  |  |  |  |  |  |  |
Municipal securities |  | $ | 14,571 |  |  | $ | 746 |  |  | $ | — |  |  | $ | 15,317 |
Corporate securities |  | 53,652 |  |  | 610 |  |  | (127) |  |  | 54,135 |
Total held-to-maturity |  | $ | 68,223 |  |  | $ | 1,356 |  |  | $ | (127) |  |  | $ | 69,452 |

The carrying value of securities at September 30, 2021 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | Available-for-Sale
(in thousands) |  | Amortized Cost |  | Fair Value
Within one year |  | $ | — |  |  | $ | — |
One to five years |  | 34,855 |  |  | 32,935 |
Five to ten years |  | 64,591 |  |  | 64,429 |
After ten years |  | 78,922 |  |  | 81,518 |
|  | 178,368 |  |  | 178,882 |
Agency mortgage-backed securities |  | 432,613 |  |  | 429,885 |
Private label mortgage-backed securities |  | 19,997 |  |  | 20,235 |
Asset-backed securities |  | 5,000 |  |  | 5,005 |
Total |  | $ | 635,978 |  |  | $ | 634,007 |

|  | Held-to-Maturity
(in thousands) |  | Amortized Cost |  | Fair Value
One to five years |  | $ | 5,793 |  |  | $ | 5,976 |
Five to ten years |  | 44,655 |  |  | 46,320 |
After ten years |  | 11,681 |  |  | 12,041 |
Total |  | $ | 62,129 |  |  | $ | 64,337 |

There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and nine months ended September 30, 2021. There were $0.1 million of gross gains resulting from the sale of available-for-sale securities during the three and nine months ended September 30, 2020.
8

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2021 and December 31, 2020 was $462.4 million and $226.5 million, which was approximately 66% and 40%, respectively, of the Company’s AFS and HTM securities portfolios. As of September 30, 2021, the Company’s security portfolio consisted of 441 securities, of which 167 were in an unrealized loss position. The unrealized losses are related to the categories noted below. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.
U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities
The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.
Agency Mortgage-Backed, Private Label Mortgage-Backed and Asset-Backed Securities
The unrealized losses on the Company’s investments in agency mortgage-backed, private label mortgage-backed and asset-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost bases over the terms of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.
The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020.

|  | September 30, 2021
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
(in thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies |  | $ | 2,931 |  |  | $ | (69) |  |  | $ | 44,034 |  |  | $ | (1,090) |  |  | $ | 46,965 |  |  | $ | (1,159) |
Municipal securities |  | 61,658 |  |  | (164) |  |  | — |  |  | — |  |  | 61,658 |  |  | (164) |
Agency mortgage-backed securities |  | 320,805 |  |  | (4,085) |  |  | 18,818 |  |  | (1,007) |  |  | 339,623 |  |  | (5,092) |
Corporate securities |  | 4,998 |  |  | (2) |  |  | 9,552 |  |  | (446) |  |  | 14,550 |  |  | (448) |
Total |  | $ | 390,392 |  |  | $ | (4,320) |  |  | $ | 72,404 |  |  | $ | (2,543) |  |  | $ | 462,796 |  |  | $ | (6,863) |

There were no securities held-to-maturity with gross unrealized losses at September 30, 2021.
9

|  | December 31, 2020
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
(in thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies |  | $ | — |  |  | $ | — |  |  | $ | 52,351 |  |  | $ | (1,652) |  |  | $ | 52,351 |  |  | $ | (1,652) |
Municipal securities |  | 18,731 |  |  | (114) |  |  | 23,519 |  |  | (617) |  |  | 42,250 |  |  | (731) |
Agency mortgage-backed securities |  | 38,987 |  |  | (276) |  |  | 45,297 |  |  | (2,189) |  |  | 84,284 |  |  | (2,465) |
Private label mortgage-backed securities |  | 1,277 |  |  | (1) |  |  | 558 |  |  | (1) |  |  | 1,835 |  |  | (2) |
Asset-backed securities |  | — |  |  | — |  |  | 4,961 |  |  | (39) |  |  | 4,961 |  |  | (39) |
Corporate securities |  | — |  |  | — |  |  | 20,406 |  |  | (1,594) |  |  | 20,406 |  |  | (1,594) |
Total |  | $ | 58,995 |  |  | $ | (391) |  |  | $ | 147,092 |  |  | $ | (6,092) |  |  | $ | 206,087 |  |  | $ | (6,483) |

|  | December 31, 2020
|  | Less Than 12 Months |  | 12 Months or Longer |  | Total
(in thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Securities held-to-maturity |  |  |  |  |  |  |  |  |  |  |  |
Corporate securities |  | 17,456 |  |  | (126) |  |  | 2,999 |  |  | (1) |  |  | 20,455 |  |  | (127) |
Total |  | $ | 17,456 |  |  | $ | (126) |  |  | $ | 2,999 |  |  | $ | (1) |  |  | $ | 20,455 |  |  | $ | (127) |

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and nine months ended September 30, 2021. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and nine months ended September 30, 2020 were as follows:

(in thousands) Details About Accumulated Other Comprehensive Loss Components |  |  |  |  |  |  |  |  | Affected Line Item in the Statements of Income
| Three Months Ended September 30, 2021 |  | Nine Months Ended September 30, 2021 |  | Three Months Ended September 30, 2020 |  | Nine Months Ended September 30, 2020 |  |
Realized gains on securities available-for-sale |  |  |  |  |  |  |  |  |  |  |
Gain realized in earnings |  | $ | — |  |  | $ | — |  |  | $ | 98 |  |  | $ | 139 |  |  |  | Gain on sale of securities
Total reclassified amount before tax |  | — |  |  | — |  |  | 98 |  |  | 139 |  |  |  | Income Before Income Taxes
Tax expense |  | — |  |  | — |  |  | 26 |  |  | 38 |  |  |  | Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss |  | $ | — |  |  | $ | — |  |  | $ | 72 |  |  | $ | 101 |  |  |  | Net Income

10

Note 4: Loans
Loan balances as of September 30, 2021 and December 31, 2020 are summarized in the table below. Categories of loans include:

(in thousands) |  | September 30, 2021 |  | December 31, 2020
Commercial loans |  |  |  |
Commercial and industrial |  | $ | 107,142 |  |  | $ | 75,387 |
Owner-occupied commercial real estate |  | 84,819 |  |  | 89,785 |
Investor commercial real estate |  | 28,505 |  |  | 13,902 |
Construction |  | 115,414 |  |  | 110,385 |
Single tenant lease financing |  | 921,998 |  |  | 950,172 |
Public finance |  | 601,738 |  |  | 622,257 |
Healthcare finance |  | 417,388 |  |  | 528,154 |
Small business lending |  | 102,889 |  |  | 125,589 |
Franchise finance |  | 25,598 |  |  | — |
Total commercial loans |  | 2,405,491 |  |  | 2,515,631 |
Consumer loans |  |  |  |
Residential mortgage |  | 188,750 |  |  | 186,787 |
Home equity |  | 17,960 |  |  | 19,857 |
Other consumer |  | 268,396 |  |  | 275,692 |
Total consumer loans |  | 475,106 |  |  | 482,336 |
Total commercial and consumer loans |  | 2,880,597 |  |  | 2,997,967 |
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other(1) |  | 55,551 |  |  | 61,264 |
Total loans |  | 2,936,148 |  |  | 3,059,231 |
Allowance for loan losses |  | (28,000) |  |  | (29,484) |
Net loans |  | $ | 2,908,148 |  |  | $ | 3,029,747 |

(1) Includes carrying value adjustments of $38.9 million and $42.7 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2021 and December 31, 2020, respectively.
The risk characteristics of each loan portfolio segment are as follows:
Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States.
Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings.
11

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest region of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to mitigate these additional risks.
Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest region of the United States.
Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.
Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment.
Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities if the real estate is held in a separate entity and secondarily on the underlying collateral provided by the borrower.
Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration ("SBA") under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. These loans also include loans originated by the Bank under the SBA’s Paycheck Protection Program, which are fully guaranteed by the SBA.
Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with asset-light financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations.
12

Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions, such as unemployment levels, in their market areas. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.
Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions, such as unemployment levels, in their market areas. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Allowance for Loan Losses Methodology
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans, as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
Provision for Loan Losses
A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
Policy for Charging Off Loans
The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.
13

The following tables present changes in the balance of the ALLL during the three and nine months ended September 30, 2021 and 2020.

(in thousands) | Three Months Ended September 30, 2021
Allowance for loan losses: | Balance, Beginning of Period |  | (Credit) Provision Charged to Expense |  | Losses Charged Off |  | Recoveries |  | Balance, End of Period
Commercial and industrial | $ | 1,902 |  |  | $ | 122 |  |  | $ | — |  |  | $ | 2 |  |  | $ | 2,026 |
Owner-occupied commercial real estate | 1,021 |  |  | (28) |  |  | — |  |  | — |  |  | 993 |
Investor commercial real estate | 329 |  |  | (4) |  |  | — |  |  | — |  |  | 325 |
Construction | 1,357 |  |  | (30) |  |  | — |  |  | — |  |  | 1,327 |
Single tenant lease financing | 11,205 |  |  | (152) |  |  | — |  |  | — |  |  | 11,053 |
Public finance | 1,700 |  |  | 32 |  |  | — |  |  | — |  |  | 1,732 |
Healthcare finance | 6,938 |  |  | (584) |  |  | — |  |  | — |  |  | 6,354 |
Small business lending | 783 |  |  | 415 |  |  | (10) |  |  | 26 |  |  | 1,214 |
Franchise finance | — |  |  | 310 |  |  | — |  |  |  |  | 310 |
Residential mortgage | 594 |  |  | 19 |  |  | — |  |  | 3 |  |  | 616 |
Home equity | 63 |  |  | — |  |  | — |  |  | 2 |  |  | 65 |
Other consumer | 2,174 |  |  | (129) |  |  | (110) |  |  | 50 |  |  | 1,985 |
Total | $ | 28,066 |  |  | $ | (29) |  |  | $ | (120) |  |  | $ | 83 |  |  | $ | 28,000 |

| Nine Months Ended September 30, 2021
Allowance for loan losses: | Balance, Beginning of Period |  | Provision (Credit) Charged to Expense |  | Losses Charged Off |  | Recoveries |  | Balance, End of Period
Commercial and industrial | $ | 1,146 |  |  | $ | 823 |  |  | $ | (28) |  |  | $ | 85 |  |  | $ | 2,026 |
Owner-occupied commercial real estate | 1,082 |  |  | (89) |  |  | — |  |  | — |  |  | 993 |
Investor commercial real estate | 155 |  |  | 170 |  |  | — |  |  | — |  |  | 325 |
Construction | 1,192 |  |  | 135 |  |  | — |  |  | — |  |  | 1,327 |
Single tenant lease financing | 12,990 |  |  | 454 |  |  | (2,391) |  |  | — |  |  | 11,053 |
Public finance | 1,732 |  |  | — |  |  | — |  |  | — |  |  | 1,732 |
Healthcare finance | 7,485 |  |  | (1,131) |  |  | — |  |  | — |  |  | 6,354 |
Small business lending | 628 |  |  | 776 |  |  | (222) |  |  | 32 |  |  | 1,214 |
Franchise finance | — |  |  | 310 |  |  | — |  |  | — |  |  | 310 |
Residential mortgage | 519 |  |  | 91 |  |  | (6) |  |  | 12 |  |  | 616 |
Home equity | 48 |  |  | 63 |  |  | (51) |  |  | 5 |  |  | 65 |
Other consumer | 2,507 |  |  | (334) |  |  | (423) |  |  | 235 |  |  | 1,985 |
Total | $ | 29,484 |  |  | $ | 1,268 |  |  | $ | (3,121) |  |  | $ | 369 |  |  | $ | 28,000 |

14

| Three Months Ended September 30, 2020
Allowance for loan losses: | Balance, Beginning of Period |  | (Credit) Provision Charged to Expense |  | Losses Charged Off |  | Recoveries |  | Balance, End of Period
Commercial and industrial | $ | 1,477 |  |  | $ | (227) |  |  | $ | (99) |  |  | $ | — |  |  | $ | 1,151 |
Owner-occupied commercial real estate | 846 |  |  | 167 |  |  | — |  |  | — |  |  | 1,013 |
Investor commercial real estate | 130 |  |  | — |  |  | — |  |  | — |  |  | 130 |
Construction | 721 |  |  | 155 |  |  | — |  |  | — |  |  | 876 |
Single tenant lease financing | 11,318 |  |  | 717 |  |  | — |  |  | — |  |  | 12,035 |
Public finance | 1,542 |  |  | 191 |  |  | — |  |  | — |  |  | 1,733 |
Healthcare finance | 4,762 |  |  | 1,232 |  |  | — |  |  | 87 |  |  | 6,081 |
Small business lending | 251 |  |  | 230 |  |  | — |  |  | 3 |  |  | 484 |
Residential mortgage | 539 |  |  | 26 |  |  | — |  |  | — |  |  | 565 |
Home equity | 51 |  |  | (1) |  |  | — |  |  | 3 |  |  | 53 |
Other consumer | 2,828 |  |  | 19 |  |  | (142) |  |  | 91 |  |  | 2,796 |
Total | $ | 24,465 |  |  | $ | 2,509 |  |  | $ | (241) |  |  | $ | 184 |  |  | $ | 26,917 |

| Nine Months Ended September 30, 2020 |
Allowance for loan losses: | Balance, Beginning of Period |  | (Credit) Provision Charged to Expense |  | Losses Charged Off |  | Recoveries |  | Balance, End of Period |
Commercial and industrial | $ | 1,521 |  |  | $ | (22) |  |  | $ | (353) |  |  | $ | 5 |  |  | $ | 1,151 |  |
Owner-occupied commercial real estate | 561 |  |  | 452 |  |  | — |  |  | — |  |  | 1,013 |  |
Investor commercial real estate | 109 |  |  | 21 |  |  | — |  |  | — |  |  | 130 |  |
Construction | 380 |  |  | 496 |  |  | — |  |  | — |  |  | 876 |  |
Single tenant lease financing | 11,175 |  |  | 860 |  |  | — |  |  | — |  |  | 12,035 |  |
Public finance | 1,580 |  |  | 153 |  |  | — |  |  | — |  |  | 1,733 |  |
Healthcare finance | 3,247 |  |  | 3,490 |  |  | (743) |  |  | 87 |  |  | 6,081 |  |
Small business lending | 54 |  |  | 413 |  |  | — |  |  | 17 |  |  | 484 |  |
Residential mortgage | 657 |  |  | (81) |  |  | (15) |  |  | 4 |  |  | 565 |  |
Home equity | 46 |  |  | (1) |  |  | — |  |  | 8 |  |  | 53 |  |
Other consumer | 2,510 |  |  | 680 |  |  | (644) |  |  | 250 |  |  | 2,796 |  |
Total | $ | 21,840 |  |  | $ | 6,461 |  |  | $ | (1,755) |  |  | $ | 371 |  |  | $ | 26,917 |  |

15

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2021 and December 31, 2020.

(in thousands) | Loans |  | Allowance for Loan Losses
September 30, 2021 | Ending Balance: Collectively Evaluated for Impairment |  | Ending Balance: Individually Evaluated for Impairment |  | Ending Balance |  | Ending Balance: Collectively Evaluated for Impairment |  | Ending Balance: Individually Evaluated for Impairment |  | Ending Balance
Commercial and industrial | $ | 106,464 |  |  | $ | 678 |  |  | $ | 107,142 |  |  | $ | 1,576 |  |  | $ | 450 |  |  | $ | 2,026 |
Owner-occupied commercial real estate | 81,390 |  |  | 3,429 |  |  | 84,819 |  |  | 993 |  |  | — |  |  | 993 |
Investor commercial real estate | 28,505 |  |  | — |  |  | 28,505 |  |  | 325 |  |  | — |  |  | 325 |
Construction | 115,414 |  |  | — |  |  | 115,414 |  |  | 1,327 |  |  | — |  |  | 1,327 |
Single tenant lease financing | 920,898 |  |  | 1,100 |  |  | 921,998 |  |  | 10,958 |  |  | 95 |  |  | 11,053 |
Public finance | 601,738 |  |  | — |  |  | 601,738 |  |  | 1,732 |  |  | — |  |  | 1,732 |
Healthcare finance | 416,447 |  |  | 941 |  |  | 417,388 |  |  | 5,831 |  |  | 523 |  |  | 6,354 |
Small business lending(1) | 100,483 |  |  | 2,406 |  |  | 102,889 |  |  | 822 |  |  | 393 |  |  | 1,214 |
Franchise finance | 25,598 |  |  | — |  |  | 25,598 |  |  | 310 |  |  | — |  |  | 310 |
Residential mortgage | 186,654 |  |  | 2,096 |  |  | 188,750 |  |  | 616 |  |  | — |  |  | 616 |
Home equity | 17,946 |  |  | 14 |  |  | 17,960 |  |  | 65 |  |  | — |  |  | 65 |
Other consumer | 268,370 |  |  | 27 |  |  | 268,396 |  |  | 1,985 |  |  | — |  |  | 1,985 |
Total | $ | 2,869,907 |  |  | $ | 10,691 |  |  | $ | 2,880,597 |  |  | $ | 26,540 |  |  | $ | 1,461 |  |  | $ | 28,000 |

1 Balance of loans individually evaluated for impairment are guaranteed by the U.S. government.

(in thousands) | Loans |  | Allowance for Loan Losses
December 31, 2020 | Ending Balance: Collectively Evaluated for Impairment |  | Ending Balance: Individually Evaluated for Impairment |  | Ending Balance |  | Ending Balance: Collectively Evaluated for Impairment |  | Ending Balance: Individually Evaluated for Impairment |  | Ending Balance
Commercial and industrial | $ | 74,870 |  |  | $ | 517 |  |  | $ | 75,387 |  |  | $ | 1,146 |  |  | $ | — |  |  | $ | 1,146 |
Owner-occupied commercial real estate | 87,947 |  |  | 1,838 |  |  | 89,785 |  |  | 1,082 |  |  | — |  |  | 1,082 |
Investor commercial real estate | 13,902 |  |  | — |  |  | 13,902 |  |  | 155 |  |  | — |  |  | 155 |
Construction | 110,385 |  |  | — |  |  | 110,385 |  |  | 1,192 |  |  | — |  |  | 1,192 |
Single tenant lease financing | 942,848 |  |  | 7,324 |  |  | 950,172 |  |  | 9,900 |  |  | 3,090 |  |  | 12,990 |
Public finance | 622,257 |  |  | — |  |  | 622,257 |  |  | 1,732 |  |  | — |  |  | 1,732 |
Healthcare finance | 527,144 |  |  | 1,010 |  |  | 528,154 |  |  | 7,485 |  |  | — |  |  | 7,485 |
Small business lending | 125,589 |  |  | — |  |  | 125,589 |  |  | 628 |  |  | — |  |  | 628 |
Residential mortgage | 185,241 |  |  | 1,546 |  |  | 186,787 |  |  | 519 |  |  | — |  |  | 519 |
Home equity | 19,857 |  |  | — |  |  | 19,857 |  |  | 48 |  |  | — |  |  | 48 |
Other consumer | 275,642 |  |  | 50 |  |  | 275,692 |  |  | 2,507 |  |  | — |  |  | 2,507 |
Total | $ | 2,985,682 |  |  | $ | 12,285 |  |  | $ | 2,997,967 |  |  | $ | 26,394 |  |  | $ | 3,090 |  |  | $ | 29,484 |

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The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows:
•“Pass” - Higher quality loans that do not fit any of the other categories described below.
•“Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention.
•“Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
•“Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.
•“Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.
Nonaccrual Loans
Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest.
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The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of September 30, 2021 and December 31, 2020.

| September 30, 2021
(in thousands) | Pass |  | Special Mention |  | Substandard |  |  |  |  |  | Total
Commercial and industrial | $ | 92,863 |  |  | $ | 13,601 |  |  | $ | 678 |  |  |  |  |  |  | $ | 107,142 |
Owner-occupied commercial real estate | 76,547 |  |  | 4,843 |  |  | 3,429 |  |  |  |  |  |  | 84,819 |
Investor commercial real estate | 28,505 |  |  | — |  |  | — |  |  |  |  |  |  | 28,505 |
Construction | 104,656 |  |  | 10,758 |  |  | — |  |  |  |  |  |  | 115,414 |
Single tenant lease financing | 915,702 |  |  | 5,196 |  |  | 1,100 |  |  |  |  |  |  | 921,998 |
Public finance | 600,658 |  |  | 1,080 |  |  | — |  |  |  |  |  |  | 601,738 |
Healthcare finance | 415,845 |  |  | 602 |  |  | 941 |  |  |  |  |  |  | 417,388 |
Small business lending(1) | 93,037 |  |  | 6,762 |  |  | 3,090 |  |  |  |  |  |  | 102,889 |
Franchise finance | 25,598 |  |  | — |  |  | — |  |  |  |  |  |  | 25,598 |
Total commercial loans | $ | 2,353,411 |  |  | $ | 42,842 |  |  | $ | 9,238 |  |  |  |  |  |  | $ | 2,405,491 |

1 Balance in “Substandard” is guaranteed by the U.S. government.

| September 30, 2021
(in thousands) | Performing |  | Nonaccrual |  | Total
Residential mortgage | $ | 187,497 |  |  | $ | 1,253 |  |  | $ | 188,750 |
Home equity | 17,946 |  |  | 14 |  |  | 17,960 |
Other consumer | 268,370 |  |  | 26 |  |  | 268,396 |
Total consumer loans | $ | 473,813 |  |  | $ | 1,293 |  |  | $ | 475,106 |

| December 31, 2020
(in thousands) | Pass |  | Special Mention |  | Substandard |  |  |  |  |  | Total
Commercial and industrial | $ | 74,138 |  |  | $ | 732 |  |  | $ | 517 |  |  |  |  |  |  | $ | 75,387 |
Owner-occupied commercial real estate | 84,292 |  |  | 3,655 |  |  | 1,838 |  |  |  |  |  |  | 89,785 |
Investor commercial real estate | 13,902 |  |  | — |  |  | — |  |  |  |  |  |  | 13,902 |
Construction | 110,385 |  |  | — |  |  | — |  |  |  |  |  |  | 110,385 |
Single tenant lease financing | 932,830 |  |  | 10,018 |  |  | 7,324 |  |  |  |  |  |  | 950,172 |
Public finance | 622,257 |  |  | — |  |  | — |  |  |  |  |  |  | 622,257 |
Healthcare finance | 526,517 |  |  | 627 |  |  | 1,010 |  |  |  |  |  |  | 528,154 |
Small business lending(1) | 117,474 |  |  | 2,930 |  |  | 5,185 |  |  |  |  |  |  | 125,589 |
Total commercial loans | $ | 2,481,795 |  |  | $ | 17,962 |  |  | $ | 15,874 |  |  |  |  |  |  | $ | 2,515,631 |

1 Balance in “Substandard” is guaranteed by the U.S. government.

| December 31, 2020
(in thousands) | Performing |  | Nonaccrual |  | Total
Residential mortgage | $ | 185,604 |  |  | $ | 1,183 |  |  | $ | 186,787 |
Home equity | 19,857 |  |  | — |  |  | 19,857 |
Other consumer | 275,646 |  |  | 46 |  |  | 275,692 |
Total consumer loans | $ | 481,107 |  |  | $ | 1,229 |  |  | $ | 482,336 |

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The following tables present the Company’s loan portfolio delinquency analysis as of September 30, 2021 and December 31, 2020.

|  | September 30, 2021
(in thousands) |  | 30-59 Days Past Due |  | 60-89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  | Current |  | Total Loans |  | Non- accrual Loans |  | Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 107,142 |  |  | $ | 107,142 |  |  | $ | 678 |  |  | $ | — |
Owner-occupied commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | 84,819 |  |  | 84,819 |  |  | — |  |  | — |
Investor commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | 28,505 |  |  | 28,505 |  |  | 3,429 |  |  | — |
Construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 115,414 |  |  | 115,414 |  |  | — |  |  | — |
Single tenant lease financing |  | — |  |  | — |  |  | — |  |  | — |  |  | 921,998 |  |  | 921,998 |  |  | 1,100 |  |  | — |
Public finance |  | — |  |  | — |  |  | — |  |  | — |  |  | 601,738 |  |  | 601,738 |  |  | — |  |  | — |
Healthcare finance |  | — |  |  | — |  |  | — |  |  | — |  |  | 417,388 |  |  | 417,388 |  |  | — |  |  | — |
Small business lending(1) |  | — |  |  | — |  |  | 1,351 |  |  | 1,351 |  |  | 101,538 |  |  | 102,889 |  |  | 1,351 |  |  | — |
Franchise finance |  | — |  |  | — |  |  | — |  |  | — |  |  | 25,598 |  |  | 25,598 |  |  | — |  |  | — |
Residential mortgage |  | — |  |  | — |  |  | 378 |  |  | 378 |  |  | 188,372 |  |  | 188,750 |  |  | 1,253 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |  |  | 17,960 |  |  | 17,960 |  |  | 14 |  |  | — |
Other consumer |  | 86 |  |  | 12 |  |  | 17 |  |  | 115 |  |  | 268,281 |  |  | 268,396 |  |  | 26 |  |  | — |
Total |  | $ | 86 |  |  | $ | 12 |  |  | $ | 1,746 |  |  | $ | 1,844 |  |  | $ | 2,878,753 |  |  | $ | 2,880,597 |  |  | $ | 7,851 |  |  | $ | — |

1 Balance in “90 Days or More Past Due” is guaranteed by the U.S. government.

|  | December 31, 2020
(in thousands) |  | 30-59 Days Past Due |  | 60-89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  | Current |  | Total Loans |  | Non- accrual Loans |  | Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 75,387 |  |  | $ | 75,387 |  |  | $ | — |  |  | $ | — |
Owner-occupied commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | 89,785 |  |  | 89,785 |  |  | 1,838 |  |  | — |
Investor commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | 13,902 |  |  | 13,902 |  |  | — |  |  | — |
Construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 110,385 |  |  | 110,385 |  |  | — |  |  | — |
Single tenant lease financing |  | — |  |  | — |  |  | 4,680 |  |  | 4,680 |  |  | 945,492 |  |  | 950,172 |  |  | 7,116 |  |  | — |
Public finance |  | — |  |  | — |  |  | — |  |  | — |  |  | 622,257 |  |  | 622,257 |  |  | — |  |  | — |
Healthcare finance |  | — |  |  | — |  |  | — |  |  | — |  |  | 528,154 |  |  | 528,154 |  |  | — |  |  | — |
Small business lending |  | — |  |  | — |  |  | — |  |  | — |  |  | 125,589 |  |  | 125,589 |  |  | — |  |  | — |
Residential mortgage |  | 49 |  |  | — |  |  | 269 |  |  | 318 |  |  | 186,469 |  |  | 186,787 |  |  | 1,183 |  |  | — |
Home equity |  | — |  |  | 15 |  |  | — |  |  | 15 |  |  | 19,842 |  |  | 19,857 |  |  | — |  |  | — |
Other consumer |  | 176 |  |  | 51 |  |  | 5 |  |  | 232 |  |  | 275,460 |  |  | 275,692 |  |  | 46 |  |  | — |
Total |  | $ | 225 |  |  | $ | 66 |  |  | $ | 4,954 |  |  | $ | 5,245 |  |  | $ | 2,992,722 |  |  | $ | 2,997,967 |  |  | $ | 10,183 |  |  | $ | — |

Impaired Loans
A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual
19

of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
ASC Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
The following table presents the Company’s impaired loans as of September 30, 2021 and December 31, 2020.

|  | September 30, 2021 |  | December 31, 2020
(in thousands) |  | Recorded Balance |  | Unpaid Principal Balance |  | Specific Allowance |  | Recorded Balance |  | Unpaid Principal Balance |  | Specific Allowance
Loans without a specific valuation allowance |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 3,429 |  |  | $ | 3,486 |  |  | $ | — |  |  | $ | 517 |  |  | $ | 517 |  |  | $ | — |
Owner-occupied commercial real estate |  | — |  |  | — |  |  | — |  |  | 1,838 |  |  | 1,850 |  |  | — |
Single tenant lease financing |  | — |  |  | — |  |  | — |  |  | 1,315 |  |  | 1,334 |  |  | — |
Healthcare finance |  | — |  |  | — |  |  | — |  |  | 1,010 |  |  | 1,010 |  |  | — |
Small business lending(1) |  | 1,377 |  |  | 1,486 |  |  | — |  |  | — |  |  | — |  |  | — |
Residential mortgage |  | 2,096 |  |  | 2,223 |  |  | — |  |  | 1,546 |  |  | 1,652 |  |  | — |
Home equity |  | 14 |  |  | 15 |  |  | — |  |  | — |  |  | — |  |  | — |
Other consumer |  | 27 |  |  | 82 |  |  | — |  |  | 50 |  |  | 120 |  |  | — |
Total |  | 6,943 |  |  | 7,292 |  |  | — |  |  | 6,276 |  |  | 6,483 |  |  | — |
Loans with a specific valuation allowance |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | 678 |  |  | 701 |  |  | 450 |  |  | — |  |  | — |  |  | — |
Single tenant lease financing |  | 1,100 |  |  | 1,123 |  |  | 95 |  |  | 6,009 |  |  | 6,036 |  |  | 3,090 |
Healthcare Finance |  | 941 |  |  | 941 |  |  | 523 |  |  | — |  |  | — |  |  | — |
Small business lending |  | 1,029 |  |  | 1,029 |  |  | 393 |  |  | — |  |  | — |  |  | — |
Total |  | 3,748 |  |  | 3,794 |  |  | 1,461 |  |  | 6,009 |  |  | 6,036 |  |  | 3,090 |
Total impaired loans |  | $ | 10,691 |  |  | $ | 11,086 |  |  | $ | 1,461 |  |  | $ | 12,285 |  |  | $ | 12,519 |  |  | $ | 3,090 |

1 Entire balance is guaranteed by the U.S. government.
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The table below presents average balances and interest income recognized for impaired loans during the three and nine months ended September 30, 2021 and 2020.

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
(in thousands) |  | Average Balance |  | Interest Income |  | Average Balance |  | Interest Income |  | Average Balance |  | Interest Income |  | Average Balance |  | Interest Income
Loans without a specific valuation allowance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | — |  |  | $ | — |  |  | $ | 971 |  |  | $ | 18 |  |  | $ | 259 |  |  | $ | 9 |  |  | $ | 1,210 |  |  | $ | 54 |
Owner-occupied commercial real estate |  | 3,457 |  |  | — |  |  | 3,586 |  |  | 29 |  |  | 3,297 |  |  | — |  |  | 4,244 |  |  | 60 |
Single tenant lease financing |  | — |  |  | — |  |  | — |  |  | — |  |  | 100 |  |  | 5 |  |  | — |  |  | — |
Healthcare finance |  | — |  |  | — |  |  | 692 |  |  | 8 |  |  | 336 |  |  | — |  |  | 231 |  |  | 8 |
Small business lending(1) |  | 1,315 |  |  | — |  |  | — |  |  | — |  |  | 1,005 |  |  | — |  |  | — |  |  | — |
Residential mortgage |  | 2,267 |  |  | 15 |  |  | 1,233 |  |  | — |  |  | 2,138 |  |  | 28 |  |  | 1,286 |  |  | — |
Home equity |  | 14 |  |  | — |  |  | — |  |  | — |  |  | 13 |  |  | — |  |  | — |  |  | — |
Other consumer |  | 23 |  |  | — |  |  | 68 |  |  | — |  |  | 27 |  |  | — |  |  | 63 |  |  | — |
Total |  | 7,076 |  |  | 15 |  |  | 6,550 |  |  | 55 |  |  | 7,175 |  |  | 42 |  |  | 7,034 |  |  | 122 |
Loans with a specific valuation allowance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | 690 |  |  | — |  |  | 182 |  |  | 18 |  |  | 677 |  |  | — |  |  | 196 |  |  | 18 |
Owner-occupied commercial real estate |  | — |  |  | — |  |  | — |  |  | 29 |  |  | 473 |  |  | — |  |  | — |  |  | 29 |
Single tenant lease financing |  | 2,048 |  |  | — |  |  | 5,978 |  |  | 4 |  |  | 4,875 |  |  | — |  |  | 5,113 |  |  | 4 |
Healthcare Finance |  | 956 |  |  | 37 |  |  | — |  |  | — |  |  | 809 |  |  | 73 |  |  | — |  |  | — |
Small business lending |  | 1,203 |  |  | — |  |  | — |  |  | — |  |  | 401 |  | — |  |  | — |  |  | — |
Total |  | 4,897 |  |  | 37 |  |  | 6,160 |  |  | 51 |  |  | 7,235 |  |  | 73 |  |  | 5,309 |  |  | 51 |
Total impaired loans |  | $ | 11,973 |  |  | $ | 52 |  |  | $ | 12,710 |  |  | $ | 106 |  |  | $ | 14,410 |  |  | $ | 115 |  |  | $ | 12,343 |  |  | $ | 173 |

1 Entire balance is guaranteed by the U.S. government.
The Company had $1.2 million in other real estate owned (“OREO”) as of September 30, 2021, which consisted of one commercial property. The Company did not have any OREO as of December 31, 2020. There were two loans totaling $0.4 million and no loans in the process of foreclosure at September 30, 2021 and December 31, 2020, respectively.
Troubled Debt Restructurings
The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months.
When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs, for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.
In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to obtain additional collateral and/or guarantees to support the debt, or a combination of the two.
There were no new TDR’s during the three months ended September 30, 2021 and one portfolio residential mortgage loan classified as a new TDR during the nine months ended September 30, 2021 with a pre-modification and post-
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modification outstanding recorded investment of $0.8 million. The Company did not allocate a specific allowance for that loan as of September 30, 2021. The modifications consisted of interest-only payments for a period of time. There were no loans classified as a new TDR during the three months ended September 30, 2020 and one portfolio residential mortgage loan classified as a new TDR during the nine months ended September 30, 2020 with a pre-modification and post-modification outstanding recorded investment of $0.8 million. The Company did not allocate a specific allowance for that loan as of September 30, 2020. The modification consisted of an extension of the maturity date. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and nine months ended September 30, 2021 and 2020, respectively.
Non-TDR Loan Modifications due to COVID-19
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. As of September 30, 2021, the Company had thirteen loans totaling $3.0 million in non-TDR loan modifications due to COVID-19.
Note 5: Premises and Equipment
The following table summarizes premises and equipment at September 30, 2021 and December 31, 2020.

(in thousands) |  | September 30, 2021 |  | December 31, 2020
Land |  | $ | — |  |  | $ | 2,500 |
Right of use leased asset |  | 256 |  |  | 819 |
Construction in process |  | 50,466 |  |  | 28,754 |
Building and improvements |  | 777 |  |  | 5,819 |
Furniture and equipment |  | 7,692 |  |  | 10,671 |
Less: accumulated depreciation |  | (6,491) |  |  | (10,973) |
Total |  | $ | 52,700 |  |  | $ | 37,590 |

In December 2018, the Bank’s subsidiary, SPF15, Inc., entered into a project agreement with the City of Fishers, Indiana, and its Redevelopment Commission, among others, to construct an office building to include the Company’s future headquarters and associated parking garage on property the Bank had acquired in 2018. Construction began on the project in the fourth quarter 2019 and is expected to be substantially complete in the fourth quarter 2021. The Company anticipates fully occupying the new headquarters building by the end of 2021.
On February 16, 2021, the Company entered into an agreement to sell its current headquarters and certain equipment currently located in the building to a third party. The sale was completed on April 16, 2021 and as a part of the sale agreement, the buyer agreed to lease the office building back to the Company through December 31, 2021, with an option to extend up to 90 days beyond that date. The sale price was $8.9 million in cash paid in full at closing. The Company is expected to continue to lease substantially all of the office space for the duration of the primary leaseback period.
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Note 6: Goodwill
As of September 30, 2021 and December 31, 2020, the carrying amount of goodwill was $4.7 million. There have been no changes in the carrying amount of goodwill for the three and nine months ended September 30, 2021. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.
Goodwill was assessed for impairment using a qualitative test performed as of August 31, 2021. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date.
Note 7: Servicing Asset
Activity for the servicing asset and the related changes in fair value for the three and nine months ended September 30, 2021 and 2020 are shown in the table below.

(in thousands) |  | Three Months Ended
|  | September 30, 2021 |  | September 30, 2020 |  |
Balance, beginning of period |  | $ | 4,120 |  |  | $ | 2,522 |  |  |
Additions |  |  |  |  |  |
Originated and purchased servicing |  | 566 |  |  | 399 |  |  |
Subtractions |  |  |  |  |  |
Paydowns |  | (176) |  |  | (103) |  |  |
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model |  | (98) |  |  | — |  |  |
Loan servicing asset revaluation |  | $ | (274) |  |  | $ | (103) |  |  |
Balance, end of period |  | $ | 4,412 |  |  | $ | 2,818 |  |  |

(in thousands) |  | Nine Months Ended |  |
|  | September 30, 2021 |  | September 30, 2020 |  |  |  |  |  |
Balance, beginning of period |  | $ | 3,569 |  |  | $ | 2,481 |  |  |  |  |  |  |
Additions |  |  |  |  |  |  |  |  |  |
Originated and purchased servicing |  | 1,512 |  |  | 709 |  |  |  |  |  |  |
Subtractions |  |  |  |  |  |  |  |  |  |
Paydowns |  | (500) |  |  | (372) |  |  |  |  |  |  |
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model |  | (169) |  |  | — |  |  |  |  |  |  |
Loan servicing asset revaluation |  | $ | (669) |  |  | $ | (372) |  |  |  |  |  |  |
Balance, end of period |  | $ | 4,412 |  |  | $ | 2,818 |  |  |  |  |  |  |

Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of September 30, 2021 and December 31, 2020 are shown in the table below.

(in thousands) |  |  |  |
|  | September 30, 2021 |  | December 31, 2020 |  |  |  |  |  |
Loan portfolios serviced for: |  |  |  |  |  |  |  |  |  |
SBA guaranteed loans |  | $ | 213,378 |  |  | $ | 165,961 |  |  |  |  |  |  |
Total |  | $ | 213,378 |  |  | $ | 165,961 |  |  |  |  |  |  |

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Loan servicing revenue totaled $0.5 million and $1.4 million for the three and nine months ended September 30, 2021 and $0.3 million and $0.8 million for the three and nine months ended September 30, 2020, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $0.3 million and $0.7 million downward valuation for the three and nine months ended September 30, 2021, respectively, and a $0.1 and $0.4 million downward valuation for the three and nine months ended September 30, 2020, respectively.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 11 - Fair Value of Financial Instruments for further details.
Note 8: Subordinated Debt
In October 2015, the Company entered into a term loan in the principal amount of $10.0 million, evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note had a fixed interest rate of 6.4375% per year, payable quarterly, and was scheduled to mature on October 1, 2025. The 2025 Note was an unsecured subordinated obligation of the Company and was eligible to be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note was intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2025 Note in full on January 4, 2021.
In September 2016, the Company issued $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially had a fixed interest rate of 6.0% per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three-month LIBOR rate plus 485 basis points. All interest on the 2026 Notes was payable quarterly. The 2026 Notes were scheduled to mature on September 30, 2026. The 2026 Notes were unsecured subordinated obligations of the Company eligible to be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes were intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2026 Notes in full on September 30, 2021.
In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 411 basis points. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.
In October 2020, the Company entered into a term loan in the principal amount of $10.0 million evidenced by term notes due 2030 (the “2030 Notes”). The 2030 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially the then current three-month term secured overnight financing rate (“Term SOFR”) plus 5.795%). The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Notes to redeem the 2025 Note.
In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11%). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes. Under the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company has agreed to take certain actions to provide for the exchange of the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes.
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The following table presents the principal balance and unamortized debt issuance costs for the 2025 Note, the 2026 Notes, the 2029 Notes, the 2030 Notes, and the 2031 Notes as of September 30, 2021 and December 31, 2020.

| September 30, 2021 |  | December 31, 2020
(in thousands) | Principal |  | Unamortized Debt Issuance Costs |  | Principal |  | Unamortized Debt Issuance Costs
2025 Note | — |  |  | — |  |  | 10,000 |  |  | (114) |
2026 Notes | — |  |  | — |  |  | 25,000 |  |  | (715) |
2029 Notes | 37,000 |  |  | (1,218) |  |  | 37,000 |  |  | (1,337) |
2030 Notes | 10,000 |  |  | (213) |  |  | 10,000 |  |  | (231) |
2031 Notes | $ | 60,000 |  |  | $ | (1,413) |  |  | $ | — |  |  | $ | — |
Total | $ | 107,000 |  |  | $ | (2,844) |  |  | $ | 82,000 |  |  | $ | (2,397) |

Note 9: Benefit Plans
Employment Agreement
The Company is party to an employment agreement with its Chief Executive Officer that provides for an annual base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonus is to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that the Chief Executive Officer may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine.
The agreement provides for the continuation of salary and certain other benefits for a specified period of time upon termination of his employment under certain circumstances, including his resignation for “good reason” or termination by the Company without “cause” at any time or any termination of his employment for any reason within twelve months following a “change in control,” along with other specific conditions.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of 750,000 shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan.
The Company recorded $0.6 million and $1.8 million of share-based compensation expense for the three and nine months ended September 30, 2021, respectively, related to awards made under th e 2013 Plan. The Company recorded $0.5 million and $1.6 million of share-based compensation expense for the three and nine months ended September 30, 2020, respectively, related to awards made under the 2013 Plan.
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The following table summarizes the status of the 2013 Plan awards as of September 30, 2021, and activity for the nine months ended September 30, 2021.

| Restricted Stock Units |  | Weighted-Average Grant Date Fair Value Per Share |  | Restricted Stock Awards |  | Weighted-Average Grant Date Fair Value Per Share |  | Deferred Stock Units |  | Weighted-Average Grant Date Fair Value Per Share
Nonvested at December 31, 2020 | 112,985 |  |  | $ | 27.76 |  |  | — |  |  | $ | — |  |  | — |  |  | $ | — |
Granted | 60,111 |  |  | 30.42 |  |  | 13,878 |  |  | 30.27 |  |  | 6 |  |  | 32.16 |
Cancelled/Forfeited | — |  |  | — |  |  | (1,057) |  |  | 30.13 |  |  | — |  |  | — |
Vested | (35,745) |  |  | 30.12 |  |  | (9,650) |  |  | 30.26 |  |  | (6) |  |  | 32.16 |
Nonvested at September 30, 2021 | 137,351 |  |  | $ | 28.32 |  |  | 3,171 |  |  | $ | 30.36 |  |  | — |  |  | $ | — |

At September 30, 2021, the total unrecognized compensation cost related to nonvested awards was $2.5 million with a weighted-average expense recognition period of 1.7 years.
Directors Deferred Stock Plan
Until January 1, 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The Directors Deferred Stock Plan provided directors the option to elect to receive up to 100% of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.
The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the nine months ended September 30, 2021.

|  | Deferred Stock Rights |
Outstanding, beginning of period |  | 83,835 |  |
Granted |  | 526 |  |
Exercised |  | — |  |
Outstanding, end of period |  | 84,361 |  |

All deferred stock rights granted during the 2021 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.
Note 10: Commitments and Credit Risk
In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At September 30, 2021 and December 31, 2020, the Company had outstanding loan commitments totaling approximately $276.9 million and $263.9 million, respectively.
Capital Commitments
Capital expenditures contracted to at the balance sheet date but not yet recognized in the financial statements are associated with the construction of premises intended to house our future corporate headquarters. The Company has entered into construction-related contracts and change orders in the amount of $66.7 million. As of September 30, 2021, $20.4 million of such contract commitments had not yet been incurred. These commitments are due within twelve months.
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Note 11: Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage- and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of September 30, 2021 or December 31, 2020.
Loans Held-for-Sale (mandatory pricing agreements)
The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Servicing Asset
Fair value is based on a loan-by-loan basis taking into consideration the original maturity of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3).
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2).
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Forward Contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).
Interest Rate Lock Commitments
The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2021 and December 31, 2020.

|  |  |  | September 30, 2021 Fair Value Measurements Using
(in thousands) |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies |  | $ | 52,455 |  |  | $ | — |  |  | $ | 52,455 |  |  | $ | — |
Municipal securities |  | 77,450 |  |  | — |  |  | 77,450 |  |  | — |
Agency mortgage-backed securities |  | 429,885 |  |  | — |  |  | 429,885 |  |  | — |
Private label mortgage-backed securities |  | 20,235 |  |  |  |  | 20,235 |  |  | — |
Asset-backed securities |  | 5,005 |  |  | — |  |  | 5,005 |  |  | — |
Corporate securities |  | 48,977 |  |  | — |  |  | 48,977 |  |  | — |
Total available-for-sale securities |  | 634,007 |  |  | — |  |  | 634,007 |  |  | — |
Loans held-for-sale (mandatory pricing agreements) |  | 19,181 |  |  | — |  |  | 19,181 |  |  | — |
Servicing asset |  | 4,412 |  |  | — |  |  | — |  |  | 4,412 |
Interest rate swap agreements |  | (18,710) |  |  | — |  |  | (18,710) |  |  | — |
Forward contracts |  | 458 |  |  | 458 |  |  | — |  |  | — |
IRLCs |  | 840 |  |  | — |  |  | — |  |  | 840 |

|  |  |  | December 31, 2020 Fair Value Measurements Using
(in thousands) |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies |  | $ | 60,545 |  |  | $ | — |  |  | $ | 60,545 |  |  | $ | — |
Municipal securities |  | 82,489 |  |  | — |  |  | 82,489 |  |  | — |
Agency mortgage-backed securities |  | 243,921 |  |  | — |  |  | 243,921 |  |  | — |
Private label mortgage-backed securities |  | 58,116 |  |  | — |  |  | 58,116 |  |  | — |
Asset-backed securities |  | 4,961 |  |  | — |  |  | 4,961 |  |  | — |
Corporate securities |  | 47,596 |  |  | — |  |  | 47,596 |  |  | — |
Total available-for-sale securities |  | 497,628 |  |  | — |  |  | 497,628 |  |  | — |
Loans held-for-sale (mandatory pricing agreements) |  | 26,341 |  |  | — |  |  | 26,341 |  |  | — |
Servicing asset |  | 3,569 |  |  | — |  |  | — |  |  | 3,569 |
Interest rate swap agreements |  | (29,750) |  |  | — |  |  | (29,750) |  |  | — |
Forward contracts |  | (640) |  |  | (640) |  |  | — |  |  | — |
IRLCs |  | 3,361 |  |  | — |  |  | — |  |  | 3,361 |

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The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2021 and 2020.

|  |  |  | Three Months Ended
(in thousands) |  |  |  | Servicing Asset |  | Interest Rate Lock Commitments
Balance, July 1, 2021 |  |  |  | $ | 4,120 |  |  | $ | 818 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 566 |  |  | — |
Paydowns |  |  |  | (176) |  |  | — |
Change in fair value |  |  |  | (98) |  |  | 22 |
Balance, September 30, 2021 |  |  |  | 4,412 |  |  | 840 |
Balance as of July 1, 2020 |  |  |  | $ | 2,522 |  |  | $ | 282 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 399 |  |  | — |
Paydowns |  |  |  | (103) |  |  | — |
Change in fair value |  |  |  | — |  |  | 2,834 |
Balance, September 30, 2020 |  |  |  | $ | 2,818 |  |  | $ | 3,116 |

|  |  |  | Nine Months Ended
(in thousands) |  |  |  | Servicing Asset |  | Interest Rate Lock Commitments
Balance, January 1, 2021 |  |  |  | $ | 3,569 |  |  | $ | 3,361 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 1,512 |  |  | — |
Paydowns |  |  |  | (500) |  |  | — |
Change in fair value |  |  |  | (169) |  |  | (2,521) |
Balance, September 30, 2021 |  |  |  | 4,412 |  |  | 840 |
Balance as of January 1, 2020 |  |  |  | $ | 2,481 |  |  | $ | 910 |
Total realized gains |  |  |  |  |  |
Additions |  |  |  | 709 |  |  | — |
Paydowns |  |  |  | (372) |  |  | — |
Change in fair value |  |  |  | — |  |  | 2,206 |
Balance, September 30, 2020 |  |  |  | $ | 2,818 |  |  | $ | 3,116 |

The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price.
If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and
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applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment.
Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at September 30, 2021 and December 31, 2020.

|  |  |  | September 30, 2021
(in thousands) |  |  |  | Fair Value Measurements Using
|  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Impaired loans |  | $ | 3,747 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,747 |

|  |  |  | December 31, 2020
(in thousands) |  |  |  | Fair Value Measurements Using
|  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Impaired loans |  | $ | 4,026 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,026 |

Significant Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

(dollars in thousands) |  | Fair Value at September 30, 2021 |  | Valuation Technique |  | Significant Unobservable Inputs |  | Range |  | Weighted-Average Range
Impaired loans |  | $ | 3,747 |  |  | Fair value of collateral |  | Discount for type of property and current market conditions |  | 10% |  | 10%
IRLCs |  | 840 |  |  | Discounted cash flow |  | Loan closing rates |  | 51% - 100% |  | 90%
Servicing asset |  | 4,412 |  |  | Discounted cash flow |  | Prepayment speeds Discount rate |  | 0% - 25% 10% |  | 12.8% 10%

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(dollars in thousands) |  | Fair Value at December 31, 2020 |  | Valuation Technique |  | Significant Unobservable Inputs |  | Range |  | Weighted-Average Range
Impaired loans |  | $ | 4,026 |  |  | Fair value of collateral |  | Discount for type of property and current market conditions |  | 10% |  | 10%
IRLCs |  | 3,361 |  |  | Discounted cash flow |  | Loan closing rates |  | 44% - 100% |  | 87%
Servicing asset |  | 3,569 |  |  | Discounted cash flow |  | Prepayment speeds Discount rate |  | 0% - 25% 10% |  | 12.1% 10%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents
For these instruments, the carrying amount is a reasonable estimate of fair value.
Securities Held-to-Maturity
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Level 2 securities include municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of September 30, 2021 or December 31, 2020.
Loans Held-for-Sale (best efforts pricing agreements)
The fair value of these loans approximates carrying value.
Loans
The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
Accrued Interest Receivable
The fair value of these financial instruments approximates carrying value.
Federal Home Loan Bank of Indianapolis Stock
The fair value approximates carrying value.
Deposits
The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.
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Advances from Federal Home Loan Bank
The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.
Subordinated Debt
The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.
Accrued Interest Payable
The fair value of these financial instruments approximates carrying value.
Commitments
The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of September 30, 2021 and December 31, 2020.
The following tables present the carrying value and estimated fair value of all financial assets and liabilities at September 30, 2021 and December 31, 2020.

|  | September 30, 2021 Fair Value Measurements Using
(in thousands) |  | Carrying Amount |  | Fair Value |  | Quoted Prices In Active Market for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Cash and cash equivalents |  | $ | 407,515 |  |  | $ | 407,515 |  |  | $ | 407,515 |  |  | $ | — |  |  | $ | — |
Securities held-to-maturity |  | 62,129 |  |  | 64,337 |  |  | — |  |  | 64,337 |  |  | — |
Loans held-for-sale (best efforts pricing agreements) |  | 24,789 |  |  | 24,789 |  |  | — |  |  | 24,789 |  |  | — |
Net loans |  | 2,908,148 |  |  | 2,969,845 |  |  | — |  |  | — |  |  | 2,969,845 |
Accrued interest receivable |  | 14,866 |  |  | 14,866 |  |  | 14,866 |  |  | — |  |  | — |
Federal Home Loan Bank of Indianapolis stock |  | 25,650 |  |  | 25,650 |  |  | — |  |  | 25,650 |  |  | — |
Deposits |  | 3,224,595 |  |  | 3,244,427 |  |  | 1,857,794 |  |  | — |  |  | 1,386,633 |
Advances from Federal Home Loan Bank |  | 514,920 |  |  | 532,605 |  |  | — |  |  | 532,605 |  |  | — |
Subordinated debt |  | 104,156 |  |  | 110,114 |  |  | 39,960 |  |  | 70,154 |  |  | — |
Accrued interest payable |  | 1,568 |  |  | 1,568 |  |  | 1,568 |  |  | — |  |  | — |

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|  | December 31, 2020 Fair Value Measurements Using
(in thousands) |  | Carrying Amount |  | Fair Value |  | Quoted Prices In Active Market for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Cash and cash equivalents |  | $ | 419,806 |  |  | $ | 419,806 |  |  | $ | 419,806 |  |  | $ | — |  |  | $ | — |
Securities held-to-maturity |  | 68,223 |  |  | 69,452 |  |  | — |  |  | 69,452 |  |  | — |
Loans held-for-sale (best efforts pricing agreements) |  | 13,243 |  |  | 13,243 |  |  | — |  |  | 13,243 |  |  | — |
Net loans |  | 3,029,747 |  |  | 3,084,375 |  |  | — |  |  | — |  |  | 3,084,375 |
Accrued interest receivable |  | 17,416 |  |  | 17,416 |  |  | 17,416 |  |  | — |  |  | — |
Federal Home Loan Bank of Indianapolis stock |  | 25,650 |  |  | 25,650 |  |  | — |  |  | 25,650 |  |  | — |
Deposits |  | 3,270,885 |  |  | 3,307,038 |  |  | 1,679,164 |  |  | — |  |  | 1,627,874 |
Advances from Federal Home Loan Bank |  | 514,916 |  |  | 541,945 |  |  | — |  |  | 541,945 |  |  | — |
Subordinated debt |  | 79,603 |  |  | 83,682 |  |  | 63,325 |  |  | 20,357 |  |  | — |
Accrued interest payable |  | 1,439 |  |  | 1,439 |  |  | 1,439 |  |  | — |  |  | — |

Note 12: Mortgage Banking Activities
The Company’s residential real estate lending business originates mortgage loans for customers and typically sells a majority of the originated loans into the secondary market. For most of the mortgages it sells in the secondary market, the Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 13 for further information on derivative financial instruments.
During the three months ended September 30, 2021 and 2020, the Company originated mortgage loans held-for-sale of $198.3 million and $216.0 million, respectively, and sold $186.1 million and $203.7 million of mortgage loans, respectively, into the secondary market. During the nine months ended September 30, 2021 and 2020, the Company originated mortgage loans held-for-sale of $585.5 million and $431.4 million, respectively, and sold $579.2 million and $429.3 million of mortgage loans, respectively, into the secondary market.
The following table presents the components of income from mortgage banking activities for the three and nine months ended September 30, 2021 and 2020.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) | 2021 |  | 2020 |  | 2021 |  | 2020
Gain on loans sold | $ | 3,244 |  |  | $ | 6,441 |  |  | $ | 14,550 |  |  | $ | 14,948 |
Gain (loss) resulting from the change in fair value of loans held-for-sale | 110 |  |  | 823 |  |  | (854) |  |  | (116) |
Gain (loss) resulting from the change in fair value of derivatives | 496 |  |  | 2,366 |  |  | (1,422) |  |  | 1,874 |
Net revenue from mortgage banking activities | $ | 3,850 |  |  | $ | 9,630 |  |  | $ | 12,274 |  |  | $ | 16,706 |

Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline.
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Note 13: Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.
The Company had various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.
The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.
The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of September 30, 2021 and December 31, 2020.

(in thousands) |  | Carrying amount of the hedged asset |  | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
Line item in the condensed consolidated balance sheets in which the hedged item is included |  | September 30, 2021 |  | December 31, 2020 |  | September 30, 2021 |  | December 31, 2020
Securities available-for-sale (1) |  | $ | 76,526 |  |  | $ | 124,210 |  |  | $ | 2,606 |  |  | $ | 6,064 |

(1) These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The designated hedged items were $50.0 million and $88.2 million, at September 30, 2021 and December 31, 2020.
The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at September 30, 2021 and December 31, 2020, identified by the underlying interest rate-sensitive instruments.

(dollars in thousands) September 30, 2021 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio
Instruments Associated With |  |  |  | Fair Value |  | Receive |  | Pay
Securities available-for-sale |  | $ | 50,000 |  |  | 3.1 |  | $ | (2,608) |  |  | 3-month LIBOR |  | 2.33 | %
Total at September 30, 2021 |  | $ | 50,000 |  |  | 3.1 |  | $ | (2,608) |  |  | 3-month LIBOR |  | 2.33 | %

In March 2021, the Company terminated fair value hedging relationships with a notional value of $38.2 million associated with agency mortgage-backed securities available-for-sale, which resulted in swap termination payments to counterparties totaling $1.9 million. The corresponding securities fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated securities.
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(dollars in thousands) December 31, 2020 |  | Notional Value |  | Weighted- Average Remaining Maturity (years) |  |  |  | Weighted-Average Ratio
Instruments Associated With |  |  |  | Fair Value |  | Receive |  | Pay
Securities available-for-sale |  | $ | 88,200 |  |  | 3.1 |  | $ | (6,072) |  |  | 3-month LIBOR |  | 2.54 | %
Total at December 31, 2020 |  | $ | 88,200 |  |  | 3.1 |  | $ | (6,072) |  |  | 3-month LIBOR |  | 2.54 | %

In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 12.36 years as of September 30, 2021.
The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at September 30, 2021 and December 31, 2020.

(dollars in thousands) September 30, 2021 |  | Notional |  | Weighted- Average Remaining Maturity |  |  |  | Weighted-Average Ratio
Cash Flow Hedges |  | Value |  | (years) |  | Fair Value |  | Receive |  | Pay
Interest rate swaps |  | $ | 110,000 |  |  | 5.3 |  | $ | (10,563) |  |  | 3-month LIBOR |  | 2.88 | %
Interest rate swaps |  | 100,000 |  |  | 2.2 |  | (5,449) |  |  | 1-month LIBOR |  | 2.88 | %

(dollars in thousands) December 31, 2020 |  | Notional |  | Weighted- Average Remaining Maturity |  |  |  | Weighted-Average Ratio
Cash Flow Hedges |  | Value |  | (years) |  | Fair Value |  | Receive |  | Pay
Interest rate swaps |  | $ | 110,000 |  |  | 6.1 |  | $ | (15,727) |  |  | 3-month LIBOR |  | 2.88 | %
Interest rate swaps |  | 100,000 |  |  | 3.0 |  | (7,951) |  |  | 1-month LIBOR |  | 2.88 | %

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged $19.3 million and $30.6 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at September 30, 2021 and December 31, 2020, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.
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The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at September 30, 2021 and December 31, 2020.

|  | September 30, 2021 |  | December 31, 2020
(in thousands) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Asset Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
IRLCs |  | $ | 78,602 |  |  | $ | 840 |  |  | $ | 108,095 |  |  | $ | 3,361 |
Forward contracts |  | 80,000 |  |  | 458 |  |  | — |  |  | — |
Total contracts |  | $ | 158,602 |  |  | $ | 1,298 |  |  | $ | 108,095 |  |  | $ | 3,361 |
Liability Derivatives |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |
Interest rate swaps associated with securities available-for-sale |  | 50,000 |  |  | (2,608) |  |  | 88,200 |  |  | (6,072) |
Interest rate swaps associated with liabilities |  | 210,000 |  |  | (16,102) |  |  | 210,000 |  |  | (23,678) |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Forward contracts |  | — |  |  | — |  |  | 107,500 |  |  | (640) |
Total contracts |  | $ | 260,000 |  |  | $ | (18,710) |  |  | $ | 405,700 |  |  | $ | (30,390) |

The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.
The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and nine months ended September 30, 2021 and 2020.

|  | Amount of Gain Recognized in Other Comprehensive Income (Loss) in The Three Months Ended |  | Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) in The Nine Months Ended
(in thousands) |  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Interest rate swap agreements |  | $ | 1,439 |  |  | $ | 1,514 |  |  | $ | 7,665 |  |  | $ | (12,453) |

The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.

|  | Amount of Gain / (Loss) Recognized in the Three Months Ended |  | Amount of Gain / (Loss) Recognized in the Nine Months Ended
(in thousands) |  | September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Asset Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
IRLCs |  | $ | — |  |  | $ | 2,834 |  |  | $ | (2,519) |  |  | $ | 2,206 |
Liability Derivatives |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
IRLCs |  | 22 |  |  | — |  |  | — |  |  | — |
Forward contracts |  | $ | 474 |  |  | $ | (468) |  |  | $ | 1,097 |  |  | $ | (332) |

The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three and nine months ended September 30, 2021 and 2020.
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(in thousands) Line item in the condensed consolidated statements of income |  | Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Interest income |  |  |  |  |  |  |  |
Loans |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (2,445) |
Securities - taxable |  | — |  |  | (229) |  |  | (253) |  |  | (479) |
Securities - non-taxable |  | (280) |  |  | (242) |  |  | (817) |  |  | (472) |
Total interest income |  | (280) |  |  | (471) |  |  | (1,070) |  |  | (3,396) |
Interest expense |  |  |  |  |  |  |  |
Deposits |  | 702 |  |  | 685 |  |  | 2,072 |  |  | 1,585 |
Other borrowed funds |  | 774 |  |  | 721 |  |  | 2,258 |  |  | 1,632 |
Total interest expense |  | 1,476 |  |  | 1,406 |  |  | 4,330 |  |  | 3,217 |
Net interest income |  | $ | (1,756) |  |  | $ | (1,877) |  |  | $ | (5,400) |  |  | $ | (6,613) |

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Note 14: Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, included in shareholders' equity, for the nine months ended September 30, 2021 and 2020, respectively, are presented in the table below.

(in thousands) |  | Available-For-Sale Securities |  | Cash Flow Hedges |  | Total
Balance, January 1, 2021 |  | $ | 468 |  |  | $ | (17,664) |  |  | $ | (17,196) |
Net unrealized holding (losses) gains recorded within other comprehensive income before income tax |  | (2,596) |  |  | 7,665 |  |  | 5,069 |
Other comprehensive (loss) gain before tax |  | (2,596) |  |  | 7,665 |  |  | 5,069 |
Income tax (benefit) provision |  | (616) |  |  | 1,657 |  |  | 1,041 |
Other comprehensive (loss) income - net of tax |  | (1,980) |  |  | 6,008 |  |  | 4,028 |
Balance, September 30, 2021 |  | $ | (1,512) |  |  | $ | (11,656) |  |  | $ | (13,168) |
Balance, January 1, 2020 |  | $ | (4,388) |  |  | $ | (9,803) |  |  | $ | (14,191) |
Net unrealized holding gains (losses) recorded within other comprehensive income before income tax |  | 6,187 |  |  | (12,453) |  |  | (6,266) |
Reclassification of net loss realized and included in earnings |  | (139) |  |  | — |  |  | (139) |
Other comprehensive income (loss) before tax |  | 6,048 |  |  | (12,453) |  |  | (6,405) |
Income tax provision (benefit) |  | 2,096 |  |  | (3,602) |  |  | (1,506) |
Other comprehensive loss - net of tax |  | 3,952 |  |  | (8,851) |  |  | (4,899) |
Balance, September 30, 2020 |  | $ | (436) |  |  | $ | (18,654) |  |  | $ | (19,090) |

The components of accumulated other comprehensive loss, included in shareholders' equity, for the three months ended September 30, 2021 and 2020, respectively, are presented in the table below.

(in thousands) |  | Available-For-Sale Securities |  | Cash Flow Hedges |  | Total
Balance, July 1, 2021 |  | $ | (164) |  |  | $ | (12,747) |  |  | $ | (12,911) |
Net unrealized holding (losses) gains recorded within other comprehensive income before income tax |  | (1,789) |  |  | 1,439 |  |  | (350) |
Other comprehensive (loss) income before tax |  | (1,789) |  |  | 1,439 |  |  | (350) |
Income tax (benefit) provision |  | (441) |  |  | 348 |  |  | (93) |
Other comprehensive (loss) income - net of tax |  | (1,348) |  |  | 1,091 |  |  | (257) |
Balance, September 30, 2021 |  | $ | (1,512) |  |  | $ | (11,656) |  |  | $ | (13,168) |
Balance, July 1, 2020 |  | $ | (1,388) |  |  | $ | (19,750) |  |  | $ | (21,138) |
Net unrealized holding gains recorded within other comprehensive income before income tax |  | 1,386 |  |  | 1,514 |  |  | 2,900 |
Reclassification of net loss realized and included in earnings |  | (98) |  |  | — |  |  | (98) |
Other comprehensive loss before tax |  | 1,288 |  |  | 1,514 |  |  | 2,802 |
Income tax provision |  | 336 |  |  | 418 |  |  | 754 |
Other comprehensive loss - net of tax |  | 952 |  |  | 1,096 |  |  | 2,048 |
Balance, September 30, 2020 |  | $ | (436) |  |  | $ | (18,654) |  |  | $ | (19,090) |

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Note 15: Recent Accounting Pronouncements
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016)
The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update.
•Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.
•Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value.
•In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief. This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.
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For public business entities that are SEC filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may early adopt the amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In October 2019, the FASB voted to delay the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this update.
The Company expects to adopt this guidance on January 1, 2023 and is currently evaluating the impact of the amendments on the Company’s condensed consolidated financial statements. The Company currently cannot determine or reasonably quantify the impact of the adoption of the amendments due to the complexity and extensive changes. The Company intends to develop processes and procedures prior to the effective date to ensure it is fully compliant with the amendments at the adoption date. The Company has formed an implementation committee and has engaged a third-party consultant to assist in developing current expected credit losses (“CECL”) models using appropriate methodologies.
Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)
In March 2020 in connection with the implementation of the CARES Act and related provisions, the Company adopted the temporary relief issued under the CARES Act, thereby suspending the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19. Section 4013 of the CARES Act specifies that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. See the “Non-TDR Loan Modifications due to COVID-19” section of Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.
ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020)
In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from the LIBORon financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. The guidance is effective March 12, 2020 through December 31, 2022. The Company believes the adoption of this guidance will not have a material impact on the condensed consolidated financial statements.
Note 16: Subsequent Event
On November 2, 2021, the Company announced it has entered into a definitive agreement to acquire First Century Bancorp. (“First Century”), the parent company of First Century Bank, N.A., headquartered in Roswell, GA. According to the terms of the definitive agreement, First Internet will acquire all of the outstanding shares of First Century common stock for $80 million in cash, which First Internet will fund with available on-balance sheet cash. As of September 30, 2021, First Century had total assets of $408 million, total deposits of $330 million, and total loans of $32 million. The transaction, which remains subject to regulatory approvals, is expected to close in the first quarter 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31,
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2020 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
Overview
First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its primary business activities through its wholly owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.
The Bank has three wholly owned subsidiaries. First Internet Public Finance Corp. provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, which manages other real estate owned (“OREO”) properties as needed; and SPF15, Inc., which was established to acquire and hold real estate.
We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners.
Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending, franchise finance and commercial deposits and treasury management. Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans on a regional basis. Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards to commercial borrowers located primarily on a regional basis in the Midwest and Southwest regions of the United States. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our healthcare finance team was originally established in conjunction with our strategic business partnership with Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, which provided lending on a nationwide basis for healthcare practice acquisition or refinancing of owner-occupied CRE and equipment purchases. During the second quarter 2021, Provide announced that it had entered into an agreement to be acquired by a super-regional financial institution, which closed in the third quarter 2021. It is our expectation that the acquiring institution will retain most, if not all, of Provide’s loan origination activity and that our healthcare finance loan balances may decline. Our franchise finance business was established in July 2021 in conjunction with our business relationship with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.
We believe that we can differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We have hired and continue to recruit experienced small business sales, credit and operations personnel to expand our capabilities in small business lending and U.S. government guaranteed lending programs. We continue to scale up this business with the goal of driving increased earnings and profitability in future periods.
COVID-19 Pandemic
Throughout the coronavirus pandemic (“COVID-19”), our top priority has been the health of our team and clients. As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19. The vast majority of our employees who worked remotely during the earlier stages of the pandemic have returned to the office. Management continues to assess the evolving health and safety situations at local, regional and national levels. Our plans remain flexible to adapt as these situations evolve.
COVID-19 impacted our business during 2020 as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 reduced the yield on interest-earning assets but also allowed us to reprice our interest-bearing
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deposits significantly lower, which provided an increase to net interest income. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which continued to benefit our mortgage business.
During 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies. We are optimistic that the combination of vaccinations and government stimulus programs will help mitigate any significant negative effects from the pandemic on our business and credit quality; however, there is still significant uncertainty concerning the ongoing trajectory of the pandemic and the speed at which the national and local economies will recover. The extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including potential new variants of COVID-19, the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.
Pending Merger Transaction
As previously reported, on November 1, 2021, we entered into a definitive agreement to acquire all of the outstanding shares of common stock of First Century Bancorp. (“First Century”), the parent company of First Century Bank, N.A., for $80 million cash. With current headquarters in Roswell, GA, First Century is a technology-driven, financial solutions company with lines of business focused on payments, tax product lending, sponsored card programs and homeowners association services. First Century also provides a wide range of products and services, including business banking, specialty lending and deposit products, to community-based businesses and individuals across its two branches located in Commerce, GA and Hilton Head Island, SC. We expect to fund our payment obligations upon closing with available on-balance sheet cash. The transaction is anticipated to close in the first quarter 2022, subject to satisfaction of customary closing conditions, including required approvals from the FDIC, Indiana Department of Financial Institutions and the Federal Reserve as well as First Century shareholder approval. As of September 30, 2021, First Century had total assets of $408 million, total deposits of $330 million, and total loans of $32 million. The acquisition, when completed, is expected to be accretive to 2023 earnings per share and initially dilutive to tangible book value per share.
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Results of Operations
During the third quarter 2021, net income was $12.1 million, or $1.21 per diluted share, compared to the third quarter 2020 net income of $8.4 million, or $0.86 per diluted share, representing an increase in net income of $3.7 million, or 43.7%. During the nine months ended September 30, 2021, net income was $35.6 million, or $3.57 per diluted share, compared to the nine months ended September 30, 2020 net income of $18.4 million, or $1.87 per diluted share, representing an increase in net income of $17.3 million, or 94.1%.
The $3.7 million increase in net income for the third quarter 2021 compared to the third quarter 2020 was due primarily to an increase of $4.7 million, or 28.9%, in net interest income, a decrease of $2.5 million, or 101.2%, in (benefit) provision for loan losses and a $2.0 million, or 11.9%, decrease in noninterest expense, partially offset by a decrease of $4.7 million, or 37.5%, in noninterest income and an increase of $0.8 million, or 59.1%, in income tax expense.
The $17.3 million increase in net income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to an increase of $17.4 million, or 38.0%, in net interest income, a decrease of $5.2 million, or 80.4%, in provision for loan losses and an increase of $1.5 million, or 6.2%, in noninterest income, partially offset by a $5.1 million, or 364.3%, increase in income tax expense and a $1.7 million, or 3.9%, increase in noninterest expense.
During the third quarter 2021, return on average assets (“ROAA”), return on average shareholders’ equity (“ROAE”), and return on average tangible common equity (“ROATCE”) were 1.12%, 13.10%, and 13.27%, respectively, compared to 0.78%, 10.67%, and 10.83%, respectively, for the third quarter 2020. During the nine months ended September 30, 2021, ROAA, ROAE, and ROATCE were 1.13%, 13.54%, and 13.73%, respectively, compared to 0.58%, 7.90%, and 8.02%, respectively, for the nine months ended September 30, 2020.
During the third quarter 2021, the Company fully redeemed its $25.0 million aggregate principal amount of 6.0% fixed-to-floating rate subordinated notes due in 2026 and recognized $0.8 million of pre-tax costs related to this redemption. Excluding this item, adjusted net income for the third quarter 2021 was $12.7 million and adjusted diluted earnings per share was $1.27. During the second quarter 2021, the Company recognized a $2.5 million pre-tax gain on sale of its corporate headquarters. Excluding both the redemption costs associated with the subordinated notes due in 2026 and the gain on sale of the Company’s corporate headquarters, adjusted net income for the nine months ended September 30, 2021 was $34.3 million and adjusted diluted earnings per share was $3.44. Additionally, for the third quarter 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.18%, 13.79% and 13.97%, respectively, and for the nine months ended September 30, 2021, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 1.09%, 13.03% and 13.21%, respectively.
These profitability ratios improved in the 2021 periods compared to the 2020 periods, as increases in net income and adjusted net income outpaced average asset growth, which was down slightly from the 2020 periods.
Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Consolidated Average Balance Sheets and Net Interest Income Analyses
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.

(dollars in thousands) |  | Three Months Ended
|  | September 30, 2021 |  | June 30, 2021 |  | September 30, 2020
|  | Average Balance |  | Interest /Dividends |  | Yield /Cost |  | Average Balance |  | Interest /Dividends |  | Yield /Cost |  | Average Balance |  | Interest /Dividends |  | Yield /Cost
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including loans held-for-sale |  | $ | 2,956,333 |  |  | $ | 30,126 |  |  | 4.04 | % |  | $ | 3,016,330 |  |  | $ | 30,835 |  |  | 4.10 | % |  | $ | 3,031,024 |  |  | $ | 29,560 |  |  | 3.88 | %
Securities - taxable |  | 629,101 |  |  | 2,297 |  |  | 1.45 | % |  | 490,634 |  |  | 1,921 |  |  | 1.57 | % |  | 539,154 |  |  | 2,240 |  |  | 1.65 | %
Securities - non-taxable |  | 84,241 |  |  | 241 |  |  | 1.14 | % |  | 84,050 |  |  | 259 |  |  | 1.24 | % |  | 94,398 |  |  | 381 |  |  | 1.61 | %
Other earning assets |  | 479,051 |  |  | 370 |  |  | 0.31 | % |  | 509,735 |  |  | 362 |  |  | 0.28 | % |  | 552,058 |  |  | 569 |  |  | 0.41 | %
Total interest-earning assets |  | 4,148,726 |  |  | 33,034 |  |  | 3.16 | % |  | 4,100,749 |  |  | 33,377 |  |  | 3.26 | % |  | 4,216,634 |  |  | 32,750 |  |  | 3.09 | %
Allowance for loan losses |  | (28,127) |  |  |  |  |  |  | (30,348) |  |  |  |  |  |  | (25,347) |  |  |  |  |
Noninterest-earning assets |  | 144,590 |  |  |  |  |  |  | 136,565 |  |  |  |  |  |  | 116,532 |  |  |  |  |
Total assets |  | $ | 4,265,189 |  |  |  |  |  |  | $ | 4,206,966 |  |  |  |  |  |  | $ | 4,307,819 |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 198,637 |  |  | $ | 150 |  |  | 0.30 | % |  | $ | 192,777 |  |  | $ | 143 |  |  | 0.30 | % |  | $ | 154,275 |  |  | $ | 228 |  |  | 0.59 | %
Regular savings accounts |  | 62,195 |  |  | 56 |  |  | 0.36 | % |  | 55,811 |  |  | 49 |  |  | 0.35 | % |  | 45,466 |  |  | 79 |  |  | 0.69 | %
Money market accounts |  | 1,498,218 |  |  | 1,532 |  |  | 0.41 | % |  | 1,416,406 |  |  | 1,462 |  |  | 0.41 | % |  | 1,295,249 |  |  | 2,442 |  |  | 0.75 | %
Certificates and brokered deposits |  | 1,378,678 |  |  | 5,352 |  |  | 1.54 | % |  | 1,444,171 |  |  | 6,051 |  |  | 1.68 | % |  | 1,784,631 |  |  | 9,679 |  |  | 2.16 | %
Total interest-bearing deposits |  | 3,137,728 |  |  | 7,090 |  |  | 0.90 | % |  | 3,109,165 |  |  | 7,705 |  |  | 0.99 | % |  | 3,279,621 |  |  | 12,428 |  |  | 1.51 | %
Other borrowed funds |  | 611,975 |  |  | 5,025 |  |  | 3.26 | % |  | 584,751 |  |  | 4,065 |  |  | 2.79 | % |  | 584,634 |  |  | 4,090 |  |  | 2.78 | %
Total interest-bearing liabilities |  | 3,749,703 |  |  | 12,115 |  |  | 1.28 | % |  | 3,693,916 |  |  | 11,770 |  |  | 1.28 | % |  | 3,864,255 |  |  | 16,518 |  |  | 1.70 | %
Noninterest-bearing deposits |  | 104,161 |  |  |  |  |  |  | 98,207 |  |  |  |  |  |  | 75,901 |  |  |  |  |
Other noninterest-bearing liabilities |  | 45,138 |  |  |  |  |  |  | 61,949 |  |  |  |  |  |  | 54,052 |  |  |  |  |
Total liabilities |  | 3,899,002 |  |  |  |  |  |  | 3,854,072 |  |  |  |  |  |  | 3,994,208 |  |  |  |  |
Shareholders’ equity |  | 366,187 |  |  |  |  |  |  | 352,894 |  |  |  |  |  |  | 313,611 |  |  |  |  |
Total liabilities and shareholders’ equity |  | $ | 4,265,189 |  |  |  |  |  |  | $ | 4,206,966 |  |  |  |  |  |  | $ | 4,307,819 |  |  |  |  |
Net interest income |  |  |  | $ | 20,919 |  |  |  |  |  |  | $ | 21,607 |  |  |  |  |  |  | $ | 16,232 |  |  |
Interest rate spread 1 |  |  |  |  |  | 1.88% |  |  |  |  |  | 1.98% |  |  |  |  |  | 1.39 | %
Net interest margin 2 |  |  |  |  |  | 2.00% |  |  |  |  |  | 2.11% |  |  |  |  |  | 1.53 | %
Net interest margin - FTE 3 |  |  |  |  |  | 2.13% |  |  |  |  |  | 2.25% |  |  |  |  |  | 1.67 | %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.
2 Net interest income divided by total average interest-earning assets (annualized).
3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.
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(dollars in thousands) |  | Nine Months Ended
|  | September 30, 2021 |  | September 30, 2020
|  | Average Balance |  | Interest /Dividends |  | Yield /Cost |  | Average Balance |  | Interest /Dividends |  | Yield /Cost
Assets |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets |  |  |  |  |  |  |  |  |  |  |  |
Loans, including loans held-for-sale |  | $ | 3,016,817 |  |  | $ | 91,846 |  |  | 4.07 | % |  | $ | 2,999,711 |  |  | $ | 89,698 |  |  | 3.99 | %
Securities - taxable |  | 527,625 |  |  | 5,997 |  |  | 1.52 | % |  | 543,699 |  |  | 9,135 |  |  | 2.24 | %
Securities - non-taxable |  | 85,130 |  |  | 781 |  |  | 1.23 | % |  | 96,960 |  |  | 1,410 |  |  | 1.94 | %
Other earning assets |  | 478,399 |  |  | 1,067 |  |  | 0.30 | % |  | 520,875 |  |  | 2,973 |  |  | 0.76 | %
Total interest-earning assets |  | 4,107,971 |  |  | 99,691 |  |  | 3.24 | % |  | 4,161,245 |  |  | 103,216 |  |  | 3.31 | %
Allowance for loan losses |  | (29,446) |  |  |  |  |  |  | (23,605) |  |  |  |  |
Noninterest-earning assets |  | 136,954 |  |  |  |  |  |  | 108,561 |  |  |  |  |
Total assets |  | $ | 4,215,479 |  |  |  |  |  |  | $ | 4,246,201 |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 190,785 |  |  | $ | 425 |  |  | 0.30 | % |  | $ | 138,288 |  |  | $ | 684 |  |  | 0.66 | %
Regular savings accounts |  | 54,740 |  |  | 145 |  |  | 0.35 | % |  | 37,700 |  |  | 249 |  |  | 0.88 | %
Money market accounts |  | 1,428,554 |  |  | 4,385 |  |  | 0.41 | % |  | 1,084,411 |  |  | 9,726 |  |  | 1.20 | %
Certificates and brokered deposits |  | 1,446,960 |  |  | 18,468 |  |  | 1.71 | % |  | 1,952,973 |  |  | 34,740 |  |  | 2.38 | %
Total interest-bearing deposits |  | 3,121,039 |  |  | 23,423 |  |  | 1.00 | % |  | 3,213,372 |  |  | 45,399 |  |  | 1.89 | %
Other borrowed funds |  | 593,605 |  |  | 13,217 |  |  | 2.98 | % |  | 584,547 |  |  | 12,141 |  |  | 2.77 | %
Total interest-bearing liabilities |  | 3,714,644 |  |  | 36,640 |  |  | 1.32 | % |  | 3,797,919 |  |  | 57,540 |  |  | 2.02 | %
Noninterest-bearing deposits |  | 97,760 |  |  |  |  |  |  | 70,060 |  |  |  |  |
Other noninterest-bearing liabilities |  | 51,281 |  |  |  |  |  |  | 67,716 |  |  |  |  |
Total liabilities |  | 3,863,685 |  |  |  |  |  |  | 3,935,695 |  |  |  |  |
Shareholders’ equity |  | 351,794 |  |  |  |  |  |  | 310,506 |  |  |  |  |
Total liabilities and shareholders’ equity |  | $ | 4,215,479 |  |  |  |  |  |  | $ | 4,246,201 |  |  |  |  |
Net interest income |  |  |  | $ | 63,051 |  |  |  |  |  |  | $ | 45,676 |  |  |
Interest rate spread 1 |  |  |  |  |  | 1.92 | % |  |  |  |  |  | 1.29 | %
Net interest margin 2 |  |  |  |  |  | 2.05 | % |  |  |  |  |  | 1.47 | %
Net interest margin - FTE 3 |  |  |  |  |  | 2.19 | % |  |  |  |  |  | 1.61 | %

1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities.
2 Net interest income divided by total average interest-earning assets (annualized).
3 On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin - FTE represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.
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Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

(dollars in thousands) |  | Three Months Ended September 30, 2021 vs. June 30, 2021 Due to Changes in |  | Three Months Ended September 30, 2021 vs. September 30, 2020 Due to Changes in |  | Nine Months Ended September 30, 2021 vs. September 30, 2020 Due to Changes in
|  | Volume |  | Rate |  | Net |  | Volume |  | Rate |  | Net |  | Volume |  | Rate |  | Net
Interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including loans held-for-sale |  | $ | (408) |  |  | $ | (301) |  |  | $ | (709) |  |  | $ | (3,416) |  |  | $ | 3,982 |  |  | $ | 566 |  |  | $ | 476 |  |  | $ | 1,672 |  |  | $ | 2,148 |
Securities – taxable |  | 1,223 |  |  | (847) |  |  | 376 |  |  | 1,282 |  |  | (1,225) |  |  | 57 |  |  | (264) |  |  | (2,874) |  |  | (3,138) |
Securities – non-taxable |  | 3 |  |  | (21) |  |  | (18) |  |  | (38) |  |  | (102) |  |  | (140) |  |  | (158) |  |  | (471) |  |  | (629) |
Other earning assets |  | (107) |  |  | 115 |  |  | 8 |  |  | (70) |  |  | (129) |  |  | (199) |  |  | (226) |  |  | (1,680) |  |  | (1,906) |
Total |  | 711 |  |  | (1,054) |  |  | (343) |  |  | (2,242) |  |  | 2,526 |  |  | 284 |  |  | (172) |  |  | (3,353) |  |  | (3,525) |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits |  | 458 |  |  | (1,073) |  |  | (615) |  |  | (516) |  |  | (4,822) |  |  | (5,338) |  |  | (1,264) |  |  | (20,712) |  |  | (21,976) |
Other borrowed funds |  | 208 |  |  | 752 |  |  | 960 |  |  | 199 |  |  | 736 |  |  | 935 |  |  | 183 |  |  | 893 |  |  | 1,076 |
Total |  | 666 |  |  | (321) |  |  | 345 |  |  | (317) |  |  | (4,086) |  |  | (4,403) |  |  | (1,081) |  |  | (19,819) |  |  | (20,900) |
Increase (decrease) in net interest income |  | $ | 45 |  |  | $ | (733) |  |  | $ | (688) |  |  | $ | (1,925) |  |  | $ | 6,612 |  |  | $ | 4,687 |  |  | $ | 909 |  |  | $ | 16,466 |  |  | $ | 17,375 |

Net interest income for the third quarter 2021 was $20.9 million, an increase of $4.7 million, or 28.9%, compared to $16.2 million for the third quarter 2020. The increase in net interest income was the result of a $4.4 million, or 26.7%, decrease in total interest expense to $12.1 million for the third quarter 2021 from $16.5 million for the third quarter 2020, as well as a $0.3 million, or 0.9% increase in total interest income to $33.0 million for the third quarter 2021 from $32.8 million for the third quarter 2020.
Net interest income for the nine months ended September 30, 2021 was $63.1 million, an increase of $17.4 million, or 38.0%, compared to $45.7 million for the nine months ended September 30, 2020. The increase in net interest income was the result of a $20.9 million, or 36.3%, decrease in total interest expense to $36.6 million for the nine months ended September 30, 2021 from $57.5 million for the nine months ended September 30, 2020, partially offset by a $3.5 million, or 3.4%, decrease in total interest income to $99.7 million for the nine months ended September 30, 2021 from $103.2 million for the nine months ended September 30, 2020.
The increase in total interest income for the third quarter 2021 compared to the third quarter 2020 was due primarily to an increase in interest earned on loans, partially offset by decreases in interest earned on other earning assets and securities. Interest income earned on loans increased $0.6 million, or 1.9%, due primarily to an increase of 16 basis points (“bps”) in the yield earned on average loan balances, partially offset by a decrease of $74.7 million, or 2.5%, in average loan balances. The decrease in average loan balances was due primarily to decreases in the average balance of single tenant lease financing, residential mortgage, public finance, consumer lending and small business lending portfolios, which included loans originated through the Paycheck Protection Program (“PPP”) that have since been forgiven, partially offset by increases in the average balance of commercial and industrial, construction and healthcare finance loan balances. Interest income earned on other earning assets declined $0.2 million, or 35.0%, due mainly to a 10 bp decline in the yield earned on these assets, as well as a decrease of $73.0 million, or 13.2%, in the average balance of other earning assets. The decrease in the average balance of other earning assets was due primarily to lower cash balances. Interest earned on securities decreased $0.1 million, or 3.2%, due to a decline of 23 bps in the yield earned on securities, partially offset by an increase of $79.8 million, or 12.6%, in the average balance of securities. The increase in loan yield was due mainly to an increase in prepayment fee income. The decrease in the yield earned on other earning assets was due primarily to lower market interest rates. The decrease in the yield earned on securities was driven primarily by lower yields earned on corporate securities as well as early redemptions and maturities in corporate securities.
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The decrease in total interest income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due primarily to a $3.8 million, or 35.7%, decrease in interest earned on securities and a $1.9 million, or 64.1%, decrease in interest earned on other earning assets, partially offset by a $2.1 million, or 2.4%, increase in income from loans. The decrease in income from securities and other earning assets was primarily due to decreases of 72 bps and 46 bps, respectively, in the yield earned on these assets as well as a modest decrease in the average balance of these assets. The decrease in the yield earned on securities was driven primarily by lower market interest rates following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19, which contributed to increased prepayment activity and lower yields earned on private label and agency mortgage-backed securities and U.S. Government agency securities as well as early redemptions and maturities in corporate and municipal securities. The decrease in the yield earned on other earning assets was primarily due to lower market interest rates, as described above. The increase in income from loans was driven primarily by an 8 bp increase in the yield on loans and a modest increase in average loan balances. The increase in loan yield was mostly due to an increase in prepayment fee income as well as a shift in the loan mix towards higher yielding commercial products.
Overall, the yield on interest-earning assets for the third quarter 2021 increased 7 bps to 3.16% from 3.09% for the third quarter 2020. The yield on interest-earning assets for the nine months ended September 30, 2021 declined 7 bps to 3.24% from 3.31% for the nine months ended September 30, 2020. The increase in the yield earned on interest-earning assets for the third quarter 2021 compared to the third quarter 2020 was due to a 16 bp increase in the yield earned on loans, partially offset by decreases of 23 bps in the yield earned on securities and 10 bps in other earning assets. The decrease in the yield earned on interest-earning assets for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to decreases of 72 bps in the yield earned on securities and 46 bps in other earning assets, partially offset by an 8 bp increase in the yield earned on loans. The decline in market interest rates negatively impacted the yields earned on securities and cash balances during both the quarter and the nine months ended September 30, 2021, in comparison to the same time periods in 2020.
The decrease in total interest expense for the third quarter 2021 compared to the third quarter 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds. Interest expense on certificates and brokered deposits decreased $4.3 million, or 44.7%, due to a decline of 62 bps in the cost of these deposits, as well as a $406.0 million, or 22.8%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $0.9 million, or 37.3%, was driven by a decline of 34 bps in the cost of these deposits, partially offset by an increase of $203.0 million, or 15.7%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 29 bps and 33 bps, respectively, partially offset by increases of $44.4 million, or 28.8%, and $16.7 million, or 36.8%, respectively, in the average balance of these deposits. The increase in interest expense associated with other borrowed funds was due primarily to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.
The decrease in total interest expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to a decrease in interest expense related to interest-bearing deposits, partially offset by an increase in interest expense associated with other borrowed funds. The decrease in deposit interest expense was driven primarily by an 89 bp decline in the cost of funds related to interest-bearing deposits and a decrease of $92.3 million, or 2.9%, in the average balance of interest-bearing deposits. The average balance of certificates and brokered deposits decreased $506.0 million, or 25.9%, while the cost of these deposits decreased 67 bps. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $5.3 million, or 54.9%, was driven by a decline of 79 bps in the cost of these deposits, partially offset by an increase of $344.1 million, or 31.7%, in the average balance of these deposits. Average money market balances increased from the prior year period due primarily to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The increase in interest expense associated with other borrowed funds was due primarily to to the recognition of $0.8 million of costs related to the Company redeeming the 2026 Notes on September 30, 2021.
Overall, the cost of total interest-bearing liabilities for the third quarter 2021 declined 42 bps to 1.28% from 1.70% for the third quarter 2020. Additionally, the cost of total interest-bearing liabilities for the nine months ended September 30, 2021 declined 70 bps to 1.32% from 2.02% for the nine months ended September 30, 2020. Declines in the cost of funds were due to
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the continued decrease in market interest rates from the prior year periods. The sharp declines in both short- and long-term interest rates in response to the economic effects of COVID-19 allowed the Company to reprice all of its deposit products at lower rates. Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost non-maturity deposit accounts also contributed to the decline in the cost of deposit funding.
Net interest margin (“NIM”) was 2.00% for the third quarter 2021 compared to 1.53% for the third quarter 2020, an increase of 47 bps. On a fully-taxable equivalent (“FTE”) basis, NIM was 2.13% for the third quarter 2021 compared to 1.67% for the third quarter 2020, an increase of 46 bps.
NIM was 2.05% for the nine months ended September 30, 2021 compared to 1.47% for the nine months ended September 30, 2020; an increase of 58 bps. FTE NIM was 2.19% for the nine months ended September 30, 2021 compared to 1.61% for the nine months ended September 30, 2020; an increase of 58 bps.
The increase in third quarter 2021 NIM and FTE NIM compared to the third quarter 2020 reflects a decrease in the cost of funds while asset yields were up modestly. The reduction in the cost of interest-bearing liabilities was due primarily to the continued decrease in market interest rates from the prior year period.
The increase in year-to-date September 2021 NIM and FTE NIM compared to year-to-date September 2020 reflects a decrease in the cost of funds, partially offset by a moderate decrease in interest-earning asset yields. The decline in the cost of interest-bearing liabilities and the yield on interest-earning assets was due primarily to the continued decrease in market interest rates from the prior year period.
Looking ahead to the fourth quarter 2021 and into 2022, the Company believes that yields on interest-earning assets will revert closer to what they were in the second quarter 2021 and then increase from there as the Company anticipates growing its commercial loan portfolio. The Company also continues to see opportunities for further downward repricing of deposits in future periods. Over the next twelve months, the Company has approximately $787.0 million of certificates and brokered deposits with a weighted average cost of 1.22% that are scheduled to mature. As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline during the remainder of 2021 and into 2022.
Noninterest Income
The following table presents noninterest income for the last five completed fiscal quarters and the nine months ended September 30, 2021 and 2020.

(in thousands) | Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Service charges and fees | $ | 276 |  |  | $ | 280 |  |  | $ | 266 |  |  | $ | 206 |  |  | $ | 224 |  |  | $ | 822 |  |  | $ | 618 |
Loan servicing revenue | 511 |  |  | 457 |  |  | 422 |  |  | 379 |  |  | 274 |  |  | 1,390 |  |  | 780 |
Loan servicing asset revaluation | (274) |  |  | (240) |  |  | (155) |  |  | (60) |  |  | (103) |  |  | (669) |  |  | (372) |
Mortgage banking activities | 3,850 |  |  | 2,674 |  |  | 5,750 |  |  | 7,987 |  |  | 9,630 |  |  | 12,274 |  |  | 16,706 |
Gain on sale of loans | 2,719 |  |  | 3,019 |  |  | 1,723 |  |  | 3,702 |  |  | 2,033 |  |  | 7,461 |  |  | 4,596 |
Gain on sale of securities | — |  |  | — |  |  | — |  |  | — |  |  | 98 |  |  | — |  |  | 139 |
Gain on sale of premises and equipment | — |  |  | 2.523 |  |  | — |  |  | — |  |  | — |  |  | 2,523 |  |  | — |
Other | 731 |  |  | 249 |  |  | 369 |  |  | 443 |  |  | 339 |  |  | 1,349 |  |  | 1,212 |
Total noninterest income | $ | 7,813 |  |  | $ | 8.962 |  |  | $ | 8,375 |  |  | $ | 12,657 |  |  | $ | 12,495 |  |  | $ | 25,150 |  |  | $ | 23,679 |

During the third quarter 2021, noninterest income was $7.8 million, representing a decrease of $4.7 million, or 37.5%, compared to $12.5 million for the third quarter 2020. The decrease in noninterest income was due primarily to a decrease in revenue from mortgage banking activities, partially offset by increases in gain on sale of loans and other noninterest income. The decline in mortgage banking revenue in the third quarter of 2021 versus the third quarter of 2020 was due primarily to decreases in interest rate locks, sold loan volume and gain-on-sale margins. The increase in gain on sale of loans was due an increase in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary market premiums during the third quarter 2021. The increase in other noninterest income was due primarily to a distribution from the Company’s investment in a Small Business Investment Company fund.
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During the nine months ended September 30, 2021, noninterest income was $25.2 million, an increase of $1.5 million, or 6.2%, compared to $23.7 million for the nine months ended September 30, 2020. The increase in noninterest income was due primarily to increases in revenue from gain on sale of loans, gain on sale of premises and equipment, and loan servicing revenue, which was partially offset by a decrease in mortgage banking activities. The increase in gain on sale of loans was due to an increase in the volume of SBA 7(a) guaranteed loan sales and an increase in secondary market premiums during the nine months ended September 30, 2021. The increase in gain on sale of premises and equipment was due to the Company completing the sale of its headquarters. The increase in loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio due to continued origination activity. The decrease in mortgage banking income was due primarily to decreases in interest rate locks, sold loan volume and gain-on-sale margins.
Noninterest Expense
The following table presents noninterest expense for the last five completed fiscal quarters and the nine months ended September 30, 2021 and 2020.

(in thousands) | Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Salaries and employee benefits | $ | 9,316 |  |  | $ | 9,232 |  |  | $ | 9,492 |  |  | $ | 9,135 |  |  | $ | 9,533 |  |  | $ | 28,040 |  |  | $ | 25,096 |
Marketing, advertising and promotion | 813 |  |  | 872 |  |  | 680 |  |  | 443 |  |  | 426 |  |  | 2,365 |  |  | 1,212 |
Consulting and professional services | 728 |  |  | 1,078 |  |  | 986 |  |  | 788 |  |  | 614 |  |  | 2,792 |  |  | 2,723 |
Data processing | 380 |  |  | 382 |  |  | 462 |  |  | 426 |  |  | 388 |  |  | 1,224 |  |  | 1,102 |
Loan expenses | 383 |  |  | 541 |  |  | 534 |  |  | 630 |  |  | 408 |  |  | 1,458 |  |  | 1,406 |
Premises and equipment | 1,687 |  |  | 1,587 |  |  | 1,601 |  |  | 1,601 |  |  | 1,568 |  |  | 4,875 |  |  | 4,795 |
Deposit insurance premium | 230 |  |  | 275 |  |  | 425 |  |  | 450 |  |  | 440 |  |  | 930 |  |  | 1,360 |
Write-down of other real estate owned | — |  |  | — |  |  | — |  |  | — |  |  | 2,065 |  |  | — |  |  | 2,065 |
Other | 914 |  |  | 1,108 |  |  | 1,137 |  |  | 1,040 |  |  | 970 |  |  | 3,159 |  |  | 3,383 |
Total noninterest expense | $ | 14,451 |  |  | $ | 15,075 |  |  | $ | 15,317 |  |  | $ | 14,513 |  |  | $ | 16,412 |  |  | $ | 44,843 |  |  | $ | 43,142 |

Noninterest expense for the third quarter 2021 was $14.5 million, compared to $16.4 million for the third quarter 2020. The decrease of $2.0 million, or 11.9%, was due primarily to a $2.1 million write-down of a commercial other real estate owned (“OREO”) property during the third quarter 2020 as well as decreases of $0.2 million, or 2.3%, in salaries and employee benefits and $0.2 million, or 47.7%, in deposit insurance premium during the third quarter 2021 compared to the third quarter 2020, partially offset by an increase of $0.4 million, or 90.8%, in marketing, advertising and promotion. The decrease in salaries and employee benefits was due primarily to a decrease in medical claims expense. The decrease in deposit insurance premium was due primarily to a decrease in asset growth and an increase in the Bank’s regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense. The increase in marketing, advertising and promotion was due mainly to higher mortgage lead generation costs and digital marketing initiatives.
Noninterest expense for the nine months ended September 30, 2021 was $44.8 million, compared to $43.1 million for the nine months ended September 30, 2020. The increase of $1.7 million, or 3.9%, was due primarily to increases of $2.9 million in salaries and employee benefits and $1.2 million in marketing, advertising and promotion, partially offset by a decrease of $2.1 million in write-down of OREO, a $0.4 million decrease in deposit insurance premium and a $0.2 million decrease in other noninterest expense. The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform. The increase in marketing, advertising and promotion was due primarily to higher mortgage lead generation costs and digital marketing initiatives. The decrease in write-down of OREO is due to a $2.1 million write-down of a commercial OREO property that occurred in 2020. The decrease in deposit insurance premium was due primarily to a decrease in asset growth and an increase in the Bank’s regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense. The decrease in other noninterest expense was due primarily to a $0.3 million charitable contribution the Company made in 2020 to assist small businesses and nonprofits in addressing the economic challenges of the COVID-19 pandemic.
Income tax provision was $2.2 million for the third quarter 2021, resulting in an effective tax rate of 15.5%, compared to a tax provision of $1.4 million for the third quarter 2020 and an effective tax rate of 14.2%. Income tax provision was $6.5
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million for the nine months ended September 30, 2021, resulting in an effective tax rate of 15.3%, compared to an income tax provision of $1.4 million and an effective tax rate of 7.0% for the nine months ended September 30, 2020. The increase in income tax provision for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due primarily to the increase in pre-tax earnings driven primarily by the $2.1 million write-down of OREO that occurred in the third quarter 2020. The increase in income tax provision for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was due primarily to the increase in pre-tax earnings driven primarily by an increase in revenue and a decrease in the provision for loan losses, partially offset by an increase in noninterest expenses. Additionally, the lower income tax provision and effective tax rate during the nine months ended September 30, 2020, was impacted by the passage of the CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses.
Financial Condition
The following table presents summary balance sheet data for the last five completed fiscal quarters.

(in thousands) |  |  |  |  |  |  |  |  |  |
Balance Sheet Data: |  | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020
Total assets |  | $ | 4,252,292 |  |  | $ | 4,204,642 |  |  | $ | 4,188,570 |  |  | $ | 4,246,156 |  |  | $ | 4,333,624 |
Loans |  | 2,936,148 |  |  | 2,957,608 |  |  | 3,058,694 |  |  | 3,059,231 |  |  | 3,012,914 |
Total securities |  | 696,136 |  |  | 729,178 |  |  | 530,566 |  |  | 565,851 |  |  | 596,565 |
Loans held-for-sale |  | 43,970 |  |  | 27,587 |  |  | 30,235 |  |  | 39,584 |  |  | 76,208 |
Noninterest-bearing deposits |  | 110,117 |  |  | 113,996 |  |  | 101,700 |  |  | 96,753 |  |  | 86,088 |
Interest-bearing deposits |  | 3,114,478 |  |  | 3,092,151 |  |  | 3,116,903 |  |  | 3,174,132 |  |  | 3,286,303 |
Total deposits |  | 3,224,595 |  |  | 3,206,147 |  |  | 3,217,603 |  |  | 3,270,885 |  |  | 3,372,391 |
Advances from Federal Home Loan Bank |  | 514,920 |  |  | 514,919 |  |  | 514,917 |  |  | 514,916 |  |  | 514,914 |
Total shareholders’ equity |  | 370,442 |  |  | 358,641 |  |  | 344,566 |  |  | 330,944 |  |  | 318,102 |

Total assets increased $6.1 million, or 0.1%, to $4.3 billion at September 30, 2021 compared to $4.2 billion at December 31, 2020.
As of September 30, 2021, total shareholders’ equity was $370.4 million, an increase of $39.5 million, or 11.9%, compared to December 31, 2020, due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss. Tangible common equity totaled $365.8 million as of September 30, 2021, representing an increase of $39.5 million, or 12.1%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity outpaced the growth in both total assets and tangible assets, the ratio of total shareholders’ equity to total assets increased to 8.71% as of September 30, 2021 from 7.79% as of December 31, 2020, and the ratio of tangible common equity to tangible assets increased to 8.61% as of September 30, 2021 from 7.69% as of December 31, 2020.
Book value per common share increased 11.3% to $37.59 as of September 30, 2021 from $33.77 as of December 31, 2020. Tangible book value per share increased 11.5% to $37.12 as of September 30, 2021 from $33.29 as of December 31, 2020. The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding increased slightly from December 31, 2020. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
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Loan Portfolio Analysis
The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.

(dollars in thousands) | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  |
Commercial loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 107,142 |  |  | 3.6 | % |  | $ | 96,203 |  |  | 3.3 | % |  | $ | 71,835 |  |  | 2.3 | % |  | $ | 75,387 |  |  | 2.5 | % |  | $ | 77,116 |  |  | 2.6 | % |  |
Owner-occupied commercial real estate | 84,819 |  |  | 2.9 | % |  | 87,136 |  |  | 2.9 | % |  | 87,930 |  |  | 2.9 | % |  | 89,785 |  |  | 2.9 | % |  | 89,095 |  |  | 3.0 | % |  |
Investor commercial real estate | 28,505 |  |  | 1.0 | % |  | 28,871 |  |  | 1.0 | % |  | 14,832 |  |  | 0.5 | % |  | 13,902 |  |  | 0.5 | % |  | 13,084 |  |  | 0.4 | % |  |
Construction | 115,414 |  |  | 3.9 | % |  | 117,970 |  |  | 4.0 | % |  | 123,483 |  |  | 4.0 | % |  | 110,385 |  |  | 3.6 | % |  | 92,154 |  |  | 3.1 | % |  |
Single tenant lease financing | 921,998 |  |  | 31.5 | % |  | 913,115 |  |  | 30.9 | % |  | 941,322 |  |  | 30.8 | % |  | 950,172 |  |  | 31.1 | % |  | 960,505 |  |  | 31.9 | % |  |
Public finance | 601,738 |  |  | 20.5 | % |  | 612,138 |  |  | 20.7 | % |  | 637,600 |  |  | 20.8 | % |  | 622,257 |  |  | 20.3 | % |  | 625,638 |  |  | 20.8 | % |  |
Healthcare finance | 417,388 |  |  | 14.2 | % |  | 455,890 |  |  | 15.3 | % |  | 510,237 |  |  | 16.8 | % |  | 528,154 |  |  | 17.3 | % |  | 461,740 |  |  | 15.3 | % |  |
Small business lending | 102,889 |  |  | 3.5 | % |  | 123,293 |  |  | 4.2 | % |  | 132,490 |  |  | 4.3 | % |  | 125,589 |  |  | 4.1 | % |  | 123,168 |  |  | 4.1 | % |  |
Franchise finance | 25,598 |  |  | 0.9 | % |  | — |  |  | — | % |  | — |  |  | — | % |  | — |  |  | — | % |  | — |  |  | — | % |  |
Total commercial loans | 2,405,491 |  |  | 82.0 | % |  | 2,434,616 |  |  | 82.3 | % |  | 2,519,729 |  |  | 82.4 | % |  | 2,515,631 |  |  | 82.3 | % |  | 2,442,500 |  |  | 81.2 | % |  |
Consumer loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage | 188,750 |  |  | 6.4 | % |  | 177,148 |  |  | 6.0 | % |  | 190,148 |  |  | 6.2 | % |  | 186,787 |  |  | 6.1 | % |  | 203,041 |  |  | 6.7 | % |  |
Home equity | 17,960 |  |  | 0.6 | % |  | 17,510 |  |  | 0.6 | % |  | 17,949 |  |  | 0.6 | % |  | 19,857 |  |  | 0.6 | % |  | 22,169 |  |  | 0.7 | % |  |
Other consumer | 268,396 |  |  | 9.1 | % |  | 271,796 |  |  | 9.2 | % |  | 270,209 |  |  | 8.8 | % |  | 275,692 |  |  | 9.0 | % |  | 282,450 |  |  | 9.3 | % |  |
Total consumer loans | 475,106 |  |  | 16.1 | % |  | 466,454 |  |  | 15.8 | % |  | 478,306 |  |  | 15.6 | % |  | 482,336 |  |  | 15.7 | % |  | 507,660 |  |  | 16.7 | % |  |
Net deferred loan origination costs, premiums and discounts on purchased loans and other (1) | 55,551 |  |  | 1.9 | % |  | 56,538 |  |  | 1.9 | % |  | 60,659 |  |  | 2.0 | % |  | 61,264 |  |  | 2.0 | % |  | 62,754 |  |  | 2.1 | % |  |
Total loans | 2,936,148 |  |  | 100.0 | % |  | 2,957,608 |  |  | 100.0 | % |  | 3,058,694 |  |  | 100.0 | % |  | 3,059,231 |  |  | 100.0 | % |  | 3,012,914 |  |  | 100.0 | % |  |
Allowance for loan losses | (28,000) |  |  |  |  | (28,066) |  |  |  |  | (30,642) |  |  |  |  | (29,484) |  |  |  |  | (26,917) |  |  |  |  |
Net loans | $ | 2,908,148 |  |  |  |  | $ | 2,929,542 |  |  |  |  | $ | 3,028,052 |  |  |  |  | $ | 3,029,747 |  |  |  |  | $ | 2,985,997 |  |  |  |  |

(1) Includes carrying value adjustments of $38.9 million, $40.4 million, $41.6 million, $42.7 million and $44.3 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.
Total loans were $2.9 billion as of September 30, 2021, a decrease of $123.1 million, or 4.0%, compared to December 31, 2020. Total commercial loan balances were $2.4 billion as of September 30, 2021, down $110.1 million, or 4.4%, from December 31, 2020. Total consumer loan balances were $475.1 million as of September 30, 2021, a decrease of $7.2 million, or 1.5%, compared to December 31, 2020. Compared to December 31, 2020, the decline in commercial loan balances was driven largely by net payoffs in healthcare finance, single tenant lease financing, small business lending and public finance loans, which were partially offset by increases in commercial and industrial, franchise finance and investor commercial real estate loan balances.
The net payoffs in the healthcare finance portfolio were driven primarily by elevated prepayment activity and minimal origination activity. Going forward, we expect the balance of healthcare finance loans may continue to decline as a result of Provide’s acquisition by a super-regional financial institution, as well as potential prepayment activity. The net payoffs in small business lending were predominantly related to PPP loan forgiveness, partially offset by new originations.
Franchise finance was established in July 2021 in conjunction with the Copmany’s business relationship with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country. Through this relationship, we began funding portfolio loans in the third quarter 2021 and expect to fund a total of up to $100.0 million of loans by the end of 2021 and up to an additional $150.0 million of loans during 2022.
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Asset Quality
Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, OREO and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.

(dollars in thousands) | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  |
Nonaccrual loans |  |  |  |  |  |  |  |  |  |  |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 678 |  |  | $ | 692 |  |  | $ | 1,002 |  |  | $ | — |  |  | $ | 117 |  |  |
Owner-occupied commercial real estate | 3,429 |  |  | 3,487 |  |  | 4,266 |  |  | 1,838 |  |  | 1,390 |  |  |
Single tenant lease financing | 1,100 |  |  | 2,373 |  |  | 7,080 |  |  | 7,116 |  |  | 7,148 |  |  |
Small business lending (1) | 1,351 |  |  | 1,209 |  |  | 865 |  |  | — |  |  | — |  |  |
Total commercial loans | 6,558 |  |  | 7,761 |  |  | 13,213 |  |  | 8,954 |  |  | 8,655 |  |  |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |
Residential mortgage | 1,253 |  |  | 1,253 |  |  | 1,120 |  |  | 1,183 |  |  | 1,085 |  |  |
Home equity | 14 |  |  | 14 |  |  | 15 |  |  | — |  |  | — |  |  |
Other consumer | 26 |  |  | 10 |  |  | 23 |  |  | 46 |  |  | 34 |  |  |
Total consumer loans | 1,293 |  |  | 1,277 |  |  | 1,158 |  |  | 1,229 |  |  | 1,119 |  |  |
Total nonaccrual loans | 7,851 |  |  | 9,038 |  |  | 14,371 |  |  | 10,183 |  |  | 9,774 |  |  |
Past Due 90 days and accruing loans |  |  |  |  |  |  |  |  |  |  |
Commercial loans: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | — |  |  | — |  |  | 278 |  |  | — |  |  | — |  |  |
Total commercial loans | — |  |  | — |  |  | 278 |  |  | — |  |  | — |  |  |
Total past due 90 days and accruing loans | — |  |  | — |  |  | 278 |  |  | — |  |  | — |  |  |
Total nonperforming loans | 7,851 |  |  | 9,038 |  |  | 14,649 |  |  | 10,183 |  |  | 9,774 |  |  |
Other real estate owned |  |  |  |  |  |  |  |  |  |  |
Investor commercial real estate | 1,188 |  |  | 1,188 |  |  | — |  |  | — |  |  | — |  |  |
Residential mortgage | — |  |  | 112 |  |  | — |  |  | — |  |  | — |  |  |
Total other real estate owned | 1,188 |  |  | 1,300 |  |  | — |  |  | — |  |  | — |  |  |
Other nonperforming assets | — |  |  | — |  |  | 29 |  |  | 35 |  |  | 8 |  |  |
Total nonperforming assets | $ | 9,039 |  |  | $ | 10,338 |  |  | $ | 14,678 |  |  | $ | 10,218 |  |  | $ | 9,782 |  |  |
Total nonperforming loans to total loans(2) | 0.27 | % |  | 0.31 | % |  | 0.48 | % |  | 0.33 | % |  | 0.32 | % |  |
Total nonperforming assets to total assets(2) | 0.21 | % |  | 0.25 | % |  | 0.35 | % |  | 0.24 | % |  | 0.23 | % |  |
Allowance for loan losses to total loans | 0.95 | % |  | 0.95 | % |  | 1.00 | % |  | 0.96 | % |  | 0.89 | % |  |
Allowance for loan losses to total loans, excluding PPP loans(3) | 0.96 | % |  | 0.96 | % |  | 1.02 | % |  | 0.98 | % |  | 0.91 | % |  |
Allowance for loan losses to nonperforming loans(2) | 356.6 | % |  | 310.5 | % |  | 209.2 | % |  | 289.5 | % |  | 275.4 | % |  |

1 Balance represents U.S. government guaranteed loans.
2 Includes the impact of nonperforming small business lending loans, which are guaranteed by the U.S. government.
3 This information represents a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.
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Troubled Debt Restructurings
The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.

(in thousands) | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020
Troubled debt restructurings – nonaccrual | $ | 2,550 |  |  | $ | 2,581 |  |  | $ | 2,606 |  |  | $ | 2,637 |  |  | $ | 811 |
Troubled debt restructurings – performing | 843 |  |  | 1,179 |  |  | 1,187 |  |  | 367 |  |  | 365 |
Total troubled debt restructurings | $ | 3,393 |  |  | $ | 3,760 |  |  | $ | 3,793 |  |  | $ | 3,004 |  |  | $ | 1,176 |

The decline in nonperforming loans of $2.3 million, or 22.9%, to $7.9 million as of September 30, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to a decrease in nonaccrual single tenant lease financing balances, which was partially offset by an increase in nonperforming small business lending, owner-occupied commercial real estate and commercial and industrial loans. The decrease in nonaccrual single tenant lease financing balances was due to a payoff of a loan that was previously on nonaccrual, as well as positive developments related to a relationship which included two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO.
Total nonperforming assets decreased $1.2 million, or 11.5%, as of September 30, 2021 compared to December 31, 2020, due primarily to a $2.3 million decrease in nonperforming loans discussed above, partially offset by a $1.2 million increase in OREO. The ratio of nonperforming loans to total loans decreased to 0.27% as of September 30, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets decreased to 0.21% as of September 30, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans and OREO mentioned above.
Total TDRs as of September 30, 2021 were $3.4 million, up $0.4 million from December 31, 2020. The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2021.
As of September 30, 2021, the Company had one commercial property in OREO, with a carrying value of $1.2 million. The Company did not have any OREO as of December 31, 2020.
As of September 30, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19. We are optimistic that the combination of vaccinations, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company’s business. However, if economic conditions return to levels experienced during 2020, our credit quality and overall financial performance could be adversely affected.
Non-TDR Loan Modifications due to COVID-19
The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of January 1, 2022, or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.
In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. As of September 30, 2021, the Company had thirteen loans totaling $3.0 million in non-TDR loan modifications due to COVID-19.
U.S. Small Business Administration Paycheck Protection Program
Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S. Small Business Administration (“SBA”) and the Department of the Treasury. The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In 2020, as a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment. The loans originated in 2020 bear an interest rate of 1.00%, and we received gross origination
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fees of approximately $2.3 million. The Company received this fee revenue from the SBA in late June 2020, and it was deferred over the life of the PPP loans and recognized as interest income. The Company began processing applications for forgiveness from this round beginning in December 2020 and 99.5% of loan balances have been forgiven as of September 30, 2021.
On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. The Company began offering PPP loans again in 2021 and continued until the program’s funds were depleted. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. The loans originated during 2021 bear an interest rate of 1.00% and the Company received gross origination fees of approximately $1.3 million. The Company received this fee revenue from the SBA during 2021, and it is being deferred over the life of the PPP loans and recognized as interest income. The Company began processing applications for forgiveness from this round beginning in May 2021 and 51.9% of loan balances have been forgiven as of September 30, 2021.
The Company anticipates that the majority of the PPP loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. Management anticipates that loan forgiveness applications will continue throughout 2021.
The following table provides a rollforward of the activity of PPP loans through September 30, 2021.

(dollars in thousands) |
| Number of Loans |  | Principal Balance |  | Net Deferred Fees
Originated | 447 |  |  | $ | 58,336 |  |  | $ | 1,851 |
Principal repaid | (71) |  |  | (7,184) |  |  |
Net deferred fees recognized |  |  |  |  | (1,253) |
Balance, December 31, 2020 | 376 |  |  | 51,152 |  |  | 598 |
Originated | 281 |  |  | 27,377 |  |  | 1,125 |
Principal repaid | (549) |  |  | (63,548) |  |  |
Net deferred fees recognized |  |  |  |  | (1,242) |
Balance, September 30, 2021 | 108 |  |  | 14,981 |  |  | 481 |

Allowance for Loan Losses
The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters and the nine months ended September 30, 2021 and 2020.

(dollars in thousands) | Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Balance, beginning of period | $ | 28,066 |  |  | $ | 30,642 |  |  | $ | 29,484 |  |  | $ | 26,917 |  |  | $ | 24,465 |  |  | $ | 29,484 |  |  | $ | 21,840 |
Provision charged to expense | (29) |  |  | 21 |  |  | 1,276 |  |  | 2,865 |  |  | 2,509 |  |  | 1,268 |  |  | 6,461 |
Losses charged off | (120) |  |  | (2,689) |  |  | (311) |  |  | (408) |  |  | (241) |  |  | (3,121) |  |  | (1,755) |
Recoveries | 83 |  |  | 92 |  |  | 193 |  |  | 110 |  |  | 184 |  |  | 369 |  |  | 371 |
Balance, end of period | $ | 28,000 |  |  | $ | 28,066 |  |  | $ | 30,642 |  |  | $ | 29,484 |  |  | $ | 26,917 |  |  | $ | 28,000 |  |  | $ | 26,917 |
Net charge-offs to average loans | 0.01 | % |  | 0.35 | % |  | 0.02 | % |  | 0.04 | % |  | 0.01 | % |  | 0.12 | % |  | 0.06 | %

The allowance for loan losses was $28.0 million as of September 30, 2021, compared to $29.5 million as of December 31, 2020. The decrease in the allowance for loan losses compared to December 31, 2020 was due primarily to the elimination of $2.9 million of specific reserves related to single tenant lease financing loans and a commercial and industrial relationship, all of which had been classified as nonaccrual. The single tenant lease financing loans included a nonaccrual loan that was paid off during the quarter and a single tenant lease financing relationship consisting of two loans, one of which was paid off at net book value (unpaid principal balance less specific reserves) and the other was transferred to OREO. The commercial and industrial relationship included four loans, two of which were paid off during the quarter. The decrease in the specific reserves
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was partially offset by additional adjustments to the qualitative factors in the Company’s allowance model that increased the allowance for loan losses to total loans.
The allowance for loan losses as a percentage of total loans was 0.95% at September 30, 2021, or 0.96%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, at December 31, 2020. The allowance for loan losses as a percentage of nonperforming loans increased to 356.6% as of September 30, 2021, compared to 289.5% as of December 31, 2020, due to the decrease in nonperforming loans related to single tenant lease financing loans and the commercial and industrial relationship discussed above. The provision for loan losses in the third quarter 2021 was less than $0.1 million, compared to $2.5 million for the third quarter 2020. The decrease in the provision for loan losses was due primarily to the decline in loan balances. During the third quarter 2021, the Company recorded net charge-offs of less than $0.1 million, compared to net charge-offs of $0.1 million for the third quarter 2020.
Investment Securities Portfolio
The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters.

(in thousands) |  |  |  |  |  |  |  |  |
Amortized Cost | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020
Securities available-for-sale |  |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies | $ | 53,380 |  |  | $ | 57,984 |  |  | $ | 60,815 |  |  | $ | 61,765 |  |  | $ | 65,007 |
Municipal securities | 76,528 |  |  | 77,364 |  |  | 79,168 |  |  | 82,757 |  |  | 87,365 |
Agency mortgage-backed securities | 432,613 |  |  | 445,895 |  |  | 229,981 |  |  | 241,795 |  |  | 250,755 |
Private label mortgage-backed securities | 19,997 |  |  | 29,003 |  |  | 40,550 |  |  | 57,268 |  |  | 71,519 |
Asset-backed securities | 5,000 |  |  | 5,000 |  |  | 5,000 |  |  | 5,000 |  |  | 5,000 |
Corporate securities | 48,460 |  |  | 48,447 |  |  | 48,433 |  |  | 48,419 |  |  | 48,406 |
Total available-for-sale | 635,978 |  |  | 663,693 |  |  | 463,947 |  |  | 497,004 |  |  | 528,052 |
Securities held-to-maturity |  |  |  |  |  |  |  |  |
Municipal securities | 14,538 |  |  | 14,549 |  |  | 14,560 |  |  | 14,571 |  |  | 14,582 |
Corporate securities | 47,591 |  |  | 51,110 |  |  | 53,630 |  |  | 53,652 |  |  | 53,672 |
Total held-to-maturity | 62,129 |  |  | 65,659 |  |  | 68,190 |  |  | 68,223 |  |  | 68,254 |
Total securities | $ | 698,107 |  |  | $ | 729,352 |  |  | $ | 532,137 |  |  | $ | 565,227 |  |  | $ | 596,306 |

(in thousands) |  |  |  |  |  |  |  |  |
Approximate Fair Value | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020
Securities available-for-sale |  |  |  |  |  |  |  |  |
U.S. Government-sponsored agencies | $ | 52,455 |  |  | $ | 57,135 |  |  | $ | 59,478 |  |  | $ | 60,545 |  |  | $ | 63,682 |
Municipal securities | 77,450 |  |  | 78,438 |  |  | 79,208 |  |  | 82,489 |  |  | 86,421 |
Agency mortgage-backed securities | 429,885 |  |  | 444,494 |  |  | 228,818 |  |  | 243,921 |  |  | 253,292 |
Private label mortgage-backed securities | 20,235 |  |  | 29,363 |  |  | 41,106 |  |  | 58,116 |  |  | 72,626 |
Asset-backed securities | 5,005 |  |  | 5,005 |  |  | 5,006 |  |  | 4,961 |  |  | 4,921 |
Corporate securities | 48,977 |  |  | 49,084 |  |  | 48,760 |  |  | 47,596 |  |  | 47,369 |
Total available-for-sale | 634,007 |  |  | 663,519 |  |  | 462,376 |  |  | 497,628 |  |  | 528,311 |
Securities held-to-maturity |  |  |  |  |  |  |  |  |
Municipal securities | 15,319 |  |  | 15,373 |  |  | 15,109 |  |  | 15,317 |  |  | 15,328 |
Corporate securities | 49,018 |  |  | 52,685 |  |  | 54,274 |  |  | 54,135 |  |  | 53,848 |
Total held-to-maturity | 64,337 |  |  | 68,058 |  |  | 69,383 |  |  | 69,452 |  |  | 69,176 |
Total securities | $ | 698,344 |  |  | $ | 731,577 |  |  | $ | 531,759 |  |  | $ | 567,080 |  |  | $ | 597,487 |

The approximate fair value of available-for-sale investment securities increased $136.4 million, or 27.4%, to $634.0 million as of September 30, 2021, compared to $497.6 million as of December 31, 2020. The increase was due primarily to an increase of $186.0 million in agency mortgage-backed securities, partially offset by a $38.1 million decrease in private label mortgage-backed securities and a $8.1 million decrease in U.S. Government-sponsored agencies. The increase in agency mortgage-backed securities was driven primarily by purchases during the nine months ended September 30, 2021, partially
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offset by prepayments and maturities in agency and private label mortgage-backed securities, as well as early redemptions and maturities in municipal securities.
Accrued Income and Other Assets
Accrued income and other assets decreased $9.9 million, or 15.4%, to $54.4 million at September 30, 2021 compared to $64.3 million at December 31, 2020. The decrease was primarily related to a decrease of $11.3 million in cash pledged as collateral. As of these dates, the Company pledged $19.3 million and $30.6 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities were $36.6 million at September 30, 2021 compared to $48.4 million at December 31, 2020. The decrease in accrued expenses and other liabilities was due primarily to an $11.8 million, or 38.7%, decrease in derivative liabilities due to changes in fair value.
Deposits
The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.

(dollars in thousands) |  | September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020
Noninterest-bearing deposits |  | $ | 110,117 |  |  | 3.4 | % |  | $ | 113,996 |  |  | 3.6 | % |  | $ | 100,700 |  |  | 3.1 | % |  | $ | 96,753 |  |  | 3.0 | % |  | $ | 86,088 |  |  | 2.6 | %
Interest-bearing demand deposits |  | 201,557 |  |  | 6.3 | % |  | 196,841 |  |  | 6.1 | % |  | 186,015 |  |  | 5.8 | % |  | 188,645 |  |  | 5.8 | % |  | 155,054 |  |  | 4.6 | %
Savings accounts |  | 66,762 |  |  | 2.1 | % |  | 56,298 |  |  | 1.8 | % |  | 51,251 |  |  | 1.6 | % |  | 43,200 |  |  | 1.3 | % |  | 49,890 |  |  | 1.5 | %
Money market accounts |  | 1,479,358 |  |  | 45.8 | % |  | 1,432,355 |  |  | 44.6 | % |  | 1,397,449 |  |  | 43.4 | % |  | 1,350,566 |  |  | 41.3 | % |  | 1,359,178 |  |  | 40.3 | %
Certificates of deposits |  | 1,043,898 |  |  | 32.4 | % |  | 1,087,350 |  |  | 33.9 | % |  | 1,174,764 |  |  | 36.5 | % |  | 1,289,319 |  |  | 39.4 | % |  | 1,360,575 |  |  | 40.3 | %
Brokered deposits |  | 322,903 |  |  | 10.0 | % |  | 319,307 |  |  | 10.0 | % |  | 307,424 |  |  | 9.6 | % |  | 302,402 |  |  | 9.2 | % |  | 361,606 |  |  | 10.7 | %
Total deposits |  | $ | 3,224,595 |  |  | 100.0 | % |  | $ | 3,206,147 |  |  | 100.0 | % |  | $ | 3,217,603 |  |  | 100.0 | % |  | $ | 3,270,885 |  |  | 100.0 | % |  | $ | 3,372,391 |  |  | 100.0 | %

Total deposits decreased $46.3 million, or 1.4%, to $3.2 billion as of September 30, 2021, compared to $3.3 billion as of December 31, 2020. This decrease was due primarily to a decline of $245.4 million, or 19.0%, in certificates of deposits, partially offset by increases of $128.8 million, or 9.6%, in money market accounts, $23.6 million, or 54.5%, in savings accounts, $20.5 million, or 6.8%, in brokered deposits, $13.4 million, or 13.8%, in noninterest-bearing deposits, and $12.9 million, or 6.8%, in interest-bearing demand deposits. The Company experienced strong growth in money market deposit accounts due to targeted digital marketing efforts to grow small business accounts as well as consumers, small business and commercial clients increasing their cash balances in part due to the economic uncertainty resulting from the COVID-19 pandemic. The decrease in certificates of deposits was due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.
Recent Debt Offerings
On October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0% per year from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The net proceeds were used to redeem the 2025 Note in January 2021.
56

In August 2021, the Company issued $60.0 million aggregate principal amount of 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75% per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then current three-month SOFR, plus 311 basis points. The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes. Under the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company has agreed to take certain actions to provide for the exchange of the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes.
Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).
The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.
57

The following tables present actual and required capital ratios as of September 30, 2021 and December 31, 2020 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2021 and December 31, 2020, which are based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

| Actual |  |  |  | Minimum Capital Required - Basel III |  | Minimum Required to be Considered Well Capitalized
(dollars in thousands) | Capital Amount |  | Ratio |  |  |  |  |  | Capital Amount |  | Ratio |  | Capital Amount |  | Ratio
As of September 30, 2021: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 376,903 |  |  | 12.62 | % |  |  |  |  |  | $ | 209,119 |  |  | 7.00 | % |  | N/A |  | N/A
Bank | 417,612 |  |  | 13.99 | % |  |  |  |  |  | 208,885 |  |  | 7.00 | % |  | $ | 193,964 |  |  | 6.50 | %
Tier 1 capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 376,903 |  |  | 12.62 | % |  |  |  |  |  | 253,930 |  |  | 8.50 | % |  | N/A |  | N/A
Bank | 417,612 |  |  | 13.99 | % |  |  |  |  |  | 253,646 |  |  | 8.50 | % |  | 238,725 |  |  | 8.00 | %
Total capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 509,059 |  |  | 17.04 | % |  |  |  |  |  | 313,679 |  |  | 10.50 | % |  | N/A |  | N/A
Bank | 445,612 |  |  | 14.93 | % |  |  |  |  |  | 313,327 |  |  | 10.50 | % |  | 298,407 |  |  | 10.00 | %
Leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 376,903 |  |  | 8.86 | % |  |  |  |  |  | 170,169 |  |  | 4.00 | % |  | N/A |  | N/A
Bank | 417,612 |  |  | 9.83 | % |  |  |  |  |  | 169,865 |  |  | 4.00 | % |  | 212,332 |  |  | 5.00 | %

| Actual |  |  |  | Minimum Capital Required - Basel III |  | Minimum Required to be Considered Well Capitalized
(dollars in thousands) | Capital Amount |  | Ratio |  |  |  |  |  | Capital Amount |  | Ratio |  | Capital Amount |  | Ratio
As of December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 342,159 |  |  | 11.31 | % |  |  |  |  |  | $ | 211,828 |  |  | 7.00 | % |  | N/A |  | N/A
Bank | 377,678 |  |  | 12.49 | % |  |  |  |  |  | 211,612 |  |  | 7.00 | % |  | $ | 196,497 |  |  | 6.50 | %
Tier 1 capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 342,159 |  |  | 11.31 | % |  |  |  |  |  | 257,220 |  |  | 8.50 | % |  | N/A |  | N/A
Bank | 377,678 |  |  | 12.49 | % |  |  |  |  |  | 256,957 |  |  | 8.50 | % |  | 241,842 |  |  | 8.00 | %
Total capital to risk-weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 451,246 |  |  | 14.91 | % |  |  |  |  |  | 317,742 |  |  | 10.50 | % |  | N/A |  | N/A
Bank | 407,162 |  |  | 13.47 | % |  |  |  |  |  | 317,418 |  |  | 10.50 | % |  | 302,303 |  |  | 10.00 | %
Leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | 342,159 |  |  | 7.95 | % |  |  |  |  |  | 172,154 |  |  | 4.00 | % |  | N/A |  | N/A
Bank | 377,678 |  |  | 8.78 | % |  |  |  |  |  | 172,036 |  |  | 4.00 | % |  | 215,045 |  |  | 5.00 | %

58

Shareholders’ Dividends
The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 15, 2021 to shareholders of record as of September 30, 2021. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors, including any potential impact resulting from COVID-19.
As of September 30, 2021, the Company had $107.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes, the 2030 Notes, as well as its 3.75% Fixed-to-Floating Rate Subordinated Notes due 2031. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.
Capital Resources
The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months. The Company may explore strategic alternatives, including additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.
Liquidity
Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings and wholesale funding, which are generally advances from the FHLB and brokered deposits.
The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19. At September 30, 2021, on a consolidated basis, the Company had $1.0 billion in cash and cash equivalents and investment securities available-for-sale and $44.0 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At September 30, 2021, the Bank had the ability to borrow an additional $597.9 million from the FHLB, the Federal Reserve and correspondent bank Fed Funds lines of credit.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At September 30, 2021, the Company, on an unconsolidated basis, had $58.8 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.
The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At September 30, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $278.3 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2021 totaled $787.0 million.
59

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.
60

Reconciliation of Non-GAAP Financial Measures
This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with GAAP. Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted revenue, adjusted income before income taxes, adjusted income tax, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity and adjusted effective income tax rate are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the last five completed fiscal quarters and the nine months ended September 30, 2021 and 2020.

(dollars in thousands, except share and per share data) | Three Months Ended |  | Nine Months Ended
September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Total equity - GAAP | $ | 370,442 |  |  | $ | 358,641 |  |  | $ | 344,566 |  |  | $ | 330,944 |  |  | $ | 318,102 |  |  | $ | 370,442 |  |  | $ | 318,102 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |
Tangible common equity | $ | 365,755 |  |  | $ | 353,954 |  |  | $ | 339,879 |  |  | $ | 326,257 |  |  | $ | 313,415 |  |  | $ | 365,765 |  |  | $ | 313,415 |
Total assets - GAAP | $ | 4,252,292 |  |  | $ | 4,204,642 |  |  | $ | 4,188,570 |  |  | $ | 4,246,156 |  |  | $ | 4,333,624 |  |  | $ | 4,252,292 |  |  | $ | 4,333,624 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |
Tangible assets | $ | 4,247,605 |  |  | $ | 4,199,955 |  |  | $ | 4,183,883 |  |  | $ | 4,241,469 |  |  | $ | 4,328,937 |  |  | $ | 4,247,605 |  |  | $ | 4,328,937 |
Common shares outstanding | 9,854,153 |  |  | 9,854,153 |  |  | 9,823,831 |  |  | 9,800,569 |  |  | 9,800,569 |  |  | 9,854,153 |  |  | 9,800,569 |
Book value per common share | $ | 37.59 |  |  | $ | 36.39 |  |  | $ | 35.07 |  |  | $ | 33.77 |  |  | $ | 32.46 |  |  | $ | 37.59 |  |  | $ | 32.46 |
Effect of goodwill | (0.47) |  |  | (0.47) |  |  | (0.47) |  |  | (0.48) |  |  | (0.48) |  |  | (0.47) |  |  | (0.48) |
Tangible book value per common share | $ | 37.12 |  |  | $ | 35.92 |  |  | $ | 34.60 |  |  | $ | 33.29 |  |  | $ | 31.98 |  |  | $ | 37.12 |  |  | $ | 31.98 |
Total shareholders’ equity to assets | 8.71 | % |  | 8.53 | % |  | 8.23 | % |  | 7.79 | % |  | 7.34 | % |  | 8.71 | % |  | 7.34 | %
Effect of goodwill | (0.10) | % |  | (0.10) | % |  | (0.11) | % |  | (0.10) | % |  | (0.10) | % |  | (0.10) | % |  | (0.10) | %
Tangible common equity to tangible assets | 8.61 | % |  | 8.43 | % |  | 8.12 | % |  | 7.69 | % |  | 7.24 | % |  | 8.61 | % |  | 7.24 | %
Total average equity - GAAP | $ | 366,187 |  |  | $ | 352,894 |  |  | $ | 335,968 |  |  | $ | 323,464 |  |  | $ | 313,611 |  |  | $ | 351,794 |  |  | $ | 310,506 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Average goodwill | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |  |  | (4,687) |
Average tangible common equity | $ | 361,500 |  |  | $ | 348,207 |  |  | $ | 331,281 |  |  | $ | 318,777 |  |  | $ | 308,924 |  |  | $ | 347,107 |  |  | $ | 305,819 |
Return on average shareholders’ equity | 13.10 | % |  | 14.88 | % |  | 12.61 | % |  | 13.64 | % |  | 10.67 | % |  | 13.54 | % |  | 7.90 | %
Effect of goodwill | 0.17 | % |  | 0.21 | % |  | 0.18 | % |  | 0.20 | % |  | 0.16 | % |  | 0.19 | % |  | 0.12 | %
Return on average tangible common equity | 13.27 | % |  | 15.09 | % |  | 12.79 | % |  | 13.84 | % |  | 10.83 | % |  | 13.73 | % |  | 8.02 | %

61

(dollars in thousands, except share and per share data) | Three Months Ended |  | Nine Months Ended
September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Total interest income | $ | 33,034 |  |  | $ | 33,377 |  |  | $ | 33,280 |  |  | $ | 33,643 |  |  | $ | 32,750 |  |  | $ | 99,691 |  |  | $ | 103,216 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Fully-taxable equivalent adjustments 1 | 1,356 |  |  | 1,394 |  |  | 1,356 |  |  | 1,400 |  |  | 1,424 |  |  | 4,105 |  |  | 4,396 |
Total interest income - FTE | $ | 34,390 |  |  | $ | 34,771 |  |  | $ | 34,636 |  |  | $ | 35,043 |  |  | $ | 34,174 |  |  | $ | 103,796 |  |  | $ | 107,612 |
Net interest income | $ | 20,919 |  |  | $ | 21,607 |  |  | $ | 20,525 |  |  | $ | 18,865 |  |  | $ | 16,232 |  |  | $ | 63,051 |  |  | $ | 45,676 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Fully-taxable equivalent adjustments 1 | 1,356 |  |  | 1,394 |  |  | 1,356 |  |  | 1,424 |  |  | 1,424 |  |  | 4,105 |  |  | 4,396 |
Net interest income - FTE | $ | 22,275 |  |  | $ | 23,001 |  |  | $ | 21,881 |  |  | $ | 20,289 |  |  | $ | 17,656 |  |  | $ | 67,156 |  |  | $ | 50,072 |
Net interest income | $ | 20,919 |  |  | $ | 21,607 |  |  | $ | 20,525 |  |  | $ | 18,865 |  |  | $ | 16,232 |  |  | $ | 63,051 |  |  | $ | 45,676 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Subordinated debt redemption cost | 810 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 810 |  |  | — |
Adjusted net interest income | $ | 21,729 |  |  | $ | 21,607 |  |  | $ | 20,525 |  |  | $ | 18,865 |  |  | $ | 16,232 |  |  | $ | 63,861 |  |  | $ | 45,676 |
Net interest income | $ | 20,919 |  |  | $ | 21,607 |  |  | $ | 20,525 |  |  | $ | 18,865 |  |  | $ | 16,232 |  |  | $ | 63,051 |  |  | $ | 45,676 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Fully-taxable equivalent adjustments 1 | 1,356 |  |  | 1,394 |  |  | 1,356 |  |  | 1,400 |  |  | 1,424 |  |  | 4,105 |  |  | 4,396 |
Subordinated debt redemption cost | 810 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 810 |  |  | — |
Adjusted net interest income - FTE | $ | 23,085 |  |  | $ | 23,001 |  |  | $ | 21,881 |  |  | $ | 20,265 |  |  | $ | 17,656 |  |  | $ | 67,966 |  |  | $ | 50,072 |
Net interest margin | 2.00 | % |  | 2.11 | % |  | 2.04 | % |  | 1.78 | % |  | 1.53 | % |  | 2.05 | % |  | 1.47 | %
Effect of fully-taxable equivalent adjustments 1 | 0.13 | % |  | 0.14 | % |  | 0.14 | % |  | 0.13 | % |  | 0.14 | % |  | 0.14 | % |  | 0.15 | %
Net interest margin - FTE | 2.13 | % |  | 2.25 | % |  | 2.18 | % |  | 1.91 | % |  | 1.67 | % |  | 2.19 | % |  | 1.61 | %
Net interest margin | 2.00 | % |  | 2.11 | % |  | 2.04 | % |  | 1.78 | % |  | 1.53 | % |  | 2.05 | % |  | 1.47 | %
Effect of subordinated debt redemption cost | 0.08 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 0.02 | % |  | — | %
Adjusted net interest margin | 2.08 | % |  | 2.11 | % |  | 2.04 | % |  | 1.78 | % |  | 1.53 | % |  | 2.07 | % |  | 1.47 | %
Net interest margin | 2.00 | % |  | 2.11 | % |  | 2.04 | % |  | 1.78 | % |  | 1.53 | % |  | 2.05 | % |  | 1.47 | %
Effect of fully-taxable equivalent adjustments | 0.13 | % |  | 0.14 | % |  | 0.14 | % |  | 0.13 | % |  | 0.14 | % |  | 0.14 | % |  | 0.14 | %
Effect of subordinated debt redemption cost | 0.08 | % |  | — | % |  | — | % |  | — | % |  | — | % |  | 0.02 | % |  | — | %
Adjusted net interest margin - FTE | 2.21 | % |  | 2.25 | % |  | 2.18 | % |  | 1.91 | % |  | 1.67 | % |  | 2.21 | % |  | 1.61 | %
Allowance for loan losses | $ | 28,000 |  |  | $ | 28,066 |  |  | $ | 30,642 |  |  | $ | 29,484 |  |  | $ | 26,917 |  |  | $ | 28,000 |  |  | $ | 26,917 |
Loans | $ | 2,936,148 |  |  | $ | 2,957,608 |  |  | $ | 3,058,694 |  |  | $ | 3,059,231 |  |  | $ | 3,012,914 |  |  | $ | 2,936,148 |  |  | $ | 3,012,914 |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
PPP loans | (14,981) |  |  | (39,682) |  |  | (53,365) |  |  | (50,554) |  |  | (58,337) |  |  | (14,981) |  |  | (58,337) |
Loans, excluding PPP loans | $ | 2,921,167 |  |  | $ | 2,917,926 |  |  | $ | 3,005,329 |  |  | $ | 3,008,677 |  |  | $ | 2,954,577 |  |  | $ | 2,921,167 |  |  | $ | 2,954,577 |
Allowance for loan losses to loans | 0.95 | % |  | 0.95 | % |  | 1.00 | % |  | 0.96 | % |  | 0.89 | % |  | 0.95 | % |  | 0.89 | %
Effect of PPP loans | 0.01 | % |  | 0.01 | % |  | 0.02 | % |  | 0.02 | % |  | 0.02 | % |  | 0.01 | % |  | 0.02 | %
Allowance for loan losses to loans, excluding PPP loans | 0.96 | % |  | 0.96 | % |  | 1.02 | % |  | 0.98 | % |  | 0.91 | % |  | 0.96 | % |  | 0.91 | %

1 Assuming a 21% tax rate
62

(dollars in thousands, except share and per share data) |  | Three Months Ended |  | Nine Months Ended |  |  |  |  |  |
| September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020 |  |  |  |  |  |
Total Revenue- GAAP |  | $ | 28,732 |  |  | $ | 30,569 |  |  | $ | 28,900 |  |  | $ | 31,522 |  |  | $ | 28,727 |  |  | $ | 88,201 |  |  | $ | 69,355 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain on sale of premises and equipment |  | — |  |  | (2,523) |  |  | — |  |  | — |  |  | — |  |  | (2,523) |  |  | — |  |  |  |  |  |  |
Subordinated debt redemption cost |  | 810 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 810 |  |  | — |  |  |  |  |  |  |
Adjusted total revenue |  | $ | 27,922 |  |  | $ | 28,046 |  |  | $ | 28,900 |  |  | $ | 31,522 |  |  | $ | 28,727 |  |  | $ | 86,488 |  |  | $ | 69,355 |  |  |  |  |  |  |
Non-interest income - GAAP |  | $ | 7,813 |  |  | $ | 8,962 |  |  | $ | 8,375 |  |  | $ | 12,657 |  |  | $ | 12,495 |  |  | $ | 25,150 |  |  | $ | 23,679 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain on sale of premises and equipment |  | — |  |  | (2,523) |  |  | — |  |  | — |  |  | — |  |  | (2,523) |  |  | — |  |  |  |  |  |  |
Adjusted non-interest income |  | $ | 7,813 |  |  | $ | 6,439 |  |  | $ | 8,375 |  |  | $ | 12,657 |  |  | $ | 12,495 |  |  | $ | 22,627 |  |  | $ | 23,679 |  |  |  |  |  |  |
Income before income taxes - GAAP |  | $ | 14,310 |  |  | $ | 15,473 |  |  | $ | 12,307 |  |  | $ | 14,145 |  |  | $ | 9,806 |  |  | $ | 42,090 |  |  | $ | 19,752 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Write-down of other real estate owned |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,065 |  |  | — |  |  | 2,065 |  |  |  |  |  |  |
Gain on sale of premises and equipment |  | — |  |  | (2,523) |  |  | — |  |  | — |  |  | — |  |  | (2,523) |  |  | — |  |  |  |  |  |  |
Subordinated debt redemption cost |  | 810 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 810 |  |  | — |  |  |  |  |  |  |
Adjusted income before income taxes |  | $ | 15,120 |  |  | $ | 12,950 |  |  | $ | 12,307 |  |  | $ | 14,145 |  |  | $ | 11,871 |  |  | $ | 40.377 |  |  | $ | 21,817 |  |  |  |  |  |  |
Income tax provision - GAAP |  | $ | 2,220 |  |  | $ | 2,377 |  |  | $ | 1,857 |  |  | $ | 3,055 |  |  | $ | 1,395 |  |  | $ | 6,454 |  |  | $ | 1,390 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Write-down of other real estate owned |  | — |  |  | — |  |  | — |  |  | — |  |  | 434 |  |  | — |  |  | 434 |  |  |  |  |  |  |
Gain on sale of premises and equipment |  | — |  |  | (530) |  |  | — |  |  | — |  |  | — |  |  | (530) |  |  | — |  |  |  |  |  |  |
Subordinated debt redemption cost |  | 170 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 170 |  |  | — |  |  |  |  |  |  |
Adjusted income tax provision |  | $ | 2,390 |  |  | $ | 1,847 |  |  | $ | 1,857 |  |  | $ | 3,055 |  |  | $ | 1,829 |  |  | $ | 6,094 |  |  | $ | 1,824 |  |  |  |  |  |  |
Net income - GAAP |  | $ | 12,090 |  |  | $ | 13,096 |  |  | $ | 10,450 |  |  | $ | 11,090 |  |  | $ | 8,411 |  |  | $ | 35,636 |  |  | $ | 18,362 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Write-down of other real estate owned |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,631 |  |  | — |  |  | 1,631 |  |  |  |  |  |  |
Gain on sale of premises and equipment |  | — |  |  | (1,993) |  |  | — |  |  | — |  |  | — |  |  | (1,993) |  |  | — |  |  |  |  |  |  |
Subordinated debt redemption cost |  | 640 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 640 |  |  | — |  |  |  |  |  |  |
Adjusted net income |  | $ | 12,730 |  |  | $ | 11,103 |  |  | $ | 10,450 |  |  | $ | 11,090 |  |  | $ | 10,042 |  |  | $ | 34,283 |  |  | $ | 19,993 |  |  |  |  |  |  |
Diluted average common shares outstanding |  | 9,988,102 |  |  | 9,981,422 |  |  | 9,963,036 |  |  | 9,914,022 |  |  | 9,773,224 |  |  | 9,974,071 |  |  | 9,827,182 |  |  |  |  |  |  |
Diluted earnings per share - GAAP |  | $ | 1.21 |  |  | $ | 1.31 |  |  | $ | 1.05 |  |  | $ | 1.12 |  |  | $ | 0.86 |  |  | $ | 3.57 |  |  | $ | 1.87 |  |  |  |  |  |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

63

Effect of write-down of other real estate owned |  | — |  |  | — |  |  | — |  |  | — |  |  | 0.17 |  |  | — |  |  | 0.16 |  |  |  |  |  |  |
Effect of gain on sale of premises and equipment |  | — |  |  | (0.20) |  |  | — |  |  | — |  |  | — |  |  | (0.19) |  |  | — |  |  |  |  |  |  |
Effect of subordinated debt redemption cost |  | 0.06 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 0.06 |  |  | — |  |  |  |  |  |  |
Adjusted diluted earnings per share |  | $ | 1.27 |  |  | $ | 1.11 |  |  | $ | 1.05 |  |  | $ | 1.12 |  |  | $ | 1.03 |  |  | $ | 3.44 |  |  | $ | 2.03 |  |  |  |  |  |  |
(dollars in thousands, except share and per share data) |  | Three Months Ended |  | Nine Months Ended |  |  |  |  |  |
| September 30, 2021 |  | June 30, 2021 |  | March 31, 2021 |  | December 31, 2020 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020 |  |  |  |  |  |
Return on average assets |  | 1.12 | % |  | 1.25 | % |  | 1.02 | % |  | 1.02 | % |  | 0.78 | % |  | 1.13 | % |  | 0.58 | % |  |  |  |  |  |
Effect of write-down of other real estate owned |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.15 | % |  | 0.00 | % |  | 0.05 | % |  |  |  |  |  |
Effect of gain on sale of premises and equipment |  | 0.00 | % |  | (0.19) | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | (0.06) | % |  | 0.00 | % |  |  |  |  |  |
Effect of subordinated debt redemption cost |  | 0.06 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.02 | % |  | 0.00 | % |  |  |  |  |  |
Adjusted return on average assets |  | 1.18 | % |  | 1.06 | % |  | 1.02 | % |  | 1.02 | % |  | 0.93 | % |  | 1.09 | % |  | 0.63 | % |  |  |  |  |  |
Return on average shareholders' equity |  | 13.10 | % |  | 14.88 | % |  | 12.61 | % |  | 13.64 | % |  | 10.67 | % |  | 13.54 | % |  | 7.90 | % |  |  |  |  |  |
Effect of write-down of other real estate owned |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 2.07 | % |  | 0.00 | % |  | 0.70 | % |  |  |  |  |  |
Effect of gain on sale of premises and equipment |  | 0.00 | % |  | (2.26) | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | (0.75) | % |  | 0.00 | % |  |  |  |  |  |
Effect of subordinated debt redemption cost |  | 0.69 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.24 | % |  | 0.00 | % |  |  |  |  |  |
Adjusted return on average shareholders' equity |  | 13.79 | % |  | 12.62 | % |  | 12.61 | % |  | 13.64 | % |  | 12.74 | % |  | 13.03 | % |  | 8.60 | % |  |  |  |  |  |
Return on average tangible common equity |  | 13.27 | % |  | 15.09 | % |  | 12.79 | % |  | 13.84 | % |  | 10.83 | % |  | 13.73 | % |  | 8.02 | % |  |  |  |  |  |
Effect of write-down of other real estate owned |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 2.10 | % |  | 0.00 | % |  | 0.71 | % |  |  |  |  |  |
Effect of gain on sale of premises and equipment |  | 0.00 | % |  | (2.30) | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | (0.77) | % |  | 0.00 | % |  |  |  |  |  |
Effect of subordinated debt redemption cost |  | 0.70 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.00 | % |  | 0.25 | % |  | 0.00 | % |  |  |  |  |  |
Adjusted return on average tangible common equity |  | 13.97 | % |  | 12.79 | % |  | 12.79 | % |  | 13.84 | % |  | 12.93 | % |  | 13.21 | % |  | 8.73 | % |  |  |  |  |  |
Effective income tax rate |  | 15.5 | % |  | 15.4 | % |  | 15.1 | % |  | 21.6 | % |  | 14.2 | % |  | 15.3 | % |  | 7.0 | % |  |  |  |  |  |
Effect of write-down of other real estate owned |  | 0.0 | % |  | 0.0 | % |  | 0.0 | % |  | 0.0 | % |  | 1.2 | % |  | 0.0 | % |  | 1.4 | % |  |  |  |  |  |
Effect of gain on sale of premises and equipment |  | 0.0 | % |  | (1.1) | % |  | 0.0 | % |  | 0.0 | % |  | 0.0 | % |  | (0.6) | % |  | 0.0 | % |  |  |  |  |  |
Effect of subordinated debt redemption cost |  | 0.3 | % |  | 0.0 | % |  | 0.0 | % |  | 0.0 | % |  | 0.0 | % |  | 0.4 | % |  | 0.0 | % |  |  |  |  |  |
Adjusted effective income tax rate |  | 15.8 | % |  | 14.3 | % |  | 15.1 | % |  | 21.6 | % |  | 15.4 | % |  | 15.1 | % |  | 8.4 | % |  |  |  |  |  |

Critical Accounting Policies and Estimates
There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020.
Recent Accounting Pronouncements
Refer to Note 15 to the condensed consolidated financial statements.
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Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swap agreements and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. In June 2020, the Company terminated all fair value hedging instruments associated with loans. At September 30, 2021 and December 31, 2020, the Company had interest rate swaps with notional amounts of $260.0 million and $298.2 million, respectively. Additionally, we enter into forward contracts related to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At September 30, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $78.6 million and $107.5 million, respectively. These contracts mature in less than one year. Refer to Note 13 to the condensed consolidated financial statements for additional information about derivative financial instruments.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for the Company is interest rate risk, which can be defined as the risk to earnings and the value of the Company’s equity resulting from changes in market interest rates. Interest rate risk arises in the normal course of business to the extent that there are timing and volume differences between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, re-priced or mature in specified periods. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.
The Company monitors its interest rate risk position using income simulation models and economic value of equity (“EVE”) sensitivity analysis that capture both short-term and long-term interest rate risk exposure. Income simulation involves forecasting net interest income (“NII”) under a variety of interest rate scenarios. The Company uses EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process, especially those pertaining to non-maturity deposit accounts. These assumptions are reviewed and refined on an ongoing basis by the Company. The Company continually models its NII and EVE positions with various interest rate scenarios and assumptions of future balance sheet composition. The Company utilizes implied forward rates as its base case scenario which reflects market expectations for rate increases over the next 24 months. Presented below is the estimated impact on the Company’s NII and EVE position as of September 30, 2021, assuming a static balance sheet and instantaneous parallel shifts in interest rates:

| % Change from Base Case for Instantaneous Parallel Changes in Rates
| Implied Forward Curve -25 Basis Points |  | Base Implied Forward Curve |  | Implied Forward Curve +100 Basis Points |  | Implied Forward Curve +200 Basis Points
NII - Year 1 | 0.73 | % |  | N/A |  | (2.86) | % |  | (7.04) | %
NII - Year 2 | 3.09 | % |  | 0.88 | % |  | (1.44) | % |  | (6.21) | %
EVE | 1.80 | % |  | N/A |  | (7.16) | % |  | (16.44) | %

To supplement the instantaneous rate shocks required by regulatory guidance, the Company also calculates its interest rate risk position assuming a gradual change in market interest rates. This gradual change is commonly referred to as a “rate ramp” and evenly allocates a change in interest rates over a specified time period.
Presented below is the estimated impact on the Company’s NII and EVE position as of September 30, 2021, assuming a static balance sheet and gradual parallel shifts in interest rates over a twelve month period:

| % Change from Base Case for Gradual Parallel Changes in Rates
| Implied Forward Curve -25 Basis Points |  | Base Implied Forward Curve |  | Implied Forward Curve +100 Basis Points |  | Implied Forward Curve +200 Basis Points
NII - Year 1 | (0.02) | % |  | N/A |  | (0.65) | % |  | (2.28) | %
NII - Year 2 | 2.54 | % |  | 0.88 | % |  | (0.80) | % |  | (4.77) | %
EVE | 1.50 | % |  | N/A |  | (6.84) | % |  | (15.67) | %

66

The NII and EVE figures presented in both tables above are reflective of a static balance sheet, and do not incorporate either balance sheet growth or strategies to increase net interest income while managing volatility arising from shifts in market interest rates. As such, it is likely that actual results will differ from what is presented in the tables above. Balance sheet strategies to achieve such objectives may include:
•Increasing the proportion of low-duration or variable-rate loans to total loans, including organic growth in SBA, construction or C&I lending
•Selling longer-term fixed rate loans
•Increasing the proportion of lower cost non-maturity deposits to total deposits
•Extending the duration of wholesale funding
•Executing derivative strategies to synthetically extend liabilities or shorten asset duration
•Repositioning the investment portfolio to manage its duration
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. These controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
The Company performed an evaluation under the supervision and with the participation of management, including the principal executive and principal financial officers, to assess the effectiveness of the design and operation of its disclosure controls and procedures under the Exchange Act. Based on that evaluation, the principal executive and principal financial officers concluded that the disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Neither we nor any of our subsidiaries are party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from its normal business activities.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”), except as described below. The risk factors set forth below update, and should be read together with, the risk factors described in our 2020 Form 10-K.
We have and expect to incur substantial costs related to the merger with First Century (the "merger") and integration.
We have incurred and expect to incur a number of non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, retention, severance and employee benefit-related costs, regulatory fees, closing, integration and other related costs. Some of these costs are payable regardless of whether or not the merger is completed.
The merger may be more difficult, costly or time-consuming than expected, and we may not realize the anticipated benefits of the merger.
The anticipated benefits of the merger, including revenue diversification and growth, may not be realized fully or at all or may take longer to realize than expected and integration may result in additional and unforeseen expenses. An inability to realize the full extent of the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect upon our operating results following the completion of the merger.
In addition, we and First Century have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, including employees of First Century, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect each company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the companies may also divert management attention and resources. These integration matters could have an adverse effect on the Company during this transition period and for an undetermined period after completion of the merger.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the Company following the merger.
Before the merger and the merger of First Century Bank, N.A. into the Bank (the “bank merger”) may be completed, various approvals, consents and non-objections must be obtained from the Indiana Department of Financial Institutions, the FDIC, the Federal Reserve Board and other regulatory authorities in the United States. In determining whether to grant these approvals, such regulatory authorities consider a variety of factors, including the regulatory standing of each party. These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing or in any other factors considered by regulators when granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment generally.
The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of our business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting our revenues following the merger or otherwise reducing the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger.
68

Failure to complete the merger could negatively impact the Company.
If the merger is not completed for any reason, including as a result of First Century shareholders failing to approve the merger, there may be various adverse consequences and we may experience negative reactions from the financial markets and from our customers and employees. Additionally, if the merger agreement is terminated, the market price of our common stock could decline to the extent that current market prices reflect a market assumption that the merger will be beneficial and will be completed. We also could be subject to litigation related to any failure to complete the merger or to perform our obligations under the merger agreement.
We will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company and/or First Century. These uncertainties may impair First Century and/or our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with First Century and/or the Company to seek to change existing business relationships with First Century and/or the Company.
The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: (i) approval by First Century shareholders; (ii) the receipt of required regulatory approvals, including the approval of the Indiana Department of Financial Institutions, the FDIC and the Federal Reserve; and (iii) the absence of any statute, rule, regulation, injunction, order, or decree, which shall have been enacted, entered, promulgated, or enforced, which prohibits, prevents, or makes illegal the completion of the merger, and no material claim, litigation or proceeding shall have been initiated and pending or threatened relating to the merger agreement or the merger or seeking to prevent the completion of the merger. Each party’s obligation to complete the merger is also subject to certain additional customary conditions. These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed.
We may not have discovered certain liabilities or other matters related to First Century, which may adversely affect the future financial performance of the combined company.
In the course of the due diligence review that we conducted prior to the execution of the merger agreement, we may not have discovered, or may have been unable to properly quantify, certain liabilities of First Century or other factors that may have an adverse effect on the business, results of operations, financial condition and cash flows of the combined company after the consummation of the merger.
Our estimates and judgments related to the acquisition accounting methods used to record the purchase price allocation related to the merger may be inaccurate.
Our management will make significant accounting judgments and estimates related to the application of acquisition accounting of the merger under GAAP, as well as the underlying valuation models. Our business, operating results and financial condition could be materially adversely impacted in future periods if the accounting judgments and estimates prove to be inaccurate.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchases of Common Stock
Subsequent to the end of the quarter, on October 20, 2021, we announced that our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $30.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization is scheduled to expire on December 31, 2022.
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Limitations on the Payment of Dividend s
The ability of the Company to make capital distributions, including paying dividends and repurchasing shares, depends upon our receipt of dividends from the Bank. The ability of the Bank to pay dividends is limited by state and federal laws and regulations, including the requirement for the Bank to obtain the prior approval of the Indiana Department of Financial Institutions (“DFI”) before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years. The ability of the Bank to pay dividends is further affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and it is generally prohibited from paying any dividends if, following payment thereof, it would be undercapitalized. Notwithstanding the availability of funds for dividends, the FDIC and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Capital Rules, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS

Exhibit No. |  | Description |  | Method of Filing
3.1 |  | Amended and Restated Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed May 21, 2020) |  | Incorporated by Reference
3.2 |  | Amended and Restated Bylaws of First Internet Bancorp (incorporated by reference to Exhibit 3.2 to current report on Form 8-K filed May 21, 2020) |  | Incorporated by Reference
4.1 |  | Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to current report on Form 8-K filed September 30, 2016) |  | Incorporated by Reference
4.2 |  | Fourth Supplemental Indenture, dated as of August 16, 2021, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed August 16, 2021) |  | Incorporated by Reference
4.3 |  | Forms of 3.75% Fixed-to-Floating Rate Subordinated Note due September 1, 2031 (included as Exhibit A-1 and Exhibit A-2 to the Fourth Supplemental Indenture filed as Exhibit 4.2 hereto) |  | Incorporated by Reference
10.1 |  | Form of Subordinated Note Purchase Agreement, dated August 16,2021, by and among First Internet Bancorp and the Purchasers* (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed August 15, 2021) |  | Incorporated by Reference
10.2 |  | Form of Registration Rights Agreement, dated August 16, 2021, by and among First Internet Bancorp and the Purchasers (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed August 16, 2021) |  | Incorporated by Reference
31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |  | Filed Electronically
31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |  | Filed Electronically
32.1 |  | Section 1350 Certifications |  | Filed Electronically
101 |  | Inline XBRL Instance Document (does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document) |  | Filed Electronically
101.SCH |  | Inline XBRL Taxonomy Extension Schema |  | Filed Electronically
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase |  | Filed Electronically
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase |  | Filed Electronically
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase |  | Filed Electronically
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase |  | Filed Electronically
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |  | Filed Electronically

* Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  | FIRST INTERNET BANCORP
11/9/2021 | By | /s/ David B. Becker
|  | David B. Becker, Chairman and Chief Executive Officer (on behalf of Registrant)
11/9/2021 | By | /s/ Kenneth J. Lovik
|  | Kenneth J. Lovik, Executive Vice President and Chief Financial Officer (principal financial officer)

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