What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-16 · 293 added, 155 removed, 473 unchanged (49% of the section changed)

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Years Ended December 31,

(in thousands)

(in thousands) 2020 2019 % Change

Interest income $ 97,251 $ 82,180 18.3 %

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Net interest income after provision

72,827 63,547 14.6 %

Noninterest income 61,061 25,692 137.7 %

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Income tax expense 9,314 5,819 60.1 %

Net income $ 25,823 $ 16,895 52.8 %

Net income for the year ended December 31, 2020 was $25.8 million, an increase of $8.9 million, or 53%, from net income for the year ended December 31, 2019 of $16.9 million.

The increase was primarily the result of the $142.6 million increase in average loans outstanding year over year.

The increase in loan volume resulted in an increase of $10.4 million of loan interest income.

The increase in net interest income was primarily due to the $150.6 million increase in average loans outstanding year over year.

The increase in loan volume resulted in an increase of $10.9 million of loan interest income which includes $4.5 million from SBA-PPP loans.

The increase in non-interest income is primarily due to credit card fees of $9.4 million and $24.7 million in mortgage banking revenue when comparing year over year.

Net Interest Income and Net Margin Analysis

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The cost of funds represents interest expense on deposits, and borrowings, which consist of federal funds purchased, advances from the FHLB and subordinated notes.

Noninterest bearing deposits and capital are other components representing funding sources.

Noninterest bearing deposits and capital also provide sources of funding.

We analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread.

Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period.

Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest

bearing liabilities, as well as in the volume and mix of interest earning assets, interest bearing and noninterest bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread.

Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest bearing

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest bearing liabilities, as well as in the volume and mix of interest earning assets, interest bearing and noninterest bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread.

Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

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Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest expense on interest bearing liabilities.

While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that the net interest margin provides a better measurement of performance.

While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that the net interest margin may provide a better measurement of performance.

The net interest margin (as compared to the net interest spread) includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets.

As the table shows, the increase in net interest income in 2019 as compared to 2018 was primarily a function of an increase in the volume of earning assets and particularly loans.

As the table shows, the increase in net interest income in 2020 as compared to 2019 was primarily a function of an increase in of earning assets.

AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

Years Ended December 31,

(in thousands)

Interest Income/

2020 2019 2018

(in thousands) Average

Balance Interest Income/

Expense Average

Balance Interest Income/

Expense Average

Balance Interest Income/

Expense Average

Interest earning assets:

Interest bearing deposits

$ 112,249 $ 343 0.31 % $ 47,762 $ 832 1.74 % $ 41,858 $ 687 1.64 %

Federal funds sold

3,128 4 0.12 % 2,733 50 1.83 % 1,537 27 1.76 %

Investment securities

58,071 1,292 2.22 % 41,130 924 2.25 % 50,074 1,041 2.08 %

Restricted investments

4,025 244 6.07 % 4,334 243 5.61 % 2,724 143 5.25 %

Loans held for sale

84,928 2,610 3.07 % 44,483 2,899 6.52 % 17,715 1,569 8.86 %

SBA-PPP loans receivable 157,630 4,479 2.84 % — — — —

Portfolio Loans (1)(2)

1,215,049 88,279 7.27 % 1,064,421 77,232 7.26 % 921,823 65,660 7.12 %

Total interest earning assets

1,635,080 97,251 5.95 % 1,204,863 82,180 6.82 % 1,035,731 69,127 6.67 %

Noninterest earning assets 24,923 15,046 10,001

$ 1,660,003 $ 1,219,909 $ 1,045,732

Liabilities and Stockholders’ Equity

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Interest bearing demand accounts

$ 195,794 $ 656 0.34 % $ 109,977 $ 672 0.61 % $ 72,523 $ 210 0.29 %

4,722 5 0.11 % 3,597 13 0.36 % 3,704 12 0.32 %

Money market accounts

480,218 4,786 1.00 % 344,272 5,822 1.69 % 286,257 3,797 1.33 %

Time deposits

297,997 6,077 2.04 % 302,149 7,182 2.38 % 326,827 5,773 1.77 %

Borrowed funds

42,471 1,658 3.90 % 59,387 2,153 3.63 % 34,558 1,447 4.19 %

Total interest bearing liabilities

1,021,202 13,182 1.29 % 819,382 15,842 1.93 % 723,869 11,239 1.56 %

Noninterest bearing liabilities:

Noninterest bearing liabilities

22,007 16,144 9,828

Noninterest bearing deposits

473,301 260,726 220,445

Stockholders’ equity

143,493 123,657 91,590

Total liabilities and stockholders’ equity

$ 1,660,003 $ 1,219,909 $ 1,045,732

Net interest spread (3)

4.66 % 4.89 % 5.11 %

Net interest income $ 84,069 $ 66,338 $ 57,888

Net interest margin (4) (5)

Net interest margin excluding credit card portfolio

5.14 % 5.51 % 5.59 %

_______________

(1) Includes nonaccrual loans.

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(4) Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period.

(5) For the twelve months ended December 31, 2020, SBA-PPP loans negatively impacted the margin by 25 basis points while credit card loans improved the margin by 136 basis points, taken together, the net impact was 125 basis points to the reported net interest margin.

For the twelve months ended December 31, 2019 and December 31, 2018, credit card loans contributed 125 and 81 basis points of the reported net interest margin, respectively.

Rate/Volume Analysis of Net Interest Income

The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates.

The increase in net interest income in 2018 relative to 2017 was primarily due to an increase in both the yield on and volume of interest earning assets, and particularly loans.

The increase in net interest income in 2020 relative to 2019 was primarily due to an increase in volume of interest earning assets, and particularly loans.

For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been proportionately allocated to both volume and rate.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

Year Ended December 31, 2019

Year Ended December 31, 2018

Year Ended December 31, 2020 Year Ended December 31, 2019

Compared to the

Year Ended December 31, 2018

Year Ended December 31, 2017

Year Ended December 31, 2019 Year Ended December 31, 2018

Change Due To

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Interest Variance

(In thousands)

(In thousands) Volume

Interest Income:

Interest bearing deposits

$ (1,253) $ 765 $ (488) $ 101 $ 44 $ 145

Federal funds sold

8 (55) (47) 22 1 23

Investment securities

Restricted stock

377 (9) 368 (213) 96 (117)

Restricted investments (8) 9 1 90 10 100

Loans held for sale

(691) 402 (289) 1,612 (282) 1,330

SBA-PPP loans 4,479 — 4,479 — — —

Portfolio loans 10,944 103 11,047 10,326 1,245 11,571

Total interest income

13,856 1,215 15,071 11,938 1,114 13,052

Interest Expense:

Interest bearing demand accounts

(38) 22 (16) 147 315 462

6 (14) (8) — 1 1

Money market accounts

25,897 (26,933) (1,036) 859 1,166 2,025

Time deposits

(97) (1,008) (1,105) (394) 1,802 1,408

Borrowed funds

(677) 183 (494) 868 (162) 706

Total interest expense

25,091 (27,750) (2,659) 1,480 3,122 4,602

Net interest income $ (11,235) $ 28,965 $ 17,730 $ 10,458 $ (2,008) $ 8,450

Net interest income increased by $9.6 million to $67.5 million for the year ended December 31, 2019 compared to 2018 , primarily as a result of the growth in average earning assets of 16.3% .

Net interest income increased by $17.7 million to $84.1 million for the year ended December 31, 2020 compared to 2019, primarily as a result of 35.7% growth in average earning assets.

For the twelve months ended December 31, 2020, our average interest-earning assets increased by $430.2 million, compared to the prior year.

In addition to the average earning asset growth in 2019 , year over year net interest income was bolstered by an increase in the average yield on our interest-earning assets of 25 basis points.

Net interest margin increased 1 basis point to 5.60% for the twelve months ended December 31, 2019 from 5.59% for the twelve months ended 2018 .

The Company was able to improve its average loan yield in 2019 to 7.4% as compared to 7.1% in 2018 .

These levels are the result of disciplined loan pricing practices.

In addition to the average earning asset growth in 2020, the average rate on interest bearing liabilities decreased by 64 basis points to 1.29%.

Net interest margin decreased 37 basis points to 5.14% for the twelve months ended December 31, 2020 from 5.51% for the twelve months ended 2019.

The Company’s average portfolio loan yield slightly decreased in 2020 to 7.27% as compared to 7.26% in 2019.

The Company believes its net interest margin remains favorable as compared to its peer banking companies.

Average total interest earning assets were $1.6 billion for the year ended December 31, 2020 compared with $1.2 billion for the year ended December 31, 2019.

The yield on those interest earning assets increased 25 basis points to 6.92% for 2019 compared to 6.67% for 2018 .

The increase in the average balance of interest earning assets was driven almost entirely by growth in the average balance of the loan portfolio of $142.6 million , or 15.5% , to $1.1 billion for the year ended December 31, 2019 compared to $921.8 million for year ended December 31, 2018 .

Average interest bearing liabilities increased by $95.5 million to $819.4 million for the year ended December 31, 2019 from $723.9 million for the year ended December 31, 2018 .

The increase was due to an

increase in the average balance of interest bearing demand accounts of $37.5 million , or 51.6% , an increase in money market accounts of $58.0 million , or 20.3% and an increase in the average balance of borrowed funds of $24.8 million , or 71.8% .

The yield on those interest earning assets decreased 87 basis points to 5.95% for 2020 compared to 6.82% for 2019.

The increase in the average balance of interest earning assets for the year ended December 31, 2020 compared to December 31, 2019, was driven by $64.5 million growth in the average balances of

interest earning deposits, as well as growth in investment securities of $16.9 million, loans held for sale of $40.4 million, SBA-PPP loans of $157.6 million and portfolio loans of $150.6 million.

Average interest bearing liabilities increased by $201.8 million to $1.0 billion for the year ended December 31, 2020 from $819.4 million for the year ended December 31, 2019.

The increase was due to an increase in the average balance of interest bearing demand accounts of $85.8 million, or 78.0%, an increase in money market accounts of $135.9 million, or 39.5% and a decrease in the average balance of borrowed funds of $16.9 million, or 28.5%.

compared to the year ended December 31, 2019 balances.

Deposits are the primary funding source for the Company.

The average interest rate paid on interest bearing liabilities increased to 1.93% for 2019 compared to 1.56% for 2018 .

While the average interest rate paid on interest bearing deposits increased 32 basis points, the average interest rate paid on borrowed funds decreased by 36 basis points.

The average interest rate paid on interest bearing liabilities decreased to 1.29% for 2020 compared to 1.93% for 2019.

While the average interest rate paid on interest bearing deposits decreased 27 basis points, the average interest rate paid on borrowed funds increased by 27 basis points.

For the year ended December 31, 2020, the Company’s net interest margin was 5.14% and net interest spread was 4.66% compared to 5.51% and 4.89% for 2019.

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The provision for loan losses represents the amount of expense charged to current earnings to fund the allowance for loan losses.

The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio.

The amount of the allowance for loan losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio.

Those factors include historical losses, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

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For the year ended December 31, 2020, the Company recorded a provision for loan losses of $11.2 million, compared to $2.8 million for the previous year.

The increase in the provision for 2019 compared to 2018 was primarily due to growth in the loan portfolio and an increase in classified loans.

Year over year our allowance for loan losses as a percent of total loans remained relatively steady at 1.14% at December 31, 2019 and 1.13% at December 31, 2018 .

Net charge-offs for 2019 amounted to $799 thousand , representing 0.08% of average loans, compared to $865 thousand for 2018.

Included in the net charge-offs for 2019 were $331 thousand and $442 thousand for commercial loans and credit cards, respectively.

The increase in the provision for 2020 compared to 2019 was primarily due to the uncertainty surrounding the deterioration of the macro-economic environment related to the COVID-19 pandemic.

Year over year our allowance for loan losses as a percent of total portfolio loans increased to 1.78% at December 31, 2020 from 1.14% at December 31, 2019.

Net charge-offs for 2020 amounted to $1.1 million, representing 0.09% of average loans, compared to $799 thousand for 2019.

Included in the net charge-offs for 2020 were $296 thousand for construction loans, $233 thousand for commercial loans and $588 thousand for credit cards.

The credit card portfolio charge-offs represented 54.7% and 55.4% of total charge-offs, respectively, for the periods presented.

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Years Ended December 31,

(in thousands)

(in thousands) 2020 2019 % Change

Noninterest income:

Service charges on deposit accounts

$ 520 $ 542 (4.1) %

Credit card fees

16,966 7,602 123.2 %

Mortgage banking revenue

Gain (loss) on sale of investment securities available for sale

Loss on sale of foreclosed real estate

Loss on disposal of premises and equipment

40,649 15,955 154.8 %

Gain on sale of investment securities available for sale 20 26 (23.1) %

Other fees and charges

2,906 1,567 85.4 %

Total noninterest income

$ 61,061 $ 25,692 137.7 %

Noninterest income for the the year ended December 31, 2020 was $61.1 million, a $35.4 million or 137.7% increase compared to noninterest income of $25.7 million for the year ended December 31, 2019.

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Credit card fees increased $9.4 million, or 123.2%, for the year ended December 31, 2020 to $17.0 million compared to $7.6 million for 2019 .

This increase was primarily due to an increase in outstanding cards accounts to 223 thousand at December 31, 2019 , compared to 170 thousand at December 31, 2018 , an increase of 53 thousand accounts, or 31.4% .

This increase was primarily due to an increase in outstanding card accounts to 568 thousand at December 31, 2020, compared to 223 thousand at December 31, 2019, an increase of 345 thousand accounts, or 154.4%.

Mortgage banking revenue increased $24.7 million, or 154.8%, during 2020 to $40.6 million compared to 2019 revenue of $16.0 million, primarily as a result of an increase in mortgage origination volume driven by the favorable mortgage refinancing market in 2020.

Year over year mortgage originations increased to $593.2 million from prior year originations of $337.1 million , a 76.0% increase.

Mortgage l oans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale.

Year over year mortgage originations increased to $1.3 billion from prior year originations of $593.2 million, a 120.7% increase.

Mortgage loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale.

The Bank considers these potential recourse provisions to be a risk and has established a reserve under generally accepted accounting principles for possible repurchases.

The reserve amounted to $184 thousand at December 31, 2019 , compared to $106 thousand for the same period in 2018 .

The reserve increased to $1.2 million at December 31, 2020, compared to $576 thousand for the same period in 2019 primarily due to the increase in volume.

The Bank does not originate “sub-prime” loans and has no exposure to this market segment

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Years Ended December 31,

(in thousands)

(in thousands) 2020 2019 % Change

Noninterest expense:

Salaries and employee benefits

$ 44,359 $ 32,586 36.1 %

Occupancy and equipment

5,170 4,360 18.6 %

Professional fees

4,900 2,871 70.7 %

Data processing

26,917 15,512 73.5 %

2,530 2,066 22.5 %

Loan processing

3,811 1,894 101.2 %

Other real estate expense, net

69 122 (43.4) %

Other operating

10,995 7,114 54.6 %

Total noninterest expense

$ 98,751 $ 66,525 48.4 %

Noninterest expense was $98.8 million for the year ended December 31, 2020, an increase of $32.2 million, or 48.4%, compared to $66.5 million for 2019.

The increase was driven primarily by increases in salaries and benefits, which includes commissions paid on mortgage originations.

In 2019, as a result of robust mortgage originations, commissions were $5.4 million , compared to $2.8 million in 2018 , an increase of 88.5% .

The increase in professional fees resulted primarily from increased audit and other outside services related to being a public company.

Other operating expenses increased as a result of increases in marketing, losses from credit card fraud and director fees.

In 2020, as a result of robust mortgage originations, commissions were $10.9 million, compared to $5.4 million in 2019.

The increase in professional fees resulted primarily from increased consultant and other outside services.

Data processing increased primarily due to the increase in loan and credit card volume.

Other operating expenses increased primarily a result of increases in marketing, credit expense and credit card related expenses.

Income Tax Expense

The amount of income tax expense we incur is influenced by our pre-tax income and our other nondeductible expenses.

Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period

in which the deferred tax assets and liabilities are expected to be realized or settled.

Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled.

A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

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Total assets at December 31, 2020 were $1.88 billion, a 31.5% increase as compared to $1.4 billion at December 31, 2019.

Total loans (excluding mortgage loans held for sale) were $1.2 billion at December 31, 2019 , a 17.1% increase as compared to $970.4 million at December 31, 2018 .

Total portfolio loans (excluding mortgage loans held for sale) were $1.3 billion at December 31, 2020, an 11.7% increase as compared to $1.1 billion at December 31, 2019.

Loans held for sale amounted to $107.2 million at December 31, 2020 as compared to $71.0 million for the same period in 2019, a 50.9% increase year over year.

Total borrowed funds at December 31, 2020, were $36.0 million compared to $47.6 million at December 31, 2019.

I n 2019, in an effort to reduce funding costs, manage liquidity and mitigate interest rate risk, the Company acquired a long term $40 million FHLB Principal Reducing Fixed Rate Advance to reduce our reliance on Daily Rate Credit advances.

In 2020, in an effort to reduce funding costs, manage liquidity and mitigate interest rate risk, the Company acquired a long term $22 million FHLB Fixed Rate Advance to pay off the FHLB Fixed Rate Principal Reducing long term debt incurred in 2019.

As of December 31, 2020, $22.0 million of the advance remains outstanding.

Deposits were $1.23 billion at December 31, 2019 , an increase of $270.2 million , a 28.3% as compared to $955.2 million at December 31, 2018 .

The growth in the portfolio was primarily due to an increase in the interest bearing demand account category.

Deposits were $1.7 billion at December 31, 2020, an increase of $426.7 million, a 34.8% as compared to $1.2 billion at December 31, 2019.

The growth in the portfolio was primarily due to an increase in the non-interest bearing demand account category.

The Company continues to execute on its strategic initiative to improve the deposit portfolio mix by reducing reliance on wholesale time deposits.

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The increase was primarily attributable to 2020 earnings of $25.8 million and proceeds from exercise of stock options of $0.8 million.

Shares repurchased and retired in 2019 as part of the Company’s stock repurchase program totaled 28,480 shares at a weighted average price of $ 13.53 for a total cost of $371 thousand including commissions.

Shares repurchased and retired in 2020 as part of the Company’s stock repurchase program totaled 304,114 shares at a weighted average price of $10.81 for a total cost of $3.3 million including commissions.

As of December 31, 2020, the Bank’s capital ratios continued to exceed the regulatory requirements for a “well capitalized” institution.

Interest Bearing Deposits at Other Financial Institutions

As of December 31, 2019 , interest bearing deposits at the Federal Reserve Bank of Richmond increased by $80.4 million million, or 365.5% , to $102.4 million from a balance of $22.0 million at December 31, 2018 .

The Bank increased liquidity in the fourth quarter of 2019 to continue re-balancing the deposit portfolio, to fund loan growth and to bolster its investment portfolio.

Excess liquidity will be deployed in early 2020 for the same purposes.

As of December 31, 2020, interest bearing deposits at the Federal Reserve Bank of Richmond increased by $23.6 million, or 23.1%, to $126.1 million from a balance of $102.4 million at December 31, 2019.

The Company uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements.

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Our investment portfolio totaled $99.8 million at December 31, 2020, a 64.0% increase from $60.8 million at December 31, 2019.

To supplement interest income earned on our loan portfolio, The Company invests

in high quality mortgage-backed securities, government agency bonds, high quality municipal and corporate bonds.

To supplement interest income earned on our loan portfolio, the Company invests in high quality mortgage-backed securities, government agency bonds, asset-backed securities and high quality municipal and corporate bonds.

The following tables summarize the contractual maturities and weighted-average yields of investment securities at December 31, 2020 and the amortized cost and carrying value of those securities as of the indicated dates.

INVESTMENT PORTFOLIO

One Year or Less

More Than One Year Through Five Years

More Than Five Years Through 10 Years

More Than 10 Years

At December 31, 2019

Weighted Average Yield

One Year or Less More Than One Year Through Five Years More Than Five Years Through 10 Years More Than 10 Years Total

At December 31, 2020 Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Fair Value Weighted Average Yield

(dollars in thousands)

Securities Available for Sale:

government-sponsored agencies

Asset-backed securities $ — — % $ — — % $ — — % $ 10,839 1.10 % $ 10,839 $ 10,881 1.10 %

Municipal — — % — — % — — % 10,836 1.94 % 10,836 10,927 1.94 %

Corporate bonds — — % — — % 5,500 5.13 % 259 3.29 % 5,759 5,767 4.83 %

Mortgage-backed securities

— — % 996 1.66 % 15,026 2.14 % 53,994 1.73 % 70,016 72,212 1.82 %

Total $ — — % $ 996 1.66 % $ 20,526 2.94 % $ 75,928 1.68 % $ 97,450 $ 99,787 1.93 %

2020 2019 2018

Book Value Fair Value Book Value Fair Value Book Value Fair Value

(in thousands)

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government-sponsored agencies

$ — $ — $ 1,000 $ 999 $ 17,496 $ 17,360

Asset-backed securities 10,839 10,881 — — — —

10,836 10,927 515 528 517 501

Corporate bonds 5,759 5,767 2,542 2,565 2,908 2,885

Mortgage-backed securities

Loan Portfolio

70,016 72,212 56,754 56,736 26,836 26,186

Total $ 97,450 $ 99,787 $ 60,811 $ 60,828 $ 47,757 $ 46,932

Portfolio Loans

Our primary source of income is derived from interest earned on loans.

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Our owner-occupied and investment commercial real estate loans, residential construction loans and commercial business loans provide us with higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, and are complemented by our relatively lower risk residential real estate loans to individuals.

To a lesser but growing extent, our credit card portfolio supplements our traditional lending products with enhanced yields.

Our lending activities are principally directed to our market area consisting of the Washington, D.C.

Our credit card portfolio supplements our traditional lending products with enhanced yields.

Outside of credit cards, our lending activities are principally directed to our market area consisting of the Washington, D.C.

and Baltimore metropolitan areas.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

COMPOSITION OF LOAN PORTFOLIO

(in thousands)

The following table summarizes our portfolio loans by type of loan as of the dates indicated:

COMPOSITION OF PORTFOLIO LOANS

2020 2019 2018 2017 2016

(in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

$ 437,860 33 % $ 427,926 36 % $ 407,844 41 % $ 342,684 39 % 286,332 37 %

392,550 30 % 348,091 30 278,691 28 259,853 29 234,869 31

224,904 17 % 198,702 17 157,586 16 144,932 16 144,932 18

Commercial 157,127 12 % 151,109 13 122,264 12 108,982 12 87,563 11

Credit card 102,186 8 % 45,526 4 34,673 3 31,507 4 20,446 3

Other consumer 1,649 0 % 1,285 — 1,202 — 1,053 — 1,157 —

Total gross loans

1,316,276 100 % 1,172,639 100 % 1,002,260 100 % 889,011 100 % 764,907 100 %

Unearned income (774) (2,404) (1,992) (1,591) (1,477)

Total loans, net of unearned income

Total portfolio loans, net of unearned income 1,315,502 1,170,235 1,000,268 887,420 763,430

Allowance for loan losses

Total net loans

(23,434) (13,301) (11,308) (10,033) (8,597)

Total portfolio loans, net $ 1,292,068 $ 1,156,934 $ 988,960 $ 877,387 $ 754,832,503

Residential Real Estate Loans .

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Our residential loans also include home equity lines of credit.

Our owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years.

Our owner-occupied residential real estate loans usually have fixed rates for five to seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years.

Our investor residential real estate loans are generally based on 25-year terms with a balloon payment due after five years.

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Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are also included in this category of loans.

As of December 31, 2019 , The Company had approximately $165.4 million of owner-occupied commercial real estate loans, representing approximately 47.5% of our commercial real estate portfolio.

As of December 31, 2020, the Company had approximately $200.3 million of owner-occupied commercial real estate loans, representing approximately 15.2% of our total portfolio.

Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less.

The interest rates on our commercial real estate loans have an initial fixed rate terms that adjust typically at 5 years.

The interest rates on our commercial real estate loans generally have an initial fixed rate terms that adjust typically at 5 years.

Origination fees are routinely charged for our services.

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According to our underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties.

We conduct semi-annual stress testing of our construction loan portfolio and closely monitor underlying real estate conditions as well as our borrower’s trends of sales valuations as compared to underwriting valuations as part of our ongoing risk management efforts.

Borrowers’ progress is closely monitored in construction buildout and strictly enforce our original underwriting guidelines for construction milestones and completion timelines.

We conduct semi-annual stress testing of our construction loan portfolio and closely monitor underlying real estate conditions as well as our borrower’s trends of sales valuations as

compared to underwriting valuations as part of our ongoing risk management efforts.

Borrowers’ progress is closely monitored during the course of construction buildout and our original underwriting guidelines for construction milestones and completion timelines are followed.

Commercial Business Loans .

In addition to our other loan products, the Company provides general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products, primarily in our target markets, and underwritten based on each

borrower’s ability to service debt from income.

These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower.

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The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2020:

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES

PORTFOLIO LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES

As of December 31, 2020

(in thousands)

Due in One Year

Due in One to

(in thousands) Due in One Year

or Less Due in One to

Five Years Due After

Five Years Total

$ 100,897 $ 164,118 $ 172,845 $ 437,860

55,026 193,777 143,747 392,550

198,529 26,375 — 224,904

Commercial 72,882 50,254 33,991 157,127

Credit card 102,186 — — 102,186

Other consumer 1,297 192 160 1,649

Total portfolio loans $ 530,817 $ 434,716 $ 350,743 $ 1,316,276

Amounts with fixed rates

$ 169,762 $ 313,101 $ 99,261 $ 582,124

Amounts with floating rates

$ 361,054 $ 121,616 $ 251,482 $ 734,152

Nonperforming Assets

4 unchanged sentences

We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt.

When interest accrual is discontinued, all unpaid accrued interest is reversed from income.

When interest accrual is discontinued, all unpaid accrued

interest is reversed from income.

Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.

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There are several procedures in place to assist the Company in maintaining the overall quality of our loan portfolio.

The Company has

established underwriting guidelines to be followed by our bankers, and monitor our delinquency levels for any negative or adverse trends.

There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Nonperforming loans were $4.7 million at December 31, 2019 and December 31, 2018 .

Nonperforming loans were 0.40% and 0.47% of total loans at the respective year ends.

Foreclosed real estate increased to $2.4 million as of December 31, 2019 compared to $142 thousand , for the same period of 2018 .

The Company has established underwriting guidelines to be followed by our bankers, and monitor our delinquency levels for any negative or adverse trends.

There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit.

Nonperforming loans were $9.2 million at December 31, 2020 and $4.7 million December 31, 2019.

Nonperforming loans were 0.61% and 0.40% of total portfolio loans at the respective year ends.

Foreclosed real estate increased to $3.3 million as of December 31, 2020 compared to $2.4 million, for the same period of 2019.

The foreclosure of a construction loan with an outstanding balance of $2.1 million was the primary reason for the increase.

9 unchanged sentences

Nonaccrual loans

$ 3,581 $ 2,193 $ 2,207 1,828 $ 1,822

2,358 1,433 1,486 1,648 1,193

1,886 — — 499 —

Commercial 1,182 474 749 1,067 750

Accruing loans 90 or more days past due

230 620 237 365 753

Total nonperforming loans

9,237 4,720 4,679 5,407 4,518

Other real estate owned 3,326 2,384 142 93 90

Total nonperforming assets

$ 12,563 $ 7,104 $ 4,821 $ 5,500 $ 4,608

Restructured loans-nonaccrual

$ 440 $ 459 $ 284 $ 592 $ 941

Restructured loans-accruing

$ — $ — $ — 3,219 $ —

Nonperforming loans to total loans 0.61 % 0.40 % 0.47 % 0.61 % 0.59 %

Nonperforming assets to total assets

0.67 % 0.50 % 0.44 % 0.54 % 0.51 %

Potential Problem Loans

9 unchanged sentences

Loans that are deemed special mention, substandard, doubtful or loss are listed in the Bank’s Problem Loan Status Report.

The Problem Loan Status Report provides a detailed summary of the borrower and

guarantor status, loan accrual status, collateral evaluation and includes a description of the planned collection and administration program designed to mitigate the Bank’s risk of loss and remove the loan from problem status.

The Problem Loan Status Report provides a detailed summary of the borrower and guarantor status, loan accrual status, collateral evaluation and includes a description of the planned collection and administration program designed to mitigate the Bank’s risk of loss and remove the loan from problem status.

The Special Asset Committee reviews the Problem Loan Status Report on a quarterly basis for borrowers with an overall loan exposure in excess of $250,000.

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Loans not meeting the criteria above are considered to be pass-rated loans.

The following tables present the loan balances by category as well as risk rating.

The following tables present the portfolio loan balances by category as well as risk rating.

No assets were classified as loss during the periods presented.

LOAN CLASSIFICATION

PORTFOLIO LOAN CLASSIFICATION

(in thousands)

Special Mention

Special Mention Substandard Doubtful Total

December 31, 2020

$ 428,260 $ 5,150 $ 4,450 $ — $ 437,860

383,311 6,881 2,358 — 392,550

220,057 1,112 3,735 — 224,904

Commercial 145,365 9,766 1,996 — 157,127

Credit card (2)

102,186 — — — 102,186

Other consumer 1,649 — — — 1,649

Total $ 1,280,828 $ 22,909 $ 12,539 $ — $ 1,316,276

December 31, 2019

$ 425,661 $ — $ 2,265 $ — $ 427,926

340,313 6,345 1,433 — 348,091

198,702 — — — 198,702

Commercial 145,178 4,505 1,426 — 151,109

Credit card (2)

45,526 — — — 45,526

Other consumer 1,285 — — — 1,285

Total $ 1,156,665 $ 10,850 $ 5,124 $ — $ 1,172,639

_______________

Category includes loans graded exceptional, very good, good, satisfactory and pass / watch.

(1) Category includes loans graded exceptional, very good, satisfactory and pass/watch.

(2) Credit cards are evaluated by past due not risk rating.

At December 31, 2020, the recorded investment in impaired loans was $9.2 million, $391 thousand of which required a specific reserve of $253 thousand compared to a recorded investment in impaired loans of $4.1 million including $273 thousand requiring a specific reserve of $119 thousand at December 31, 2019.

1 unchanged sentence

Impaired loans also include certain loans that have been modified as troubled debt restructurings (“TDRs”).

At December 31, 2019 , the Company had five loans amounting to $459 thousand that were considered to be TDRs, compared to four loans amounting to $284 thousand at December 31, 2018 .

At December 31, 2020, the Company had five loans amounting to $440 thousand that were considered to be TDRs, compared to five loans amounting to $459 thousand at December 31, 2019.

Allowance for Loan Losses

8 unchanged sentences

Allowance for loan losses at beginning of period

$ 13,301 $ 11,308 $ 10,033 $ 8,597 $ 6,573

— (40) (121) (190) (42)

— — (22) (312) (62)

(296) — — — —

Commercial (233) (331) (147) (25) (1,765)

Credit card (637) (461) (806) (1,124) (640)

Other consumer — — — — —

Total charge-offs

(1,166) (832) (1,096) (1,651) (2,509)

— 13 152 115 89

Commercial — 2 34 3 8

Credit card 50 19 42 314 138

Other consumer — — — — —

Total recoveries

57 34 231 432 242

Net charge-offs (1,109) (798) (865) (1,219) (2,267)

1 unchanged sentence

Allowance for loan losses at period end (1)

Allowance for loan losses to period end loans

Net charge-offs to average loans

Our allowance for loan losses at December 31, 2019 and December 31, 2018 was $13.3 million and $11.3 million , respectively, or 1.14% and 1.13% of loans for each respective period end.

$ 23,434 $ 13,301 $ 11,308 $ 10,033 $ 8,597

Allowance for loan losses to period end portfolio loans (1)

1.78 % 1.14 % 1.13 % 1.13 % 1.13 %

Net charge-offs to average portfolio loans 0.09 % 0.08 % 0.09 % 0.15 % 0.33 %

_______________

(1) Allowance calculation excludes SBA-PPP loans.

Our allowance for loan losses at December 31, 2020 and December 31, 2019 was $23.4 million and $13.3 million, respectively, or 1.78% and 1.14% of portfolio loans for each respective period end.

The allowance for loan losses at December 31, 2020 included specific reserves of $253 thousand set aside for impaired loans.

Our charge-offs for the year ended December 31, 2019 were $832 thousand and were partially offset by recoveries of $34 thousand .

Our charge-offs for the year ended December 31, 2020 were $1.2 million and were partially offset by recoveries of $57 thousand.

The allowance for loan losses at December 31, 2019 included specific reserves of $119 thousand set aside for impaired loans.

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The Company has an experienced Credit Administration function, which provides independent analysis of credit requests and the management of problem credits.

The Credit Department has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system, and continues to adopt and enhance the monitoring of the loan portfolio.

The loan portfolio analysis process is ongoing and proactive in order to maintain a portfolio of quality credits and to identify any weaknesses before they become more severe.

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.

The Credit Department has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system, and continues to adapt and enhance the monitoring of the loan portfolio.

The loan portfolio analysis process is intended to contribute to the identification of weaknesses before they become more severe.

Although we believe we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.

The following table sets forth activity in the allowance for loan losses for the past five years for the categories and certain other information as of the dates indicated.

1 unchanged sentence

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

2020 2019 2018 2017 2016

(in thousands)

Amount Percent (1)

$ 7,153 31 % $ 4,135 31 % $ 3,541 30 % $ 3,137 31 % $ 2,664 30 %

6,786 29 3,572 27 3,003 27 2,860 29 2,682 31

4,595 20 2,668 20 2,093 19 1,646 16 1,591 19

Commercial 2,417 10 1,548 12 1,578 14 1,497 15 1,174 14

Credit card 2,462 10 1,368 10 1,084 10 885 9 477 6

Other consumer 21 — 10 — 9 — 8 — 9 —

1 unchanged sentence

_______________

Loan category as a percentage of total loans.

(1) Loan category as a percentage of total portfolio loans which excludes SBA-PPP loans.

Deposits are the major source of funding for the Company.

1 unchanged sentence

We generate deposits from our customers on a relationship basis and through the efforts of our commercial lending officers and our business banking officers.

Year over year, deposits increased 28.3% with the largest increase occurring in interest bearing demand accounts and money market accounts.

Year over year, deposits increased 34.8% with the largest increase occurring in non-interest bearing demand accounts.

The Company continues to execute on its strategic initiative to improve the deposit portfolio mix by reducing reliance on wholesale time deposits.

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We supplement our deposits with wholesale funding sources such as brokered deposits as needed.

At December 31, 2019 , interest bearing deposits were $933.6 million , an increase of $220.7 million , or 30.9% , compared to $713.0 million at December 31, 2018 .

At December 31, 2020, interest bearing deposits were $1.0 billion, an increase of $109.9 million, or 11.8%, compared to $933.6 million at December 31, 2019.

This increase was primarily due to the Company’s continued effort to improve the deposit mix by reducing reliance on wholesale time deposits.

During the same period, money market balances increased to $429.1 million , a $140.2 million or 48.5% change from the prior year’s balance of $288.9 million .

In order to fund the loan growth of the Bank, we built upon our prior success of focusing our strategic efforts on growing core deposits through an expanded deposits sales force, incentives to our commercial loan team and increased marketing efforts.

The average rate paid on interest bearing deposits increased nine basis points to 1.74% at December 31, 2019 from 1.64% for the same period in 2018 .

Rates paid on certificates of deposit and money market increased 61 and 36 basis points, respectively, for the period presented.

The increase in the average rates was primarily due to increases in market interest rates resulting from the December 2018 increase in the federal funds rate.

During the same period, money market balances increased to $447.1 million, an $18.0 million or 4.2% change from the prior year’s balance of $429.1 million.

In order to fund the loan growth of the Bank, we built upon our prior success of focusing our strategic efforts to grow core deposits through an expanded deposits sales force, incentives to our commercial loan team and increased marketing efforts.

The average rate paid on interest bearing demand deposits decreased 27 basis points to 0.34% at December 31, 2020 from 0.61% for the same period in 2019.

Rates paid on certificates of deposit and money market decreased 34 and 69 basis points, respectively, for the period presented.

The decrease in the average rates was primarily due to decreases in market interest rates resulting from prolonged low level of the federal funds rate during 2020.

The following table presents the average balances and average rates paid on deposits for the periods indicated:

COMPOSITION OF DEPOSITS

2020 2019 2018

(in thousands)

Balance Average

Interest bearing demand accounts $ 195,794 0.34 % $ 109,977 0.61 % $ 72,523 0.29 %

Money market accounts

480,218 1.00 % 344,272 1.69 % 286,257 1.33 %

Savings accounts

4,722 0.11 % 3,597 0.36 % 3,704 0.32 %

Certificates of deposit

297,997 2.04 % 302,149 2.38 % 326,827 1.77 %

Total interest bearing deposits

978,731 1.18 % 759,995 1.80 % 689,311 1.42 %

Noninterest bearing demand accounts

473,301 260,726 220,445

Total deposits

$ 1,452,032 0.79 % $ 1,020,721 1.34 % $ 909,756 1.08 %

The following table presents the maturities of our certificates of deposit as of December 31, 2020.

MATURITIES OF CERTIFICATES OF DEPOSIT

(in thousands)

(in thousands) Three

Months Over Six

$100,000 or more $ 51,471 $ 46,704 $ 109,164 $ 91,516 $ 298,855

Less than $100,000 4,842 6,717 18,724 5,428 35,711

Total $ 56,313 $ 53,421 $ 127,888 $ 96,944 $ 334,566

We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.

9 unchanged sentences

Amount outstanding at period-end

$ 22,000 $ 32,222 $ 2,000

Weighted average interest rate at period-end 0.93 % 2.40 % 4.26 %

8 unchanged sentences

The principal amount of the debentures has not changed since issuance, and they accrue interest at a floating rate equal to the three-month LIBOR plus 1.87%.

On November 24, 2015, the Company issued $13.5 million in aggregate principal amount of subordinated notes with a maturity date of December 1, 2025.

The notes may be redeemed prior to the maturity date under certain circumstances.

The notes bear interest at 6.95% for the first five years, then adjust to the three-month LIBOR plus 5.33%.

On November 30, 2020, the Company issued $10.0 million in subordinated notes due in 2030 to replace the outstanding higher yielding $13.5 million, reducing interest expense.

The notes have a ten year term and have a fixed rated of 5.00% for the first five years;

thereafter, the rate resets quarterly to a benchmark rate plus 490 basis points.

The notes may be redeemed, in part or whole, upon the occurrence of certain events.

Federal Reserve Bank of Richmond .

4 unchanged sentences

No advances were outstanding under this facility as of December 31, 2020.

The Company also has lines of credit of $28.0 million available with other correspondent banks at December 31, 2019 , as well as access to certificate of deposit funding through a financial network which the Bank limits to 15% of the Bank’s assets.

The Company also has lines of credit of $76.0 million available with other correspondent banks at December 31, 2020, as well as access to certificate of deposit funding through a financial network which the Bank strives to limit to 15% of the Bank’s assets.

There were no outstanding balances on the lines of credit from correspondent banks at December 31, 2020.

5 unchanged sentences

These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events.

Changes in economic conditions or exposure to credit, market, operation, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity and asset/liability management.

economic conditions or exposure to credit, market, operating, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity and asset/liability management.

Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk.

Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes.

Because of its critical importance to the viability of the Bank, liquidity risk management is integrated into our risk management processes.

Critical elements of our liquidity risk management include:

effective corporate governance consisting of oversight by the board of directors and active involvement by management;

appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk;

comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Bank;

corporate governance consisting of oversight by the board of directors and active involvement by management;

the application of strategies, policies, procedures, and limits used to manage and mitigate liquidity risk;

liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Bank;

active management of intraday liquidity and collateral;

1 unchanged sentence

adequate levels of highly liquid marketable securities free of legal, regulatory or operational impediments, that can be used to meet liquidity needs in stressful situations;

comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements;

and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process.

comprehensive contingency funding plans that are believed to be adequate to address potential adverse liquidity events and emergency cash flow requirements;

and internal controls and internal audit processes that are believed to be appropriate to assure the adequacy of the institution’s liquidity risk management process.

We expect funds to be available from a number of basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows.

Other potential funding sources include brokered certificates of deposit, deposit listing services, CDARS, borrowings from the FHLB and other lines of credit.

We did not have any borrowings outstanding with the Federal Reserve Bank of Richmond at December 31, 2019 or December 31, 2018 , and our borrowing capacity is limited only by eligible collateral.

We had outstanding borrowings of $2.0 million with the Federal Reserve Bank of Richmond at December 31, 2020 as participation with the Paycheck Protection Program Liquidity Facility (“PPPLF”).

The PPPLF extended credit to eligible financial institutions that originated SBA-PPP loans, using the loans as collateral.

We have an available borrower custody arrangement with the Federal Reserve Bank of Richmond which allows us to borrow on an eligible collateralized basis.

As of December 31, 2020, we had $201.2 million of available borrowing capacity from the FHLB, $15.6 million of available borrowing capacity from the Federal Reserve Bank of Richmond and available lines of credit of $76.0 million with other correspondent banks.

4 unchanged sentences

Stock options exercised, shares issued as compensation, shares sold and stock-based compensation increased common stock and additional paid-in capital aggregately by $1.8 million.

These increases were offset by the repurchase of 28,480 shares aggregating $371 thousand during 2019 , and net unrealized losses on available for sale securities and cash flow hedging derivative of $13 thousand .

These increases were offset by the repurchase of 304,114 shares aggregating $3.7 million during 2020, and net unrealized gains on available for sale securities and cash flow hedging derivative of $1.7 million.

The Company uses several indicators of capital strength.

1 unchanged sentence

The following table shows the return on average assets (computed as net income divided by average total assets), return on average equity (computed as net income divided by average equity) and average equity to average assets ratios for the years ended December 31, 2020 and 2019.

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Return on Average Assets 1.56 % 1.38 %

19 unchanged sentences

The following table presents the regulatory capital ratios for the Company (as if such requirements applied to the Company) and the Bank as of the dates indicated.

(dollars in thousands)

Minimum Capital

Full Phase In

December 31, 2019

Tier 1 leverage ratio (to average assets)

Tier 1 capital (to risk-weighted assets)

(dollars in thousands) Actual Minimum Capital

Adequacy To Be Well

Capitalized Full Phase In

December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Amount Ratio

Tier 1 leverage ratio (to average assets) $ 159,656 8.78 % $ 72,770 4.00 % N/A N/A $ 90,962 5.00 %

Tier 1 capital (to risk-weighted assets) 159,656 13.10 % 73,100 6.00 % N/A N/A 97,467 8.00 %

Common equity tier 1 capital ratio (to risk-weighted assets)

Total capital ratio (to risk-weighted assets)

157,594 12.94 % 54,825 4.50 % N/A N/A 79,192 6.50 %

Total capital ratio (to risk-weighted assets) 185,008 15.19 % 97,467 8.00 % N/A N/A 121,834 10.00 %

Tier 1 leverage ratio (to average assets) $ 135,527 7.44 % $ 72,770 4.00 % $ 90,962 5.00 % $ 90,962 5.00 %

1 unchanged sentence

Common equity tier 1 capital ratio (to risk-weighted assets)

135,527 12.06 % 53,798 4.50 % 77,709 6.50 % 77,709 6.50 %

Total capital ratio (to risk-weighted assets) 150,593 13.40 % 95,642 8.00 % 119,552 10.00 % 119,552 10.00 %

December 31, 2019

Tier 1 leverage ratio (to average assets)

Tier 1 capital (to risk-weighted assets)

Tier 1 leverage ratio (to average assets) $ 135,380 9.96 % $ 54,397 4.00 % N/A N/A $ 67,996 5.00 %

Tier 1 capital (to risk-weighted assets) 135,380 12.31 % 66,011 6.00 % N/A N/A 88,015 8.00 %

Common equity tier 1 capital ratio (to risk-weighted assets)

Total capital ratio (to risk-weighted assets)

133,318 12.12 % 49,508 4.50 % N/A N/A 71,512 6.50 %

Total capital ratio (to risk-weighted assets) 149,142 13.56 % 88,015 8.00 % N/A N/A 110,018 10.00 %

Tier 1 leverage ratio (to average assets) $ 114,613 8.65 % $ 53,005 4.00 % $ 66,256 5.00 % $ 66,256 5.00 %

1 unchanged sentence

Common equity tier 1 capital ratio (to risk-weighted assets)

114,613 10.73 % 48,070 4.50 % 69,435 6.50 % 69,435 6.50 %

Total capital ratio (to risk-weighted assets) 127,976 11.98 % 85,458 8.00 % 106,822 10.00 % 106,822 10.00 %

4 unchanged sentences

As of December 31, 2020

(in thousands)

Due in One Year or Less

Due After One Through Three Years

Due After Three Through Five Years

Due After 5 Years

(in thousands) Due in One Year or Less Due After One Through Three Years Due After Three Through Five Years Due After 5 Years Total

FRB Borrowings $ — $ 1,954 $ — $ — $ 1,954

FHLB advances — — 22,000 — 22,000

Certificates of deposit $100,000 or more

207,339 90,872 644 — 298,855

Certificates of deposit less than $100,000

30,284 4,952 445 30 35,711

Lease payments 1,408 1,800 420 — 3,628

Subordinated debt — — — 12,062 12,062

Total $ 239,031 $ 99,578 $ 23,509 $ 12,092 $ 374,210

Off-Balance Sheet Items

19 unchanged sentences

The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment.

If the commitment is funded, we would be entitled to seek recovery from the

customer from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities.

Our policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements and our credit risk associated with issuing letters of credit is substantially the same as the risk involved in extending loan facilities to our customers.

If the commitment is funded, we would be

entitled to seek recovery from the customer from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities.

Our policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

The credit risk associated with issuing letters of credit is substantially the same as the risk involved in extending loan facilities to our customers.

We minimize our exposure to loss under letters of credit and credit commitments by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments.

16 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis