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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-15 · 197 added, 326 removed, 440 unchanged (54% of the section changed)

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This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes.

The discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements.

We assume no obligation to update any of these forward-looking statements

Executive Summary

The following summary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.

Net income for the year ended December 31, 2021 increased $14.2 million, or 54.8% when compared to the prior year, due primarily to an increase in average balances in the loan portfolio, an increase in credit card revenue, a reduction in rates for all interest bearing liabilities, and a reduction in the provision for loan losses.

These positive factors were offset by a decrease in mortgage banking revenue, increases in salaries and employee benefits, data processing and advertising.

During the year ended December 31, 2021, primarily as a result of bringing on new lending teams to focus on growing the Company’s commercial real estate portfolio, specifically owner occupied properties, the Bank’s commercial real estate loan portfolio grew by $163.8 million, of which $102.2 million was owner occupied.

The growth in our credit card portfolio of $38.9 million was due in part to targeted advertising as well as the normalization of consumer behavior across a larger customer base.

The increase in credit card activity was mainly responsible for the increase in data processing expenses.

The net interest margin was 5.86% for the year ended December 31, 2021 compared to 5.14% for the prior year.

Primarily driving this margin expansion were increases in average portfolio loan balances of $155.9 million, a 90 basis point increase in the loan yield on the portfolio loans, and the overall rate reduction for the interest bearing deposit portfolio.

Leading the increase in average portfolio balances were the commercial real estate and credit card portfolios with average balance increases of $90.5 million and $51.4 million, respectively, when comparing the year ended December 31, 2021 to December 31, 2020.

Management’s concerted effort in reducing the cost of funds associated with our interest bearing deposit portfolio resulted in a 63 basis point reduction between 2020 and 2021.

The reduction in rates for the money market and time deposit portfolios provided the greatest benefit in reducing the cost of funds for the overall interest bearing deposit portfolio.

Total assets grew by $178.7 million while total liabilities grew by $140.1 million when comparing year end 2021 to 2020.

Liquidity provided by the net SBA-PPP run off and the reduction in our mortgage loans held for sale balances coupled with our increase in core deposits enabled the Company to redeploy excess liquidity to growth in our loan and investment portfolios as well as acquiring $35.0 million in bank-

owned life insurance.

Total liability growth was due to the growth in total core deposits with noninterest bearing deposits growing by 29.4% when comparing December 31, 2021 to December 31, 2020.

The Bank’s OpenSky ® division continued to exceed management’s expectations during 2021.

Active customer accounts grew by 92 thousand when comparing the year end balance 2021 to 2020, driving a $38.9 million growth in credit card loans, net of reserves.

The noninterest bearing deposits associated with the secured credit card loans grew by $37.0 million, to $229.5 million at December 31, 2021 in comparison to December 31, 2020.

Management is beginning to see the impact of COVID-19 dissipate as customer behaviors begin to return to more seasonal norms.

Prior to COVID-19, the majority of growth came in the first and second quarters of the year tapering off in quarters three and four.

Beginning in the second quarter of 2020, management saw unprecedented growth through the end of the year and into the first quarter of 2021 due mainly to the COVID-19 stimulus monies being received by OpenSky’s ® target market.

The second quarter of 2021 saw a return to more normalized quarterly trends which continued throughout the year.

The Bank’s Capital Bank Home Loans division saw a decline in mortgage originations during the year ended December 31, 2021 when compared to the prior year.

The steepening of the yield curve in 2021 slowed originations from the year earlier when low interest rates fueled refinance volumes.

Gain on sale margins, down slightly from 3.02% for the twelve months ended December 31, 2020, remained strong at 2.79% for the twelve months ended December 31, 2021.

Historically-low housing inventory, shortages in new home building materials, and fluctuating interest rates are likely to continue suppressing origination volumes into 2022.

Critical Accounting Estimates

The accounting and reporting policies of the Company are in accordance with U.S.

GAAP and conform to general practices within the banking industry.

The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures.

Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed.

Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations.

Accordingly, the Company’s significant accounting policies are discussed in detail in “Note 1 - Nature of Business and Basis of Presentation” in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 "Financial Statements and Supplementary Data".

The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses.

The Company provides additional information on its allowance for loan losses in “Note 1 - Nature of Business and Basis of Presentation” in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 "Financial Statements and Supplementary Data".

Recent Accounting Pronouncements

For a discussion of Recent Accounting Pronouncements, see “Part II, Item 8.

Financial Statements and Supplementary Data - Notes to Financial Statements - Note 1.

Summary of Significant Accounting Policies.”

Results of Operations for the Years Ended December 31, 2021 and 2020

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Net income $ 39,978 $ 25,823 54.8 %

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 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 income for the year ended December 31, 2021 was $40.0 million, up from net income for the year ended December 31, 2020 of $25.8 million.

The increase in net interest income was primarily due to the increase in average loans outstanding in the loan portfolio year over year, an increase in credit card fees, and a reduction in rates for all interest bearing liabilities.

Year over year growth in portfolio loan volumes attributed $26.8 million to the increase in net interest income with $22.1 million attributable to the growth in the credit card portfolio.

An additional $10.9 million in credit card fees were generated in 2021 when compared to 2020.

Year over year rate reductions for all interest bearing liabilities contributed an additional $6.1 million to the net interest income growth.

The provision for loan losses decreased $7.9 million when comparing the years ended December 31, 2020 to 2021.

Management’s focus on reducing nonperforming assets as well as the improved economy during 2021 resulted in a reduced need for additional provisioning.

Offsetting factors included a decline in mortgage banking revenue of $11.4 million when comparing 2021 to 2020 as well as increases in noninterest expenses.

Data processing and advertising increased $12.3 million and $2.3 million, respectively, when comparing the annual 2021 expenses to 2020 due primarily to increases in credit card portfolio activity and targeted marketing campaigns for the unveiling of OpenSky’s new offerings.

Salaries and employee benefits increased $4.4 million for the year ended December 31, 2021 in comparison to 2020 as the Company increased its overall full-time positions by 18, hiring commercial lending teams as well as senior management officials and staff at the Bank.

Net Interest Income and Net Margin Analysis

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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

Net interest margin is a ratio calculated as net interest income annualized 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.

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Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings.

The table below presents the average balances and rates of the major categories of the Company’s assets and liabilities for the years ended December 31, 2020, 2019 and 2018.

Included in the table is a measurement of interest rate spread and margin.

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 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 2020 as compared to 2019 was primarily a function of an increase in of earning assets.

The table below presents the average balances and weighted average rates of the major categories of the Company’s assets, liabilities, and stockholders’ equity for the years ended December 31, 2021 and 2020.

Weighted average yields are derived by dividing annual income by the average balance of the related assets, and weighted average rates are derived by dividing annual expense by the average balance of the related liabilities, for the periods shown.

Average outstanding balances are derived by utilizing average daily balances for the time period shown.

The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates.

Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

Years Ended December 31,

2020 2019 2018

(in thousands) Average

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Expense Average

Balance Interest Income/

Expense Average

Interest earning assets:

Interest bearing deposits $ 228,420 $ 283 0.12 % $ 112,249 $ 343 0.31 %

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

Federal funds sold 2,850 — — 3,128 4 0.12

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

Investment securities 151,479 2,010 1.33 58,071 1,292 2.22

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

Restricted investments 3,774 166 4.40 4,025 244 6.07

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

Loans held for sale 43,126 1,224 2.84 84,928 2,610 3.07

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

SBA-PPP loans receivable 190,588 7,613 3.99 157,630 4,479 2.84

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Total interest earning assets 1,991,225 123,243 6.19 1,635,080 97,251 5.95

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

Noninterest earning assets 44,619 24,923

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

Total assets $ 2,035,844 $ 1,660,003

Liabilities and Stockholders’ Equity

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Interest bearing demand accounts $ 289,285 $ 202 0.07 $ 195,794 $ 656 0.34

$ 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 %

Savings 6,470 3 0.05 4,722 5 0.11

Money market accounts 482,225 1,484 0.31 480,218 4,786 1.00

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

Time deposits 269,262 4,119 1.53 297,997 6,077 2.04

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

Borrowed funds 34,214 742 2.17 42,471 1,658 3.90

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

Total interest bearing liabilities 1,081,456 6,550 0.61 1,021,202 13,182 1.29

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 24,128 22,007

22,007 16,144 9,828

Noninterest bearing deposits 750,760 473,301

473,301 260,726 220,445

Stockholders’ equity 179,500 143,493

143,493 123,657 91,590

Total liabilities and stockholders’ equity $ 2,035,844 $ 1,660,003

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

Net interest spread 5.58 % 4.66 %

4.66 % 4.89 % 5.11 %

Net interest income $ 116,693 $ 84,069

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(2) Interest income includes amortization of deferred loan fees, net of deferred loan costs.

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

(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.

(3) For the twelve months ended December 31, 2021 and 2020, SBA-PPP loans and credit card loans accounted for 226 and 125 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 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, 2020 Year Ended December 31, 2019

Compared to the

Year Ended December 31, 2021

Compared to the

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

Change Due To

Interest Variance

Year Ended December 31, 2020

Change Due To

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Interest bearing deposits $ 144 $ (205) $ (61)

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

Federal funds sold — (4) (4)

8 (55) (47) 22 1 23

Investment securities 1,239 (521) 718

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

Restricted investments (11) (67) (78)

Loans held for sale (1,186) (200) (1,386)

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

SBA-PPP loans 1,316 1,818 3,134

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

Portfolio loans excluding credit card loans 4,752 (4,806) (54)

Credit card loans 22,064 1,659 23,723

Total interest income 28,318 (2,326) 25,992

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

Interest Expense:

Interest bearing demand accounts 65 (519) (454)

(38) 22 (16) 147 315 462

6 (14) (8) — 1 1

Savings 1 (3) (2)

Money market accounts 6 (3,308) (3,302)

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

Time deposits (440) (1,518) (1,958)

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

Borrowed funds (179) (737) (916)

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

Total interest expense (547) (6,085) (6,632)

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

Net interest income $ 28,865 $ 3,759 $ 32,624

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 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 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 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.

When comparing the years ended December 31, 2021 to 2020, the greatest positive impact to total interest income was associated with the credit card portfolio.

On a stand-alone basis, the credit card portfolio contributed an increase of $23.7 million due to volume and rate increases when comparing the year over year 2021 to 2020 figures.

The origination of SBA-PPP loans in 2021 as well as the SBA-PPP loan forgiveness in 2021 contributed an additional $3.1 million to interest income.

Volume increases in the portfolio loans excluding credit cards accounted for an additional increase $4.8 million in interest income for the year ended December 31, 2021.

Management’s efforts to reduce the cost of funds associated with the deposit portfolio contributed $5.3 million to the increase in net interest income between the years ended December 31, 2021 and 2020.

Provision for Loan Losses

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For the year ended December 31, 2021, the Company recorded a provision for loan losses of $3.4 million, compared to $11.2 million for the previous year.

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.

The decrease in the provision for 2021 compared to 2020 was primarily due to an improving economy.

See additional discussion regarding the Company’s allowance for loan losses and reserve for off-balance sheet credit exposures at December 31, 2021 in “Financial Condition— Allowance for Loan Losses.”

The maintenance of a high quality loan portfolio, with an adequate allowance for possible credit losses, will continue to be a primary management objective for the Company.

Noninterest Income

Our primary sources of recurring noninterest income are service charges on deposit accounts, credit card fees, such as interchange fees and statement fees, and gain on sale of residential mortgage loans and other mortgage banking revenue.

Our primary sources of recurring noninterest income are credit card fees, such as interchange fees and statement fees, and mortgage banking revenue.

Noninterest income does not include (i) loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method or (ii) annual, renewal and late fees related to our credit card portfolio, which are generally recognized over the twelve month life of the related loan as an adjustment to yield using the interest method.

The following table presents, for the periods indicated, the major categories of noninterest income:

NONINTEREST INCOME

Years Ended December 31,

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20,843 32,273 (35.4)

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

Other fees and charges

2,906 1,567 85.4 %

Gain on sale of investment securities available for sale, net 153 20 665.0

Other income 1,147 365 214.2

Total noninterest income

$ 50,636 $ 50,144 1.0 %

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.

This increase is largely due to increases in credit card fees and mortgage banking revenue.

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 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 $1.3 billion from prior year originations of $593.2 million, a 120.7% increase.

The Bank’s OpenSky ® Division continued to exceed management’s expectations in 2021.

Active customer accounts grew by 92 thousand when comparing the year-end balance 2021 to 2020.

The increase in accounts led to increased fees totaling $10.9 million during 2021.

Management anticipates the impact of COVID-19 will wane as consumer patterns return to more normalized seasonal trends.

The Bank’s Capital Bank Home Loans division saw a decline in mortgage originations during the year ended December 31, 2021 when compared to the prior year.

The steepening of the yield curve in 2021 slowed originations from the year earlier when low interest rates fueled refinance volumes.

Gain on sale margins, down slightly from 3.02% for the twelve months ended December 31, 2020, remained strong at 2.79% for the twelve months ended December 31, 2021.

Historically-low housing inventory, shortages in new home building materials, and fluctuating interest rates are likely to continue suppressing origination volumes into 2022.

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 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 reserve was $1.2 million at December 31, 2021 and 2020.

The Bank repurchased one loan for $205 thousand during 2021 while no loans were repurchased during 2020.

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

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The following table presents, for the periods indicated, the major categories of noninterest expense:

NONINTEREST EXPENSE

Years Ended December 31,

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Other real estate expense, net

69 122 (43.4) %

Other operating

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$ 110,094 $ 87,834 25.3 %

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 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.

During 2021, salaries and employee benefits increased due to the addition of new employees in our commercial and commercial real estate lending groups as well as additional positions in executive management as the Company continues to put in place the requisite human capital for its continued growth.

Contributions to the long-term incentive plan during 2021 was responsible for an additional $1.2 million in salaries and employee benefits expense when compared to the year ended December 31, 2020.

The increase in data processing expense as well as other operating expense was primarily related to the increase in the number of active OpenSky ® accounts at year end 2021, while the increase in advertising expense was attributable to enhanced marketing for the commercial bank segment as well as OpenSky ® during 2021.

Professional fees associated with the commercial bank segment increased as the Company continued to build out its regulatory and compliance infrastructure in anticipation of the budgeted growth for 2022.

Income Tax Expense

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

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

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Financial Condition

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 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.

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 $1.7 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.

Accordingly, wholesale time deposits decreased by $59.3 million or 35.5% to $107.7 million at December 31, 2020, from $167.0 million at December 31, 2019.

Stockholders’ equity increased $26.0 million, or 19%, to $159.3 million at December 31, 2020, compared to $133.3 million at December 31, 2019.

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 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, 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 following table summarizes the Company’s financial condition at the dates indicated.

December 31, Change expressed in:

(in thousands) 2021 2020 Dollars Percent

Total assets $ 2,055,300 $ 1,876,593 $ 178,707 9.5 %

AFS securities 184,455 99,787 84,668 84.8

Portfolio loans receivable, net 1,523,982 1,315,502 208,480 15.8

Deposits 1,797,137 1,652,128 145,009 8.8

Borrowings 34,062 36,016 (1,954) (5.4)

Stockholders’ equity 197,903 159,311 38,592 24.2

Equity to total assets at end of period 9.6 % 8.5 % 12.9

Average number of basic shares outstanding 13,799 13,793 0.0

Average number of diluted shares outstanding 14,081 13,800 2.0 %

Total assets at December 31, 2021 reflected an increase from its December 31, 2020 balance due to growth in the commercial real estate loan portfolio and credit card portfolios, the addition of bank-owned life insurance, and the deployment of excess liquidity into the investment portfolio.

Offsetting these increases were decreases in the loans held for sale portfolio during 2021 when compared to 2020, as well as a reduction in SBA-PPP loans.

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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For the years presented, all securities were classified as available for sale.

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, 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 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

During 2021, management invested a portion of its excess liquidity into U.S.

Treasuries as the spread between treasuries and other investment portfolios continued to contract.

The following tables summarize the contractual maturities, without consideration of call features or pre-refunding dates, and weighted-average yields of investment securities at December 31, 2021 and the amortized cost and carrying value of those securities as of the indicated dates.

The weighted average yields were calculated by multiplying the book value of each individual security by its yield, dividing that figure by the portfolio total, and then summing the value of these results to arrive at the weighted average yield.

Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.

More Than One Year Through Five Years More Than Five Years Through Ten Years More Than Ten Years Total

At December 31, 2021 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:

U.S Treasuries $ 58,602 0.56 % $ 73,850 1.27 % $ — — % $ 132,452 $ 131,001 0.96 %

Asset-backed securities — — — — 10,093 0.98 10,093 10,140 0.98

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Total $ 58,602 0.56 % $ 89,022 1.56 % $ 38,335 1.06 % $ 185,959 $ 184,455 1.15 %

2020 2019 2018

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

(in thousands)

Securities Available for Sale:

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

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

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and Baltimore metropolitan areas.

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

Allowance for loan losses

(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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In general, the required minimum debt service coverage ratio is 1.15.

Residential real estate loans have represented a stable and growing portion of our loan portfolio.

The Company intends to continue to emphasize residential real estate lending.

Residential real estate loans have represented a growing portion of our loan portfolio.

Commercial Real Estate Loans .

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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, 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.

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and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes, condominium and townhouse conversions or renovations and, to a lesser extent, to individuals.

Our construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loan.

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 during the course of construction buildout and our original underwriting guidelines for construction milestones and completion timelines are followed.

Our construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to

permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loan.

According to our underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, should not 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 monitored during the course of construction buildout, including for adherence to construction milestones and completion timelines.

Commercial Business Loans .

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The repayment of loans is a source of additional liquidity for us.

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

PORTFOLIO LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES

The following table details contractual maturities of our portfolio loans, along with associated weighted average yields and an analysis of loans maturing after one year categorized by rate characteristic.

Loans with adjustable interest rates are shown as maturing in the period during which the contract is due.

The table does not reflect the effects of possible prepayments.

As of December 31, 2021

(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

(in thousands) One Year

or Less One to

Five Years Over

Five Years to Fifteen Years After Fifteen Years Total

Amount Yield Amount Yield Amount Yield Amount Yield

Residential $ 74,282 5.58 % $ 152,875 4.88 % $ 97,229 4.38 % $ 77,221 4.19 % $ 401,607

Commercial 114,801 4.98 212,592 4.54 223,468 4.14 5,478 3.23 556,339

Construction 240,587 5.86 14,560 5.75 — — — — 255,147

Commercial 74,002 5.25 57,822 4.61 39,863 5.50 4,269 4.53 175,956

Credit card 141,120 42.96 — — — — — — 141,120

Other consumer 306 5.60 296 5.30 431 4.89 — — 1,033

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

Total portfolio loans, gross $ 645,098 13.69 % $ 438,145 4.71 % $ 360,991 4.36 % $ 86,968 4.14 % $ 1,531,202

Loans above maturing after one year categorized by rate characteristic:

Predetermined Interest Rates Floating or Variable Rates Total

Residential $ 154,928 $ 172,397 $ 327,325

Commercial 297,753 143,785 441,538

Construction 488 14,072 14,560

Commercial 69,682 32,272 101,954

Other consumer 677 50 727

Total portfolio loans, gross $ 523,528 $ 362,576 $ 886,104

Nonperforming Assets

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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.

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.

The property is currently being marketed.

As of December 31, 2020, we had $230 thousand of accruing loans past due 90 days.

These loans were past due as a result of maturity date, not payment issues.

Total nonperforming assets were $12.6 million at December 31, 2020 compared to $7.1 million at December 31, 2019, or 0.67% and 0.50%, respectively, of corresponding total assets.

Of the $12.6 million in total nonperforming assets, nonperforming loans represented $9.2 million and other real estate owned totaled $3.3 million.

Nonperforming loans included five restructured loans totaling $440 thousand.

The following table presents information regarding nonperforming assets at the dates indicated:

NONPERFORMING ASSETS

(in thousands) 2020 2019 2018 2017 2016

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

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Our lending policy requires the routine monitoring of weekly past due reports, daily overdraft reports, monthly maturing loans, monthly risk rating reports and internal loan review reports.

The lending and credit management of the Bank meet several times a week to review loans rated pass/watch.

The lending and credit management of the Bank meet periodically to review loans rated pass/watch.

The focus of each meeting is to identify and promptly determine any necessary required action with this loan population, which consists of loans that, although considered satisfactory and performing to terms, may exhibit special risk features that warrant management’s attention.

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No assets were classified as loss during the periods presented.

PORTFOLIO LOAN CLASSIFICATION

(in thousands)

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

_______________

(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, 2021, the recorded investment in impaired loans was $11.3 million, $336 thousand of which required a specific reserve of $218 thousand compared to a recorded investment in impaired loans of $9.2 million including $391 thousand requiring a specific reserve of $253 thousand at December 31, 2020.

Of the $9.2 million of impaired loans, $3.7 million was related to one loan relationship.

Of the $11.3 million of impaired loans, $5.0 million was related to one well-collateralized construction loan relationship.

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

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The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

The following table presents a summary of changes in the allowance for loan losses for the periods and dates indicated:

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

The following table presents key ratios for the allowance for loan losses and nonaccrual loans for the periods indicated:

For the Years Ended December 31,

(in thousands) 2020 2019 2018 2017 2016

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)

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

Nonaccrual loans to total portfolio loans Allowance for loan losses to nonaccrual loans (1)

2021 2020 2021 2020 2021 2020

Residential 1.40 % 1.63 % 0.71 % 0.82 % 198 % 200 %

Commercial 1.54 1.73 — 0.60 34,606 288

Construction 1.84 2.04 3.06 0.84 60 244

Commercial 1.50 1.54 0.38 0.75 390 205

Credit card 2.59 2.41 — — — —

Other consumer 1.13 1.28 — — — —

Total charge-offs

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

Total 1.65 % 1.78 % 0.70 % 0.61 % 220 % 254 %

_____________

(1) Allowance calculation excludes SBA-PPP loans.

The following table presents a summary of the net charge-off (recovery) of loans as a percentage of average loans for the periods indicated:

For the Years Ended December 31,

(in thousands) Net Charge-offs (Recoveries) Average Loans Percent of average portfolio loans Net Charge-offs Average Loans Percent of average portfolio loans

Residential $ — $ 421,856 — % $ — $ 426,868 — %

Commercial 161 456,972 0.04 — 366,490 —

Construction (1) 233,964 — 289 218,787 0.13

Commercial 33 143,434 0.02 233 139,432 0.17

Credit card 1,419 112,313 1.26 587 60,958 0.96

Other consumer — 2,449 — — 2,512 —

Total recoveries

57 34 231 432 242

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

Provision for loan losses 11,242 2,791 2,140 2,655 4,291

Allowance for loan losses at period end (1)

$ 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.

Total $ 1,612 $ 1,370,988 0.12 % $ 1,109 $ 1,215,047 0.09 %

The allowance for loan losses at December 31, 2021 included specific reserves of $218 thousand set aside for impaired loans.

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, 2020 included specific reserves of $253 thousand set aside for impaired loans.

Our charge-offs for the year ended December 31, 2019 were $0.8 million and were partially offset by recoveries of $34 thousand.

Total charge-offs for the years ended December 31, 2021 and 2020 were primarily due to credit card charge-offs resulting from growth in our credit card portfolio and certain charges in excess of credit limits.

Additionally in 2019, there was a charge-off of a commercial and industrial loan in the amount of $233 thousand.

As the loan portfolio and allowance for loan losses review processes continue to evolve, there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance maintained.

Historically, the Bank has enjoyed a high quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates.

The maintenance of a high quality portfolio will continue to be a high priority for both management and the Board of Directors.

Management, being aware of the significant loan growth experienced by the Company, is intent on maintaining a strong credit review function and risk rating process.

The maintenance of a high quality portfolio will continue to be a high priority.

Management is intent on maintaining a strong credit review function and risk rating process.

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

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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.

The following table sets forth activity in the allowance for loan losses for the past two years for the categories shown below as of the dates indicated.

The total allowance is available to absorb losses from any loan category.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

2020 2019 2018 2017 2016

(in thousands)

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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

Residential $ 5,612 22 % $ 7,153 31 %

Commercial 8,566 34 6,786 29

Construction 4,699 19 4,595 20

Commercial 2,637 10 2,417 10

Credit card 3,655 15 2,462 10

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

Total Liabilities

Total liabilities at December 31, 2021 saw an increase from its December 31, 2020 balance due to growth in the deposit portfolio.

Offsetting this increase were decreases in borrowed funds as well as other liabilities.

Deposits are the major source of funding for the Company.

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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 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.

This is evident in the reduction in our wholesale time deposit portfolio of $59.3 million or 35.5%, to $107.7 million at December 31, 2020, from $167.0 million, or 13.6% at December 31, 2019.

At December 31, 2021, the Company had no balances pertaining to wholesale time deposits compared to $107.7 million at December 31, 2020.

Our credit card customers are also a significant source of low cost deposits.

As of December 31, 2020, our credit card customers accounted for $192.5 million, or 31.6%, of our total noninterest bearing deposit balances.

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

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 $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.

As of December 31, 2021 and 2020, our credit card customers accounted for $229.5 million and $192.5 million, or 29.1% and 31.6%, respectively, of our total noninterest bearing deposit balances.

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)

1 unchanged sentence

Balance Average

Interest bearing demand accounts $ 289,285 0.07 % $ 195,794 0.34 %

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$ 1,798,002 0.32 % $ 1,452,032 0.79 %

Management was actively focused on reducing its cost of funds on its deposits during 2021 as evidenced by the overall reduction in average rates from 0.79% during 2020 to 0.32% in 2021.

The following table presents the maturities of our certificates of deposit as of December 31, 2021.

MATURITIES OF CERTIFICATES OF DEPOSIT

(in thousands) Three

3 unchanged sentences

Total $ 32,396 $ 20,489 $ 114,437 $ 10,328 $ 177,650

As of December 31, 2021 and 2020, approximately $972.4 million and $934.6 million, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

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

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The FHLB allows us to borrow up to 25% of our assets on a blanket floating lien status collateralized by certain securities and loans.

As of December 31, 2020, approximately $222.0 million in real estate loans and $1.2 million in investment securities were pledged as collateral for our FHLB borrowings.

As of December 31, 2021, approximately $296.1 million in real estate loans were pledged as collateral for our FHLB borrowings.

Of the $296.1 million in loans pledged to the FHLB, our total borrowing capacity at December 31, 2021 was $205.3 million.

None of our investment securities were pledged with the FHLB as of December 31, 2021.

We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

As of December 31, 2021, we had $22.0 million in outstanding advances and $183.3 million in available borrowing capacity from the FHLB.

The following table sets forth certain information on our FHLB borrowings during the periods presented:

FHLB ADVANCES

Years Ended December 31,

(in thousands) 2020 2019 2018

Amount outstanding at period-end

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

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

Maximum month-end balance during the period $ 31,111 $ 34,444 $ 17,000

Average balance outstanding during the period $ 25,917 $ 43,472 $ 8,101

Weighted average interest rate during the period 2.15 % 2.47 % 2.83 %

Other borrowed funds .

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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.

thereafter, the rate resets quarterly to a benchmark rate, being the three-month term SOFR, plus 490 basis points.

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

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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.

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.

Changes in 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.

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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;

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

active management of intraday liquidity and collateral;

an appropriately diverse mix of existing and potential future funding sources;

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;

a diverse mix of existing and potential future funding sources;

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 are believed to be adequate to address potential adverse liquidity events and emergency cash flow requirements;

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

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”).

We participated in the Federal Reserve Bank of Richmond’s 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.

No new extensions of credit were made under the PPPLF after July 30, 2021.

In addition, 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, 2021, we had $183.3 million of available borrowing capacity from the FHLB, $15.9 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.

Cash and cash equivalents were $146.9 million million at December 31, 2020 and $114.8 million at December 31, 2019.

Accordingly, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.

Cash and cash equivalents were $183.4 million at December 31, 2021 and $146.9 million at December 31, 2020.

Accordingly, at December 31, 2021, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.

Capital Resources

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Stock options exercised, shares issued as compensation, shares sold and stock-based compensation increased common stock and additional paid-in capital aggregately by $2.8 million.

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.

These increases were offset by net unrealized losses on available for sale securities of $1.1 million.

The Company uses several indicators of capital strength.

The most commonly used measure is average common equity to average assets (computed as average equity divided by average total assets), which was 8.82% at December 31, 2021 and 8.64% at December 31, 2020.

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, 2020 December 31, 2019

Return on Average Assets 1.56 % 1.38 %

Return on Average Equity 18.00 % 13.66 %

Average Equity to Average Assets 8.64 % 10.14 %

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

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Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The capital amounts and classifications are also subject to qualitative judgments by the regulators.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%.

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The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank’s concentrations in commercial real estate loans.

See “Regulation” at page 18 and “Risk Factors” at page 33.

See "”Risks Related to the Regulation of Our Industry” in Part I, Item 1A - Risk Factors.

As of December 31, 2021, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject and was classified as “well capitalized” for purposes of the prompt corrective action regulations.

6 unchanged sentences

December 31, 2021 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 leverage ratio (to average assets) $ 201,040 9.73 % $ 82,683 4.00 % N/A N/A N/A N/A

Tier 1 capital (to risk-weighted assets) 201,040 14.43 % 83,596 6.00 % N/A N/A 118,428 8.50 %

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Total capital ratio (to risk-weighted assets) 228,574 16.41 % 111,462 8.00 % N/A N/A 146,294 10.50 %

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

Tier 1 leverage ratio (to average assets) $ 169,384 8.36 % $ 81,070 4.00 % $ 101,338 5.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) 169,384 12.53 % 81,097 6.00 % 108,130 8.00 % 114,888 8.50 %

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December 31, 2020

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 leverage ratio (to average assets) $ 159,656 8.78 % $ 72,770 4.00 % N/A N/A N/A N/A

Tier 1 capital (to risk-weighted assets) 159,656 13.10 % 73,100 6.00 % N/A N/A 103,559 8.50 %

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Total capital ratio (to risk-weighted assets) 185,008 15.19 % 97,467 8.00 % N/A N/A 127,926 10.50 %

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

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

Tier 1 capital (to risk-weighted assets) 135,527 12.06 % 71,731 6.00 % 95,642 8.00 % 101,645 8.50 %

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While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of December 31, 2021.

CONTRACTUAL OBLIGATIONS

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 Total

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

FHLB advances $ — $ — $ 22,000 $ — $ 22,000

Certificates of deposit $250,000 or more 105,765 2,550 512 — 108,827

207,339 90,872 644 — 298,855

Certificates of deposit less than $250,000 61,557 6,240 1,006 20 68,823

30,284 4,952 445 30 35,711

Lease payments 1,099 1,496 225 — 2,820

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Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

CREDIT EXTENSION COMMITMENTS

(in thousands) 2021 2020

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Letters of credit 5,105 5,102

Commitment to fund other investments 6,352 —

Total credit extension commitments $ 373,228 $ 348,122

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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.

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.

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These commitments to fund mortgage loans, to be sold into the secondary market (interest rate lock commitments), and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.

The commitment to fund other investments reflects an obligation to make an investment in a Small Business Investment Company.

Impact of Inflation

6 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