What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2021-03-01 compared with 2020-03-02 · 223 added, 173 removed, 181 unchanged (69% of the section changed)

4 unchanged sentences

In any such case, you could lose all or a portion of your original investment.

The price of our common stock may fluctuate significantly, which may make it difficult for investors to resell shares of common stock at a time or price they find attractive.

Our stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control.

In addition to those described in “Caution About Forward Looking Statements,” these factors include:

● Actual or anticipated quarterly fluctuations in our operating results and financial condition;

● Changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;

● Reports in the press, internet, or investment community generally or relating to our reputation or the financial services industry, whether or not those reports are based on accurate, complete or transparent information;

● Uncertainties related to our regulatory relationships or status;

● Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

● Fluctuations in the stock price and operating results of our competitors;

● Future sales of our equity or equity-related securities;

● Proposed or adopted regulatory changes or developments;

● Domestic and international economic and political factors unrelated to our performance;

● Actions of one or more investors in selling our common stock short;

● General market conditions and, in particular, developments related to market conditions for the financial services industry.

In addition, the stock market in general has experienced price and volume fluctuations.

This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance.

These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.

We expect that the market price of our common stock will continue to fluctuate and there can be no assurances about the levels of the market prices for our common stock.

Shareholders may not be able to readily sell large quantities of common stock at prevailing market prices.

Although the daily trading volume of our common stock on Nasdaq Stock Market, or Nasdaq, has increased, averaging approximately 236,178 shares per trading day for 2019 and 181,546 shares for the 90 trading days ended February 21, 2020, there can be no assurance that the market for our common stock can accommodate the sale of large quantities of our common stock in a short time frame without adversely impacting the market price for our stock.

As a result, shareholders may find it difficult to sell a significant number of shares of our common stock at the prevailing market price.

Short sellers of our stock may be manipulative and may drive down the market price of our common stock.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender.

A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale.

As it is in the short seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business practices and prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short.

Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks.

The publication of any such commentary regarding us in the future may bring about a temporary, or possibly long term, decline in the market price of our common stock.

In the past, the publication of commentary regarding us by a self-described short seller has been associated with the selling of shares of our common stock in the market on a large scale, resulting in a significant decline in the market price per share of our common stock.

No assurances can be made that similar declines in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers, as a result of regulatory uncertainty, or otherwise.

When the market price of a company's stock drops significantly, it is not unusual for stockholder lawsuits to be filed or threatened against the company and its board of directors and for a company to suffer reputational damage, or for a company to be subject to regulatory or governmental investigations or enforcement actions.

Such events could cause us to incur substantial costs and divert the time and attention of our board and management.

In addition, reputational damage to the Company may affect our ability to attract and retain deposits and may cause our deposit costs to increase, which could adversely affect our liquidity and earnings, and adversely impact our ability to raise capital, which could adversely affect our growth.

Reputational damage may also affect our ability to attract and retain loan customers

and maintain and develop other business relationships, which could likewise adversely affect our earnings.

Negative reports issued by short sellers or reputational damage could also negatively impact our ability to attract and retain employees.

Our ability to make distributions in respect of our securities may be limited.

Our ability to pay a cash dividend on our common stock, to repurchase of shares of our common stock, or to pay interest on our subordinated debt will depend largely upon the ability of the Bank, the Company’s principal operating business, to declare and pay dividends to the Company.

Payment of distributions on our securities will also depend upon the Bank’s earnings, financial condition, and need for funds, as well as laws, regulations and governmental policies applicable to the Company and the Bank, which limit the amount of distributions that may be made.

In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, the Company and the Bank each must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends and repurchasing shares.

The payment of dividends in any period, and the adoption or implementation of a share repurchase program, do not mean that the Company will continue to pay dividends at the current level, or at all, or that it will repurchase any additional shares of common stock.

Refer to “Regulation” under Item 1 and to “Market for Common Stock” under Item 5 for additional information.

We may issue additional equity securities, or engage in other transactions, which could affect the priority of our common stock, which may adversely affect the market price of our common stock.

Our Board of Directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities.

We are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.

Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be effected.

Such offerings could be dilutive to common shareholders.

New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, our then current common shareholders.

Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation of the Company, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, will receive distributions of our available assets prior to the holders of our common stock.

Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both.

Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

Changes in the value of goodwill and intangible assets could reduce our earnings.

The Company accounts for goodwill and other intangible assets in accordance with generally accepted accounting principles (“GAAP”), which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level.

Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values.

The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used.

Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

RISKS RELATED TO OUR BUSINESS AND ECONOMIC CONDITIONS

The COVID-19 pandemic has adversely affected, and is likely to continue to adversely affect, our customers and other businesses in our market area, as well as counterparties and third party vendors.

The resulting adverse impacts on our business, financial condition, liquidity and results of operations have been, and may continue to be significant.

The COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely effect, our customers and other businesses in our market area, as well as counterparties and third-party vendors.

We continue to see the impact of the pandemic on our business, which we expect may potentially worsen, particularly since there remains ongoing uncertainty as to how long the COVID-19 pandemic and related containment measures will continue, both in our market area and the rest of the country.

This impact has been, in certain areas, and could continue to be significant, adverse and potentially material.

The full extent of this impact, and the resulting impact on our business, financial condition, liquidity and results of operations, remains inestimable at this time, and will depend on a number of evolving factors and future developments beyond our control and that we are unable to predict, including the duration, spread and severity of the pandemic;

the nature, extent and effectiveness of containment measures;

the timing of development and widespread availability of medical treatments or vaccines;

the extent and duration of the effect on the economy, unemployment, consumer confidence and consumer and business spending;

the impact and continued availability of monetary, fiscal and other economic policies and programs designed to provide economic assistance to individuals and small businesses;

and how quickly and to what extent normal economic and operating conditions can resume.

It is also possible that any adverse impacts of the pandemic and containment measures may continue once the pandemic is controlled and the containment measures are lifted.

We expect the negative impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations to continue, and be the most severe in the following areas:

• Loan Credit Quality .

The significant disruption resulting from the COVID-19 pandemic has been materially affecting the businesses of our customers and of their customers, which impacts their creditworthiness, their ability to pay amounts owed to us and our ability to collect those amounts.

Among the industry’s most clearly impacted by the pandemic are the Accommodation and Food Service industry, exposure to which represents 10% of our loan portfolio as of December 31, 2020, and the Retail Trade industry, which represents 1% of our loan portfolio as of December 31, 2020.

In addition, approximately 6% of our loan portfolio as of December 31, 2020 is secured by restaurants, hotels or retail properties.

These areas may have a longer recovery period than other industries.

Despite high home sales volumes and our strong performance in gains from residential mortgage loans for the quarter and year ended December 31, 2020, such volumes and performance may not be stable.

Economic conditions may likely result in future material declines in real estate values and home sales volumes, and an increase in tenants failing to make or deferring rent payments.

A large portion of our loan portfolio is related to real estate, with 73% consisting of commercial real estate and real estate construction loans, and 85% of our loans being secured by real estate.

As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for loan losses, and write-down or charge-off credit relationships, any of which would negatively impact our results of operations.

In addition, market upheavals are likely to affect the value of real estate and commercial assets.

In the event of foreclosure, it is unlikely that we will be able to sell the foreclosed property at a price that will allow us to recoup a significant portion of the delinquent loan.

Table o f Contents

• Allowance for Credit Losses .

We began using a new credit reserving methodology known as the CECL methodology effective January 1, 2020.

Our ability to accurately forecast future losses under that methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of a comparable precedent.

For the twelve months ended December 31, 2020, after the initial adjustment to the ACL as of January 1, 2020, we further increased the ACL by $45.6 million of provisioning, respectively, inclusive of $167 thousand of ACL on AFS debt securities recorded in 2020.

We may need to record additional provisions for credit losses in future, as the COVID-19 pandemic continues to evolve, and our losses on our loans and other exposures could exceed our allowance.

• Increased Demands on Capital and Liquidity .

We have experienced increased volume of loan originations, particularly SBA loans pursuant to the PPP created by recent legislation.

Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes.

In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses.

These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

• Deposit Business .

As a result of the COVID-19 pandemic, deposit customers are expected to retain higher levels of cash.

While increased low-interest deposits could have a positive impact in the short-term, we would not expect these funds to be replenished as customers use deposit funds for liquidity for their business and individual needs.

If deposit levels decline, our available liquidity would decline, and we could be forced to obtain liquidity on terms less favorable than current deposit terms, which would in turn compress margins and negatively impact our results of operations.

• Interest Rate Risk .

Our net interest income, lending activities, deposits and profitability have been and could continue to be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic.

In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent.

A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.

Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets.

Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results or financial condition.

• Operational Risk .

Current and future restrictions on our workforce's access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations.

We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.

In response to COVID-19, we have modified our business practices by directing a portion of our employees to work remotely from their homes to minimize interruptions to our operations.

These actions will likely result in increased spending on our business continuity efforts, such as technology and readiness procedures for returning to our offices.

We could also experience an increased strain on our risk management policies, including, but not limited to, the effectiveness and accuracy of our models, given the lack of data inputs and comparable precedent.

Further, technology in employees' homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices.

The continuation of these work-from-home measures also introduces additional operational risk, including related to the effectiveness of our anti-money laundering and other compliance programs, as well as increased cybersecurity risk.

These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

• External Vendors and Service Providers .

We rely on many outside service providers that support our day-to-day operations including data processing and electronic communications, real estate appraisal, loan servicers and local and federal government agencies, offices and courthouses.

In light of the containment measures responding to COVID-19, many of these entities may limit the availability and access of their services, which may impact our business.

For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses, which slows the process for title work, mortgage and UCC filings.

If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Table o f Contents

• Strategic and Reputational Risk .

The pandemic and containment measures have caused us to modify our strategic plans and business practices, and we may take further actions that we determine are in the best interests of our colleagues, customers and business partners.

If we do not respond appropriately to the pandemic, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could materially adversely affect our business.

We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions, as detailed in the Note 1 to the Consolidated Financial Statements.

We may not be able to manage future growth and competition.

We have grown in the past several years through organic growth.

We intend to seek further growth in the level of our assets and deposits and selectively in the number of our branches, both within our existing footprint within the Washington, D.C.

We intend to seek further growth in the level of our assets and deposits and selectively in the number of our branches, within our existing footprint in the Washington, D.C.

metropolitan area, although no additional branches are currently anticipated in 2021.

3 unchanged sentences

Accordingly, an inability to maintain growth, or an inability to effectively manage growth, could adversely affect our results of operations, financial condition and stock price.

Substantial regulatory limitations on changes of control and anti-takeover provisions of Maryland law may make it more difficult for shareholders to receive a change in control premium.

With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquiror is a bank holding company) of any class of the Company’s voting stock or obtaining the ability to control in any manner the election of a majority of its directors or otherwise direct the management or policies of the Company without prior notice or application to and the approval of the Federal Reserve.

There are comparable prior approval requirements for changes in control under Maryland law.

Also, the Maryland General Corporation Law, as amended, contains several provisions that may make it more difficult for a third party to acquire control of the Company without the approval of its Board of Directors, and may make it more difficult or expensive for a third party to acquire a majority of its outstanding common stock.

The economic environment continues to pose significant challenges for us and could adversely affect our financial condition and results of operations.

The Company and the Bank are operating in a challenging and uncertain economic environment.

Financial institutions continue to be affected by some softness in selected segments of the real estate market and constrained financial markets, highlighted by historically low interest rates and a flat yield curve.

If declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment emerge, such events could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations.

A worsening of these conditions (further declining interest rates which negatively impact net interest margins) would likely exacerbate the adverse effects on the Company and others in the financial institutions industry.

For example, deterioration in local economic conditions in our market could drive losses beyond that which is provided for in our allowance for loan losses (although adoption of the new CECL methodology effective January 1, 2020 could mitigate further additions to the allowance for loan losses).

The Company may also face the following risks in connection with these events:

● Economic conditions that negatively affect commercial real estate values and the job market may result in a deterioration in credit quality of our loan portfolio, and such deterioration in credit quality could have a negative impact on our business;

● Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities;

● A reduction in the size, spending or employment levels of the federal, state and/or local governments in the Washington, D.C.

metropolitan area could have a negative effect on the economy in the region, on our customers and on real estate prices;

● The methodologies we use to establish our allowance for loan losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation;

● Compliance with regulations of the banking industry may increase our costs, limit our ability to pursue business opportunities, and divert management efforts.

If these conditions or similar ones continue to exist or worsen, the Company could experience continuing or increased adverse effects on its financial condition and results of operations.

Additionally, geopolitical events, terrorist attacks, natural disasters, severe weather conditions, floods, health pandemics (including the recent coronavirus outbreak) and other catastrophic events can have a material adverse effect on the economic environment and our business.

Our financial condition and results of operations would be adversely affected if our allowance for credit losses is not sufficient to absorb actual losses or if we are required to increase our allowance for credit losses.

Historically, we have enjoyed a relatively low level of nonperforming assets and net charge-offs, both in absolute dollars, as a percentage of loans and as compared to many of our peer institutions.

As a result of this historical experience, and our low level of losses inherent in our loan portfolio, we have incurred a relatively lower credit loss provision expense, which has positively impacted our earnings.

The Financial Accounting Standards Board, or FASB, has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which became applicable to us on January 1, 2020.

CECL requires financial institutions to estimate and establish a provision for credit losses over the lifetime of the asset, at the origination or the date of acquisition of the asset, as opposed to reserving for incurred or probable losses through the balance sheet date.

The CECL model also applies to certain financial assets other than loans, including held-to-maturity debt securities.

Under the CECL model, expected credit deterioration would be reflected in the income statement in the period of origination or acquisition of an asset, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Accordingly, the CECL model could require financial institutions, like the Bank, to increase their allowances for credit losses.

Moreover, the CECL model may create more volatility in our level of allowance for credit losses, and consequently in our level of income.

We plan to elect the Federal Reserve and FDIC’s rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard.

If we need to make significant and unanticipated increases in our loss allowance in the future, our business, results of operations, capital and financial condition could be materially adversely affected at that time.

We expect that the adoption of the CECL model will materially affect how we determine our allowance for credit losses, and will result in changes to our allowance.

Moreover, the CECL model may create more volatility in the level of the allowance for credit losses.

We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a one-time 10 to 20% increase in our reserve, inclusive of the reserve for unfunded commitments, as of January 1, 2020 as a cumulative-effect adjustment to the allowance for credit losses recognized through shareholder’s equity.

This number is subject to change as we finalize our CECL testing and documentation.

Please refer to Note 1 to the Consolidated Financial Statements for a more detailed discussion of CECL.

The implementation of the CECL model involves the use of estimates and forecasts based on difficult, subjective, and complex judgments, including estimates as to the direction and effects of economic conditions and how these economic conditions might affect the ability of our borrowers to repay their loans or the value of assets.

To the extent that our analysis of our prior loss experience, current and forecast economic conditions, and other factors included in our estimates of expected loss are incorrect, our allowance for credit losses may be inadequate.

Additionally, to the extent that economic conditions and forecasts and prior loss experience have been favorable, rapid or unforeseen changes in economic conditions or performance of our loans and other financial assets could result in our allowance for credit losses being inadequate, which could materially adversely affect our business, results of operations and financial condition.

There can be no assurance that our judgments about our historical loss experience, categorization of loans and other assets and forecasts of economic conditions and other facts that will impact the expected losses on an asset will be correct.

Changes in tax laws could have an adverse effect on us, the banking industry, our customers, the value of collateral securing our loans and demand for loans.

We are subject to the effect of changes in tax laws which could increase the effective tax rate payable by us to federal and state governments, reduce the value of our beneficial tax attributes or otherwise adversely affect our business, results of operations or financial condition.

Additionally, changes in tax laws could have a negative impact on the banking industry, borrowers, the market for single family residential or commercial real estate, or business borrowing.

To the extent that changes in law discourage borrowing, ownership of real property or business investment, such changes may have an adverse effect on the demand for our loans.

Further, the value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of real estate ownership and borrowing, which could require an increase in our allowance for credit losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Additionally, certain borrowers could become less able to service their debts as a result of changes in taxation.

Any such changes could adversely affect our business, financial condition and results of operations.

Changes in accounting standards could impact reported earnings.

From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements.

These changes can be operationally complex to implement and can materially impact how we record and report

our financial condition and results of operations.

In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Effective January 1, 2020, we implemented the CECL framework for our allowance for credit losses.

Any such changes (while not anticipated) could adversely affect the Company’s and Bank’s capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics.

Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on our results of operation, financial condition and stock price.

2 unchanged sentences

As part of our ongoing monitoring of internal and disclosure controls, we occasionally discover material weaknesses or significant deficiencies in our internal and disclosure controls that require remediation;

as we did in our current assessment of internal controls.

as we did in our 2019 assessment of internal controls.

See “Item 9A.

9 unchanged sentences

Under those circumstances net income and the rate of growth of net income may be adversely affected.

Additional issuances of equity securities could have a dilutive effect on existing shareholders.

The significant level of ADC loans in our portfolio, and new loans sought by customers, which may be required to be assigned a higher risk weight, could require us to maintain additional capital for these loans.

Table o f Contents

Our results of operations, financial condition and the value of our shares may be adversely affected if we are not able to continue to grow our assets.

9 unchanged sentences

Our largest source of liquidity is customer deposit accounts, including noninterest bearing demand deposit accounts, which constituted 31% of our total deposits at December 31, 2020.

If we are unable to increase customer deposits in an amount sufficient to fund loan growth, we may be required to rely on other, potentially more expensive, sources of liquidity, such as FHLB borrowings, brokered deposits and repurchase agreements, to fund loan growth, which could adversely affect our earnings, or reduce our rate of growth, which could adversely effect our earnings and stock price.

We also have a significant amount of deposits, which are in excess of the maximum FDIC insurance coverage limits.

13 unchanged sentences

Additionally, the value of an acquisition to the Company is dependent on our ability to successfully identify and estimate the magnitude of any asset quality issues of acquired companies.

We will be subject to heightened regulatory requirements if our total assets grow and exceed $10.0 billion.

As of December 31, 2019, our total assets were $8.99 billion.

We anticipate that our total assets may exceed $10 billion within the next few years.

In addition to our current regulatory requirements, banks with $10 billion or more in total assets are examined directly by the CFPB with respect to various federal consumer protection laws, subject to enhanced prudential regulation, and subject to additional regulatory requirements.

Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of significant expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.

Table o f Contents

Our concentrations of loans may create a greater risk of loan defaults and losses.

15 unchanged sentences

a loss of earnings from these loans, an increase in the provision for loan losses, an increase in loan charge-offs, and/or an increase in operating expenses which could have an adverse impact on our results of operations and financial condition.

Our concentrations of loans may require us to maintain higher levels of capital.

Under guidance adopted by the federal banking agencies, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital.

Although not currently anticipated, we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans.

Our Residential Lending department may not continue to provide us with significant noninterest income.

In 2019, the Bank originated $666 million and sold $628 million of residential mortgage loans to investors, as compared to $416 million originated and $422 million sold to investors in 2018.

In 2020, the Bank originated $1.3 billion and sold $1.2 billion of residential mortgage loans to investors, as compared to $666 million originated and $628 million sold to investors in 2019.

The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other factors beyond our control.

13 unchanged sentences

While not a significant matter in the past, should repurchases become a material issue, our earnings and asset quality could be adversely impacted, which could adversely impact our share price.

Table o f Contents

Our financial condition, earnings and asset quality could be adversely affected if our consumer facing operations do not operate in compliance with applicable regulations.

2 unchanged sentences

As a result, despite the education, compliance training, supervision and oversight we exercise in these areas, individual loan officers intentionally trying to conceal improper activities could result in the Bank being strictly liable for restitution or damages to individual borrowers, and to regulatory enforcement activity.

Litigation and regulatory actions, possibly including enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

In the normal course of our business, we are named as a defendant in various legal actions, arising in connection with our current and/or prior business activities or public disclosures.

Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages.

Further, we may be subject to regulatory enforcement actions.

We are also, from time to time, the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by various agencies and other bodies regarding our current and/or prior business activities.

The Company has received various document requests and subpoenas from securities and banking regulators and U.S.

Attorney’s offices in connection with investigations, which the Company believes relate to the Company's identification, classification and disclosure of related party transactions;

the retirement of certain former officers and directors;

and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

The Company is currently defending against shareholder litigation.

Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices, required changes in our senior officers, or other requirements resulting in increased expenses, diminished income and damage to our business.

Our involvement in any such matters, whether tangential or otherwise, and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business.

Further, any settlement, regulatory order or agreement, informal enforcement action, or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in adverse audit findings, or additional litigation, investigations or proceedings as other parties, including other litigants and/or government agencies begin independent reviews of the same activities.

As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, results of operations, financial condition and stock price, including in any particular reporting period.

Further, in such matters, it is inherently difficult to determine whether any loss is probable or whether it is possible to estimate the amount of any reasonably possible loss.

We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual fine, penalty or other relief, conditions or restrictions, if any, may be, particularly for actions that are in their early stages of investigation.

We may be required to pay fines or civil money penalties, or make other payments in connection with certain of these issues.

This uncertainty makes it difficult to estimate probable losses, which, in turn, can lead to substantial disparities between the

reserves we may establish for such proceedings and the eventual settlements, fines, or penalties.

Adverse determinations in such actions could have a material adverse effect on our business, financial condition, results of operations and stock price.

Changes in interest rates and other factors beyond our control could have an adverse impact on our financial performance and results.

7 unchanged sentences

At December 31, 2020, our cumulative net asset sensitive twelve month gap position was +4% of total assets.

As such, we expect modest increases of approximately 5.1% and 8.8%, respectively, in projected net interest income and net income over a twelve month period resulting from a 100 basis point increase in rates and our residential mortgage origination and sale volume could decline as interest rates increase.

In addition, our residential mortgage origination and sale volume could decline if interest rates increase.

The results of our interest rate sensitivity simulation model depend upon a number of assumptions, which may not prove to be accurate.

7 unchanged sentences

The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.

Table o f Contents

The inability to obtain LIBOR rates, and the uncertainty as to the nature, comparability and utility of alternative reference rates which have been or may be established may adversely affect the value of LIBOR-based loans, investment securities and other financial instruments in our portfolio, and may impact the availability and cost of hedging instruments and borrowings.

If LIBOR rates are no longer available, and the Bank is required to implement substitute indices for the calculation of interest rates under its loan agreements, it may incur additional expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse affect on its results of operations.

At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, the establishment of alternative reference rates, or the impact of any such events on contractual mechanisms may have on the markets, us or our fixed-to-floating rate debt securities.

11 unchanged sentences

While we believe that our relationship banking model will enable us to keep a significant percentage of these new relationships, there can be no assurance that we will be able to do so, that we would be able to maintain favorable pricing, margins and asset quality, or that we will be able to grow at the same rate we did when alternative financing was not widely available.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.

The banking industry is highly regulated and supervised under federal and state laws and regulations (“laws and regulations”) that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors.

The Company and Bank are subject to regulation and supervision by the Federal Reserve, the FDIC, as well as our state regulator.

Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs.

The laws and regulations applicable to the Company and Bank govern a variety of matters, including permissible types, amounts and terms of loans and investments they may make, the maximum interest rate that may be charged, the amount of reserves that must hold against deposits, the types of deposits that may be accepted and the rates that may be paid on such deposits, maintenance of adequate capital and liquidity, changes in control of the Company and Bank, transactions between the Bank and its affiliates, handling of nonpublic information, restrictions on distributions to shareholders through dividends or share repurchases, dividends and establishment of new offices.

We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all.

These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition and results of operations.

Also, the burden imposed by those laws and regulations may place banks in general, including the Bank in particular, at a competitive disadvantage compared to its non-bank competitors.

Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

Applicable federal and state laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes.

Future changes may have a material adverse effect on our business, financial condition and results of operations.

Federal regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied.

We cannot predict the substance or effect of future legislation or regulation or the application of laws and regulations to us.

Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase regulatory capital, and limit our ability to pursue business opportunities in an efficient manner by requiring it to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations.

In addition, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways, and could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of laws and regulations and their assessment of the quality of our loan portfolio, securities portfolio and other assets.

If any regulatory agency’s assessment of the quality of our assets, operations, lending practices, investment practices, capital structure or other aspects of our business differs from our assessment, we may be required to take additional charges or undertake, or refrain from taking, actions that could have a material adverse effect on our business, financial condition and results of operations.

Our customers and businesses in the Washington, D.C.

6 unchanged sentences

Accordingly, such potential federal government actions could lead to increases in past due loans, nonperforming loans, credit loss reserves, and charge-offs, and a decline in liquidity.

We rely upon independent appraisals to determine the value of the real estate, which secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

Table o f Contents

We rely upon independent appraisals to determine the value of the real estate, that secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

A significant portion of our loan portfolio consists of loans secured by real estate.

14 unchanged sentences

While we have comprehensive policies and procedures in place to mitigate risk at all phases of service provider management from selection, to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to our business, which could have a material adverse effect on our financial conditions and results of our operations.

RISKS RELATED TO INVESTING IN OUR STOCK

Our ability to make distributions in respect of our securities may be limited.

Our ability to pay a cash dividend on our common stock, to repurchase shares of our common stock, or to pay interest on our subordinated debt will depend largely upon the ability of the Bank, the Company’s principal operating business, to declare and pay dividends to the Company.

Refer to “Regulation” under Item 1 and to “Market for Common Stock” under Item 5 for additional information.

Table o f Contents

We may issue additional equity securities, or engage in other transactions, which could affect the priority of our common stock, which may adversely affect the market price of our common stock.

In accordance with our Amended Articles of Incorporation, our Board of Directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities.

We are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.

Such offerings could be dilutive to common shareholders.

Pursuant to our Amended Articles of Incorporation, the Company’s Board of Directors is authorized to issue up to one million shares of preferred stock, on such terms and with such powers, preferences, rights and provisions as it may determine, and to divide the preferred stock into one or more classes or series.

New investors, and particularly investors in any preferred stock the Company may issue from time to time, will therefore have rights, preferences and privileges that are senior to, and that adversely affect, our then current common shareholders.

Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both.

Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

Substantial regulatory limitations on changes of control and anti-takeover provisions of Maryland law may make it more difficult for shareholders to receive a change in control premium.

There are comparable prior approval requirements for changes in control under Maryland law.

RISKS RELATED TO OUR LEGAL AND REGULATORY ENVIRONMENT

Due to our increased asset size, the Company may be subject to additional regulation, increased supervision and increased costs in the future.

As of December 31, 2020, our total assets were $11.1 billion.

In November 2020, the federal banking regulators issued an interim final rule that provides temporary relief for certain community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from participating in COVID-19 pandemic response programs, such as the PPP and other lending that supports the U.S.

Under the interim final rule, community banking organizations that have crossed a relevant threshold generally will have until 2022 to either reduce their size, or to prepare for new regulatory and reporting standards.

The rule applies to community banking organizations and financial institutions with less than $10 billion in total assets as of December 31, 2019, including the Company.

Our concentrations of loans may require us to maintain higher levels of capital.

Table o f Contents

In the normal course of our business, we are named as a defendant in various legal actions, arising in connection with our current and/or prior business activities or public disclosures.

Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages.

Further, we may be subject to regulatory enforcement actions.

Additionally, we also from time to time receive demand letters from shareholders, and such letters may lead to these shareholders filing claims or derivative suits against us if our engagement with such shareholders ends in a failure to successfully negotiate a settlement.

The Company has received various document requests and subpoenas from securities and banking regulators and U.S.

Attorney’s offices in connection with investigations, which the Company believes relate to the Company's identification, classification and disclosure of related party transactions;

the retirement of certain former officers and directors;

and the relationship of the Company and certain of its former officers and directors with a local public official, among other things.

The Company is currently defending against shareholder litigation.

Further, in such matters, it is inherently difficult to determine whether any loss is probable or whether it is possible to estimate the amount of any reasonably possible loss.

We may be required to pay fines or civil money penalties, or make other payments in connection with certain of these issues.

This uncertainty makes it difficult to estimate probable losses, which, in turn, can lead to substantial disparities between the reserves we may establish for such proceedings and the eventual settlements, fines, or penalties.

While the Company and Bank carry insurance to protect us from material outlays (excluding regulatory fees and penalties), such insurance may not always fully or even substantially cover such outlays, and any adverse determinations in such actions could have a material adverse effect on our business, financial condition, results of operations and stock price.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.

The banking industry is highly regulated and supervised under federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors.

The Company and Bank are subject to regulation and supervision by the Federal Reserve, the FDIC, as well as our state regulator.

Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs.

We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all.

Also, the burden imposed by those laws and regulations may place banks in general, including the Bank in particular, at a competitive disadvantage compared to its non-bank competitors.

Future changes may have a

Table o f Contents

material adverse effect on our business, financial condition and results of operations.

Federal regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied.

We cannot predict the substance or effect of future legislation or regulation or the application of laws and regulations to us.

We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or another incident involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information, or PII, in various information systems that we maintain and in those maintained by third party service providers.

We also maintain important internal company data such as PII about our employees and information relating to our operations.

We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees and other third parties), as well as planning for responding to data security breaches.

Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach.

Ensuring that our collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase our costs.

Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.

If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations.

Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues.

Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations, financial condition and results of operations.

RISKS RELATED TO ACCOUNTING AND TAXATION

Changes in the value of goodwill and intangible assets could reduce our earnings.

Testing for impairment of goodwill is performed annually and involves the identification of the reporting unit and the estimation of fair value.

The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used.

Table o f Contents

Changes in tax laws could have an adverse effect on us, the banking industry, our customers, the value of collateral securing our loans and demand for loans.

Additionally, changes in tax laws could have a negative impact on the banking industry, borrowers, the market for single family residential or commercial real estate, or business borrowing.

To the extent that changes in law discourage borrowing, ownership of real property or business investment, such changes may have an adverse effect on the demand for our loans.

Further, the value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of real estate ownership and borrowing, which could require an increase in our ACL, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Additionally, certain borrowers could become less able to service their debts as a result of changes in taxation.

Any such changes could adversely affect our business, financial condition and results of operations.

Changes in accounting standards could impact our financial condition and results of operations.

From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements.

These changes can be operationally complex to implement and can materially impact how we record and report our financial condition and results of operations.

In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Effective January 1, 2020, we implemented the CECL framework for our ACL.

Any such changes (while not anticipated) could adversely affect the Company’s and Bank’s capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics.

The Financial Accounting Standards Board, or FASB, issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which became applicable to us on January 1, 2020 as stated above.

The CECL model also applies to certain financial assets other than loans, including held-to-maturity debt securities of which the Bank has none..

The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Accordingly, the CECL model could require financial institutions, like the Bank, to increase their allowances for credit losses.

We elected the Federal Reserve and FDIC’s rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard.

The adoption of the CECL model materially affected how we determine our ACL, and resulted in changes to our allowance.

Moreover, the CECL model has and may continue to create more volatility in our level of ACL.

We are always evaluating the impact the CECL accounting model will have on our accounting, as it had an initial $14.7 million one-time increase in our reserve, inclusive of the reserve for unfunded commitments, as of January 1, 2020 as a cumulative-effect adjustment to the ACL recognized through shareholder’s equity ($10.9 million).

Please refer to Note 1 to the Consolidated Financial Statements for a more detailed discussion of CECL.

Additionally, to the extent that economic conditions and forecasts and prior loss experience have been favorable, rapid or unforeseen changes in economic conditions or performance of our loans and other financial assets could result in our ACL being inadequate, which could materially adversely affect our business, results of operations and financial condition.

Table o f Contents

RISKS RELATED TO THE USE OF TECHNOLOGY

Our operations, including our transactions with customers, are increasingly conducted via electronic means, and this has increased risks related to cybersecurity.

5 unchanged sentences

While we maintain insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.

While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.

While we have not incurred any material losses related to cyber-attacks, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.

Such negative consequences could include remediation costs that may include liability for stolen assets or information, and repairing system damage that may have been caused;

10 unchanged sentences

The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, adversely affecting customer or investor confidence, result in a loss of customer business, subject us to additional regulatory scrutiny and possible regulatory penalties, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

On December 15, 2020, the federal banking agencies issued a notice of proposed rulemaking that would require a banking organization to notify its primary federal regulators within 36 hours of identifying a computer-security incident that meets certain criteria.

We are evaluating the potential impact of the proposal on our operations.

Failure to keep up with the rapid technological changes in the financial services industry could have a material adverse effect on our competitive position and profitability.

6 unchanged sentences

As these technologies are improved in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have a material adverse effect on our business, financial condition and results of operations.

Table o f Contents

We depend on the use of data and modeling in both management’s decision-making, generally, and in meeting regulatory expectations, in particular.

4 unchanged sentences

Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making, which could have a material adverse effect on our business, financial condition, results of operations and share price.

We also maintain important internal company data such as PII about our employees and information relating to our operations.

Ensuring that our collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase our costs.

GENERAL RISKS

The price of our common stock may fluctuate significantly, which may make it difficult for investors to resell shares of common stock at a time or price they find attractive.

Our stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control.

In addition to those described in “Caution About Forward Looking Statements,” these factors include:

• Actual or anticipated quarterly fluctuations in our operating results and financial condition;

• Changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;

• Reports in the press, internet, or investment community generally or relating to our reputation or the financial services industry, whether or not those reports are based on accurate, complete or transparent information;

• Uncertainties related to our regulatory relationships or status;

• Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

• Fluctuations in the stock price and operating results of our competitors;

• Future sales of our equity or equity-related securities;

• Proposed or adopted regulatory changes or developments;

• Domestic and international economic and political factors unrelated to our performance;

• Actions of one or more investors in selling our common stock short;

• General market conditions and, in particular, developments related to market conditions for the financial services industry.

In addition, the stock market in general has experienced price and volume fluctuations.

This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance.

These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.

We expect that the market price of our common stock will continue to fluctuate and there can be no assurances about the levels of the market prices for our common stock.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors