FVCBankcorp (FVCB) 10-Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021

or

☐       Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                         

Commission File Number:  001-38647

FVCBankcorp, Inc.

(Exact name of registrant as specified in its charter)

Virginia	47-5020283
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

11325 Random Hills Road Suite 240
Fairfax, Virginia	22030
(Address of principal executive offices)	(Zip Code)

(703) 436-3800

(Registrant’s telephone number, including area code)

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	FVCB	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  ☐   No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

13,686,865 shares of common stock, par value $0.01 per share, outstanding as of November 5, 2021

FVCBankcorp, Inc.

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020	3
Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4
Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2021 and 2020 (unaudited)	6
Consolidated Statements of Changes in Stockholders’ Equity For the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3. Quantitative and Qualitative Disclosures About Market Risk	73
Item 4. Controls and Procedures	74
PART II — OTHER INFORMATION	75
Item 1. Legal Proceedings	75
Item 1A. Risk Factors	75
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3. Defaults Upon Senior Securities	77
Item 4. Mine Safety Disclosures	77
Item 5. Other Information	77
Item 6. Exhibits	78
SIGNATURES	79

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FVCBankcorp, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2021 and December 31, 2020

(In thousands, except share data)

			September 30,		December 31,
			2021		2020 *
			(Unaudited)
Assets
Cash and due from banks			$	30,382	$	20,835
Interest-bearing deposits at other financial institutions				122,487		120,228
Securities held-to-maturity (fair value of $0.3 million for both September 30, 2021 and December 31, 2020)				264		264
Securities available-for-sale, at fair value				269,943		126,151
Restricted stock, at cost				6,372		6,563
Loans, net of allowance for loan losses of $14.4 million and $15.0 million at September 30, 2021 and December 31, 2020, respectively				1,454,723		1,451,125
Premises and equipment, net				1,655		1,654
Accrued interest receivable				8,405		9,135
Prepaid expenses				2,204		621
Deferred tax assets, net				9,176		8,552
Goodwill and intangibles, net				8,124		8,357
Bank owned life insurance (BOLI)				38,924		38,178
Other real estate owned (OREO)				3,866		3,866
Operating lease right-of-use assets				10,476		11,125
Other assets				30,901		14,827
Total assets			$	1,997,902	$	1,821,481
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing			$	548,662	$	399,062
Interest-bearing checking, savings and money market				910,198		820,378
Time deposits				250,638		313,053
Total deposits			$	1,709,498	$	1,532,493
FHLB advances			$	25,000	$	25,000
Subordinated notes, net of issuance costs				19,551		44,085
Accrued interest payable				1,174		685
Operating lease liabilities				11,428		12,123
Accrued expenses and other liabilities				27,057		17,595
Total liabilities			$	1,793,708	$	1,631,981
Commitments and Contingent Liabilities
Stockholders' Equity	2021	2020
Preferred stock, $0.01 par value
Shares authorized	1,000,000	1,000,000
Shares issued and outstanding	—	—		—		—
Common stock, $0.01 par value
Shares authorized	20,000,000	20,000,000
Shares issued and outstanding	13,686,752	13,510,760	$	137	$	135
Additional paid-in capital				121,356		119,568
Retained earnings				83,387		67,971
Accumulated other comprehensive income (loss), net				(686)		1,826
Total stockholders' equity			$	204,194	$	189,500
Total liabilities and stockholders' equity			$	1,997,902	$	1,821,481

See Notes to Consolidated Financial Statements.

*Derived from audited consolidated financial statements.

3

FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Income

For the three and nine months ended September 30, 2021 and 2020

(In thousands, except per share data)

(Unaudited)

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest and Dividend Income
Interest and fees on loans	$	16,217	$	15,958	$	47,899	$	47,257
Interest and dividends on securities held-to-maturity		2		2		5		5
Interest and dividends on securities available-for-sale		996		706		2,586		2,333
Dividends on restricted stock		82		79		245		260
Interest on deposits at other financial institutions		89		16		205		119
Total interest and dividend income	$	17,386	$	16,761	$	50,940	$	49,974
Interest Expense
Interest on deposits	$	1,848	$	2,690	$	5,703	$	9,992
Interest on federal funds purchased		—		1		—		80
Interest on short-term debt		89		80		257		216
Interest on subordinated notes		970		395		2,272		1,185
Total interest expense	$	2,907	$	3,166	$	8,232	$	11,473
Net Interest Income	$	14,479	$	13,595	$	42,708	$	38,501
Provision for loan losses		—		1,700		—		4,516
Net interest income after provision for loan losses	$	14,479	$	11,895	$	42,708	$	33,985
Noninterest Income
Service charges on deposit accounts	$	278	$	275	$	768	$	738
Gain on sale of securities available-for-sale		—		44		—		141
Loss on loans held for sale		—		—		—		(451)
BOLI income		249		280		746		845
Income from minority membership interest		364		—		364		—
Other income		170		171		659		878
Total noninterest income	$	1,061	$	770	$	2,537	$	2,151
Noninterest Expenses
Salaries and employee benefits	$	4,717	$	4,344	$	13,723	$	12,354
Occupancy and equipment expense		810		811		2,437		2,525
Data processing and network administration		520		538		1,633		1,466
State franchise taxes		496		466		1,487		1,398
Audit, legal and consulting fees		356		303		1,213		734
Merger and acquisition expense		1,107		—		1,107		—
Loan related expenses		417		279		830		764
FDIC insurance		160		193		590		538
Marketing, business development and advertising		55		51		160		179
Director fees		180		138		471		416
Postage, courier and telephone		46		52		141		137
Internet banking		132		142		406		384
Core deposit intangible amortization		75		85		233		263
Impairment loss on long lived assets		—		—		—		676
Other operating expenses		355		344		1,104		1,119
Total noninterest expenses	$	9,426	$	7,746	$	25,535	$	22,953
Net income before income tax expense	$	6,114	$	4,919	$	19,710	$	13,183
Income tax expense		1,432		1,045		4,294		2,696
Net income	$	4,682	$	3,874	$	15,416	$	10,487
Earnings per share, basic	$	0.34	$	0.29	$	1.13	$	0.77
Earnings per share, diluted	$	0.32	$	0.28	$	1.06	$	0.74

See Notes to Consolidated Financial Statements.

4

FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2021 and 2020

(In thousands)

(Unaudited)

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income	$	4,682	$	3,874	$	15,416	$	10,487
Other comprehensive (loss) income:
Unrealized (loss) gain on securities available for sale, net of tax benefit of $450 and $696 for the three and nine months ended September 30, 2021, respectively, net of tax benefit of $60 and net of tax expense $558 for the three and nine months ended September 30, 2020, respectively.		(1,688)		(224)		(2,786)		2,100
Unrealized gain (loss) on interest rate swaps, net of tax expense of $17 and $73 for the three and nine months ended September 30, 2021 respectively, net of tax expense of $18 and net of tax benefit of $153 for the three and nine months ended September 30, 2020, respectively.		61		67		274		(575)
Reclassification adjustment for gains realized in income, net of tax expense of $9 and $29 for the three and nine months ended September 30, 2020, respectively.		0		(35)		0		(112)
Total other comprehensive (loss) income	$	(1,627)	$	(192)	$	(2,512)	$	1,413
Total comprehensive income	$	3,055	$	3,682	$	12,904	$	11,900

See Notes to Consolidated Financial Statements.

5

FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2021 and 2020

(In thousands)

(Unaudited)

	2021		2020
Cash Flows From Operating Activities
Net income	$	15,416	$	10,487
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		427		460
Provision for loan losses		—		4,516
Net amortization of premium of securities		347		327
Net amortization of deferred loan costs and purchase premiums		4,490		1,721
Net accretion of acquisition accounting adjustments		(331)		(742)
Gain on sale of available-for-sale securities		—		(141)
Loss on loans held for sale		—		451
Impairment loss on lived assets		—		676
Payments received on loans held for sale, net		—		1,107
Amortization of subordinated debt issuance costs		466		60
Core deposits intangible amortization		233		263
Stock-based compensation expense		749		532
BOLI income		(746)		(845)
Changes in assets and liabilities:
Increase in accrued interest receivable, prepaid expenses and other assets		(16,280)		(12,520)
(Decrease) increase in accrued interest payable, accrued expenses and other liabilities		(4,899)		6,533
Net cash (used in) provided by operating activities	$	(128)	$	12,885
Cash Flows From Investing Activities
Increase in interest-bearing deposits at other financial institutions	$	(2,259)	$	(55,548)
Purchases of securities available-for-sale		(181,219)		(4,996)
Proceeds from sales of securities available-for-sale		—		13,239
Proceeds from maturities and calls of securities available-for-sale		5,000		1,000
Proceeds from redemptions of securities available-for-sale		28,599		23,494
Net redemption (purchase) of restricted stock		191		(546)
Net increase in loans		(7,747)		(218,622)
Purchases of premises and equipment, net		(428)		(291)
Net cash used in investing activities	$	(157,863)	$	(242,270)
Cash Flows From Financing Activities
Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits	$	239,420	$	284,534
Net decrease in time deposits		(62,423)		(55,924)
(Decrease) increase in federal funds purchased		—		5,000
Net increase in FHLB advances		—		10,000
Payments due to call of subordinated notes		(10,500)		—
Repurchase of shares of common stock		—		(7,280)
Common stock issuance		1,041		260
Net cash provided by financing activities	$	167,538	$	236,590
Net increase in cash and cash equivalents	$	9,547	$	7,205
Cash and cash equivalents, beginning of year		20,835		14,916
Cash and cash equivalents, end of year	$	30,382	$	22,121

See Notes to Consolidated Financial Statements.

6

FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the three and nine months ended September 30, 2021 and 2020

(In thousands)

(Unaudited)

								Accumulated
				Additional				Other
		Common		Paid-in		Retained		Comprehensive
	Shares	Stock		Capital		Earnings		Income (Loss)		Total
Balance at December 31, 2019	13,902	$	139	$	125,779	$	52,470	$	690	$	179,078
Net income	—		—		—		10,487		—		10,487
Other comprehensive income	—		—		—		—		1,413		1,413
Repurchase of common stock	(487)		(5)		(7,275)		—		—		(7,280)
Common stock issuance for options exercised, net	44		1		259		—		—		260
Vesting of restricted stock grants	19		—		—		—		—		—
Stock-based compensation expense	—		—		532		—		—		532
Balance at September 30, 2020	13,478	$	135	$	119,295	$	62,957	$	2,103	$	184,490
Balance at June 30, 2020	13,459	$	135	$	119,139	$	59,083	$	2,295	$	180,652
Net income	—		—		—		3,874		—		3,874
Other comprehensive loss	—		—		—		—		(192)		(192)
Common stock issuance for options exercised, net	—		—		—		—		—		—
Vesting of restricted stock grants	19		—		—		—		—		—
Stock-based compensation expense	—		—		156		—		—		156
Balance at September 30, 2020	13,478	$	135	$	119,295	$	62,957	$	2,103	$	184,490
Balance at December 31, 2020	13,511	$	135	$	119,568	$	67,971	$	1,826	$	189,500
Net income	—		—		—		15,416		—		15,416
Other comprehensive loss	—		—		—		—		(2,512)		(2,512)
Common stock issuance for options exercised, net	156		2		1,039		—		—		1,041
Vesting of restricted stock grants	20		—		—		—		—		—
Stock-based compensation expense	—		—		749		—		—		749
Balance at September 30, 2021	13,687	$	137	$	121,356	$	83,387	$	(686)	$	204,194
Balance at June 30, 2021	13,648	$	136	$	120,905	$	78,705	$	941	$	200,687
Net income	—		—		—		4,682		—		4,682
Other comprehensive loss	—		—		—		—		(1,627)		(1,627)
Common stock issuance for options exercised, net	20		1		162		—		—		163
Vesting of restricted stock grants	19		—		—		—		—		—
Stock-based compensation expense	—		—		289		—		—		289
Balance at September 30, 2021	13,687	$	137	$	121,356	$	83,387	$	(686)	$	204,194

See Notes to Consolidated Financial Statements.

7

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

FVCBankcorp, Inc. (the Company), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the Bank). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.

The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C. and Baltimore metropolitan areas. The Bank commenced operations on November 27, 2007 and is a member of the Federal Reserve System (the Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC). It is subject to the regulations of the Board of Governors of the Federal Reserve and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.

On July 14, 2021, the Company announced the signing of a definitive merger agreement with Blue Ridge Bankshares, Inc. (“Blue Ridge”), pursuant to which the companies will combine in an all-stock merger of equals, subject to customary closing conditions including shareholder and regulatory approvals (the “Blue Ridge Merger”). On November 4, 2021, the Company and Blue Ridge announced that Blue Ridge has learned that the Office of the Comptroller of the Currency (the "OCC") identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the Merger.

On August 31, 2021, the Company announced that the Bank had made an investment in Atlantic Coast Mortgage, LLC (“ACM”) for $20.4 million. As a result of this investment, the Bank has obtained a 28.7% ownership interest in ACM, which is subject to an earnback option of up to 3.7% over the next three years.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2020. Certain prior period amounts have been reclassified to conform to current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

Significant Accounting Policies

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry.

8

Notes to Unaudited Consolidated Financial Statements

(Continued)

Risks and Uncertainties

The COVID-19 pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The pandemic has caused significant disruptions to the U.S. economy and has disrupted banking and other financial activity in the areas the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for it.

The U.S. government and its agencies have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief, and Economic Stability Act (CARES Act) was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19; certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it is not possible to know the full universe or extent that the impact of COVID-19 and resulting measures to curtail its spread will have on the Company’s business, it is aware of the following items that are potentially material to the Company and its operations.

Financial Condition and Results of Operations

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company has worked with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company has worked with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

Capital and Liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its regulatory capital ratios could be adversely impacted by future credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt when necessary. If its capital deteriorates such that the subsidiary bank is unable to pay dividends to the Company for an extended period of time, it may not be able to service its debt.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to it, and rates for short term funding have been quite low. If funding costs become elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of its deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

9

Notes to Unaudited Consolidated Financial Statements

(Continued)

Asset Valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the valuation of assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause it to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. The Company’s stock price exceeded its book value at September 30, 2021.

It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause it to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

During the fourth quarter of 2020, the Company engaged a third party specialist to perform an independent goodwill and other intangible assets valuation. Based on the qualitative analysis completed, the Company’s goodwill and other intangible assets were not impaired as of December 31, 2020. However, it is possible a triggering event could occur in the future to cause the Company reevaluate the valuation of its intangible assets. There have been no triggering events for the nine months ended September 30, 2021.

Processes, Controls and Business Continuity Plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to another deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending Operations and Accommodations to Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company executed a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment generally for 90 days. During the first and second quarters of 2020, the Company modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. As of September 30, 2021, remaining payment deferred loans totaled $10.6 million, or 0.72% of the total loan portfolio, comprising 2 loans. In accordance with interagency guidance and the CARES Act issued in March 2020, these short term deferrals were not considered troubled debt restructurings (TDRs).

10

Notes to Unaudited Consolidated Financial Statements

(Continued)

With the passage of the Paycheck Protection Program (PPP), administered by the U.S. Small Business Administration (SBA), the Company actively participated in assisting its customers with applications for resources through the program. The majority of the PPP loans it originated have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. At September 30, 2021, PPP loans, net of deferred fees and costs, totaled $58.2 million. The Company continued to originate PPP loans until May 2021 as part of the 2021 program for first and second draw loans. It is the Company’s understanding that loans funded through PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through a charge to earnings.

Credit

The Company is working with customers directly affected by COVID-19. It is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communications with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan losses and record additional provision for loan loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has identified a third-party vendor to assist in the measurement of expected credit losses under this standard. The implementation committee has completed the data collection process, validated the data inputs, determined its allowance methodology and is prepared to beginning running the model parallel to the Company’s incurred loss model as of December 31, 2021

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (ASC) 326, “Financial Instruments - Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

11

Notes to Unaudited Consolidated Financial Statements

(Continued)

In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. For both public and private companies, the ASU is effective for fiscal years beginning after December 15, 2021. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06, “Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements.

12

Notes to Unaudited Consolidated Financial Statements

(Continued)

Note 2.Securities

Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of September 30, 2021 and December 31, 2020, are as follows:

	September 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
Securities of state and local municipalities tax exempt	$	264	$	7	$	0	$	271
Total Held-to-maturity Securities	$	264	$	7	$	0	$	271
Available-for-sale
Securities of U.S. government and federal agencies	$	13,719	$	3	$	(146)	$	13,576
Securities of state and local municipalities tax exempt		1,395		65		0		1,460
Securities of state and local municipalities taxable		638		1		0		639
Corporate bonds		11,968		223		(41)		12,150
SBA pass-through securities		108		2		0		110
Mortgage-backed securities		225,800		1,829		(2,547)		225,082
Collateralized mortgage obligations		16,732		279		(85)		16,926
Total Available-for-sale Securities	$	270,360	$	2,402	$	(2,819)	$	269,943

	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
Securities of state and local municipalities tax exempt	$	264	$	10	$	0	$	274
Total Held-to-maturity Securities	$	264	$	10	$	0	$	274
Available-for-sale
Securities of state and local municipalities tax exempt	$	3,398	$	95	$	0	$	3,493
Securities of state and local municipalities taxable		804		14		0		818
Corporate bonds		12,974		80		(237)		12,817
SBA pass-through securities		138		3		0		141
Mortgage-backed securities		81,296		2,479		(61)		83,714
Collateralized mortgage obligations		24,476		718		(26)		25,168
Total Available-for-sale Securities	$	123,086	$	3,389	$	(324)	$	126,151

The Company had $6.5 million and $9.2 million in securities pledged with the Federal Reserve Bank of Richmond (FRB) to collateralize certain municipal deposits at September 30, 2021 and December 31, 2020, respectively. The Company had $22.1 million in securities pledged with the Virginia Department of Treasury to collateralize certain municipal deposits at September 30, 2021. There were 0 securities pledged to the Virginia Department of Treasury at December 31, 2020.

13

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020, respectively. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period. Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position are as follows:

	Less Than 12 Months				12 Months or Longer				Total
(In thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At September 30, 2021	Value		Losses		Value		Losses		Value		Losses
Securities of U.S. government and federal agencies	$	11,414	$	(146)	$	0	$	0	$	11,414	$	(146)
Corporate bonds		3,959		(41)		0		0		3,959		(41)
Mortgage-backed securities		172,975		(2,478)		1,786		(69)		174,761		(2,547)
Collateralized mortgage obligations		1,879		(49)		1,905		(36)		3,784		(85)
Total	$	190,227	$	(2,714)	$	3,691	$	(105)	$	193,918	$	(2,819)

	Less Than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At December 31, 2020	Value		Losses		Value		Losses		Value		Losses
Corporate bonds	$	4,240	$	(10)	$	2,000	$	(227)	$	6,240	$	(237)
Mortgage-backed securities		17,504		(61)		0		0		17,504		(61)
Collateralized mortgage obligations		2,098		(26)		0		0		2,098		(26)
Total	$	23,842	$	(97)	$	2,000	$	(227)	$	25,842	$	(324)

Securities of U.S. government and federal agencies: The unrealized losses on two available-for-sale securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

Corporate bonds: The unrealized losses on the investments in corporate bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. NaN of these investments carries an S&P investment grade rating of BBB+, while 1 has a rating of BB. The remaining 10 investments do not carry a rating.

Mortgage-backed securities: The unrealized losses on the Company’s investment in 31 mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

Collateralized mortgage obligations (CMOs): The unrealized loss associated with four CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021.

14

Notes to Unaudited Consolidated Financial Statements

(Continued)

The amortized cost and fair value of securities as of September 30, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

	September 30, 2021
	Held-to-maturity				Available-for-sale
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
After 1 year through 5 years	$	0	$	0	$	2,016	$	2,045
After 5 years through 10 years		264		271		43,638		44,437
After 10 years		0		0		224,706		223,461
Total	$	264	$	271	$	270,360	$	269,943

For the nine months ended September 30, 2021 and 2020, proceeds from principal repayments of securities were $28.6 million and $23.5 million, respectively. During the nine months ended September 30, 2021 and 2020, proceeds from calls and maturities of securities were $ 5.0 million and $1.0 million, respectively. There were 0 gross realized gains or losses during the nine months ended September 30, 2021. There were gross realized gains of approximately $141,000 during the nine months ended September 30, 2020 resulting from the sale of available-for-sale securities with a book value of approximately $13.1 million. There were 0 realized losses on the sale of securities for the nine months ended September 30, 2020.

Note 3.Loans and Allowance for Loan Losses

A summary of loan balances by type follows:

	September 30, 2021						December 31, 2020
(In thousands)	Originated		Acquired		Total		Originated		Acquired		Total
Commercial real estate	$	849,828	$	20,639	$	870,467	$	761,876	$	28,149	$	790,025
Commercial and industrial		218,289		3,792		222,081		271,039		4,295		275,334
Commercial construction		205,404		1,189		206,593		220,845		1,474		222,319
Consumer real estate		140,689		25,408		166,097		133,940		33,932		167,872
Consumer nonresidential		8,220		25		8,245		15,802		33		15,835
	$	1,422,430	$	51,053	$	1,473,483	$	1,403,502	$	67,883	$	1,471,385
Less:
Allowance for loan losses		14,363		—		14,363		14,333		625		14,958
Unearned income and (unamortized premiums), net		4,397		—		4,397		5,302		—		5,302
Loans, net	$	1,403,670	$	51,053	$	1,454,723	$	1,383,867	$	67,258	$	1,451,125

During 2018, as a result of the Company’s acquisition of Colombo Bank (Colombo), the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

15

Notes to Unaudited Consolidated Financial Statements

(Continued)

The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20. The outstanding principal balance and related carrying amount of acquired loans included in the consolidated balance sheets as of September 30, 2021 and December 31, 2020 are as follows:

(In thousands)	September 30, 2021
Purchased credit impaired acquired loans evaluated individually for credit losses
Outstanding principal balance	$	222
Carrying amount		0
Other acquired loans
Outstanding principal balance		51,663
Carrying amount		51,053
Total acquired loans
Outstanding principal balance		51,885
Carrying amount		51,053

(In thousands)	December 31, 2020
Purchased credit impaired acquired loans evaluated individually for credit losses
Outstanding principal balance	$	4,010
Carrying amount		3,064
Other acquired loans
Outstanding principal balance		65,656
Carrying amount		64,819
Total acquired loans
Outstanding principal balance		69,666
Carrying amount		67,883

The following table presents changes during the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.

(In thousands)
Balance at January 1, 2021	$	216
Accretion		(164)
Reclassification of nonaccretable difference due to changes in expected cash flows		33
Other changes, net		(79)
Balance at September 30, 2021	$	6
(In thousands)
Balance at January 1, 2020	$	371
Accretion		(878)
Reclassification of nonaccretable difference due to changes in expected cash flows		691
Other changes, net		32
Balance at December 31, 2020	$	216

16

Notes to Unaudited Consolidated Financial Statements

(Continued)

An analysis of the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020, and for the year ended December 31, 2020, follows:

Allowance for Loan Losses

For the three months ended September 30, 2021

(In thousands)

	Commercial		Commercial and		Commercial		Consumer Real		Consumer
	Real Estate		Industrial		Construction		Estate		Nonresidential		Total
Allowance for credit losses:
Beginning Balance, July 1	$	8,969	$	2,032	$	2,360	$	673	$	325	$	14,359
Charge-offs		(24)		—		—		—		(24)		(48)
Recoveries		—		—		—		31		21		52
Provision		569		(410)		(135)		27		(51)		—
Ending Balance	$	9,514	$	1,622	$	2,225	$	731	$	271	$	14,363

Allowance for Loan Losses

For the nine months ended September 30, 2021

(In thousands)

	Commercial		Commercial and		Commercial		Consumer Real		Consumer
	Real Estate		Industrial		Construction		Estate		Nonresidential		Total
Allowance for credit losses:
Beginning Balance, January 1	$	9,291	$	2,546	$	1,960	$	690	$	471	$	14,958
Charge-offs		(476)		(117)		—		—		(201)		(794)
Recoveries		24		—		—		35		140		199
Provision		675		(807)		265		6		(139)		—
Ending Balance	$	9,514	$	1,622	$	2,225	$	731	$	271	$	14,363

17

Notes to Unaudited Consolidated Financial Statements

(Continued)

Allowance for Loan Losses

For the three months ended September 30, 2020

(In thousands)

	Commercial		Commercial and		Commercial		Consumer Real		Consumer
	Real Estate		Industrial		Construction		Estate		Nonresidential		Total
Allowance for credit losses:
Beginning Balance, July 1	$	8,855	$	1,256	$	2,105	$	549	$	129	$	12,894
Charge-offs		(2)		0		0		0		(85)		(87)
Recoveries		9		1		0		0		39		49
Provision		855		148		(51)		279		469		1,700
Ending Balance	$	9,717	$	1,405	$	2,054	$	828	$	552	$	14,556

Allowance for Loan Losses

For the nine months ended September 30, 2020

(In thousands)

	Commercial		Commercial and		Commercial		Consumer Real		Consumer
	Real Estate		Industrial		Construction		Estate		Nonresidential		Total
Allowance for credit losses:
Beginning Balance, January 1	$	6,399	$	1,275	$	2,067	$	417	$	73	$	10,231
Charge-offs		(115)		0		0		(3)		(149)		(267)
Recoveries		9		20		0		2		45		76
Provision		3,424		110		(13)		412		583		4,516
Ending Balance	$	9,717	$	1,405	$	2,054	$	828	$	552	$	14,556

Allowance for Loan Losses

For the year ended December 31, 2020

(In thousands)

	Commercial		Commercial and		Commercial		Consumer Real		Consumer
	Real Estate		Industrial		Construction		Estate		Nonresidential		Total
Allowance for credit losses:
Beginning Balance	$	6,399	$	1,275	$	2,067	$	417	$	73	$	10,231
Charge-offs		(115)		0		0		(41)		(254)		(410)
Recoveries		9		62		0		2		48		121
Provision		2,998		1,209		(107)		312		604		5,016
Ending Balance	$	9,291	$	2,546	$	1,960	$	690	$	471	$	14,958

18

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following tables present the recorded investment in loans and impairment method as of September 30, 2021 and 2020, and at December 31, 2020, by portfolio segment:

Allowance for Loan Losses

At September 30, 2021

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Allowance for credit losses:
Ending Balance:
Individually evaluated for impairment	$	701	$	270	$	—	$	22	$	—	$	993
Purchased credit impaired		—		—		—		—		—		—
Collectively evaluated for impairment		8,813		1,352		2,225		709		271		13,370
	$	9,514	$	1,622	$	2,225	$	731	$	271	$	14,363

Loans Receivable

At September 30, 2021

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Financing receivables:
Ending Balance
Individually evaluated for impairment	$	11,928	$	5,230	$	1,596	$	414	$	0	$	19,168
Purchased credit impaired		0		0		0		0		0		0
Collectively evaluated for impairment		858,539		216,851		204,997		165,683		8,245		1,454,315
	$	870,467	$	222,081	$	206,593	$	166,097	$	8,245	$	1,473,483

Allowance for Loan Losses

At September 30, 2020

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Allowance for credit losses:
Ending Balance:
Individually evaluated for impairment	$	80	$	310	$	0	$	66	$	0	$	456
Purchased credit impaired		0		—		0		0		0		0
Collectively evaluated for impairment		9,637		1,095		2,054		762		552		14,100
	$	9,717	$	1,405	$	2,054	$	828	$	552	$	14,556

19

Notes to Unaudited Consolidated Financial Statements

(Continued)

Loans Receivable

At September 30, 2020

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Financing receivables:
Ending Balance
Individually evaluated for impairment	$	15,102	$	4,078		820	$	297	$	0	$	20,297
Purchased credit impaired		3,537		309		0		56		0		3,902
Collectively evaluated for impairment		789,215		281,599		214,693		176,679		17,357		1,479,543
	$	807,854	$	285,986	$	215,513	$	177,032	$	17,357	$	1,503,742

Allowance for Loan Losses

At December 31, 2020

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Allowance for credit losses:
Ending Balance:
Individually evaluated for impairment		625	$	1,450	$	—	$	25	$	—	$	2,100
Purchased credit impaired		—		—		—		—		—		—
Collectively evaluated for impairment		8,666		1,096		1,960		665		471		12,858
	$	9,291	$	2,546	$	1,960	$	690	$	471	$	14,958

Loans Receivable

At December 31, 2020

(In thousands)

	Commercial		Commercial		Commercial		Consumer		Consumer
	Real Estate		and Industrial		Construction		Real Estate		Nonresidential		Total
Financing receivables:
Ending Balance
Individually evaluated for impairment	$	13,379	$	7,086	$	0	$	254	$	0	$	20,719
Purchased credit impaired		3,007		0		0		57		0		3,064
Collectively evaluated for impairment		773,639		268,248		222,319		167,561		15,835		1,447,602
	$	790,025	$	275,334	$	222,319	$	167,872	$	15,835	$	1,471,385

20

Notes to Unaudited Consolidated Financial Statements

(Continued)

Impaired loans by class excluding purchased credit impaired, at September 30, 2021 and December 31, 2020, are summarized as follows:

Impaired Loans – Originated Loan Portfolio

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
September 30, 2021
With an allowance recorded:
Commercial real estate	$	2,274	$	2,274	$	701	$	2,302	$	78
Commercial and industrial		1,701		1,711		270		1,716		71
Commercial construction		—		—		—		—		—
Consumer real estate		94		94		22		96		4
Consumer nonresidential		—		—		—		—		—
	$	4,069	$	4,079	$	993	$	4,114	$	153
September 30, 2021
With no related allowance:
Commercial real estate	$	9,654	$	9,654	$	—	$	9,654	$	357
Commercial and industrial		3,529		3,529		—		3,731		181
Commercial construction		1,596		1,596		—		1,596		130
Consumer real estate		320		323		—		323		21
Consumer nonresidential		—		—		—		—		—
	$	15,099	$	15,102	$	—	$	15,304	$	689

Impaired Loans – Acquired Loan Portfolio

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
September 30, 2021
With an allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Consumer real estate		—		—		—		—		—
Consumer nonresidential		—		—		—		—		—
	$	—	$	—	$	—	$	—	$	—
September 30, 2021
With no related allowance:
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Consumer real estate		—		—		—		—		—
Consumer nonresidential		—		—		—		—		—
	$	—	$	—	$	—	$	—	$	—

21

Notes to Unaudited Consolidated Financial Statements

(Continued)

Impaired Loans – Originated Loan Portfolio

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
December 31, 2020
With an allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		5,287		5,287		1,450		5,682		358
Commercial construction		—		—		—		—		—
Consumer real estate		97		97		25		99		6
Consumer nonresidential		—		—		—		—		—
	$	5,384	$	5,384	$	1,475	$	5,781	$	364
December 31, 2020
With no related allowance:
Commercial real estate	$	9,926	$	9,930	$	—	$	9,938	$	133
Commercial and industrial		1,799		1,799		—		2,433		148
Commercial construction		—		—		—		—		—
Consumer real estate		—		—		—		—		—
Consumer nonresidential		—		—		—		—		—
	$	11,725	$	11,729	$	—	$	12,371	$	281

Impaired Loans – Acquired Loan Portfolio

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
December 31, 2020
With an allowance recorded:
Commercial real estate	$	3,303	$	4,316	$	625	$	4,811	$	267
Commercial and industrial		—		—		—		—		—
Commercial construction		—		—		—		—		—
Consumer real estate		—		—		—		—		—
Consumer nonresidential		—		—		—		—		—
	$	3,303	$	4,316	$	625	$	4,811	$	267
December 31, 2020
With no related allowance:
Commercial real estate	$	150	$	164	$	—	$	164	$	13
Commercial and industrial		157		215		—		215		12
Commercial construction		—		—		—		—		—
Consumer real estate		—		—		—		—		—
Consumer nonresidential		—		—		—		—		—
	$	307	$	379	$	—	$	379	$	25

22

Notes to Unaudited Consolidated Financial Statements

(Continued)

No additional funds are committed to be advanced in connection with the impaired loans. There were no nonaccrual loans excluded from the impaired loan disclosure.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass — Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the enhanced possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful include those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, improbable.

Loss — Loans classified as loss include those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be achieved in the future, it is neither practical nor desirable to defer writing off these loans.

Based on the most recent analysis performed, the risk category of loans by class of loans was as follows as of September 30, 2021 and December 31, 2020:

As of September 30, 2021 – Originated Loan Portfolio

	Commercial Real		Commercial and		Commercial		Consumer Real		Consumer
(In thousands)	Estate		Industrial		Construction		Estate		Nonresidential		Total
Grade:
Pass	$	837,900	$	212,872	$	203,808	$	138,246	$	8,220	$	1,401,046
Special mention		—		—		—		2,029		—		2,029
Substandard		11,928		5,417		1,596		414		—		19,355
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	849,828	$	218,289	$	205,404	$	140,689	$	8,220	$	1,422,430

23

Notes to Unaudited Consolidated Financial Statements

(Continued)

As of September 30, 2021 – Acquired Loan Portfolio

	Commercial Real		Commercial and		Commercial		Consumer Real		Consumer
(In thousands)	Estate		Industrial		Construction		Estate		Nonresidential		Total
Grade:
Pass	$	20,639	$	3,792	$	1,189	$	25,408	$	25	$	51,053
Special mention		0		0		0		0		0		0
Substandard		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
Total	$	20,639	$	3,792	$	1,189	$	25,408	$	25	$	51,053

As of December 31, 2020 – Originated Loan Portfolio

	Commercial Real		Commercial and		Commercial		Consumer Real		Consumer
(In thousands)	Estate		Industrial		Construction		Estate		Nonresidential		Total
Grade:
Pass	$	741,570	$	262,355	$	220,845	$	133,750	$	15,802	$	1,374,322
Special mention		10,380		1,598		0		93		0		12,071
Substandard		9,926		7,086		0		97		0		17,109
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
Total	$	761,876	$	271,039	$	220,845	$	133,940	$	15,802	$	1,403,502

As of December 31, 2020 – Acquired Loan Portfolio

	Commercial Real		Commercial and		Commercial		Consumer Real		Consumer
(In thousands)	Estate		Industrial		Construction		Estate		Nonresidential		Total
Grade:
Pass	$	24,696	$	4,295	$	1,474	$	33,844	$	33	$	64,342
Special mention		0		0		0		0		0		0
Substandard		3,453		0		0		88		0		3,541
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
Total	$	28,149	$	4,295	$	1,474	$	33,932	$	33	$	67,883

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. This analysis is performed on an ongoing basis as new information is obtained. At September 30, 2021, the Company had $2.0 million in loans identified as special mention, a decrease from $12.1 million from December 31, 2020. Special mention rated loans are loans that have a potential weakness that deserves management’s close attention; however, the borrower continues to pay in accordance with their contract. The decrease from December 31, 2020 was primarily related to two loans being paid off totaling $7.6 million and two loans being upgraded during 2021. Loans rated as special mention do not have a specific reserve and are considered well-secured.

24

Notes to Unaudited Consolidated Financial Statements

(Continued)

At September 30, 2021, the Company had $19.4 million in loans identified as substandard , a decrease of $1.3 million from December 31, 2020. The decrease in substandard loans was primarily related to two loans totaling $1.3 million which were sold at a discount. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At September 30, 2021, specific reserves on originated and acquired loans totaling $993 thousand has been allocated within the allowance for loan losses to supplement any shortfall of collateral.

Past due and nonaccrual loans presented by loan class were as follows at September 30, 2021 and December 31, 2020:

As of September 30, 2021 – Originated Loan Portfolio

	30-59 days past		60-89 days past		90 days or more								90 days past due
(In thousands)	due		due		past due		Total past due		Current		Total loans		and still accruing		Nonaccruals
Commercial real estate	$	0	$	0	$	0	$	0	$	849,828	$	849,828	$	0	$	0
Commercial and industrial		0		0		0		0		218,289		218,289		0		1,702
Commercial construction		0		0		0		0		205,404		205,404		0		1,596
Consumer real estate		592		0		0		592		140,097		140,689		0		320
Consumer nonresidential		0		37		20		57		8,163		8,220		20		0
Total	$	592	$	37	$	20	$	649	$	1,421,781	$	1,422,430	$	20	$	3,618

As of September 30, 2021 – Acquired Loan Portfolio

	30-59 days past		60-89 days past		90 days or more								90 days past due
(In thousands)	due		due		past due		Total past due		Current		Total loans		and still accruing		Nonaccruals
Commercial real estate	$	0	$	0	$	0	$	0	$	20,639	$	20,639	$	0	$	0
Commercial and industrial		0		0		0		0		3,792		3,792		0		0
Commercial construction		0		0		0		0		1,189		1,189		0		0
Consumer real estate		0		0		0		0		25,408		25,408		0		0
Consumer nonresidential		2		0		0		2		23		25		0		0
Total	$	2	$	0	$	0	$	2	$	51,051	$	51,053	$	0	$	0

As of December 31, 2020 – Originated Loan Portfolio

	30-59 days past		60-89 days past		90 days or more								90 days past due
(In thousands)	due		due		past due		Total past due		Current		Total loans		and still accruing		Nonaccruals
Commercial real estate	$	0	$	88	$	0	$	88	$	761,788	$	761,876	$	0	$	0
Commercial and industrial		0		0		0	$	0	$	271,039		271,039		0		2,883
Commercial construction		0		13		0		13		220,832		220,845		0		0
Consumer real estate		347		76		0		423		133,517		133,940		0		0
Consumer nonresidential		0		0		44		44		15,758		15,802		44		0
Total	$	347	$	177	$	44	$	568	$	1,402,934	$	1,403,502	$	44	$	2,883

As of December 31, 2020 – Acquired Loan Portfolio

	30-59 days past		60-89 days past		90 days or more								90 days past due
(In thousands)	due		due		past due		Total past due		Current		Total loans		and still accruing		Nonaccruals
Commercial real estate	$	694	$	0	$	0	$	694	$	27,455	$	28,149	$	0	$	2,309
Commercial and industrial		0		0		0		0		4,295		4,295		0		0
Commercial construction		111		0		0		111		1,363		1,474		0		0
Consumer real estate		353		108		228		689		33,243		33,932		228		157
Consumer nonresidential		0		0		0		0		33		33		0		0
Total	$	1,158	$	108	$	228	$	1,494	$	66,389	$	67,883	$	228	$	2,466

As of September 30, 2021, there were $70 thousand of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of December 31, 2020 and September 30, 2020, respectively.

25

Notes to Unaudited Consolidated Financial Statements

(Continued)

There were overdrafts of $60 thousand and $72 thousand at September 30, 2021 and December 31, 2020, respectively, which have been reclassified from deposits to loans. At September 30, 2021 and December 31, 2020, loans with a carrying value of $237.2 million and $132.6 million, respectively, were pledged to the Federal Home Loan Bank of Atlanta (FHLB).

There were no defaults of TDRs during the twelve months since restructuring for the nine months ended September 30, 2021 and 2020.

There were 0 loans designated as TDRs during the nine months ended September 30, 2021. The following table presents loans designated as TDRs during the nine months ended September 30, 2020:

For the nine months ended September 30, 2020

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
Troubled Debt Restructurings	Contracts	Investment		Investment
	(Dollars in thousands)
Consumer real estate	1	$	99	$	99
Total	1	$	99	$	99

As of September 30, 2021 and December 31, 2020, the Company had a recorded investment in TDRs of $94 thousand and $97 thousand, respectively.

The concessions made in the TDRs were related to the reduction in the stated interest rate for the remaining life of the debt.

Note 4.Derivative Financial Instruments

The Company enters into interest rate swap agreements (swap agreements) to facilitate the risk management strategies needed to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of September 30, 2021 and December 31, 2020. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of September 30, 2021, the Company had entered into 21 interest rate swap agreements which are collateralized with $9.2 million in cash. There were 21 interest rate swap agreements outstanding as of December 31, 2020 which were collateralized with $14.0 million in cash.

26

Notes to Unaudited Consolidated Financial Statements

(Continued)

The notional amount and fair value of the Company’s derivative financial instruments as of September 30, 2021 and December 31, 2020 were as follows:

	September 30, 2021
	Notional Amount		Fair Value
	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	96,884	$	8,326
Pay Fixed/Receive Variable Swaps		96,884		(8,326)

	December 31, 2020
	Notional Amount		Fair Value
	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	97,658	$	13,633
Pay Fixed/Receive Variable Swaps		97,658		(13,633)

Interest Rate Risk Management—Cash Flow Hedging Instruments

The Company uses FHLB advances and other wholesale funding from time to time as a source of funds for use in the Company’s lending and investment activities and other general business purposes. This wholesale funding exposes the Company to increased interest rate risk as a result of the variability in cash flows (future interest payments). The Company believes it is prudent to reduce this interest rate risk. To meet this objective, the Company entered into interest rate swap agreements whereby the Company reduces the interest rate risk associated with the Company’s variable rate advances (or other wholesale funding) from the designation date and going through the maturity date.

At September 30, 2021 and December 31, 2020, the information pertaining to outstanding interest rate swap agreements used to hedge variability in cash flows (FHLB advances which are included in other borrowed funds on the consolidated balance sheet) and its wholesale deposits (which are included in total deposits on the consolidated balance sheet) was as follows:

(Dollars in thousands)	September 30, 2021			December 31, 2020
Notional amount	$	60,000		$	60,000
Weighted average pay rate		0.87	%		0.87	%
Weighted average receive rate		0.13	%		0.24	%
Weighted average maturity in years		1.35 years			2.10 years
Unrealized loss relating to interest rate swaps	$	(407)		$	(754)

These agreements provided for the Company to receive payments determined by a specific index (three month LIBOR) in exchange for making payments at a fixed rate. At September 30, 2021 and December 31, 2020, the unrealized loss relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with FHLB advances and wholesale deposits are reported in other comprehensive income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the advance affects earnings. The Company measures cash flow hedging relationships for effectiveness on a monthly basis, and at September 30, 2021 and December 31, 2020, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.

Note 5.Financial Instruments with Off-Balance Sheet Risk

The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

27

Notes to Unaudited Consolidated Financial Statements

(Continued)

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At September 30, 2021 and December 31, 2020, the following financial instruments were outstanding, which contract amounts represent credit risk:

(In thousands)	September 30, 2021		December 31, 2020
Commitments to grant loans	$	58,982	$	13,598
Unused commitments to fund loans and lines of credit		196,195		166,259
Commercial and standby letters of credit		9,419		5,529

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments, if deemed necessary.

The Company maintains its cash accounts with the FRB and correspondent banks. The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $46.2 million and $25.3 million at September 30, 2021 and December 31, 2020, respectively.

Note 6.Stock-Based Compensation Plan

The Company’s Amended and Restated 2008 Option Plan (the Plan), which is stockholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock. In June 2018, the stockholders approved an amendment to Plan to extend the term and increase the number of shares authorized for issuance under the Plan by 200,000 shares. The Company has granted stock options and restricted stock units under the Plan.

The maximum number of shares with respect to which awards may be made is 2,529,296 shares of common stock, subject to adjustment for certain corporate events. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest annually over four years of continuous service and have ten year contractual terms. At September 30, 2021, 51,045 shares were available to grant under the Plan.

28

Notes to Unaudited Consolidated Financial Statements

(Continued)

NaN options were granted during the three and nine months ended September 30, 2021 and 2020, respectively. For the three and nine months ended September 30, 2021, there were 0 shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant. There were 0 and 2,737 shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant during the three and nine months ended September 30, 2020, respectively.

A summary of option activity under the Plan as of September 30, 2021 and changes during the nine months ended is presented below:

				Weighted-
		Weighted-		Average
	Number	Average		Remaining	Aggregate
	of	Exercise		Contractual	Intrinsic
Options	Shares	Price		Term	Value (1)
Outstanding at January 1, 2021	1,727,945	$	8.14	3.17
Granted	—		—
Exercised	(156,295)		6.66
Forfeited or expired	(760)		10.76
Outstanding and Exercisable at September 30, 2021	1,570,890	$	8.29	2.67	$	18,401,060

(1)  The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2021. This amount changes based on changes in the market value of the Company’s common stock.

As of September 30, 2021, all outstanding stock options granted under the Plan are fully vested and amortized. There was 0 income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements for the three months ended September 30, 2021. The total income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements was $6 thousand for the three months ended September 30, 2020. Tax benefits recognized for nonqualified stock options during the nine months ended September 30, 2021 and 2020 totaled $125 thousand and $82 thousand, respectively.

Restricted stock units relating to 116,488 shares were granted during the nine months ended September 30, 2021. There were 0 restricted stock units granted during the nine months ended September 30, 2020.

A summary of the Company’s restricted stock unit grant activity as of September 30, 2021 is shown below.

		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Nonvested at January 1, 2021	72,743	$	18.82
Granted	116,488		17.49
Vested	(19,697)		19.08
Forfeited	(2,885)		17.82
Balance at September 30, 2021	166,649	$	17.88

29

Notes to Unaudited Consolidated Financial Statements

(Continued)

The compensation cost that has been charged to income for the Plan was $289 thousand and $156 thousand for the three months ended September 30, 2021 and 2020, respectively. Total compensation cost for the nine months ended September 30, 2021 and 2020 was $749 thousand and $532 thousand, respectively. As of September 30, 2021, there was $2.4 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the Plan. The cost is expected to be recognized over a weighted-average period of 35 months.

Note 7.Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date (exit price). Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 — Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 — Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

30

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

Cash flow hedges: The Company has interest rate swap derivatives that are designated as cash flow hedges and are recorded at fair value using published yield curve rates from a national valuation service. These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:

			Fair Value Measurements at
			September 30, 2021 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
(In thousands)	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2021		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale
Securities of U.S. government and federal agencies	$	13,576	$	—	$	13,576	$	—
Securities of state and local municipalities tax exempt		1,460		—		1,460		—
Securities of state and local municipalities taxable		639		—		639		—
Corporate bonds		12,150		—		12,150		—
SBA pass-through securities		110		—		110		—
Mortgage-backed securities		225,082		—		225,082		—
Collateralized mortgage obligations		16,926		—		16,926		—
Total Available-for-Sale Securities	$	269,943	$	—	$	269,943	$	—

31

Notes to Unaudited Consolidated Financial Statements

(Continued)

			Fair Value Measurements at
			December 31, 2020 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
(In thousands)	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale
Securities of state and local municipalities tax exempt	$	3,493	$	—	$	3,493	$	—
Securities of state and local municipalities taxable		818		—		818		—
Corporate bonds		12,817		—		12,817		—
SBA pass-through securities		141		—		141		—
Mortgage-backed securities		83,714		—		83,714		—
Collateralized mortgage obligations		25,168		—		25,168		—
Total Available-for-Sale Securities	$	126,151	$	—	$	126,151	$	—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the present value of future cash flows,observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned (OREO): Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, which results in a Level 3 classification of the inputs for determining fair value. OREO properties are evaluated regularly for impairment and adjusted accordingly.

32

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020:

			Fair Value Measurements
			Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
(In thousands)	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2021		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans	$	3,076	$	—	$	—	$	3,076
Other real estate owned	$	3,866	$	—	$	—	$	3,866

			Fair Value Measurements
			Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
(In thousands)	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans	$	6,587	$	—	$	—	$	6,587
Other real estate owned	$	3,866	$	—	$	—	$	3,866

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2021 and December 31, 2020:

Quantitative information about Level 3 Fair Value Measurements for September 30,  2021
(In thousands)
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Avg.)
Impaired loans	$	3,076	Discounted appraised value	Marketability/Selling costs	8% - 10% (8.73)	%
Other real estate owned	$	3,866	Discounted appraised value	Selling costs	10.51	%

Quantitative information about Level 3 Fair Value Measurements for December 31,  2020
(In thousands)
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Avg.)
Impaired loans	$	6,587	Discounted appraised value	Marketability/Selling costs	0% - 8% (6.23)	%
Other real estate owned	$	3,866	Discounted appraised value	Selling costs	10.51	%

33

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2021 and December 31, 2020. Fair values for September 30, 2021 and December 31, 2020 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

			Fair Value Measurements as of September 30, 2021, using
			Quoted Prices in
			Active Markets		Significant		Significant
			for Identical		Other Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
(In thousands)	Amount		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	30,382	$	30,382	$	—	$	—
Interest-bearing deposits at other institutions		122,487		122,487		—		—
Securities held-to-maturity		264		—		271		—
Securities available-for-sale		269,943		—		269,943		—
Restricted stock		6,372		—		6,372		—
Loans, net		1,454,723		—		—		1,453,516
Derivative assets - interest rate swaps		8,326		—		8,326		—
Bank owned life insurance		38,924		—		38,924		—
Accrued interest receivable		8,405		—		8,405		—
Financial liabilities:
Checking, savings and money market accounts	$	1,458,860	$	—	$	1,458,860	$	—
Time deposits		250,638		—		252,362		—
FHLB advances		25,000		—		25,000		—
Subordinated notes		19,551		—		18,233		—
Accrued interest payable		1,174		—		1,174		—
Derivative liabilties - interest rate swaps		8,326		—		8,326		—
Derivative liabilties - cash flow hedge		407		—		407		—

34

Notes to Unaudited Consolidated Financial Statements

(Continued)

			Fair Value Measurements as of December 31, 2020, using
			Quoted Prices in
			Active Markets		Significant		Significant
			for Identical		Other Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
(In thousands)	Amount		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	20,835	$	20,835	$	—	$	—
Interest-bearing deposits at other institutions		120,228		120,228		—		—
Securities held-to-maturity		264		—		274		—
Securities available-for-sale		126,151		—		126,151		—
Restricted stock		6,563		—		6,563		—
Loans, net		1,451,125		—		—		1,463,270
Derivative assets - interest rate swaps		13,633		—		13,633		—
Bank owned life insurance		38,178		—		38,178		—
Accrued interest receivable		9,135		—		9,135		—
Financial liabilities:
Checking, savings and money market accounts	$	1,219,440	$	—	$	1,219,440	$	—
Time deposits		313,053		—		316,341		—
FHLB advances		25,000		—		25,000		—
Subordinated notes		44,085		—		42,438		—
Accrued interest payable		685		—		685		—
Derivative liabilties - interest rate swaps		13,633		—		13,633		—
Derivative liabilties - cash flow hedge		754		—		754		—

Note 8.Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of stock which then shared in the earnings of the Company. Holders of the Company’s restricted stock units do not have voting rights during the vesting period and therefore, restricted stock units are not included in the computation of basic earnings per share. Weighted average shares – diluted includes the potential dilution of stock options and restricted stock units as of September 30, 2021. The weighted average shares – diluted as of September 30, 2020 includes only the potential dilution of stock options.

35

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common stockholders. There were 0 anti-dilutive shares for the period ended September 30, 2021. There were 329,295 shares excluded from the calculation for the period ended September 30, 2020, as they were anti-dilutive.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except per share data)	2021		2020		2021		2020
Net income	$	4,682	$	3,874	$	15,416	$	10,487
					���
Weighted average number of shares		13,683		13,477		13,636		13,561
Effect of dilutive securities,restricted stock units and options		929		414		919		576
Weighted average diluted shares		14,612		13,891		14,555		14,137
Basic EPS	$	0.34	$	0.29	$	1.13	$	0.77
Diluted EPS	$	0.32	$	0.28	$	1.06	$	0.74

Note 9.Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (AOCI) for the three and nine months ended September 30, 2021 and 2020 are shown in the following table. The Company has 2 components, which are available-for-sale securities and cash flow hedges, for the periods presented.

(In thousands)
Three Months Ended September 30, 2021	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	1,323	$	(382)	$	941
Net unrealized gains (losses) during the period		(1,688)		61		(1,627)
Other comprehensive income (loss), net of tax		(1,688)		61		(1,627)
Balance, end of period	$	(365)	$	(321)	$	(686)

(In thousands)
Nine Months Ended September 30, 2021	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	2,421	$	(595)	$	1,826
Net unrealized gains (losses) during the period		(2,786)		274		(2,512)
Other comprehensive income (loss), net of tax		(2,786)		274		(2,512)
Balance, end of period	$	(365)	$	(321)	$	(686)

(In thousands)
Three Months Ended September 30, 2020	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	3,000	$	(705)	$	2,295
Net unrealized gains (losses) during the period		(224)		67		(157)
Net reclassification adjustment for gains realized in income		(35)		—		(35)
Other comprehensive income (loss), net of tax		(259)		67		(192)
Balance, end of period	$	2,741	$	(638)	$	2,103

36

Notes to Unaudited Consolidated Financial Statements

(Continued)

(In thousands)
Nine Months Ended September 30, 2020	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	753	$	(63)	$	690
Net unrealized gains (losses) during the period		2,100		(575)		1,525
Net reclassification adjustment for gains realized in income		(112)		—		(112)
Other comprehensive income (loss), net of tax		1,988		(575)		1,413
Balance, end of period	$	2,741	$	(638)	$	2,103

The following table presents information related to reclassifications from AOCI:

	Amount Reclassified from AOCI				Amount Reclassified from AOCI				Affected Line Item
	into Income				into Income				in the Consolidated
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				Statements of
Details about AOCI	2021		2020		2021		2020		Income
Gains on sale of available-for-sale securities	$	—	$	44	$	—	$	141	Gain on sale of securities available-for-sale
Income tax expense		—		(9)		—		(29)	Income tax expense
Total	$	—	$	35	$	—	$	112	Net of tax

Note 10.Subordinated Notes

On June 20, 2016, the Company issued $25 million of fixed-to-floating rate subordinated notes due June 30, 2026, in a private placement to accredited investors. Interest was payable at 6.00% per annum, from and including June 20, 2016 to, but excluding, June 30, 2021, semi-annually in arrears. From and including June 30, 2021 to the maturity date or early redemption date, the interest rate was to reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.

The Company had the option, on any scheduled interest payment date, to redeem the subordinated notes, in whole or in part, upon not fewer than 30 nor greater than 60 days’ notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. In August 2021, the Company provided a redemption notice to each holder of the subordinated notes that the notes would be redeemed on September 30, 2021 or such later date as the holder returned its note to the Company. $10.5 million of principal was redeemed and paid on September 30, 2021. The remaining principal balance of $14.5 million as of September 30, 2021 is included in other liabilities awaiting redemption from the note holders. The notes stopped accruing interest effective as of September 30, 2021 redemption date.

On October 13, 2020, the Company completed its private placement of $20 million of its 4.875% Fixed to Floating Subordinated Notes due 2030 (the Notes) to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes.

37

Notes to Unaudited Consolidated Financial Statements

(Continued)

Note 11. Revenue Recognition

The Company adopted ASU 2014-09 ‘‘Revenue from Contracts with Customers’’ (Topic 606) and all subsequent ASUs that modified Topic 606 in recognizing revenue. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, gain on sale of securities, bank-owned life insurance income, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and personal checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges and are included in other income on the Company’s consolidated statements of income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. This income is reflected in other income on the Company’s consolidated statements of income.

Other income

Other noninterest income consists of loan swap fees, insurance commissions, and other miscellaneous revenue streams not meeting the criteria above. When the Company enters into an interest rate swap agreement, the Company may receive an additional one-time payment fee which is recognized as income when received. The Company receives monthly recurring commissions based on a percentage of premiums issued and revenue is recognized when received. Any residual miscellaneous fees are recognized as they occur, and therefore, the Company determined this consistent practice satisfies the obligation for performance.

38

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2021		2020		2021		2020
Noninterest Income
In-scope of Topic 606
Service Charges on Deposit Accounts	$	278	$	275	$	768	$	738
Fees, Exchange, and Other Service Charges		101		87		275		245
Other income		1		10		183		42
Noninterest Income (in-scope of Topic 606)		380		372		1,226		1,025
Noninterest Income (out-scope of Topic 606)		681		398		1,311		1,126
Total Noninterest Income	$	1,061	$	770	$	2,537	$	2,151

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2021 and 2020, the Company did not have any significant contract balances.

Contract Acquisition Costs

Under Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company did not capitalize any contract acquisition cost during the nine months ended September 30, 2021 or 2020.

39

Notes to Unaudited Consolidated Financial Statements

(Continued)

Note 12. Supplemental Cash Flow Information

Below is additional information regarding the Company’s cash flows for the nine months ended September 30, 2021 and 2020.

	For the Nine Months Ended September 30,
(In thousands)	2021		2020
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	7,733	$	11,130
Income taxes		3,846		2,055
Noncash investing and financing activities:
Unrealized (loss) gain on securities available-for-sale		(3,483)		2,517
Unrealized gain (loss) on interest rate swaps		347		(728)
Transfer of loans held for sale to loans, net		—		9,641
Transfer of called subordinated notes to other liabilities		14,500		—
Right-of-use assets obtained in the exchange for lease liabilities during the current period		—		59
Derecognition of right-of-use assets and lease liability		—		458

40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of our consolidated financial condition at September 30, 2021 and December 31, 2020 and the results of our operations for the three and nine months ended September 30, 2021 and 2020. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. Results of operations for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results of operations for the balance of 2021, or for any other period. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, as well as other periodic reports filed with the U.S. Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of FVCBankcorp, Inc. and our subsidiary (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

● risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues; the imposition of any restrictions on business operations and/or travel; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates; and the timing of distribution, effectiveness, and acceptance of vaccines against COVID-19;

● general business and economic conditions nationally or in the markets that we serve could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, and consumer and business confidence, which could lead to decreases in demand for loans, deposits, and other financial services that we provide and increases in loan delinquencies and defaults;

● the risk of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

● changes in the assumptions underlying the establishment of reserves for possible loan losses;

● changes in market conditions, specifically declines in the commercial and residential real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions we do business with;

● risks inherent in making loans such as repayment risks and fluctuating collateral values;

● declines in our common stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to record a noncash impairment charge to earnings in future periods;

41

● the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

● geopolitical conditions, including acts or threats of terrorism, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

● the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;

● our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;

● changes in consumer spending and savings habits;

● technological and social media changes;

● the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), inflation, interest rate, market and monetary fluctuations;

● changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

● the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

● the impact of changes in laws, regulations and policies affecting the real estate industry;

● the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setting bodies;

● the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

● the willingness of users to substitute competitors’ products and services for our products and services;

● the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

● the ability to close our previously-announced merger (the “Blue Ridge Merger”) with Blue Ridge Bankshares, Inc. (“Blue Ridge”) on the expected terms and schedule including our ability to obtain required regulatory and shareholder approvals;

● difficulties, delays and unforeseen costs in completing the Blue Ridge Merger and in integrating the Company’s and Blue Ridge’s businesses;

● the ability to realize expected revenue growth, cost savings and/or other benefits of the Blue Ridge Merger;

● business disruption during the pendency of, or following, the Blue Ridge Merger including customer and employee relationships and business operations that may be disrupted;

● changes in the level of our nonperforming assets and charge-offs;

● our involvement, from time to time, in legal proceedings and examination and remedial actions by regulators; and

● potential exposure to fraud, negligence, computer theft and cyber-crime.

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The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2020, including those discussed in the section entitled “Risk Factors”. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

Overview

We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank (the “Bank”), was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.

On August 31, 2021, we announced that the Bank made an investment in Atlantic Coast Mortgage, LLC (“ACM”) for $20.4 million. As a result of this investment, the Bank has obtained a 28.7% ownership interest in ACM, which is subject to an earnback option of up to 3.7% over the next three years. The Bank began providing a warehouse lending facility to ACM during the second quarter of 2021, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify its held for investment loan portfolio. At September 30, 2021, the warehouse facility totaled $41.8 million, portfolio loans totaled $9.8 million, and noninterest income attributable to the Bank’s investment in ACM totaled $364 thousand.

On July 14, 2021, we announced the signing of a definitive merger agreement with Blue Ridge, pursuant to which the companies will combine in an all-stock merger of equals, subject to customary closing conditions including shareholder and regulatory approvals. On November 4, 2021, we and Blue Ridge announced that Blue Ridge has learned that the Office of the Comptroller of the Currency (the “OCC”) identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the Merger.

On October 12, 2018, we completed our acquisition of Colombo Bank (“Colombo”), which was headquartered in Rockville, Maryland, and added five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland.

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. As discussed further in “Quantitative and Qualitative Disclosures About Market Risk” below, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterest income is a complementary source of revenue for us and includes, among other things, service charges on deposits and loans, merchant services fee income, loan swap fees, insurance commission income, income from bank owned life insurance (“BOLI”), income from membership interest in ACM, and gains and losses on sales of investment securities available-for-sale.

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Critical Accounting Policies

General

The accounting principles we apply under U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchase credit-impaired loans, fair value measurements, and the valuation of other real estate owned.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our loan portfolio. We are not required to implement the provisions of the current expected credit losses accounting standard (“CECL”) until January 1, 2023, and are continuing to account for the allowance for loan losses under the incurred loss model. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. Unusual and infrequently occurring events, such as weather-related disasters and health-related events, such as the COVID-19 pandemic and associated efforts to restrict the spread of the disease, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience, ability and depth of management, national and local economic trends and conditions, concentrations of credit, competition, and loan review results to support estimates.

The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on loan segments, which are largely based on the type of collateral underlying each loan. For purposes of this analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economic and environmental factors in determining the allowance for loan losses. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.

Our peer group is defined by selecting commercial banking institutions of similar size within Virginia, Maryland and the District of Columbia. This is known as our custom peer group. The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 21 banks for our custom peer group which are within $1 billion to $3 billion in total assets, the majority of whom are geographically concentrated in the Washington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areas of the country. These baseline peer group loss rates are then adjusted based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updated on a quarterly basis.

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The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. We evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the fair value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan.

Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.

Allowance for Loan Losses - Acquired Loans

Acquired loans accounted for under Accounting Standards Codification (“ASC”) 310-30

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans accounted for under ASC 310-20

Subsequent to the acquisition date, we establish an allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that may warrant recognition in determining our allowance for loan losses.

Purchased Credit-Impaired Loans

Purchased credit-impaired (“PCI”) loans, which are the loans acquired in our acquisition of Colombo, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received). At September 30, 2021, we had specific reserves for impairment of one acquired loan within our allowance for loan losses totaling $22 thousand that had further deteriorated post acquisition.

We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

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Fair Value Measurements

We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

Other Real Estate Owned (“OREO”)

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any writedowns are charged against current earnings. Accounting policy and treatment is consistent with accounting for impaired loans described above.

LIBOR and Other Benchmark Rates

In 2017, the Financial Conduct Authority (the authority that regulates the London Interbank Offered Rate (“LIBOR”)) announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (“IBOR”) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (“ARRs”) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.

To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, we have established an enterprise-wide initiative led by executive management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs.

COVID-19 Pandemic Discussion Matters

Employee Matters

Our workforce has returned to our offices full-time to service the needs of our clients in a continued customer secure environment. We continue frequent cleaning of our facilities and other practices encouraging a safe work environment. Management provides updates to employees through both email and the Company’s intranet on jurisdictional changes related to mask wearing requirements and social distancing as warranted.

Branch Hours

Branch hours and availability, which were modified early on during the onset of the pandemic in consideration of the safety of our employees and clients, were reinstated during the second quarter of 2020. All of our locations are open with advanced safety measures and are available during our normal business hours.

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Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021.

In response to the COVID-19 pandemic, the Coronovirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (“Appropriations Act”) was signed into law on December 27, 2020. Among other things, the CARES Act and Appropriations Act include the following provisions impacting financial institutions:

● Community Bank Leverage Ratio. The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the Community Bank Leverage Ratio (“CBLR”) from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

● Temporary Troubled Debt Restructurings Relief. The CARES Act allowed banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring (“TDR”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking agencies are required to defer to the determination of the banks making such suspension. The Appropriations Act extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

● Small Business Administration Paycheck Protection Program. The CARES Act created the U.S. Small Business Administrtation’s (“SBA”) Paycheck Protection Program (“PPP”) and it was extended by the Appropriations Act. Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans.

Loans made under the PPP are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. government. PPP loans afford borrowers forgiveness up to the principal amount of the PPP covered loan if the proceeds are used to retain workers and maintain payroll or make mortgage interest, lease and utility payments. The SBA will reimburse banks that participate in this program for any amount of a PPP covered loan that is forgiven. Because of the SBA guarantee, we are currently not reserving an allowance for loan losses for these loans.

We actively participated in originating PPP loans, and began processing applications at the inception of the program and through the program’s initial expiration. As of December 31, 2020, we had originated 755 applications for approximately $170.3 million, net of deferred fees and costs. We continued to originate PPP loans until the program ended May 2021, as part of the 2021 program for first and second draw loans, and as of May 31, 2021, we had originated an additional 413 applications for approximately $65.1 million.

Loan Portfolio Exposures

As a result of the COVID-19 pandemic, we implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. On September 30, 2021, payment deferred loans totaled $10.6 million, or 0.72% of the total loan portfolio, comprising one hotel participation loan and one mixed-use commercial real estate loan.

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We are closely and proactively monitoring the effects of the pandemic on our loan and deposit customers and are focused on assessing risks within the loan portfolio and working with customers to minimize losses. We consider pandemic impacted loans to include commercial real estate loans made to hotels, churches, and certain retail and special purpose asset classes. During our assessment of the allowance for loan losses, we addressed the credit risks associated with these pandemic impacted segments and those loans that have requested payment deferrals. The following table shows the number of loans and outstanding loan balances by pandemic-impacted asset class as of September 30, 2021.

COVID Impacted Loans By Asset Class

At September 30, 2021

(Dollars in thousands)

Asset Class	Number of Loans	Amount
Commercial real estate - retail	108	$	221,926
Commercial real estate - mixed use	54		96,354
Specialty use-hotel/lodging/motel	11		60,391
Commercial real estate - office	109		106,804
Multi-family first lien	86		113,302
Commercial real estate - industrial	70		123,130
Commercial real estate - special use/church	21		40,948
Special purpose	18		30,402
Total loan categories COVID impacted	477	$	793,257
Other loan categories not impacted by COVID	2,132		680,226
Total loans	2,609	$	1,473,483

We believe that as a result of our conservative underwriting discipline at loan origination coupled with the active dialogue we have with our borrowers, we have the ability and necessary flexibility to assist our customers through this pandemic.

Liquidity and Backup Sources

Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $422.8 million at September 30, 2021, or 21.2% of total assets, an increase from $267.2 million, or 14.7%, at December 31, 2020. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”). Additional borrowing capacity at the FHLB at September 30, 2021 was approximately $325.4 million. Borrowing capacity with the FRB was approximately $85.6 million at September 30, 2021. We also have unsecured federal funds purchased lines of $269.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors as we endure through this pandemic.

Share Repurchases

While our capital position remained well above the levels to be considered well capitalized for regulatory purposes, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, we temporarily suspended stock repurchases on March 20, 2020. On January 21, 2021, we approved a new share repurchase program pursuant to which we may repurchase up to 1,080,860 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2020. The repurchase program will expire on December 31, 2021, subject to earlier termination of the program by the Board of Directors. We have not repurchased any shares of our common stock during the nine months ended September 30, 2021.

Risks and Uncertainties

The COVID-19 pandemic has adversely impacted a broad range of industries in which our customers operate and could impair their ability to fulfill their financial obligations to us. The pandemic has caused significant disruptions to the U.S. economy and has disrupted banking and other financial activity in the areas we operate. While there has been no material impact to our employees to date, COVID-19 could also potentially create widespread business continuity issues for us.

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The U.S. government and its agencies have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.

Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. While it is not possible to know the full universe or extent that the impact of COVID-19 and resulting measures to curtail its spread will have on our business, we are aware of the following items that are potentially material to us and our operations.

Financial Condition and Results of Operations

Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we have worked with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we have worked with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

Capital and Liquidity

While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our regulatory capital ratios could be adversely impacted by future credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt when necessary. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for short-term funding have recently been quite low. If funding costs become elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

Asset Valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the valuation of assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

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It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Processes, Controls and Business Continuity Plan

We have invoked our Board approved Pandemic Preparedness Plan that includes a remote working strategy. We do not anticipate incurring additional material cost related to another deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. We do not currently face any material resource constraint through the implementation of our business continuity plans.

Lending Operations and Accommodations to Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, we executed a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, we are deferring either the full loan payment or the principal component of the loan payment generally for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. As of September 30, 2021, remaining payment deferred loans totaled $10.6 million, or 0.72% of the total loan portfolio, comprising two loans. In accordance with interagency guidance and the CARES Act issued in March 2020, these short-term deferrals are not considered TDRs.

With the passage of the PPP, administered by the SBA, we actively participated in assisting our customers with applications for resources through the program. The majority of the PPP loans we originated have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. At September 30, 2021, PPP loans, net of deferred fees and costs, totaled $58.2 million. We continued to originate PPP loans until May 2021 as part of the 2021 program for first and second draw loans. It is our understanding that loans funded through PPP are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for loan losses through a charge to earnings.

Credit

We are working with customers directly affected by COVID-19. We are prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communications with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise. Should economic conditions worsen, we could experience further increases in our required allowance for loan losses and record additional provision for loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

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Results of Operations— Three and Nine Months Ended September 30, 2021 and 2020

Overview

We recorded net income of $4.7 million, or $0.32 per diluted common share, for the three months ended September 30, 2021, compared to net income of $3.9 million, or $0.28 per diluted common share, for the three months ended September 30, 2020. Net income for the three months ended September 30, 2021 was impacted by one-time accelerated recognition of debt issuance costs of $380 thousand (associated with our redemption of our 2016 subordinated debt issuance during the third quarter of 2021) and merger and acquisition expenses of $1.1 million, neither of which occurred during the comparable 2020 period. Net interest income increased $884 thousand to $14.5 million for the three months ended September 30, 2021, compared to $13.6 million for the three months ended September 30, 2020. No provision for loan losses was recorded for the three months ended September 30, 2021, compared to $1.7 million for the same period of 2020. Noninterest income was $1.1 million compared to $770 thousand for the three months ended September 30, 2021 and 2020, respectively. Noninterest expense was $9.4 million for the three months ended September 30, 2021 compared to $7.7 million for the same three month period of 2020.

The annualized return on average assets for the three months ended September 30, 2021 and 2020 was 0.91% and 0.89%, respectively. The annualized return on average equity for the three months ended September 30, 2021 and 2020 was 9.18% and 8.44%, respectively.

Operating earnings, which exclude merger-related expenses and accelerated debt issuance costs, net of tax, for the three months ended September 30, 2021 and 2020 were $5.8 million and $3.9 million, respectively, an increase of $1.9 million, or 51%. Diluted earnings per share excluding merger-related expenses and accelerated debt issuance costs, net of tax, for the three months ended September 30, 2021 and 2020 were $0.40 and $0.28, respectively. Operating earnings annualized return on average assets for the three months ended September 30, 2021 and 2020 was 1.14% and 0.89%, respectively. Operating earnings annualized return on average equity for the three months ended September 30, 2021 and 2020 was 11.46% and 8.44%, respectively. We believe that operating earnings is a financial measure that is more reflective of our operating performance than net income. Operating earnings is determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation of non-GAAP financial measures to their most comparable financial measures in accordance with GAAP can be found in the table below.

For the nine months ended September 30, 2021, we recorded net income of $15.4 million, or $1.06 per diluted common share, compared to net income of $10.5 million, or $0.74 per diluted common share, for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2021 was impacted by the aforementioned one-time accelerated recognition of debt issuance costs of $380 thousand and merger and acquisition expenses of $1.1 million, neither of which occurred during the comparable 2020 period. Net income for the nine months ended September 30, 2020 was impacted by one-time branch closure costs of $676 thousand and increased provision for loan losses, neither of which occurred during the year-to-date 2021 period. Net interest income increased $4.2 million to $42.7 million for the nine months ended September 30, 2021, compared to $38.5 million for the nine months ended September 30, 2020, a result of an increase in interest-earning assets through organic growth and a decrease in deposit interest expense year-over-year. No provision for loan losses was recorded for the nine months ended September 30, 2021, compared to $4.5 million for the same period of 2020. Noninterest income increased $386 thousand to $2.5 million for the nine months ended September 30, 2021 as compared to $2.2 million for 2020. Noninterest expense was $25.5 million for the nine months ended September 30, 2021 compared to $23.0 million for the same nine month period of 2020.

The annualized return on average assets for the nine months ended September 30, 2021 and 2020 was 1.05% and 0.84%, respectively. The annualized return on average equity for the nine months ended September 30, 2021 and 2020 was 10.35% and 7.72%, respectively.

For the nine months ended September 30, 2021 and 2020, operating earnings (which excludes merger-related expenses and accelerated debt issuance costs during 2021, and branch closure costs recorded during 2020) was $16.6 million and $11.0 million, respectively, an increase of $5.6 million, or 50%. Diluted earnings per share on an operating earnings basis for the nine months ended September 30, 2021 and 2020 were $1.14 and $0.78, respectively. Operating earnings annualized return on average assets for the nine months ended September 30, 2021 and 2020 was 1.13% and 0.88%, respectively. Operating earnings annualized return on average equity for the nine months ended September 30, 2021 and 2020 was 11.13% and 8.11%, respectively.

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Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net income (as reported)	$	4,682		$	3,874		$	15,416		$	10,487
Add: impairment on branch closures		—			—			—			676
Add: merger and acquisition expense		1,107			—			1,107			—
Add: accelerated debt issuance costs		380			—			380			—
Add (Subtract): provision for income taxes associated with non-GAAP adjustments		(320)			—			(320)			(142)
Net income, excluding above charges, net of tax (non-GAAP)	$	5,849		$	3,874		$	16,583		$	11,021
Earnings per share - basic (excluding above charges, net of tax)	$	0.43		$	0.29		$	1.22		$	0.81
Earnings per share - diluted (excluding above charges, net of tax)	$	0.40		$	0.28		$	1.14		$	0.78
Return on average assets (non-GAAP net income)		1.14	%		0.89	%		1.13	%		0.88	%
Return on average equity (non-GAAP net income)		11.46	%		8.44	%		11.13	%		8.11	%

Net Interest Income/Margin

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended September 30, 2021 and 2020.

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

For the Three Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	2021						2020
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial real estate	$	858,179	$	8,902	4.15	%	$	784,990	$	9,005	4.59	%
Commercial and industrial		141,665		1,617	4.56	%		107,716		1,356	5.04	%
Paycheck protection program		79,225		1,205	6.08	%		170,071		981	2.31	%
Commercial construction		211,656		2,641	4.99	%		225,711		2,421	4.29	%
Consumer residential		163,901		1,642	4.01	%		178,531		1,850	4.15	%
Consumer nonresidential		11,529		210	7.29	%		17,834		345	7.72	%
Total loans (1)		1,466,155		16,217	4.42	%		1,484,853		15,958	4.30	%
Investment securities (2)		219,295		1,000	1.82	%		113,395		713	2.52	%
Restricted stock		6,224		82	5.27	%		6,451		80	4.95	%
Deposits at other financial institutions and federal funds sold		243,409		89	0.15	%		37,326		16	0.17	%
Total interest-earning assets and interest income		1,935,083		17,388	3.59	%		1,642,025		16,767	4.08	%
Noninterest-earning assets:
Cash and due from banks		24,325						18,769
Premises and equipment, net		1,544						1,816
Accrued interest and other assets		101,963						99,512
Allowance for loan losses		(14,384)						(13,117)
Total assets	$	2,048,531					$	1,749,005
Liabilities and Stockholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	$	616,422		845	0.55	%	$	379,218	$	659	0.69	%
Savings and money markets		308,092		344	0.44	%		284,665		386	0.54	%
Time deposits		233,539		618	1.07	%		311,615		1,458	1.86	%
Wholesale deposits		35,000		41	0.47	%		83,044		187	0.90	%
Total interest - bearing deposits		1,193,053		1,848	0.62	%		1,058,542		2,690	1.01	%
Other borrowed funds		68,889		1,059	6.15	%		51,934		476	3.64	%
Total interest-bearing liabilities and interest expense		1,261,942		2,907	0.92	%		1,110,476		3,166	1.13	%
Noninterest-bearing liabilities:
Demand deposits		555,941						423,357
Other liabilities		26,581						31,673
Common stockholders' equity		204,067						183,499
Total liabilities and stockholders' equity	$	2,048,531					$	1,749,005
Net interest income and net interest margin			$	14,481	2.97	%			$	13,601	3.30	%

(1) Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $1.5 million and $793 thousand for the three months ended September 30, 2021 and 2020, respectively.

(2) The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2021 and 2020.

The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” below for further information.

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The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the three months ended September 30, 2021.

Rate and Volume Analysis

For the Three Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	2021 Compared to 2020
	Average		Average		Increase
	Volume		Rate		(Decrease)
Interest income:
Loans (1):
Commercial real estate	$	840	$	(943)	$	(103)
Commercial and industrial		431		(170)		261
Paycheck protection program		(524)		748		224
Commercial construction		(151)		371		220
Consumer residential		(148)		(60)		(208)
Consumer nonresidential		(123)		(12)		(135)
Total loans (1)		325		(66)		259
Investment securities (2)		666		(379)		287
Restricted stock		(3)		5		2
Deposits at other financial institutions and federal funds sold		88		(15)		73
Total interest income		1,076		(455)		621
Interest expense:
Interest - bearing deposits:
Interest checking		392		(206)		186
Savings and money markets		30		(72)		(42)
Time deposits		(387)		(453)		(840)
Wholesale deposits		(109)		(37)		(146)
Total interest - bearing deposits		(74)		(768)		(842)
Other borrowed funds		156		427		583
Total interest expense		82		(341)		(259)
Net interest income	$	994	$	(114)	$	880

(1) Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented.

(2) The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2021 and 2020.

54

Net interest income for the three months ended September 30, 2021 was $14.5 million, compared to $13.6 million for the three months ended September 30, 2020, an increase of $884 thousand, or 6.5%. The increase in net interest income was primarily a result of a decrease in average rates paid on interest-bearing deposits during 2021 compared to 2020, reducing interest expense $842 thousand. In addition, the average volume of interest-earning assets related to growth of the loan and investment securities portfolios contributed to an increase in interest income of $991 thousand. Offsetting these attributes contributing to the increase in net interest income was an increase in interest expense related to the recognition of accelerated debt issuance costs of $380 thousand during the third quarter of 2021. The yield on interest-earning assets decreased 49 basis points to 3.59% for the three months ended September 30, 2021, compared to 4.08% for the same period of 2020. The average yield of the loan portfolio for the three months ended September 30, 2021 and 2020 was 4.42% and 4.30%, respectively, with accelerated accretion of net deferred fees associated with PPP loan forgiveness, totaling $712 thousand, contributing to 2021 interest income. Cost of interest-bearing deposits decreased 39 basis points to 0.62% for the three months ended September 30, 2021, compared to 1.01% for the same period of 2020, reflecting our efforts to decrease deposit rates to offset the repricing of our variable rate loan portfolio.

Our net interest margin, on a tax equivalent basis, for the three months ended September 30, 2021 and 2020 was 2.97% and 3.30%, respectively. The decrease in our net interest margin was primarily a result of a decrease in the yields earned on our interest-earning assets during 2021 as compared to 2020, a result of the decreased rate environment. In addition, the one-time accelerated debt issuance costs of $380 thousand recorded during the third quarter of 2021 contributed to this decrease by 8 basis points. Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2021 and 2020.

Net interest income, on a tax equivalent basis, is a non-GAAP financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
GAAP Financial Measurements:
Interest income:
Loans	$	16,217	$	15,958	$	47,899	$	47,257
Deposits at other financial institutions and federal funds sold		89		16		205		119
Investment securities available‑for‑sale		996		706		2,586		2,333
Investment securities held‑to‑maturity		2		2		5		5
Restricted stock		82		79		245		260
Total interest income		17,386		16,761		50,940		49,974
Interest expense:
Interest‑bearing deposits		1,848		2,690		5,703		10,027
Other borrowed funds		1,059		476		2,529		1,446
Total interest expense		2,907		3,166		8,232		11,473
Net interest income	$	14,479	$	13,595	$	42,708	$	38,501
Non‑GAAP Financial Measurements:
Add: Tax benefit on tax‑exempt interest income - securities		2		6		10		18
Total tax benefit on tax-exempt interest income	$	2	$	6	$	10	$	18
Tax equivalent net interest income	$	14,481	$	13,601	$	42,718	$	38,519

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Average interest-earning assets increased $293.1 million, or 17.9%, to $1.94 billion for the three months ended September 30, 2021 compared to $1.64 billion for the three months ended September 30, 2020. The increase in our earning assets was primarily driven by an increase in the average volume of deposits at other financial institutions and federal funds sold of $206.1 million, which only contributed an additional $73 thousand in interest income due to the low interest rate environment. In addition, the average volume of investment securities increased $105.9 million for the three months ended September 30, 2021 compared to the same period of 2020, contributing an additional $287 thousand to interest income, net of the impact of the lower interest rate environment. The excess liquidity is a result of PPP loan forgiveness and the increase in deposits accumulated over the past year.

Total average interest-bearing deposits increased $134.5 million to $1.19 billion for the three months ended September 30, 2021 compared to $1.06 billion for the three months ended September 30, 2020. Average noninterest-bearing deposits increased $132.6 million to $555.9 million for the three months ended September 30, 2021 compared to $423.4 million for the same period in 2020. The largest increase in average interest-bearing customer deposit balances was in our interest checking, which increased $237.2 million compared to 2020. As customers move balances to non-maturity deposit products, average balances for time deposits decreased $78.1 million as compared to 2020. Average wholesale deposits decreased $48.0 million to $35.0 million for the third quarter of 2021 compared to $83.0 million for the third quarter of 2020, as we have been able to reduce our reliance on wholesale funding due to other core sources of liquidity. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, increased 251 basis points to 6.15% for the three months ended September 30, 2021, a result of the one-time accelerated recognition of debt issuance costs associated with the 2016 subordinated debt we redeemed during the during the third quarter of 2021.

56

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the nine months ended September 30, 2021 and 2020.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

For the Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	2021						2020
			Interest		Average				Interest		Average
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial real estate	$	812,623	$	25,913	4.25	%	$	770,820	$	26,387	4.56	%
Commercial and industrial		124,460		4,382	4.69	%		107,045		4,214	5.25	%
Paycheck protection program		126,310		4,511	4.76	%		97,570		1,782	2.44	%
Commercial construction		214,798		7,449	4.62	%		222,844		7,810	4.67	%
Consumer real estate		164,678		4,950	4.01	%		180,103		5,995	4.44	%
Consumer nonresidential		12,836		694	7.21	%		14,919		833	7.44	%
Total loans (1)		1,455,705		47,899	4.39	%		1,393,301		47,021	4.50	%
Investment securities (2)		171,864		2,601	2.01	%		124,380		2,356	2.52	%
Restricted stock		6,284		245	5.21	%		6,302		260	5.51	%
Loans held for sale, at fair value		—		—	0.00	%		4,583		236	6.86	%
Deposits at other financial institutions and federal funds sold		218,557		205	0.13	%		43,472		119	0.36	%
Total interest-earning assets and interest income		1,852,410		50,950	3.67	%		1,572,038		49,992	4.24	%
Noninterest-earning assets:
Cash and due from banks		18,575						17,287
Premises and equipment, net		1,559						1,935
Accrued interest and other assets		97,020						94,534
Allowance for loan losses		(14,567)						(11,662)
Total assets	$	1,954,997					$	1,674,132
Liabilities and Stockholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	$	568,742	$	2,304	0.54	%	$	331,600	$	2,137	0.86	%
Savings and money markets		294,730		1,019	0.46	%		258,678		1,456	0.75	%
Time deposits		239,332		2,257	1.26	%		329,003		5,262	2.14	%
Wholesale deposits		38,553		123	0.43	%		111,948		1,172	1.40	%
Total interest - bearing deposits		1,141,357		5,703	0.67	%		1,031,229		10,027	1.30	%
Other borrowed funds		69,037		2,529	4.90	%		55,016		1,446	3.51	%
Total interest-bearing liabilities and interest expense		1,210,394		8,232	0.91	%		1,086,245		11,473	1.41	%
Noninterest-bearing liabilities:
Demand deposits		518,478						376,518
Other liabilities		27,516						30,249
Common stockholders' equity		198,609						181,120
Total liabilities and stockholders' equity	$	1,954,997					$	1,674,132
Net interest income and net interest margin			$	42,718	3.08	%			$	38,519	3.27	%

(1) Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $4.9 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively.

(2) The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2021 and 2020.

57

The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the nine months ended September 30, 2021.

Rate and Volume Analysis

For the Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	2021 Compared to 2020
	Average		Average		Increase
	Volume		Rate		(Decrease)
Interest income:
Loans (1):
Commercial real estate	$	1,431	$	(1,905)	$	(474)
Commercial and industrial		686		(518)		168
Paycheck protection program		525		2,204		2,729
Commercial construction		(282)		(79)		(361)
Consumer real estate		(513)		(532)		(1,045)
Consumer nonresidential		(116)		(23)		(139)
Total loans (1)		1,731		(853)		878
Investment securities (2)		900		(655)		245
Restricted stock		(1)		(14)		(15)
Loans held for sale, at fair value		(236)		—		(236)
Deposits at other financial institutions and federal funds sold		478		(392)		86
Total interest income		2,872		(1,914)		958
Interest expense:
Interest - bearing deposits:
Interest checking		1,525		(1,358)		167
Savings and money markets		201		(638)		(437)
Time deposits		(1,421)		(1,584)		(3,005)
Wholesale deposits		(769)		(280)		(1,049)
Total interest - bearing deposits		(464)		(3,860)		(4,324)
Other borrowed funds		365		718		1,083
Total interest expense		(99)		(3,142)		(3,241)
Net interest income	$	2,971	$	1,228	$	4,199

(1) Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented.

(2) The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2021 and 2020.

Net interest income for the nine months ended September 30, 2021 was $42.7 million, compared to $38.5 million for the nine months ended September 30, 2020, an increase of $4.2 million, or 10.9%. The increase in net interest income was primarily a result of the decrease in the average rates paid on interest-bearing deposits, which improved net interest income by $3.8 million for the nine months ended September 30, 2021 compared to the same period of 2020. The yield on interest-earning assets decreased 57 basis points to 3.67% for the nine months ended September 30, 2021, compared to 4.24% for the same period of 2020. Offsetting this decrease in yield was a 50 basis point decrease in the cost of interest-bearing liabilities, primarily reflecting our efforts to decrease rates on interest-bearing deposits as a result of the decreased rate environment that began over a year ago.

58

Average interest-earning assets increased by 17.8% to $1.85 billion for the nine months ended September 30, 2021 compared to $1.57 billion for the nine months ended September 30, 2020, which resulted in an increase in total interest income of $958 thousand, to $51.0 million for the nine months ended September 30, 2021, compared to $50.0 million for the nine months ended September 30, 2020. The increase in our earning assets was primarily driven by an increase in the average balance of loans receivable of $62.4 million, of which $28.7 million of this increase was related to PPP loan originations, which yielded 4.76% for the nine months ended September 30, 2021, primarily a result of the accelerated accretion earned during the nine months of 2021 totaling $2.4 million. Interest income for the nine months ended September 30, 2021 was impacted by a decrease in yields earned on the loan portfolio which decreased interest income $853 thousand, offset by an increase in interest as a result of loan volumes totaling $1.7 million. Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2021 and 2020.

Total average interest-bearing deposits increased $110.1 million to $1.14 billion for the nine months ended September 30, 2021 compared to $1.03 billion for the nine months ended September 30, 2020. Average noninterest-bearing deposits increased $165.6 million to $518.5 million for the nine months ended September 30, 2021 compared to $352.8 million for the same period in 2020. The largest increase in average interest-bearing deposit balances was in our interest checking, which increased $237.1 million compared to 2020. As customers move balances to non-maturity deposit products, average balances for time deposits decreased $89.7 million as compared to 2020. Average wholesale deposits decreased $73.4 million to $38.6 million for the nine months ended September 30, 2021 compared to $111.9 million for the nine months ended September 30, 2020, as we have been able to reduce our reliance on wholesale funding due to other core sources of liquidity. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, increased 138 basis points to 4.89% for the nine months ended September 30, 2021, from 3.51% for the same period in 2020, a result of the subordinated debt we issued during the fourth quarter of 2020 at 4.88% and the recognition of accelerated debt issuance costs of $380 thousand recorded during the third quarter of 2021.

Provision Expense and Allowance for Loan Losses

Our policy is to maintain the allowance for loan losses at a level that represents our best estimate of inherent losses in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. We are not required to implement the provisions of CECL until January 1, 2023, and as such we are continuing to account for the allowance for loan losses under the incurred loss model.

We recorded no provision for loan losses for the three months ended September 30, 2021 compared to a provision for loan losses of $1.7 million for the same period of 2020, which primarily reflects changes in certain qualitative factors as a result of the local economic conditions and improvement in credit quality metrics of our loan portfolio during the third quarter of 2021. We recorded no provision for loan losses for the nine months ended September 30, 2021 compared to $4.5 million for the nine months ended September 30, 2020.  In addition, as previously mentioned, we continue to evaluate our exposure to certain credit risks within industry segments in our loan portfolio that are most impacted by the pandemic. During 2020, industry subgroups such as retail, hotels, churches and other commercial real estate loans were isolated within our allowance model, in addition to those loans deferring payments, and qualitative factors were adjusted to increase the reserves for these loans as a result of their risk profiles. Specific reserves decreased $68 thousand for the three months ended September 30, 2021, as we obtained additional collateral for an impaired loan that reduced our loss exposure. For the nine months ended September 30, 2021, specific reserves decreased $1.1 million, primarily a result of several watchlist loans that the Bank had in its portolfio at December 31, 2020 being either paid off or sold during 2021.

See “Asset Quality” below for additional information on the credit quality of the loan portfolio. The allowance for loan losses at September 30, 2021 was $14.4 million compared to $15.0 million at December 31, 2020. Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs, at September 30, 2021 was 0.98% compared to 1.02% at December 31, 2020.

59

Noninterest Income

Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM, and income from our BOLI policies, and continues to supplement our operating results. Noninterest income for the three months ended September 30, 2021 and 2020 was $1.1 million and $770 thousand, respectively. The increase in noninterest income is primarily attributable to the Bank’s income associated with its investment in ACM, recording $364 thousand during the third quarter of 2021. Fee income from fees on loans, service charges on deposits, and other fee income was $448 thousand for the three months ended September 30, 2021, compared to $446 thousand for the same quarter of 2020. Income from BOLI was $249 thousand and $280 thousand for the three months ended September 30, 2021 and 2020, respectively.

Noninterest income for the nine months ended September 30, 2021 and 2020 was $2.5 million and $2.2 million, respectively. As mentioned previously, the increase in noninterest income during 2021 is primarily attributable to the Bank’s income associated with its investment in ACM, recording $364 thousand during the third quarter of 2021. Fee income from fees on loans, service charges on deposits, and other fee income was $1.4 million for the nine months ended September 30, 2021, a decrease of $189 thousand, as compared to the same period of 2020, a result of loan swap fee income totaling $378 thousand recorded during 2020 compared to none recorded for 2021. Income from BOLI decreased to $746 thousand for the year-to-date period of 2021, compared to $845 thousand for the same period of 2020. Noninterest income for the nine months ended September 30, 2020 was improved by gains totaling $141 thousand on the sales of $13.2 million in investment securities available-for-sale. These securities were sold as they had larger premiums susceptible to prepayment risk, decreasing future interest income. Noninterest income for the nine months ended September 30, 2020 was also impacted by losses on loans held for sale totaling $451 thousand.

Noninterest Expense

Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was $9.4 million and $7.7 million for the three months ended September 30, 2021 and 2020, respectively, an increase of $1.7 million, or 21.7%. The increase in noninterest expense compared to the year ago quarter was primarily related to merger-related expenses of $1.1 million recorded during the third quarter of 2021.

Salaries and benefits expense increased $373 thousand to $4.7 million for the three months ended September 30, 2021 compared to $4.3 million for the same period in 2020, which was primarily related to additions to business development staff and associated accruals for incentive compensation during the third quarter of 2021 compared to the year ago quarter. Legal expenses related to loan workouts (which is included in loan related expenses on the income statement) increased $138 thousand during the third quarter of 2021 when compared to the year ago quarter. All other increases in noninterest expense for the quarter ended September 30, 2021 as compared to the same period of 2020, are primarily related to supporting the larger organization as a result of continued organic growth.

For the nine months ended September 30, 2021 and 2020, noninterest expense was $25.5 million and $23.0 million, respectively, an increase of $2.6 million. As mentioned previously, the increase in noninterest expense compared to the nine month period of 2020 was primarily related to merger-related expenses of $1.1 million recorded during 2021. Salaries and benefits expense increased $1.4 million to $13.7 million for the nine months ended September 30, 2021 compared to $12.4 million for the same period in 2020, which was primarily related to additions to business development staff and associated accruals for incentive compensation during 2021. Data processing and network administration expense increased $167 thousand year-over-year, primarily related to planned upgrades to the Company’s network infrastructure that occurred during 2020. Audit, legal and consulting fees increased $479 thousand to $1.2 million for the nine months ended September 30, 2021 as compared to the same period of 2020, primarily as a result of expenses incurred as a result of our membership interest purchase of ACM. These increases in noninterest expense during 2021 as compared to the same period of 2020 were partially offset by branch impairment charges totaling $676 thousand that were recorded during the second quarter of 2020.

Income Taxes

We recorded a provision for income tax expense of $1.4 million for the three months ended September 30, 2021, compared to $1.0 million for the three months ended September 30, 2020. Our effective tax rate for the three months ended September 30, 2021 was 23.4%, compared to 21.2% for the same period of 2020. The effective tax rate for the third quarter of 2021 is greater than our combined federal and state statutory rate of 22.5% primarily because of nondeductible merger-related expenses recognized during the third quarter of 2021.

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For the nine months ended September 30, 2021 and 2020, we recorded a provision for income tax expense of $4.3 million and $2.7 million, respectively. Our effective tax rate for the nine months ended September 30, 2021 was 21.8%, compared to 20.5% for the same period of 2020. Our effective tax rates for the nine months ended September 30, 2021 and 2020 were less than the statutory rate because of discrete tax benefits recorded as a result of exercises of nonqualified stock options during 2021 and 2020.

Discussion and Analysis of Financial Condition

Overview

At September 30, 2021, total assets were $2.00 billion, an increase of 9.7%, or $176.4 million, from $1.82 billion at December 31, 2020. Total loans receivable, net of deferred fees and costs, was $1.47 billion at each of September 30, 2021 and December 31, 2020. Total investment securities increased $143.8 million, or 114.0%, to $270.2 million at September 30, 2021, from $126.4 million at December 31, 2020. Total deposits increased 11.6%, or $177.0 million, to $1.71 billion at September 30, 2021, from $1.53 billion at December 31, 2020. From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. At each of September 30, 2021 and December 31, 2020, we had FHLB advances totaling $25.0 million. At September 30, 2021, we redeemed in full our 2016 issuance of subordinated debt totaling $25.0 million.

Loans Receivable, Net

Total loans receivable, net of deferred fees and costs, were $1.47 billion at each of September 30, 2021 and December 31, 2020. Loans receivable, net of deferred fees, excluding PPP loans, increased $97.7 million, or 7.4%, during the nine months ended September 30, 2021.

PPP loans totaled $59.7 million at September 30, 2021, a decrease from $101.9 million at June 30, 2021 and $155.8 million at December 31, 2020. Loans forgiven during the third quarter of 2021 totaled $42.2 million, and totaled $162.3 million year-to-date 2021. Net deferred fees associated with PPP loans totaled $1.4 million at September 30, 2021.

Commercial real estate loans totaled $870.5 million at September 30, 2021, compared to $790.0 million at December 31, 2020, an increase of $80.4 million, or 9.2%. Owner-occupied commercial real estate loans were $192.9 million at September 30, 2021 compared to $182.9 million at December 31, 2020. Nonowner-occupied commercial real estate loans were $677.6 million at September 30, 2021 compared to $607.5 million at December 31, 2020. Construction loans totaled $206.6 million at September 30, 2021, 14.0% of total loans receivable. Of the $206.6 million in construction loans, $36.6 million are collateralized by land and only $5.1 million are lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio). Our commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We plan to manage this portion of our portfolio in a disciplined manner. We have comprehensive policies to monitor, measure, and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices.

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The following table presents the composition of our loans receivable portfolio at September 30, 2021 and at December 31, 2020.

Loans Receivable

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,		December 31,
	2021		2020
Commercial real estate	$	870,467	$	790,025
Commercial and industrial		162,411		119,529
Paycheck protection program		59,670		155,805
Commercial construction		206,593		222,319
Consumer real estate		166,097		167,872
Consumer nonresidential		8,245		15,835
Gross loans		1,473,483		1,471,385
Less:
Allowance for loan losses		14,363		14,958
Unearned income and (unamortized premiums)		4,397		5,302
Loans receivable, net	$	1,454,723	$	1,451,125

Asset Quality

Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more as to principal or interest and still accruing, and OREO at September 30, 2021were $7.5 million compared to $9.5 million at December 31, 2020. Our ratio of nonperforming assets to total assets was 0.38% at September 30, 2021 compared to 0.52% at December 31, 2020. We had one loan classified as a TDR at each of September 30, 2021 and December 31, 2020, which totaled $94 thousand and $97 thousand, respectively.

Nonperforming loans, which are primarily commercial real estate and commercial and industrial loans, decreased $2.0 million during the nine months ended September 30, 2021, as several loans either paid off or were sold during 2021. Loans that we have classified as nonperforming are a result of customer specific deterioration mostly financial in nature that are not a result of economic, industry, or environmental causes that we might see as a pattern for possible future losses within our loan portfolio. For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we have specific reserves totaling $993 thousand and $2.1 million at September 30, 2021 and December 31, 2020, respectively. Because these loans are individually evaluated for impairment, nonperforming loans are excluded from the general reserve allocation.

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At September 30, 2021, we had $2.0 million in loans identified as special mention, a decrease from $12.1 million from December 31, 2020. Special mention rated loans are loans that have a potential weakness that deserves management’s close attention; however, the borrower continues to pay in accordance with their contract. The decrease from December 31, 2020 was primarily related to two loans being paid off totaling $7.6 million and two loans being upgraded during 2021. Loans rated as special mention do not have a specific reserve and are considered well-secured.

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At September 30, 2021, we had $19.4 million in loans identified as substandard, a decrease of $1.3 million from December 31, 2020. The decrease in substandard loans was primarily related to two loans totaling $1.3 million which were sold at a discount. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At September 30, 2021, specific reserves on originated and acquired loans totaling $993 thousand has been allocated within the allowance for loan losses to supplement any shortfall of collateral.

We recorded annualized net charge-offs to average loans receivable of 0.05% for the nine months ended September 30, 2021, compared to annualized net charge-offs to average loans receivable of 0.02% for the nine months ended September 30, 2020. The increase in net charge-offs during 2021 were primarily related to substandard loans we sold at a discount, which was estimated and included in our specific reserves as of December 31, 2020. The following tables provide additional information on our asset quality for the periods presented.

Nonperforming Assets

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,			December 31,
	2021			2020
Nonperforming assets:
Nonaccrual loans	$	3,618		$	5,349
Loans contractually past‑due 90 days or more and still accruing		20			272
Total nonperforming loans (NPLs)	$	3,638		$	5,621
Other real estate owned		3,866			3,866
Total nonperforming assets (NPAs)	$	7,504		$	9,487
Performing troubled debt restructurings	$	94		$	97
NPLs/Total Assets		0.18	%		0.31	%
NPAs/Total Assets		0.38	%		0.52	%
NPAs and TDRs/Total Assets		0.38	%		0.53	%
Allowance for loan losses/NPLs		394.80	%		266.11	%

Nonperforming Loans by Type

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,		December 31,
	2021		2020
Commercial real estate		1,596	$	2,309
Commercial and industrial		1,702		2,883
Commercial construction		—		—
Consumer real estate		320		385
Consumer nonresidential		20		44
	$	3,638	$	5,621

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At September 30, 2021 and December 31, 2020, there were no performing loans considered potential problem loans. Potential problem loans are defined as loans that are not included in the 90 days or more past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. We take a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our loan loss allowance methodology incorporates increased reserve factors for certain loans that are adversely rated but not impaired as compared to the general portfolio.

As previously mentioned, we have evaluated our exposure to credit risks directly related to the COVID-19 pandemic and have identified subgroups of industry segments most impacted by the pandemic. As a result of the COVID-19 pandemic, we implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. As of September 30, 2021, remaining payment deferred loans totaled $10.6 million, or 0.72% of the total loan portfolio, comprising two loans.

We are closely and proactively monitoring the effects of the pandemic on our loan and deposit customers and are focused on assessing risks within the loan portfolio and working with customers to minimize losses. We consider pandemic impacted loans to include commercial real estate loans made to hotels, churches, and certain retail and special purpose asset classes. During our assessment of the allowance for loan losses, we addressed the credit risks associated with these pandemic impacted segments and those loans that have requested payment deferrals. See above for a table of COVID impacted loans by asset class, which reports the number of loans and outstanding loan balances by pandemic-impacted asset class as of September 30, 2021.

We believe that as a result of our conservative underwriting discipline at loan origination coupled with active dialogue we have with our borrowers, we have the ability and necessary flexibility to assist our customers through this pandemic.

At September 30, 2021, we had one OREO property with a fair value of $3.9 million. Subsequent to the end of the third quarter of 2021, this OREO property was sold at a small gain compared to the recorded fair value at September 30, 2021. Previously, for the year ended December 31, 2017, we recorded a $1.1 million gain on the foreclosure of the property.

Unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. At September 30, 2021, our commercial real estate portfolio (including construction lending) was 73.1% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

See “Critical Accounting Policies” above for more information on our allowance for loan losses methodology.

The following tables present additional information pertaining to the activity in and allocation of the allowance for loan losses by loan type and the percentage of the loan type to the total loan portfolio. The allocation of the allowance for loan losses to a category of loans is not necessarily indicative of future losses or charge-offs, and does not restrict the use of the allowance to any specific category of loans.

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Allowance for Loan Losses

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning balance	$	14,359	$	12,894	$	14,958	$	10,231
Provision for loan losses		—		1,700		—		4,516
Loans charged off:
Commercial real estate		(24)		(2)		(476)		(115)
Commercial and industrial		—		—		(117)		—
Commercial construction		—		—		—		—
Consumer real estate		—		—		—		(3)
Consumer nonresidential		(24)		(85)		(201)		(149)
Total loans charged off		(48)		(87)		(794)		(267)
Recoveries:
Commercial real estate		—		9		24		9
Commercial and industrial		—		1				20
Commercial construction		—		—		—		—
Consumer real estate		31		1		35		2
Consumer nonresidential		21		39		140		45
Total recoveries		52		49		199		76
Net charge offs		4		(38)		(595)		(191)
Ending balance	$	14,363	$	14,556	$	14,363	$	14,556

	September 30,
Loans, net of deferred fees:	2021		2020
Balance at period end	$	1,469,086	$	1,497,634
Allowance for loan losses to loans receivable, net of fees		0.98		0.97	%
Net charge-offs to average loans receivable, annualized		0.05		0.02	%

Allocation of the Allowance for Loan Losses

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,				December 31,
	2021				2020
	Allocation		% of Total*		Allocation		% of Total*
Commercial real estate	$	9,514	59.08	%	$	9,291	53.69	%
Commercial and industrial		1,622	11.02	%		2,546	8.12	%
Paycheck protection program		—	4.05	%		—	10.59	%
Commercial construction		2,225	14.02	%		1,960	15.11	%
Consumer real estate		731	11.27	%		690	11.41	%
Consumer nonresidential		271	0.56	%		471	1.08	%
Total allowance for loan losses	$	14,363	100.00	%	$	14,958	100.00	%

*Percentage of loan type to the total loan portfolio.

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Investment Securities

Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and certificates of deposit. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity for each of September 30, 2021 and December 31, 2020 totaled $264 thousand, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of our investment securities available-for-sale was $269.9 million at September 30, 2021, an increase of $143.8 million, or 114.0%, from $126.2 million at December 31, 2020. Through September 30, 2021, we have purchased $181.2 million in available-for-sale investment securities to invest excess liquidity and reinvest cashflows received from the investment portfolio and PPP forgiveness.

As of September 30, 2021and December 31, 2020, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. All of our mortgage-backed securities are guaranteed by either the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Investment securities that were pledged to secure public deposits totaled $28.6 million and $9.2 million at September 30, 2021 and December 31, 2020, respectively.

We complete reviews for other-than-temporary impairment at least quarterly. At September 30, 2021 and December 31, 2020, only investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.

No other-than-temporary impairment has been recognized for the securities in our investment portfolio as of September 30, 2021 and December 31, 2020.

We hold restricted investments in equities of the FRB and FHLB. At September 30, 2021, we owned $1.8 million in FHLB stock and $4.4 million in FRB stock. At December 31, 2020, we owned $2.4 million in FHLB stock and $4.0 million in FRB stock.

The following table reflects the composition of our investment portfolio, at amortized cost, at September 30, 2021 and December 31, 2020.

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Investment Securities

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,				December 31,
	2021				2020
			Percent of				Percent of
	Balance		Total		Balance		Total
Held‑to‑maturity
Securities of state and local municipalities tax exempt	$	264	0.11	%	$	264	0.21	%
Total held‑to‑maturity securities	$	264	0.11	%	$	264	0.21	%
Available‑for‑sale
Securities of U.S. government and federal agencies	$	13,719	5.07	%	$	—	0.00	%
Securities of state and local municipalities		2,033	0.74	%		4,202	3.41	%
Corporate bonds and securities		11,968	4.42	%		12,974	10.52	%
Mortgage‑backed securities		242,640	89.66	%		105,910	85.86	%
Total available‑for‑sale securities	$	270,360	99.89	%	$	123,086	99.79	%
Total investment securities	$	270,624	100.00	%	$	123,350	100.00	%

The following table presents the amortized cost of our investment portfolio by their stated maturities, as well as the weighted average yields for each of the maturity ranges at September 30, 2021.

Investment Securities by Stated Maturity

At September 30, 2021

(Dollars in thousands)

	At September 30, 2021
	Within One Year			One to Five Years				Five to Ten Years				Over Ten Years				Total
			Weighted			Weighted				Weighted				Weighted				Weighted
	Amortized		Average	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
	Cost		Yield	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
Held‑to‑maturity
Securities of state and local municipalities tax exempt	$	—	—	$	—	—		$	264	2.32	%	$	—	—		$	264	2.32	%
Total held-to-maturity securities	$	—	—	$	—	—		$	264	2.32	%	$	—	—		$	264	2.32	%
Available‑for‑sale
Securities of U.S. government and federal agencies	$	—	—	$	—	—		$	13,719	1.48	%	$	—	—		$	13,719	1.48	%
Securities of state and local municipalities		—	—		1,016	2.25	%		378	2.25	%		639	2.92	%		2,033	2.46	%
Corporate bonds		—	—		1,000	1.18	%		10,968	4.99	%		—	—			11,968	4.67	%
Mortgage‑backed securities		—	—		—	—			18,573	2.12	%		224,067	1.55	%		242,640	1.59	%
Total available‑for‑sale securities	$	—	—	$	2,016	1.72	%	$	43,638	2.64	%	$	224,706	1.55	%	$	270,360	1.73	%
													—	—				—
Total investment securities	$	—	—	$	2,016	1.72	%	$	43,902	2.64	%	$	224,706	1.55	%	$	270,624	1.73	%

Deposits and Other Borrowed Funds

Total deposits were $1.71 billion at September 30, 2021, an increase of $177.0 million, or 11.6%, from $1.53 billion at December 31, 2020. Noninterest-bearing deposits totaled $548.7 million at September 30, 2021, comprising 32.1% of total deposits and increased $149.6 million, or 37.5%, compared to December 31, 2020.

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The following table provides information on our deposit composition at September 30, 2021 and December 31, 2020.

Deposit Composition

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,				December 31,
	2021				2020
			Average				Average
	Balance		Rate		Balance		Rate
Noninterest bearing demand	$	548,662	—		$	399,062	—
Interest bearing - checking, savings and money market		910,198	0.28	%		820,378	0.32	%
Time deposits $100,000 or more		159,888	1.03	%		194,190	1.54	%
Other time deposits		90,750	0.65	%		118,863	0.88	%
	$	1,709,498			$	1,532,493

The remaining maturity of time deposits at September 30, 2021 and December 31, 2020 are as follows:

	September 30,		December 31,
	2021		2020
Three months or less	$	87,804	$	115,707
Over three months through six months		36,157		60,490
Over six months through twelve months		72,282		53,053
Over twelve months		54,395		83,803
	$	250,638	$	313,053

Wholesale deposits decreased to $35.0 million at September 30, 2021 from $50.0 million at December 31, 2020. In addition, we are a member of the IntraFi Network (“IntraFi”), which gives us the ability to offer Certificates of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) products to our customers who seek to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance protection. When a customer places a large deposit with us for IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At September 30, 2021 and December 31, 2020, we had $122.3 million and $138.9 million, respectively, in either CDARS reciprocal or ICS reciprocal products.

The following table reports those certificates of deposit that exceed $100,000 by maturity as of September 30, 2021 and December 31, 2020.

Certificates of Deposit Over $100,000

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,		December 31,
	2021		2020
Three months or less	$	40,518	$	48,388
Over three months through six months		25,469		46,739
Over six months through twelve months		53,865		36,327
Over twelve months		40,036		62,736
	$	159,888	$	194,190

Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $44.6 million at September 30, 2021 and $69.1 million at December 31, 2020. At September 30, 2021, we redeemed our 2016 subordinated debt which totaled $25.0 million. As such, our subordinated debt at September 30, 2021 decreased to $19.6 million. For each of September 30, 2021 and December 31, 2020, FHLB advances totaled $25.0 million.

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The following table reflects the short-term borrowings and other borrowed funds outstanding at September 30, 2021 and December 31, 2020.

Other Borrowed Funds

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

	September 30,				December 31,
	2021				2020
			Weighted				Weighted
	Amount		Average		Amount		Average
	Outstanding		Rate		Outstanding		Rate
Other short‑term borrowed funds:
FHLB advances - short term	$	25,000	1.37	%		25,000	1.15	%
Total borrowed funds and weighted average rate	$	25,000	1.37	%	$	25,000	1.15	%
Other borrowed funds:
Subordinated Debt	$	19,551	6.90	%	$	44,085	6.26	%
Total other borrowed funds and weighted average rate	$	19,551	6.90	%	$	44,085	6.26	%
Total borrowed funds and weighted average rate	$	44,551	3.80	%	$	69,085	4.41	%

Capital Resources

Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements for the Bank are: (i) a common equity Tier 1 (“CET1”), capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to the Bank’s CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we currently consider the Bank’s minimum capital ratios to be as follows: 7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total capital. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation.

On January 1, 2020, the federal banking agencies adopted a “Community Bank Leverage Ratio”, which is calculated by dividing tangible equity capital by average consolidated total assets. If a “qualified community bank,” generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, opts into the CBLR framework and has a leverage ratio that exceeds the CBLR threshold, which was initially set at 9%, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements under Basel III, the capital ratio requirements for “well capitalized” status under Section 38 of the Federal Deposit Insurance Act, and any other leverage or capital requirements to which it is subject. A bank or holding company may be excluded from qualifying community bank status based on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures; and such other facts as the appropriate federal banking agencies determine to be appropriate.

In April 2020, as required by the CARES Act, the federal banking agencies issued two interim final rules related to the CBLR framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

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At January 1, 2020, we qualified and adopted this simplified capital structure, however, there can be no assurance that satisfaction of the CBLR will provide adequate capital for our operations and growth, or an adequate cushion against increased levels of nonperforming assets or weakened economic conditions.

Shareholders’ equity at September 30, 2021 was $204.2 million, an increase of $14.7 million, compared to $189.5 million at December 31, 2020. The increase in shareholders’ equity was primarily attributable to the net income recorded year-to-date totaling $15.4 million. Common stock issued as a result of option exercises increased shareholders’ equity by $1.0 million for the nine months ended September 30, 2021. Accumulated other comprehensive income decreased $2.5 million during 2021, primarily as a result of a decrease in the market value of our available-for-sale investment securities portfolio.

Total shareholders’ equity to total assets for September 30, 2021 and December 31, 2020 was 10.2% and 10.4%, respectively. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) at September 30, 2021 and December 31, 2020 was $14.33 and $13.41, respectively. The Bank’s CBLR at September 30, 2021 and December 31, 2020 was 10.67% and 11.65%, respectively. Accordingly, we were considered “well capitalized” for regulatory purposes at September 30, 2021 and December 31, 2020.

As noted above, regulatory capital levels for the Bank meet those established for “well capitalized” institutions. While we are currently considered “well capitalized,” we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.

As the Company is a bank holding company with less than $3 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”), it is not currently subject to risk-based capital requirements adopted by the Federal Reserve, pursuant to the small bank holding company policy statement. The Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that the Federal Reserve will continue this practice.

The following tables show the minimum capital requirements and our capital position at September 30, 2021 and December 31, 2020 for the Bank.

Capital Components

At September 30, 2021 and December 31, 2020

(Dollars in thousands)

					For Capital
	Actual				Adequacy Purposes
	Amount		Ratio		Amount			Ratio
At September 30, 2021
Leverage capital ratio	$	216,954	10.67	%		173,769	>	8.500	%
At December 31, 2020
Leverage capital ratio	$	209,359	11.65	%		143,823	>	8.000	%

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Tangible Book Value

At September 30, 2021 and December 31, 2020

(Dollars in thousands, except per share data)

	September 30,		December 31,
	2021		2020
Total stockholders’ equity	$	204,194	$	189,500
Less: goodwill and intangibles, net		(8,124)		(8,357)
Tangible Common Equity	$	196,070	$	181,143
Book value per common share	$	14.92	$	14.03
Less: intangible book value per common share		(0.59)		(0.62)
Tangible book value per common share	$	14.33	$	13.41

Liquidity

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing.

In addition to deposits, we have access to the different wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the IntraFi Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. We also have one-way authority with IntraFi for both their CDARs and ICS products which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.

Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.

Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $422.8 million at September 30, 2021, or 21.2% of total assets, an increase from $267.2 million, or 14.7%, at December 31, 2020. We held investments that are classified as held-to-maturity in the amount of $264 thousand at September 30, 2021. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at September 30, 2021 was approximately $325.4 million. Borrowing capacity with the FRB was approximately $85.6 million at September 30, 2021. These facilities are subject to the FHLB and the FRB approving disbursement to us. We also have unsecured federal funds purchased lines of $269.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

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Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on management’s evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which we have committed.

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to the business of the Company.

At September 30, 2021 and December 31, 2020, unused commitments to fund loans and lines of credit totaled $196.2 million and $166.3 million, respectively. Commercial and standby letters of credit totaled $9.4 million and $5.5 million at September 30, 2021 and December 31, 2020, respectively.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a financial institution, we are exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee (“ALCO”). ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management.

We employ an independent consulting firm to model our interest rate sensitivity. We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Bank’s interest rate risk position over a historical time frame for comparison purposes.

At September 30, 2021, our asset/liability position was asset sensitive based on our interest rate sensitivity model in the one-year time frame and asset sensitive in the the two-year time frame. Our net interest income would increase by 0.7% in an up 100 basis point scenario and would increase by 3.6% in an up 400 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would increase by 5.1% in an up 100 basis point scenario and would increase by 19.2% in an up 400 basis point scenario. At September 30, 2021 and December 31, 2020, all interest rate risk stress tests measures were within our board policy established limits in each of the increased rate scenarios.

Additional information on our interest rate sensitivity for a static balance sheet over a one-year time horizon as of September 30, 2021 and December 31, 2020 can be found below.

Interest Rate Risk to Earnings (Net Interest Income)
September 30, 2021			December 31, 2020
Change in interest	Percentage change in		Change in interest	Percentage change in
rates (basis points)	net interest income		rates (basis points)	net interest income
+400	3.55	%	+400	−0.62	%
+300	2.72	%	+300	−0.55	%
+200	1.66	%	+200	−0.63	%
+100	0.65	%	+100	−0.54	%
—	—		—	—
−100	0.10	%	−100	−0.07	%
−200	−1.70	%	−200	−1.58	%

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Economic value of equity (“EVE”) measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.

The interest rate risk to capital at September 30, 2021 and December 31, 2020 is shown below and reflects that our market value of capital is in a liability position in which an increase in short-term interest rates is expected to generate lower market values of capital. At September 30, 2021 and December 31, 2020, all EVE stress tests measures were within our board policy established limits.

Interest Rate Risk to Capital
September 30, 2021			December 31, 2020
Change in interest	Percentage change in		Change in interest	Percentage change in
rates (basis points)	economic value of equity		rates (basis points)	economic value of equity
+400	-1.81	%	+400	6.64	%
+300	-0.97	%	+300	6.14	%
+200	-0.21	%	+200	4.84	%
+100	0.09	%	+100	2.68	%
0	—		0	—
−100	-4.23	%	−100	-4.15	%
−200	-3.78	%	−200	-3.41	%

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act).  As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel, and an internal audit program to monitor its effectiveness. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

In the ordinary course of our operations, we become party to various legal proceedings. Currently, we are not party to any material legal proceedings, and no such proceedings except as noted above are, to management’s knowledge, threatened against us.

Item 1A.Risk Factors

Except as set forth below, there have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Combining Blue Ridge and the Company may be more difficult, costly or time-consuming than we expect.

The success of the Blue Ridge Merger will depend, in part, on Blue Ridge’s ability to realize the anticipated benefits from combining the businesses of Blue Ridge and the Company. To realize such anticipated benefits and cost savings, Blue Ridge must successfully combine the businesses of Blue Ridge and the Company in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of Blue Ridge or the Company or decreasing revenues due to loss of customers. If Blue Ridge is not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully, or at all, or may take longer to realize than expected.

Blue Ridge and the Company have operated, and, until the completion of the Blue Ridge Merger, will continue to operate, independently. After the completion of the merger, Blue Ridge will integrate the Company’s business into its own. The integration process in the Blue Ridge Merger could result in the loss of key employees, the disruption of each party’s ongoing business, inconsistencies in standards, controls, procedures and policies that affect adversely either party’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Blue Ridge’s ability to successfully conduct its business in the markets in which the Company now operates, which could have an adverse effect on Blue Ridge’s financial results and the value of its common stock. If Blue Ridge experiences difficulties with the integration process, the anticipated benefits of the Blue Ridge Merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Blue Ridge and the Company to lose customers or cause customers to withdraw their deposits from the Company’s or Blue Ridge’s banking subsidiaries, or other unintended consequences that could have a material adverse effect on Blue Ridge’s results of operations or financial condition after the Blue Ridge Merger. These integration matters could have an adverse effect on the Company during this transition period and on Blue Ridge for an undetermined period after consummation of the merger.

The Blue Ridge Merger may distract management of the Company from its other responsibilities.

The Blue Ridge Merger could cause the management of the Company to focus its time and energies on matters related to the merger that otherwise would be directed to its business and operations. Any such distraction on the part of the Company’s management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the Company before the merger, or the business and earnings of Blue Ridge after the merger.

Failure of the Blue Ridge Merger to be completed, termination of the merger agreement, or a significant delay in completing the Blue Ridge Merger could negatively impact the Company.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the Blue Ridge Merger. These conditions to the consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the Blue Ridge Merger is not completed by June 30, 2022, either the Company or Blue Ridge may terminate the merger agreement at any time after that date if the failure of the effective time to occur on or before that date is not caused by any breach of the merger agreement by the party electing to terminate the merger agreement, before or after shareholder approval.

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Any delay in completing the Blue Ridge Merger could cause us not to realize some or all of the benefits that we expect to achieve if the merger is successfully completed within its expected timeframe. If the merger agreement with Blue Ridge is terminated, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Blue Ridge Merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Blue Ridge Merger will be completed. If the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by the Company’s board of directors, the Company may be required to pay to Blue Ridge a termination fee of $12.3 million. On November 4, 2021, the Company and Blue Ridge announced that Blue Ridge has learned that the Office of the Comptroller of the Currency (the "OCC") identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the Merger.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the Blue Ridge Merger is not completed, the Company would have to recognize these expenses and would have committed substantial time and resources by management, without realizing the expected benefits of the merger. In addition, failure to consummate the Blue Ridge Merger also may result in negative reactions from the financial markets or from our customers, vendors and employees. If the Blue Ridge Merger is not completed, it could have a material adverse effect on the Company’s stock price, business and cash flows, financial condition and results of operations.

The merger agreement limits the ability of the Company to pursue alternatives to the Blue Ridge Merger.

The merger agreement contains “no-shop” provisions that, subject to limited exceptions, limit the ability of the Company to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the Company. In addition, under certain circumstances, if the merger agreement is terminated and the Company, subject to certain restrictions, consummates a similar transaction other than the Blue Ridge Merger, the Company must pay to Blue Ridge a termination fee of $12.3 million. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing the acquisition even if it were prepared to pay consideration, with respect to the Company, with a higher per share market price than that proposed in the Blue Ridge Merger.

The Company will be subject to business uncertainties and contractual restrictions while the Blue Ridge Merger is pending.

Uncertainty about the effect of the Blue Ridge Merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Blue Ridge Merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the Blue Ridge Merger is pending, as certain employees may experience uncertainty about their future roles with the Company or the combined company following the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or the combined company following the Blue Ridge Merger, the Company’s business, or the business of the combined company following the merger, could be harmed. In addition, the Company has agreed to operate its business in the ordinary course prior to the closing of the Blue Ridge Merger and from taking certain specified actions until the merger occurs without the consent of Blue Ridge. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Blue Ridge Merger.

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Litigation against the Company or Blue Ridge, or the members of the Company’s or Blue Ridge’s board of directors, could prevent or delay the completion of the Blue Ridge Merger.

Purported shareholder plaintiffs may assert legal claims related to the Blue Ridge Merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. The existence of litigation related to the merger could affect the likelihood of obtaining the required approval from Company’s and Blue Ridge’s shareholders. Moreover, any litigation could be time consuming and expensive, and could divert attention of the Company’s and Blue Ridge’s respective management teams away from their companies’ regular business. Any lawsuit adversely resolved against the Company, Blue Ridge or members of their respective boards of directors, could have a material adverse effect on each party’s business, financial condition and results of operations.

One of the conditions to the consummation of the merger is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent) or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the transactions contemplated by the merger agreement, including the merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting, prohibiting or making illegal the completion of the transactions contemplated by the merger agreement, including the merger, then such injunctive or other relief may prevent the merger from being completed in a timely manner or at all.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) Not applicable.

(c) On February 4, 2020, we publicly announced that the Board of Directors had adopted a program to repurchase up to 8% of our outstanding shares of common stock at December 31, 2019; such program expired on December 31, 2020. On January 21, 2021, we extended the share repurchase program and increased the number of shares subject to repurchase. Under the revised repurchase program, we may repurchase up to 1,080,860 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2020. The repurchase program will expire on December 31, 2021, subject to earlier termination of the program by the Board of Directors.

No shares were purchased during the nine months ended September 30, 2021.

Item 3.Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

(a) None.

(b) None.

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Item 6.Exhibits

31.1	Rule 13a-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a) Certification of Principal Financial Officer
32.1	Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Statement of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.
104	The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	FVCBankcorp, Inc.
	(Registrant)
Date: November 10, 2021	/s/ David W. Pijor
	David W. Pijor
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 10, 2021	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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