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Dynamic quotes 
OFFON

CAPITAL BANCORP, INC.

(CBNK)
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CAPITAL BANCORP INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/09/2021 | 02:29pm EST
The following discussion and analysis is intended as a review of significant
factors affecting the Company's financial condition and results of operations
for the periods indicated. This discussion and analysis should be read in
conjunction with the accompanying consolidated financial statements and the
related notes and the Company's Annual Report on Form 10-K for the year ended
December 31, 2020.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q and oral statements made from time-to-time by
our representatives contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that are subject to risks
and uncertainties. You should not place undue reliance on such statements
because they are subject to numerous risks and uncertainties relating to our
operations and the business environment in which we operate, all of which are
difficult to predict and many of which are beyond our control. Forward-looking
statements include information concerning our possible or assumed future results
of operations, including descriptions of our business strategy, expectations,
beliefs, projections, anticipated events or trends, growth prospects, financial
performance, and similar expressions concerning matters that are not historical
facts. These statements often include words such as "may," "believe," "expect,"
"anticipate," "potential," "opportunity," "intend," "endeavor," "plan,"
"estimate," "could," "project," "seek," "should," "will," or "would," or the
negative of these words and phrases or similar words and phrases.
In addition to the foregoing, the COVID-19 pandemic is adversely affecting us,
our customers, counterparties, employees and third party service providers. The
ultimate extent of the impact on our business, financial position, results of
operations, liquidity, and prospects is uncertain. Continued deterioration in
general business and economic conditions, or turbulence in domestic or global
financial markets could adversely affect our revenues and the values of our
assets and liabilities, reduce the availability of funding and lead to a
tightening of credit. Changes to statutes, regulations, or regulatory policies
or practices as a result of, or in response to COVID-19, could affect us in
substantial and unpredictable ways, including the potential adverse impact of
loan modifications and payment deferrals implemented consistent with recent
regulatory guidance. The following factors, among others, could cause our
financial performance to differ materially from that expressed in such
forward-looking statements:
General Economic Conditions
•economic conditions (including the interest rate environment, government
economic and monetary policies, the strength of global financial markets and
inflation and deflation) that impact the financial services industry as a whole
and/or our business;
•interest rate risk associated with our business, including sensitivity of our
interest earning assets and interest bearing liabilities to changes in interest
rates, and the impact to our earnings from changes in interest rates;
•the concentration of our business in the Washington, D.C. and Baltimore,
Maryland metropolitan areas and the effect of changes in the economic, political
and environmental conditions on these markets;
General Business Operations
•our ability to prudently manage our growth and execute our strategy;
•our plans to grow our commercial real estate and commercial business loan
portfolios which may carry material risks of non-payment or other unfavorable
consequences;
                                           38

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•strategic acquisitions we may undertake to achieve our goals;
•our dependence on our information technology and telecommunications systems and
the potential for any systems failures or interruptions;
•our dependence upon outside third parties for the processing and handling of
our records and data;
•our ability to adapt to technological change;
•our engagement in derivative transactions;
•volatility and direction of market interest rates;
•the possible impact of uncertainty about the future of LIBOR on our net
interest income;
•due to the Federal Reserve Board's target federal funds rate near 0%, the yield
on our assets may decline to a greater extent than the decline in our cost of
interest-bearing liabilities, reducing our net interest margin and spread and
reducing net income;
•the effectiveness of our internal controls over financial reporting and our
ability to remediate any future material weakness in our internal controls over
financial reporting;
•our dependence on our management team and board of directors and changes in
management and board composition;
•our involvement from time to time in legal proceedings, examinations and
remedial actions by regulators;
•risks associated with our OpenSky credit card division, including compliance
with applicable consumer finance and fraud prevention regulations;
•we may be required to repurchase loans originated for sale by our mortgage
banking division;
•results of examinations of us by our regulators, including the possibility that
our regulators may, among other things, require us to increase our allowance for
loan losses or to write-down assets;
•changes in the laws, rules, regulations, interpretations or policies relating
to financial institution, accounting, tax, trade, monetary and fiscal matters;
•increased competition in the financial services industry, particularly from
regional and national institutions;
•the financial soundness of other financial institutions;
•Federal Deposit Insurance Corporation premiums may increase if the agency
experiences additional resolution costs;
•further government intervention in the U.S. financial system;
•natural disasters and adverse weather, acts of terrorism, an outbreak of
hostilities or other international or domestic calamities, and other matters
beyond our control; and
•potential exposure to fraud, negligence, computer theft and cyber-crime.
As you read and consider forward-looking statements, you should understand that
these statements are not guarantees of performance or results. They involve
risks, uncertainties and assumptions and can change as a result of many possible
events or factors, not all of which are known to us or in our control. Although
we believe that these forward-looking statements are based on reasonable
assumptions,
                                           39


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beliefs, and expectations, if a change occurs or our beliefs, assumptions, or
expectations were incorrect, our business, financial condition, liquidity or
results of operations may vary materially from those expressed in our
forward-looking statements. You should be aware that many factors could affect
our actual financial results or results of operations and could cause actual
results to differ materially from those in the forward-looking statements. These
factors include those described under the heading "Risk Factors" under Item 1A
in our Annual Report on Form 10-K for the year ended December 31, 2020 and those
referenced in other reports on file with the SEC.
You should keep in mind that any forward-looking statement made by us speaks
only as of the date on which we make it. New risks and uncertainties arise from
time to time, and it is impossible for us to predict these events or how they
may affect us. We have no duty to, and do not intend to, and disclaim any
obligation to, update or revise any industry information or forward-looking
statements after the date on which they are made.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with U.S.
GAAP and conform to general practices within the banking industry. The Company's
financial position and results of operations are affected by management's
application of accounting policies, including estimates, assumptions, and
judgments made to arrive at the carrying value of assets and liabilities and
amounts reported for revenues, expenses, and related disclosures. Different
assumptions in the application of these policies could result in material
changes in the Company's consolidated financial position and/or results of
operations. The Company evaluates its critical accounting estimates and
assumptions on an ongoing basis and updates them, as needed. Management has
discussed the Company's critical accounting policies and estimates with the
Audit Committee of the Board of Directors of the Company.
The critical accounting and reporting policies include the Company's accounting
for the allowance for loan losses. The Company's accounting policies are
fundamental to understanding the Company's consolidated financial position and
consolidated results of operations. Accordingly, the Company's significant
accounting policies are discussed in detail in Note 1 "Nature of Business and
Basis of Presentation" in the "Notes to the Consolidated Financial Statements"
contained in Item 8 "Financial Statements and Supplementary Data" of the
Company's 2020 Form 10-K.
The Company provides additional information on its allowance for loan losses in
Note 1 "Significant Accounting Policies" within Part I, Item 1 of this Quarterly
Report.
Overview
Capital Bancorp, Inc. (the "Company") was incorporated in 1998 in Maryland to
act as the bank holding company for Capital Bank, N.A. (the "Bank") which
received its charter in 1999 and began operations in 1999. The Bank is
headquartered in Rockville, Maryland and serves the Washington, D.C. and
Baltimore, Maryland metropolitan areas through five commercial bank branches,
five mortgage offices, two loan production offices, a limited service branch and
three corporate and operations facilities located in key markets throughout our
operating area. We serve businesses, not-for-profit associations and
entrepreneurs throughout the region by partnering with them to design tailored
financial solutions supported by customized technology and "client first"
advice.
The Company reports its activities in four business segments: commercial
banking; mortgage lending; credit cards; and corporate activities. In
determining the appropriateness of segment definition, the Company considers
components of the business about which financial information is available and
regularly evaluated relative to resource allocation and performance assessment.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), and conform to general practices within the banking industry.
                                           40


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Our Commercial Banking division accounts for the majority of the Bank's total
assets. Our commercial bankers endeavor to provide quality service, customized
solutions and tailored advice to commercial clients in our operating markets.
Our Capital Bank Home Loan ("CBHL") division originates conventional and
government-guaranteed residential mortgage loans on a nationwide basis primarily
for sale into the secondary market and in certain, limited circumstances for the
Bank's loan portfolio.
Our OpenSky® division provides secured credit cards on a nationwide basis to
under-banked populations and those looking to rebuild their credit scores.
OpenSky® cards operate on a digital and mobile enabled platform with almost all
marketing and application procedures conducted through website and mobile
applications. A deposit equal to the full credit limit of the card is made into
a noninterest-bearing demand account with the Bank when the account is opened
and the deposit is required to be maintained throughout the life of the card.
Using our proprietary scoring model, which considers credit score and repayment
history (typically a minimum of six months of on-time repayments, but ultimately
determined on a case-by-case basis), OpenSky® also offers certain existing
customers an unsecured line in excess of their secured line of credit.
COVID-19 Pandemic
The outbreak of COVID-19, which was declared a pandemic by the World Health
Organization on March 11, 2020, has led to adverse impacts on economic
conditions and created uncertainty in financial markets. In early March 2020,
the Company began preparing for potential disruptions and government limitations
on activity in the markets in which we serve. Our team activated our Business
Continuity Program and was able to quickly execute on multiple initiatives to
adjust our operations to protect the health and safety of our employees and
clients. Currently, a significant portion of our workforce is working remotely
without materially impacting our productivity while continuing to provide a high
level of customer service. Since the beginning of the crisis, we have been in
close contact with our clients, assessing the level of impact on their
businesses, and providing relief programs according to each client's specific
situation and qualifications. Currently, the Company has four branches open and
one previous location has been permanently closed. We have enhanced awareness of
digital banking offerings and limited the number of customers in the branch and
have taken steps to comply with various government directives regarding "social
distancing," as well as enhanced cleaning and disinfecting of surface areas to
protect our clients and employees.
Small Business Administration's Paycheck Protection Program
We were able to quickly establish our process for participating in the Small
Business Administration's Paycheck Protection Program ("SBA-PPP") that enabled
our clients to utilize this valuable resource. SBA-PPP loans are designed to
provide assistance for small businesses during the COVID-19 pandemic to help
meet the costs associated with payroll, mortgage interest, rent and utilities.
These loans are 100% guaranteed by the SBA and, under certain circumstances,
forgiveness of the loan by the SBA is granted to the borrower. In general,
forgiveness is predicated on the small business maintaining or quickly rehiring
their employees and maintaining salary levels for their employees. SBA-PPP loans
do not require any collateral or personal guarantees. As of September 30, 2021,
the outstanding loan balance was approximately $141.4 million for SBA-PPP loans
that were originated in the first and second rounds of the program. These
efforts have allowed us to strengthen and deepen our client relationships, while
positively impacting thousands of individuals.



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Short-term Modifications for Borrowers
In keeping with regulatory guidance to work with borrowers during this
unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act"), the Company is providing loan
modifications where appropriate, including potential interest only payments or
payment deferrals for clients that are adversely affected by the COVID-19
pandemic. Section 4013 of the CARES Act, as amended by the Consolidated
Appropriations Act, 2021, also addressed COVID-19 related modifications and
specified that such modifications made between March 1, 2020 and the earlier of
(i) 60 days after the date of termination of the National Emergency or (ii)
January 1, 2022, on loans that were current as of December 31, 2019 are not
TDRs. In accordance with interagency guidance issued in April 2020, these
short-term modifications made to a borrower affected by the COVID-19 pandemic
and governmental shutdown orders, such as payment deferrals, fee waivers and
extensions of repayment terms, do not need to be identified as TDRs if the loans
were current at the time a modification plan was implemented. Commercial and
consumer loans still on COVID-19 related deferrals were $30.5 million at
December 31, 2020 and have decreased to $7.3 million or approximately 0.50% of
total portfolio loans receivable as of September 30, 2021.
Liquidity
We are monitoring our liquidity position on an ongoing basis as the
circumstances surrounding the pandemic continue to evolve. The Company has
several available sources of on and off-balance sheet liquidity. Currently, the
Company has not needed to tap into these available liquidity sources. The
potential for increased reliance on available liquidity sources may be required
based on the effects of the pandemic and their impact on the level of deposits
and other factors. Additional discussion on our liquidity as of the report date
is reflected in the "Liquidity" section of management's discussion and analysis.
Capital
As of September 30, 2021, the Bank exceeded all the capital requirements to
which it was subject and based on the most recent notification from its primary
federal regulator is considered to be well-capitalized. There are no conditions
or events since that notification that management believes would change the
Bank's classification. We are closely monitoring our capital position and intend
to take appropriate steps to ensure our level of capital remains strong.
Results of Operations
Net Income
The following table sets forth the principal components of net income for the
periods indicated.
                                                                     Three Months Ended September 30,
                                                             2021                   2020                % Change
(in thousands)
Interest income                                       $         33,528          $   25,189                   33.1  %
Interest expense                                                 1,469               3,150                  (53.4) %
Net interest income                                             32,059              22,039                   45.5  %
Provision for loan losses                                          975               3,500                  (72.1) %
Net interest income after provision                             31,084              18,539                   67.7  %
Noninterest income                                              12,597              17,477                  (27.9) %
Noninterest expenses                                            28,627              24,450                   17.1  %
Net income before income taxes                                  15,054              11,566                   30.2  %
Income tax expense                                               3,877               3,128                   23.9  %
Net income                                            $         11,177          $    8,438                   32.5  %


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Net income for the three months ended September 30, 2021 increased 32.5 percent
to $11.2 million from $8.4 million for the three months ended September 30,
2020. The increase was primarily due to increases in interest income and credit
card fees of $8.3 million and $1.8 million, respectively, and decreases in
interest expense and the provision for loan losses of $1.7 million and $2.5
million, respectively. The decrease in the quarterly provision for loan losses
was a result of the improving economic environment from the COVID-19 worldwide
pandemic when comparing third quarter 2020 to third quarter 2021. Noninterest
expense was $28.6 million for the three months ended September 30, 2021,
compared to $24.5 million for the three months ended September 30, 2020, an
increase of $4.1 million, or 17.1 percent. The increase was primarily due to an
increase of $2.3 million, or 28.9 percent, in data processing expenses, a $1.0
million, or 11.4 percent, increase in salaries and employee benefits, and a $1.2
million, or 95.5 percent, increase in professional fees. The increase in data
processing expenses was a result of a 32.4 percent increase in the number
OpenSky® accounts, to 700 thousand from 529 thousand, when comparing the three
months ended September 30, 2021 to the three months ended September 30, 2020.
                                                                   Nine 

Months Ended September 30,

                                                           2021                  2020                % Change
(in thousands)
Interest income                                     $        89,455$   68,933                    29.8  %
Interest expense                                              5,433              10,583                   (48.7) %
Net interest income                                          84,022              58,350                    44.0  %
Provision for loan losses                                     2,259               9,209                   (75.5) %
Net interest income after provision                          81,763              49,141                    66.4  %
Noninterest income                                           40,019              34,114                    17.3  %
Noninterest expenses                                         81,599              61,153                    33.4  %
Net income before income taxes                               40,183              22,102                    81.8  %
Income tax expense                                           10,376               5,968                    73.9  %
Net income                                          $        29,807$   16,134                    84.7  %


Net income for the nine months ended September 30, 2021 was $29.8 million, an
increase of approximately $13.7 million, or 84.7%, from net income for the nine
months ended September 30, 2020 of $16.1 million. The increase was primarily due
to increases in interest income and credit card fees of $20.5 million and $10.5
million, respectively, and decreases in interest expense and the provision for
loan losses of $5.1 million and $6.9 million, respectively. The decrease in the
provision for loan losses when comparing the nine months ended September 30,
2020 to the nine months ended September 30, 2021 reflects improvement in overall
economic conditions from the comparable prior year period. Noninterest expense
was $81.6 million for the nine months ended September 30, 2021, compared to
$61.2 million for the nine months ended September 30, 2020, an increase of $20.4
million, or 33.4 percent. The increase was primarily due to an increase of $11.9
million, or 67.5 percent, in data processing expenses, a $2.4 million, or 9.8
percent, increase in salaries and employee benefits, a $2.6 million, or 86.5
percent, increase in professional fees, a $2.2 million, or 28.7 percent,
increase in other operating expenses, and a $1.3 million, or 68.2 percent,
increase in advertising. The increase in data processing expenses was a result
of a 32.4 percent increase in OpenSky® accounts, to 700 thousand from 529
thousand, when comparing the nine months ended September 30, 2021 to the nine
months ended September 30, 2020.
Net Interest Income and Net Margin Analysis
We analyze our ability to generate income from interest earning assets and
endeavor to control the interest expenses of our liabilities, measured as net
interest income, through our net interest margin and net interest spread. Net
interest income is the difference between the interest and fees earned on
interest earning assets, such as loans and securities, and the interest expense
incurred in connection with
                                           43

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interest bearing liabilities, such as deposits and borrowings, which are used to
fund those assets. Net interest margin is a ratio calculated as net interest
income divided by average interest earning assets for the same period. Net
interest spread is the difference between average interest rates earned on
interest earning assets and average interest rates paid on interest bearing
liabilities.
Changes in market interest rates and the interest rates we earn on interest
earning assets or pay on interest bearing liabilities, as well as in the volume
and types of interest earning assets, interest bearing and noninterest bearing
liabilities and stockholders' equity, are usually the largest drivers of
periodic changes in net interest income, net interest margin and net interest
spread. Fluctuations in market interest rates are driven by many factors,
including governmental monetary policies, inflation, deflation, macroeconomic
developments, changes in unemployment, the money supply, political and
international conditions and conditions in domestic and foreign financial
markets. Periodic changes in the volume and types of loans in our loan portfolio
are affected by, among other factors, economic and competitive conditions in the
Washington, D.C. and Baltimore, Maryland metropolitan areas, as well as
developments affecting the real estate, technology, government services,
hospitality, tourism, financial services and other sectors within our target
markets and throughout the Washington, D.C. and Baltimore, Maryland metropolitan
areas. Our ability to respond to changes in these factors by using effective
asset-liability management techniques will affect the stability of our net
interest income and net interest margin.
The following table shows the average outstanding balance of each principal
category of our assets, liabilities and stockholders' equity, together with the
average yields on our assets and the average costs of our liabilities for the
periods indicated. Such yields and costs are calculated by dividing income or
expense by the average daily balances of the corresponding assets or liabilities
for the same period.
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                AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

Three Months Ended September 30,

                                                          2021                                                         2020
                                    Average             Interest            Average              Average             Interest            Average
                                  Outstanding           Income/              Yield/            Outstanding           Income/              Yield/
                                    Balance             Expense             Rate(1)              Balance             Expense             Rate(1)
($ in thousands)
Assets
Interest earning assets:
Interest bearing deposits        $   250,326$      98                 0.15  %       $   119,279$      29                 0.10  %
Federal funds sold                     2,421                  -                 0.00                3,980                  -                 0.01
Investment securities                171,506                549                 1.27               54,989                273                 1.97
Restricted investments                 3,480                 41                 4.64                4,007                 51                 5.04
Loans held for sale                   32,660                248                 3.02              112,890                856                 3.02
SBA-PPP loans receivable             162,217              1,525                 3.73              235,160              1,470                 2.49
Portfolio loans receivable(2)      1,404,006             31,067                 8.78            1,218,589             22,510                 7.35
Total interest earning assets      2,026,616             33,528                 6.55            1,748,894             25,189                 5.73
Noninterest earning assets            58,156                                                       22,768
Total assets                     $ 2,084,772$ 1,771,662

Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Interest bearing demand accounts $   301,272                 45                 0.06          $   218,415                156                 0.28
Savings                                7,025                  1                 0.05                5,126                  1                 0.05
Money market accounts                495,534                335                 0.27              532,973              1,186                 0.89
Time deposits                        250,836                904                 1.43              267,970              1,291                 1.92
Borrowed funds                        36,384                184                 2.01               41,069                516                 5.01
Total interest bearing
liabilities                        1,091,051              1,469                 0.53            1,065,553              3,150                 1.18
Noninterest bearing liabilities:
Noninterest bearing liabilities       21,138                                                       22,702
Noninterest bearing deposits         786,784                                                      539,220
Stockholders' equity                 185,799                                                      144,187
Total liabilities and
stockholders' equity             $ 2,084,772$ 1,771,662

Net interest spread                                                             6.02  %                                                      4.55  %
Net interest income                                   $  32,059$  22,039
Net interest margin (3)                                                         6.27  %                                                      5.01  %


_______________
(1)Annualized.
(2)Includes nonaccrual loans.
(3)For the three months ended September 30, 2021 and 2020 , SBA-PPP loans and
credit card loans collectively accounted for 275 and 117 basis points of the
reported net interest margin, respectively.


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The following table presents information regarding the dollar amount of changes
in interest income and interest expense for the periods indicated for each major
component of interest earning assets and interest bearing liabilities and
distinguishes between the changes attributable to changes in volume and changes
attributable to changes in interest rates. For purposes of this table, changes
attributable to both rate and volume that cannot be segregated have been
proportionately allocated to both volume and rate.
                   ANALYSIS OF CHANGES IN NET INTEREST INCOME
                                       Three Months Ended September 30, 2021                        Nine Months Ended September 30, 2021
                                                  Compared to the                                             Compared to the
                                       Three Months Ended September 30, 2020                        Nine Months Ended September 30, 2020
                                         Change Due To                   Interest                    Change Due To                    Interest
(in thousands)                      Volume               Rate            Variance               Volume               Rate             Variance
Interest Income:
Interest bearing deposits      $        (157)$   226$       69$        (190)$     95$      (95)
Federal funds sold                         -                -                   -                      2                (6)                 (4)
Investment securities                    332              (56)                276                    814              (172)                642
Restricted stock                          (6)              (4)                (10)                   (16)              (34)                (50)
Loans held for sale                     (608)               -                (608)                  (621)             (246)               (867)
SBA-PPP loans receivable                  55                -                  55                  3,784                 -               3,784
Portfolio loans receivable             3,754            4,803               8,557                  7,870             9,242              17,112
Total interest income                  3,370            4,969               8,339                 11,643             8,879              20,522

Interest Expense:
Interest bearing demand
accounts                                 103             (213)               (110)                   800            (1,191)               (391)
Savings                                    -                -                   -                      3                (5)                 (2)
Money market accounts                    (78)            (774)               (852)                   (72)           (2,865)             (2,937)
Time deposits                            (78)            (309)               (387)                   179            (1,176)               (997)
Borrowed funds                           (53)            (279)               (332)                  (257)             (566)               (823)
Total interest expense                  (106)          (1,575)             (1,681)                   653            (5,803)             (5,150)
Net interest income            $       3,476$ 6,544$   10,020$      10,990$ 14,682$   25,672



For the three months ended September 30, 2021, net interest income increased
$10.0 million, or 45.5 percent, to $32.1 million from the same period in 2020,
primarily due to an increase in interest earning assets, an increase in rates on
portfolio loans receivable and a decrease in rates on interest bearing
liabilities. The net interest margin increased 126 basis points to 6.27% for the
three months ended September 30, 2021 from the same period in 2020. Net interest
margin, excluding credit card and SBA-PPP loans, was 3.52% for the third quarter
of 2021 compared to 3.84% for the same period in 2020.
For the three months ended September 30, 2021, average interest earning assets
increased $277.7 million, or 15.9 percent, to $2.0 billion as compared to the
same period in 2020. The average yield on interest earning assets increased 82
basis points, from 5.73% for the three months ended September 30, 2020 to 6.55%
for the three months ended September 30, 2021. The largest increase in interest
income when comparing these two time periods related to the income generated by
the average portfolio loans receivable, which grew $185.4 million, from $1.2
billion at September 30, 2020 to $1.4 billion at September 30, 2021. This growth
in average balances for the three month period ended September 30, 2021 compared
to the three month period ended September 30, 2020, along with the average rate
increase for portfolio loans when comparing the same time periods in 2021 and
2020 of 143 basis points, generated $8.6 million in additional interest income,
43.9 percent due to the increase in average balances and 56.1 percent due to the
increase in the average interest rate.
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For the three months ended September 30, 2021, average interest-bearing
liabilities increased $25.5 million, or 2.4 percent when compared to the three
month period ended September 30, 2020. Average interest bearing deposits grew
$30.2 million, or 2.9 percent, and was partially offset by a decrease in the
average balance of borrowed funds of $4.7 million, or 11.4 percent. The average
cost of interest bearing liabilities decreased 65 basis points to 0.53% from
1.18% when comparing the three months ended September 30, 2021 to the three
months ended September 30, 2020. The decreases in the interest rates primarily
reflect market interest rate decreases in 2021.

                AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

Nine Months Ended September 30,

                                                         2021                                                         2020
                                   Average             Interest            Average              Average             Interest            Average
                                 Outstanding           Income/              Yield/            Outstanding           Income/              Yield/
                                   Balance             Expense             Rate(1)              Balance             Expense             Rate(1)
(in thousands)
Assets
Interest earning assets:
Interest bearing deposits       $   238,648$     211                 0.12  %       $    98,661$     306                 0.41  %
Federal funds sold                    3,121                  -                 0.00                2,319                  4                 0.22
Investment securities               139,643              1,571                 1.50               58,071                929                 2.14
Restricted investments                3,620                124                 4.59                4,025                174                 5.78
Loans held for sale                  49,775              1,043                 2.80               77,878              1,909                 3.27
SBA-PPP loans receivable            215,524              6,266                 3.89              134,130              2,482                 2.47
Portfolio loans receivable(2)     1,339,010             80,240                 8.01            1,197,719             63,129                 7.04
Total interest earning assets     1,989,341             89,455                 6.01            1,572,803             68,933                 5.85
Noninterest earning assets           36,245                                                       21,779
Total assets                    $ 2,025,586$ 1,594,582

Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Interest bearing demand
accounts                        $   280,305$     163                 0.08          $   181,597$     555                 0.41
Savings                               6,435                  2                 0.05                4,686                  4                 0.13
Money market accounts               475,875              1,217                 0.34              484,412              4,153                 1.15
Time deposits                       295,705              3,492                 1.58              284,844              4,489                 2.11
Borrowed funds                       34,265                559                 2.18               43,823              1,382                 4.21
Total interest bearing
liabilities                       1,092,585              5,433                 0.66              999,362             10,583                 1.41
Noninterest bearing
liabilities:
Noninterest bearing liabilities      23,327                                                       21,401
Noninterest bearing deposits        735,509                                                      433,381
Stockholders' equity                174,165                                                      140,438
Total liabilities and
stockholders' equity            $ 2,025,586$ 1,594,582

Net interest spread                                                            5.35  %                                                      4.44  %
Net interest income                                  $  84,022$  58,350
Net interest margin (3)                                                        5.65  %                                                      4.96  %


(1)Annualized
(2)Includes nonaccrual loans.
(3)For the nine months ended September 30, 2021 and 2020, SBA-PPP loans and
credit card loans collectively accounted for 208 and 104 basis points of the
reported net interest margin, respectively.

                                           47


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For the nine months ended September 30, 2021, net interest income increased
$25.7 million, or 44.0 percent, to $84.0 million from the same period in 2020,
primarily due to an increase in interest earning assets, an increase in rates on
portfolio loans receivable and a decrease in rates on interest bearing
liabilities. The net interest margin increased 69 basis points to 5.65% for the
nine months ended September 30, 2021 from the same period in 2020. Net interest
margin, excluding credit card and SBA-PPP loans, was 3.57% for the nine months
ended September 30, 2021 compared to 3.92% for the same period in 2020.
For the nine months ended September 30, 2021, average interest earning assets
increased $416.5 million, or 26.5 percent, to $2.0 billion as compared to the
same period in 2020, and the average yield on interest earning assets increased
16 basis points, from 5.85% for the nine months ended September 30, 2020 to
6.01% for the nine months ended September 30, 2021. The largest increase in
interest income when comparing these two time periods related to the income
generated by the average portfolio loans receivable, which grew $141.3 million,
from $1.2 billion at September 30, 2020 to $1.3 billion at September 30, 2021.
This growth in average balances for the nine month period ended September 30,
2021 compared to the nine month period ended September 30, 2020, along with the
average rate increase for portfolio loans when comparing the same time periods
in 2021 and 2020 of 97 basis points, generated $17.1 million in additional
interest income, 46.0 percent due to the increase in average balances and 54.0
percent due to the increase in the average interest rate.
For the nine months ended September 30, 2021, average interest-bearing
liabilities increased $93.2 million, or 9.3 percent when compared to the nine
month period ended September 30, 2020. Average interest bearing deposits grew
$102.8 million, or 10.8 percent, and was partially offset by a decrease in the
average balance of borrowed funds of $9.6 million, or 21.8 percent. The average
cost of interest bearing liabilities decreased 75 basis points to 0.66% from
1.41% when comparing the nine months ended September 30, 2021 to the nine months
ended September 30, 2020. The decreases in the interest rates primarily reflect
market interest rate decreases in 2021.
Provision for Loan Losses
The provision for loan losses is a charge to income in order to bring our
allowance for loan losses to a level deemed appropriate by management. For a
description of the factors taken into account by our management in determining
the allowance for loan losses, see "Financial Condition-Allowance for Loan
Losses."
During the quarter ended September 30, 2021, credit metrics improved as the
economy continued to recover from the effects of COVID-19. Primarily as a result
of an improving economic environment, the provision for loan losses declined
from $3.5 million for the three months ended September 30, 2020 to $975 thousand
for the three months ended September 30, 2021. On an annualized basis, net
charge-offs for the third quarter of 2021 were $301 thousand, or 0.09% of
average loans, compared to $163 thousand, or 0.06% of average loans on an
annualized basis, for the third quarter of 2020. The $301 thousand in net
charge-offs during the quarter was mainly comprised of $302 thousand in net
credit card charge-offs.
For the nine months ended September 30, 2021, the provision for loan losses was
$2.3 million, a decrease of $6.9 million from the prior year to date period. Net
charge-offs for the nine months ended September 30, 2021 were $940 thousand, or
0.09% of average portfolio loans on an annualized basis, compared to $494
thousand, or 0.05% of average portfolio loans on an annualized basis, for the
same period in 2020. The $940 thousand in net charge-offs during the nine months
ended September 30, 2021 was comprised of commercial real estate net charge-offs
of $161 thousand, commercial loan net charge-offs of $33 thousand, and net
charge-offs of $747 thousand in the credit card portfolio and was offset by
construction loan net recoveries of $1 thousand,
                                           48


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The allowance for loan losses as a percent of portfolio loans was 1.71% and
1.78% at September 30, 2021 and December 31, 2020, respectively.
Noninterest Income
Our primary sources of recurring noninterest income are service charges on
deposit accounts, certain credit card fees, such as interchange fees and
statement fees, credit card fees and mortgage banking revenue. Noninterest
income does not include (i) loan origination fees to the extent they exceed the
direct loan origination costs, which are generally recognized over the life of
the related loan as an adjustment to yield using the interest method or (ii)
annual, renewal and late fees related to our credit card portfolio, which are
generally recognized over the twelve month life of the related loan as an
adjustment to yield using the interest method.
The following table presents, for the periods indicated, the major categories of
noninterest income:
                               NONINTEREST INCOME
                                           Three Months Ended September 30,                            Nine Months Ended September 30,
                                     2021              2020              % Change               2021              2020               % Change
(in thousands)
Noninterest income:
Service charges on deposit
accounts                         $     160$    119                  34.5  %       $     473$    378                   25.1  %
Credit card fees                     7,554             5,773                  30.9  %          21,208            10,694                   98.3  %
Mortgage banking revenue             4,465            10,690                 (58.2) %          17,478            20,984                  (16.7) %
 Gain on sale of securities              -                 -                     -  %             153                 -                      -  %
Other fees and charges                 418               895                 (53.3) %             707             2,058                  (65.6) %
Total noninterest income         $  12,597$ 17,477                 (27.9) %       $  40,019$ 34,114                   17.3  %


For the quarter ended September 30, 2021, noninterest income was $12.6 million,
a decrease of $4.9 million, or 27.92 percent, from $17.5 million in the prior
year quarter. The decrease was primarily the result of reduced mortgage banking
revenue. The third quarter of 2021 saw mortgage origination volumes slow after a
record-breaking 2020. Origination volumes declined 49.6 percent, to
$217 million, in the third quarter of 2021, when compared to $431 million in the
third quarter of 2020. The steepening yield curve in the third quarter of 2021
has slowed originations from the year earlier period when low interest rates
fueled refinance volumes. Purchase volumes increased to 51.0 percent of total
originations for the third quarter of 2021, up from 33.8 percent during the
third quarter of 2020. Partially offsetting the decrease in mortgage banking
revenue, credit card fees increased $1.8 million to $7.6 million for the three
months ended September 30, 2021, from $5.8 million for the three months ended
September 30, 2020.
For the nine months ended September 30, 2021, noninterest income was $40.0
million, an increase of $5.9 million, or 17.3 percent, from the same period in
2020. The increase was primarily driven by significant growth in credit card
fees, which increased by $10.5 million, partially offset by a decrease in
mortgage banking revenues of $3.5 million. The year-to-date gain on sale of
mortgage loans grew modestly to $25.9 million at September 30, 2021 from
$25.5 million at September 30, 2020, even as year to date origination volumes
declined 8.2 percent, to $845 million at September 30, 2021 from $920 million at
September 30, 2020. Gain on sale margins remained strong at 2.85% for the nine
months ended September 30, 2021. The steepening yield curve in 2021 has slowed
originations from the year earlier period when low interest rates fueled
refinance volumes. Historically-low housing inventory, shortages in new home
building materials, and fluctuating interest rates are likely to continue
suppressing origination volumes throughout the remainder of 2021. Purchase
volume as a percentage of loan originations was 39.6 percent for the nine months
ended September 30, 2021, compared to 32.69 percent for the nine months ended
September 30, 2020. Proceeds from the sale of loans held for sale amounted to
$925.1 million for the nine months ended September 30, 2021 compared to $880.9
million for the nine months
                                           49

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ended September 30, 2020. OpenSky® credit card account growth led to higher
credit card fees, which increased to $21.2 million compared to $10.7 million for
the same nine month period last year, largely driven by the larger number of
accounts in the portfolio.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs
associated with operating our facilities, obtaining and retaining customer
relationships and providing bank services. The largest component of noninterest
expense is salaries and employee benefits. Noninterest expense also includes
operational expenses, such as occupancy and equipment expenses, professional
fees, advertising expenses, loan processing expenses and other general and
administrative expenses, including FDIC assessments, communications, travel,
meals, training, supplies and postage.
The following table presents, for the periods indicated, the major categories of
noninterest expense:
                              NONINTEREST EXPENSE
                                           Three Months Ended September 30,                           Nine Months Ended September 30,
                                     2021              2020              % Change               2021              2020              % Change
(in thousands)
Noninterest expense:
Salaries and employee benefits       9,962             8,940                  11.4  %          27,279            24,849                   9.8  %
Occupancy and equipment                998             1,328                 (24.8) %           3,322             3,658                  (9.2) %
Professional services                2,555             1,307                  95.5  %           5,542             2,971                  86.5  %
Data processing                     10,161             7,880                  28.9  %          29,594            17,664                  67.5  %
Advertising                          1,027               633                  62.2  %           3,153             1,875                  68.2  %
Loan processing                        644             1,264                 (49.1) %           2,670             2,451                   8.9  %
Foreclosed real estate expense,
net                                     44                 9                 388.9  %             321               137                 134.3  %
Other operating                      3,236             3,089                   4.8  %           9,718             7,548                  28.7  %
Total noninterest expense        $  28,627$ 24,450                  17.1  %       $  81,599$ 61,153                  33.4  %


Noninterest expense was $28.6 million for the three months ended September 30,
2021, as compared to $24.5 million for the three months ended September 30,
2020, an increase of $4.1 million, or 17.0 percent. The increase was primarily
driven by a $2.3 million, or 28.9 percent, increase in data processing expenses,
an increase in professional services of $1.2 million, or 95.5 percent, and an
increase in salaries and employee benefits of $1.02 million, or 11.4 percent.
The increase of $2.3 million in data processing expenses was mainly attributable
to the higher volume of active credit cards during the third quarter of 2021,
while the increases in professional services was primarily related to the
preparatory activities for a possible expansion of credit card offerings.
Noninterest expense was $81.6 million for the nine months ended September 30,
2021, as compared to $61.2 million for the nine months ended September 30, 2020,
an increase of $20.4 million, or 33.4 percent. The increase was primarily driven
by a $2.4 million, or 9.8 percent, increase in salaries and benefits, an
increase in professional fees of 86.5 percent, or $2.6 million, a $11.9 million,
or 67.5 percent, increase in data processing, and a $2.2 million, or 28.7
percent, increase in other operating expenses period over period. The increase
of $11.9 million in data processing expenses was primarily due to the higher
volume of open credit cards during the nine month period ended September 30,
2021. Additionally, operating expenses increased $2.2 million, primarily due to
increases in outside service providers.
Income Tax Expense
The amount of income tax expense we incur is influenced by our pre-tax income
and our nondeductible expenses. Deferred tax assets and liabilities are
reflected at current income tax rates in
                                           50


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effect for the period in which the deferred tax assets and liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense was $3.9 million for the three months ended September 30,
2021 compared to $3.1 million for the three months ended September 30, 2020. Our
effective tax rates were approximately 25.8% and 27.0% for the 2021 and 2020
periods, respectively. For the nine months ended September 30, 2021, income tax
expense was $10.4 million compared to $6.0 million for the nine months ended
September 30, 2020, with effective tax rates of 25.8% and 27.0% for 2021 and
2020, respectively.
Financial Condition
Total assets increased $293.0 million, or 20.9 percent on an annualized basis,
during the nine months ended September 30, 2021. The growth of earning assets on
the balance sheet consisted of increases in cash equivalents of $177.1 million,
portfolio loans of $128.3 million which includes OpenSky® loan growth of $32.8
million, investments available for sale of $89.4 million, and Bank Owned Life
Insurance ("BOLI") of $35.3 million. Asset growth was offset by a decrease of
$71.1 million in loans held for sale as well as a $63.8 million reduction in
SBA-PPP loans. The asset growth was primarily funded by a $269.1 million
increase in deposits.
Noninterest bearing deposits increased to $833.2 million at September 30, 2021
from $608.6 million at December 31, 2020 and interest bearing deposits increased
to $1.1 billion from $1.0 billion in the period. Stockholders' equity increased
$29.8 million, or 18.7%, to $189.1 million at September 30, 2021, primarily due
to earnings.
Interest Bearing Deposits at Other Financial Institutions
As of September 30, 2021, interest bearing deposits at other financial
institutions increased $173.0 million, or 137.2%, to $299.0 million from $126.1
million at December 31, 2020. The increase was primarily due to increased
deposits from customer deposit accounts.
Securities
We use our securities portfolio to provide a source of liquidity, provide an
appropriate return on funds invested, manage interest rate risk, meet collateral
requirements and meet regulatory capital requirements.
Management classifies investment securities as either held to maturity or
available for sale based on our intentions and the Company's ability to hold
such securities until maturity. In determining such classifications, securities
that management has the positive intent and the Company has the ability to hold
until maturity are classified as held to maturity and carried at amortized cost.
All other securities are designated as available for sale and carried at
estimated fair value with unrealized gains and losses included in stockholders'
equity on an after-tax basis. For the years presented, all securities were
classified as available for sale.
Our investment portfolio increased by 89.6 percent, or approximately $89.4
million, from $99.8 million at December 31, 2020, to $189.2 million at September
30, 2021 primarily due to excess liquidity resulting in purchases of $139.3
million, which were partially offset by $9.6 million of principal paydowns and a
decrease in unrealized gain on securities of $2.1 million. To supplement
interest income earned on our loan portfolio, we invest in mortgage-backed
securities, U.S Government agency, U.S.Treasury bonds, and high quality
municipal and corporate bonds.
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The following tables summarize the contractual maturities and weighted-average
yields of investment securities at September 30, 2021 and the amortized cost and
carrying value of those securities as of the indicated dates.
                             INVESTMENT MATURITIES
                                            One Year or Less                  More Than One Year Through Five Years       More Than Five Years Through 10 Years               More Than 10 Years                             Total
                                                           Weighted                                    Weighted                                    Weighted                                 Weighted                                                      Weighted
September 30, 2021                  Book Value           Average Yield          Book Value           Average Yield          Book Value           Average Yield         Book Value         Average Yield         Book Value          Fair Value          Average Yield
(in thousands)
Securities Available for
Sale:

U.S. Treasuries                   $          -                     -  %       $     58,652                  0.56  %       $     73,918                  1.26  %       $       -                     -  %       $  132,570$  133,030                  0.95  %
Municipal                                    -                     -  %                  -                     -  %                  -                     -  %          10,828                  1.94  %           10,828              10,911                  1.94  %
Corporate bonds                              -                     -  %                  -                     -  %              5,000                  4.31  %               -                     -  %            5,000               5,000                  4.31  %
Asset-backed securities                      -                     -  %                  -                     -  %                  -                     -  %          10,260                  0.99  %           10,260              10,329                  0.99  %
Mortgage-backed securities                   -                     -  %                  -                     -  %             10,178                  2.34  %          19,058                  1.37  %           29,236              29,895                  1.71  %

Total                             $          -                     -  %       $     58,652                  0.56  %       $     89,096                  1.56  %       $  40,146                  1.42  %       $  187,894$  189,165                  1.22  %


Portfolio Loans Receivable
Our primary source of income is derived from interest earned on loans. Our
portfolio loans consist of loans secured by real estate as well as commercial
business loans, credit card loans, substantially all of which are secured by
corresponding deposits at the Bank and, to a limited extent, other consumer
loans. Our loan customers primarily consist of small- to medium-sized
businesses, professionals, real estate investors, small residential builders and
individuals. Our owner-occupied commercial real estate loans, residential
construction loans and commercial business and investment loans provide us with
higher risk-adjusted returns, shorter maturities and more sensitivity to
interest rate fluctuations, and are complemented by our relatively lower risk
residential real estate loans to individuals. To a lesser extent, our credit
card portfolio supplements our traditional lending products with enhanced
yields. Our lending activities, outside of credit cards, are principally
directed to our market area consisting of the Washington, D.C. and Baltimore,
Maryland metropolitan areas.
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The following table summarizes our loan portfolio by type of loan as of the dates indicated:

                         COMPOSITION OF PORTFOLIO LOANS
                                         As of September                               As of December
                                             30, 2021                                     31, 2020
(in thousands)                                Amount                Percent                Amount                 Percent
Real estate:
Residential                              $     418,205                    29  %       $      437,860                    33  %
Commercial                                     502,523                    35  %              392,550                    30  %
Construction                                   251,256                    17  %              224,904                    17  %
Commercial and Industrial                      143,244                    10  %              157,127                    12  %

Credit card                                    134,979                     9  %              102,186                     8  %
Other consumer                                   1,425                     -  %                1,649                     -  %
Portfolio loans receivable, gross            1,451,632                   100  %            1,316,276                   100  %
Deferred origination fees, net                  (6,506)                                         (774)
Portfolio loans, net of unearned income      1,445,126                                     1,315,502
Allowance for loan losses                      (24,753)                                      (23,434)
Portfolio loans receivable, net          $   1,420,373

$ 1,292,068

The repayment of loans is a source of additional liquidity. The following table details maturities and sensitivity to interest rate changes for our loan portfolio at September 30, 2021:

           LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
                                                                     As of September 30, 2021
                                         Due in One Year           Due in One to           Due After
(in thousands)                               or Less                Five Years             Five Years             Total
Real estate:
Residential                            $         89,474          $      158,811$   169,920$   418,205
Commercial                                      118,290                 186,755              197,478              502,523
Construction                                    233,586                  17,670                    -              251,256
Commercial and Industrial                        47,458                  65,666               30,120              143,244
Credit card                                     134,979                       -                    -              134,979
Other consumer                                      721                     323                  381                1,425
Portfolio loans receivable, gross      $        624,508$      429,225$   397,899$ 1,451,632
Amounts with fixed rates               $         80,388          $      313,842$   145,070$   539,300
Amounts with floating rates            $        544,120$      115,383$   252,829$   912,332


In addition to the portfolio loans shown above, SBA-PPP loans receivable, which
totaled $141.4 million at September 30, 2021, mature in the 1-5 year time-frame
and carry a fixed rate of interest.
Nonperforming Assets
Non-performing assets ("NPAs") increased to $17.2 million, or 0.79 percent of
total assets, at September 30, 2021 compared to $12.6 million, or 0.67 percent
of total assets, at December 31, 2020 primarily due to the addition of one
well-collateralized multi-family construction loan totaling $5.0 million.
Nonperforming loans increased to $13.9 million, or 0.96 percent of total
portfolio loans, at September 30, 2021 compared to $9.2 million, or 0.70 percent
of total portfolio loans, at December 31, 2020. The
                                           53


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$4.7 million, or 50.7 percent, increase during the nine months ended September
30, 2021 was primarily due to the addition of one well-collateralized
multi-family construction loan totaling $5.0 million. Included in nonperforming
loans at September 30, 2021 are troubled debt restructurings of $545 thousand.
Foreclosed real estate decreased to $3.2 million as of September 30, 2021
compared to $3.3 million as of December 31, 2020 due to the sale of a
residential property. Management continues to focus on reducing non-performing
assets as evidenced by the disposition of two OREO properties totaling $3.1
million after September 30, 2021.
As a result of the COVID-19 pandemic, we anticipate that our commercial,
commercial real estate, residential and consumer borrowers could encounter
economic difficulties, which could lead to increases in our levels of
nonperforming assets, impaired loans and troubled debt restructurings.
The following table presents information regarding nonperforming assets at the
dates indicated:
                            NONPERFORMING ASSETS(1)
(in thousands)                                              September 30, 2021         December 31, 2020
Nonaccrual loans
Real Estate:
Residential                                                $          5,039           $          3,581
Commercial                                                               28                      2,358
Construction                                                          7,803                      1,886
Commercial and Industrial                                               695                      1,182

Accruing loans 90 or more days past due                                 361                        231
Total nonperforming portfolio loans                                  13,926                      9,238
Foreclosed real estate                                                3,236                      3,326
Total nonperforming assets                                 $         17,162           $         12,564

Restructured loans - nonaccrual                            $            545           $            440

Ratio of nonperforming loans to portfolio loans                        0.96   %                   0.70  %

Ratio of nonperforming assets to total assets                          0.79   %                   0.67  %


_______________

(1)Excludes SBA-PPP loans receivable, none of which were nonperforming.

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The following table presents the loan balances by category as well as risk
rating at the dates indicated. No assets were classified as loss during the
periods presented.
                         PORTFOLIO LOAN CLASSIFICATION
                                                        Special
                                   Pass(1)              Mention            Substandard            Doubtful              Total
(in thousands)
September 30, 2021
Real estate:
Residential                     $   406,197$    5,733$      6,275          $         -          $   418,205
Commercial                          494,355               8,140                    28                    -              502,523
Construction                        238,426               5,027                 7,803                    -              251,256
Commercial and Industrial           129,890              11,852                 1,502                    -              143,244

Credit card                         134,979                   -                     -                    -              134,979
Other consumer                        1,425                   -                     -                    -                1,425
Portfolio loans receivable,
gross                           $ 1,405,272$   30,752$     15,608          $         -          $ 1,451,632

December 31, 2020
Real estate:
Residential                     $   428,260$    5,150$      4,450          $         -          $   437,860
Commercial                          383,311               6,881                 2,358                    -              392,550
Construction                        220,057               1,112                 3,735                    -              224,904
Commercial and Industrial           145,365               9,766                 1,996                    -              157,127
Credit card                         102,186                   -                     -                    -              102,186
Other consumer                        1,649                   -                     -                    -                1,649
Portfolio loans receivable,
gross                           $ 1,280,828$   22,909$     12,539          $         -          $ 1,316,276


_______________
(1)Category includes loans graded exceptional, very good, good, satisfactory and
pass / watch, in addition to credit cards and consumer credits that are not
graded.
At September 30, 2021, the recorded investment in impaired loans was $13.6
million, of which $355 thousand required a specific reserve of $222 thousand.
This compares to a recorded investment in impaired loans of $10.0 million at
December 31, 2020, including $391 thousand which required a specific reserve of
$253 thousand. The increase in impaired loans is largely attributable to the
addition of one well-collateralized multi-family construction loan totaling $5.0
million which was offset by a reduction in commercial real estate of
$2.3 million.
Impaired loans also include certain loans that have been modified as TDRs. The
Company had five loans amounting to $545 thousand at September 30, 2021, and
five loans totaling $440 thousand at December 31, 2020 that were considered to
be TDRs.
Allowance for Loan Losses
We maintain an allowance for loan losses that represents management's best
estimate of the loan losses and risks inherent in our loan portfolio. The amount
of the allowance for loan losses should not be interpreted as an indication that
charge-offs in future periods will necessarily occur in those amounts, or at
all. In determining the allowance for loan losses, we estimate losses on
specific loans, or groups of loans, where the probable loss can be identified
and reasonably determined. The balance of the allowance for loan losses is based
on internally assigned risk classifications of loans, historical loan loss
rates, changes in the nature of our loan portfolio, overall portfolio quality,
industry concentrations, delinquency trends, current economic factors and the
estimated impact of current economic conditions on certain historical loan loss
rates. The following table presents a summary of changes in the allowance for
loan losses for the periods and dates indicated:
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                   ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
                                                            For the Nine Months
                                                            Ended September 30,          For the Year Ended
                                                                    2021                  December 31, 2020
(in thousands)
Allowance for loan losses at beginning of period           $         23,434             $         13,301
Charge-offs:
  Real estate:
  Residential                                                             -                            -
Commercial                                                             (161)                           -
Construction                                                              -                         (296)
Commercial and Industrial                                               (39)                        (233)
Credit card                                                            (777)                        (637)
Other consumer                                                            -                            -
Total charge-offs                                                      (977)                      (1,166)

Recoveries:
Real estate:

Construction                                                              1                            7
Commercial and Industrial                                                 6                            -
Credit card                                                              30                           50

Total recoveries                                                         37                           57
Net charge-offs                                                        (940)                      (1,109)
Provision for loan losses                                             2,259                       11,242
Allowance for loan losses at period end                    $         24,753             $         23,434

Portfolio loans outstanding, net of unearned income $ 1,445,126

             $      1,315,503

Average portfolio loans outstanding, net of unearned income

                                                     $      1,339,010$      1,215,049

Allowance for loan losses to period end portfolio loans                1.71     %                   1.78    %
Annualized net charge-offs to average portfolio loans                  0.09     %                   0.09    %
Net charge-offs to average loans, excluding PPP loans                  0.09     %                   0.09    %


Our allowance for loan losses at September 30, 2021 and December 31, 2020 was
$24.8 million, or 1.71% of portfolio loans, and $23.4 million, or 1.78% of
portfolio loans, respectively. The provision for loan losses of $2.3 million for
the nine months ended September 30, 2021 was primarily due to a small number of
loan charge-offs which was offset by improving overall credit metrics. The
allowance for loan losses for SBA-PPP loans was separately evaluated given the
explicit government guarantee. This analysis, which incorporated historical
experience with similar SBA guarantees and underwriting, concluded that the
likelihood of loss was remote and therefore these loans were not assigned a
reserve in the allowance for loan losses. The allowance for loan losses at
September 30, 2021 included specific reserves of $222 thousand established for
impaired loans. Charge-offs for the nine months ended September 30, 2021 were
$977 thousand and were partially offset by recoveries of $37 thousand. At
December 31, 2020, the allowance for loan losses included specific reserves of
$253 thousand established for impaired loans. Charge-offs for the year ended
December 31, 2020 were $1.2 million, and were partially offset by recoveries of
$57 thousand. The charge-offs for the first nine months ended September 30, 2021
and for the year ended December 31, 2020 were primarily due to credit card
charge-offs.
Although we believe we have established the allowance for loan losses in
accordance with GAAP and that the allowance for loan losses was adequate to
provide for known and inherent losses in the portfolio at all times shown above,
future provisions for loan losses will be subject to ongoing evaluations of the
risks in our loan portfolio.
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The following table shows the allocation of the allowance for loan losses among
loan categories and certain other information as of the dates indicated. The
total allowance is available to absorb losses from any loan category.
                   ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
                                                                September 30, 2021                           December 31, 2020
                                                         Amount              Percent (1)              Amount              Percent (1)
(in thousands)
Real estate:
Residential                                           $   6,420                        26  %       $   7,153                        31  %
Commercial                                                8,092                        33  %           6,786                        29  %
Construction                                              4,872                        20  %           4,595                        20  %
Commercial and Industrial                                 2,128                         8  %           2,417                        10  %
Credit card                                               3,224                        13  %           2,462                        10  %
Other consumer                                               17                         -  %              21                         -  %
Total allowance for loan losses                       $  24,753                       100  %       $  23,434                       100  %


_______________

(1)Loan category as a percentage of total portfolio loans.
Management continues to monitor the loan portfolio for industry concentrations
that may be impacted as the economy works through the impacts of COVID-19. While
the Company has negligible exposure to the energy sector, shared national
credits or leveraged lending, the Bank does have exposures to affected
industries such as, for example, hospitality, food service and retail
businesses.
Management has been working with customers on payment deferrals to assist
companies in managing through the pandemic. The following table shows the
allocation of deferred loans related to COVID-19:
                                                                                        Loan Modifications (1)
                                                       September 30, 2021                                            December 31, 2020                                 September 30, 2020
(dollars in millions)                     Deferred Loans
                                   Total Loans
            Sector                 Outstanding            Balance           # of Loans Deferred            Balance            # of Loans Deferred            Balance             # of Loans Deferred
Accommodation & Food Services            100.6          $    2.7                                2       $     14.7                      16                $      11.2                      14
Real Estate and Rental Leasing           522.8               1.3                                2                 5.5                   10                        9.3                      16
Other Services Including
Private Households                       170.9               0.8                       2                          1.1                    3                        5.6                      11
Educational Services                      16.7                 -                       -                         -                       -                          -                       -
Construction                             259.1                 -                       -                         -                       -                        0.3                       1
Professional, Scientific, and
Technical Services                        48.1                 -                       -                       1.4                       3                        1.1                       2
Arts, Entertainment &
Recreation                                36.7               0.6                                1              0.7                       2                        1.4                       2
Retail Trade                              21.6                 -                       -                       0.3                       1                          -                       -
Healthcare & Social Assistance            85.7                 -                       -                          0.9                    1                        0.9                       1
Wholesale Trade                           25.0                 -                       -                         -                       -                          -                       -
All other (1)                            295.1               1.9                                2                 5.9                    7                        0.5                       2
 Total                          $      1,582.3$    7.3                       9                $     30.5                      43                $      30.3                      49

(1)Loans outstanding include PPP loans; modifications and deferrals made for OpenSky® secured card customers are excluded.


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Outstanding deferred loans decreased $23.0 million, or 75.9 percent, from
September 30, 2020 to September 30, 2021. Loans that have been removed from
deferred status have returned to original payment terms.
Deposits
Deposits are the major source of funding for the Company. We offer a variety of
deposit products including interest bearing demand, savings, money market and
time accounts, all of which we actively market at competitive pricing. We
generate deposits from our customers on a relationship basis and through the
efforts of our commercial lending officers and our business banking officers.
Our credit card customers are a significant source of noninterest bearing
deposits and accounted for $242.4 million, or 29.1%, of our total noninterest
bearing deposit balances as of September 30, 2021, an increase of $49.9 million
from December 31, 2020. At September 30, 2021, noninterest bearing deposits
amounted to $833.2 million, an increase of $224.6 million, or 36.9%, compared to
the level at December 31, 2020 due in large part to an increase of $43.4 million
in fiduciary accounts and the above noted increase in deposits generated by our
OpenSky® secured credit card program. If needed, we supplement our deposits with
wholesale funding sources such as brokered deposits.
Interest bearing deposits increased $44.5 million, or 4.3%, from December 31,
2020 to September 30, 2021 due primarily to the increases in interest bearing
demand deposits of $112.7 million, or 43.8%, and money market deposits of $46.0
million, or 10.3%, which were offset by a decrease in time deposits of $116.0
million, or 34.7 percent. The Company continues to execute on its strategic
initiative to improve the deposit portfolio mix from wholesale deposits to core
deposits including noninterest bearing deposits. The decrease in certificates of
deposit was primarily attributable to the decrease in listing service deposits
of $53.1 million and brokered deposits of $29.5 million when comparing December
31, 2020 to September 30, 2021.
The average rate paid on interest bearing deposits decreased 56 basis points
from 1.18% for the year ended December 31, 2020 to 0.62% for the nine months
ended September 30, 2021. Rates paid on certificates of deposit decreased 46
basis points over the same period. The decrease in the average rates reflects
decreases in market interest rates and the reduction of higher rate balances.
The following table presents the average balances and average rates paid on
deposits for the periods indicated:
                        COMPOSITION OF AVERAGE DEPOSITS
                                             For the Nine Months Ended September 30,
                                                               2021                          For the Year Ended December 31, 2020
                                                  Average                Average                Average                Average
                                                  Balance                  Rate                 Balance                  Rate
(in thousands)
Interest bearing demand accounts             $      280,305                   0.08  %       $     195,794                   0.34  %
Money market accounts                               475,875                   0.34  %             480,218                   1.00  %
Savings accounts                                      6,435                   0.05  %               4,722                   0.11  %
Certificates of deposit                             295,705                   1.58  %             297,997                   2.04  %
Total interest bearing deposits                   1,058,320                   0.62  %             978,731                   1.18  %
Noninterest bearing demand accounts                 735,509                                       473,301
Total deposits                               $    1,793,829                   0.36  %       $   1,452,032                   0.79  %

The following table presents the maturities of our certificates of deposit as of September 30, 2021.

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                     MATURITIES OF CERTIFICATES OF DEPOSIT
                                                 Over
                                                Three        Over Six
                                  Three        Through       Through         Over
                                Months or        Six          Twelve        Twelve
                                  Less          Months        Months        Months         Total
          (in thousands)
          $100,000 or more     $  48,658$ 23,483$ 29,661$ 83,237$ 185,039
          Less than $100,000      10,407         9,210         8,984         4,888         33,489
          Total                $  59,065$ 32,693$ 38,645$ 88,125$ 218,528

Borrowings

We primarily utilize short-term and long-term borrowings to supplement deposits
to fund our lending and investment activities, each of which is discussed below.
FHLB Advances. The FHLB allows us to borrow up to 25% of our assets on a blanket
floating lien status collateralized by certain securities and loans. As of
September 30, 2021, approximately $199.5 million in real estate loans pledged as
collateral to the FHLB support a $530.1 million line of credit. We utilize these
borrowings to meet liquidity needs and to fund certain fixed rate loans in our
portfolio. As of September 30, 2021, we had $22.0 million in outstanding
advances and our available borrowing capacity at the FHLB was $177.5 million.
The following table sets forth certain information on our FHLB borrowings during
the periods presented:
                                 FHLB ADVANCES
                                                    For the Nine Months Ended            For the Year Ended
                                                       September 30, 2021                 December 31, 2020
(in thousands)
Amount outstanding at period-end                  $               22,000              $            22,000
Weighted average interest rate at period-end                        0.93      %                      0.93     %
Maximum month-end balance during the period       $               22,000              $            31,111
Average balance outstanding during the period     $               22,000              $            25,917
Weighted average interest rate during the period                    0.94      %                      2.15     %


The Company has also issued junior subordinated debentures and other
subordinated notes. At September 30, 2021, these other borrowings amounted to
$12.1 million.
At September 30, 2021, our junior subordinated debentures amounted to $2.1
million. The junior subordinated debentures were issued in June of 2006, mature
on June 15, 2036, and may be redeemed prior to that date under certain
circumstances. The principal amount of the debentures has not changed since
issuance, and they accrue interest at a floating rate equal to the three-month
LIBOR plus 1.87%.
On November 30, 2020, the Company issued $10.0 million in subordinated notes due
in 2030 to repay the higher yielding subordinated noted amounting to $13.5
million, reducing interest expense. The notes have a ten year term and have a
fixed rate of 5.00% for the first five years; thereafter, the rate resets
quarterly to a benchmark rate plus 490 basis points. The notes may be redeemed
in part or in whole, upon the occurrence of certain events.
The Federal Reserve Bank of Richmond has an available borrower in custody
arrangement which allows us to borrow on a collateralized basis. The Company's
borrowing capacity under the Federal
                                           59


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Reserve's discount window program was $16.3 million as of September 30, 2021.
Certain commercial loans are pledged under this arrangement. We maintain this
borrowing arrangement to meet liquidity needs pursuant to our contingency
funding plan. No advances were outstanding under this facility as of September
30, 2021.
The Company also has available lines of credit of $76.0 million with other
correspondent banks at September 30, 2021, as well as access to certificate of
deposit funding through a financial network and wholesale brokers. Our funding
policy limits use of this funding source to 30% of the Bank's deposits. These
lines were not utilized at September 30, 2021.
                                           60


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Liquidity

Liquidity is defined as the Bank's capacity to meet its cash and collateral
obligations at a reasonable cost. Maintaining an adequate level of liquidity
depends on the Bank's ability to meet both expected and unexpected cash flows
and collateral needs efficiently without adversely affecting either daily
operations or the financial condition of the Bank. Liquidity risk is the risk
that we will be unable to meet our obligations as they become due because of an
inability to liquidate assets or obtain adequate funding. The Bank's
obligations, and the funding sources used to meet them, depend significantly on
our business mix, balance sheet structure and the cash flow profiles of our on-
and off-balance sheet obligations. In managing our cash flows, management
regularly confronts situations that can give rise to increased liquidity risk.
These include funding mismatches, market constraints on the ability to convert
assets into cash or in accessing sources of funds (i.e., market liquidity) and
contingent liquidity events. Changes in economic conditions or exposure to
credit, market, operational, legal and reputational risks also could affect the
Bank's liquidity risk profile and are considered in the assessment of liquidity
and asset/liability management.
Management has established a management process for identifying, measuring,
monitoring and controlling liquidity risk. Because of its critical importance to
the viability of the Bank, liquidity risk management is fully integrated into
our risk management processes. Critical elements of our liquidity risk
management include: corporate governance consisting of oversight by the board of
directors and active involvement by management; strategies, policies,
procedures, and limits used to manage and mitigate liquidity risk; liquidity
risk measurement and monitoring systems (including assessments of the current
and prospective cash flows or sources and uses of funds) that are believed to be
commensurate with the complexity and business activities of the Bank; active
management of intraday liquidity and collateral; a diverse mix of existing and
potential future funding sources; holding liquid marketable securities, free of
legal, regulatory or operational impediments, that can be used to meet liquidity
needs in stressful situations; contingency funding plans that address potential
adverse liquidity events and emergency cash flow requirements; and internal
controls and internal audit processes believed to be sufficient to determine the
adequacy of the institution's liquidity risk management process.
We expect funds to be available from a number of basic banking activity sources,
including the core deposit base, the repayment and maturity of loans and
investment security cash flows. Other potential funding sources include brokered
certificates of deposit, deposit listing services, CDARS, borrowings from the
FHLB and other lines of credit.
As of September 30, 2021, we had $177.5 million of available borrowing capacity
from the FHLB, $16.3 million of available borrowing capacity from the Federal
Reserve Bank of Richmond and available lines of credit of $76.0 million with
other correspondent banks. Cash and cash equivalents were $324.0 million at
September 30, 2021 and $146.9 million at December 31, 2020. We believe our
liquidity resources are at sufficient levels to fund loans and meet other cash
needs as necessary.
                                           61

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Capital Resources
Stockholders' equity increased $29.8 million at September 30, 2021 compared to
December 31, 2020. Net income for the nine months ended September 30, 2021
increased retained earnings by $29.8 million. Stock options exercised and
stock-based compensation increased common stock and additional paid-in capital
in the aggregate by $766 thousand. These increases were partially offset by the
change in net unrealized gains on available for sale securities of $804
thousand.
The Company uses several indicators of capital strength. The most commonly used
measure is the Common Equity Tier 1 ("CET1") capital ratio (common equity tier 1
capital divided by risk weighted assets), which was 14.34% at September 30, 2021
and 12.94% at December 31, 2020. The Company has above-average levels of capital
and has taken steps to navigate COVID-19 related disruptions, including taking
higher levels than normal of loan loss provisions and maintaining higher than
normal levels of liquidity on the balance sheet.
The following table shows the return on average assets (computed as net income
divided by average total assets), return on average equity (computed as net
income divided by average equity) and common equity tier 1 capital ratios for
the nine months ended September 30, 2021 and for the year ended December 31,
2020.
                                                     For the Three Months        For the Nine Months
                                                            Ended                       Ended                For the Year Ended
                                                      September 30, 2021          September 30, 2021          December 31, 2020
Return on Average Assets(1)                                        2.13  %                    1.97  %                     1.56  %
Return on Average Equity(1)                                       23.87  %                   22.88  %                    18.00  %
Common Equity Tier 1 Capital                                      14.34  %                   14.34  %                    12.94  %


_______________

(1)These ratios are annualized for the nine months ended September 30, 2021.


The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
precipitate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
As of September 30, 2021, the Bank was in compliance with all applicable
regulatory capital requirements to which it was subject, and the Bank was
classified as "well capitalized" for purposes of the prompt corrective action
regulations. As we deploy our capital and continue to grow our operations, our
regulatory capital levels may decrease depending on our level of earnings.
However, we intend to monitor and control our growth relative to our earnings in
order to remain in compliance with all regulatory capital standards applicable
to us.
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The following table presents the regulatory capital ratios for the Company (as if applicable to the Company) and the Bank as of the dates indicated.

                                                                                                  Minimum Capital                             To Be Well
(in thousands)                                               Actual                                  Adequacy                                 Capitalized
September 30, 2021                                 Amount              Ratio                Amount                 Ratio              Amount               Ratio
The Company
Tier 1 leverage ratio (to average assets)       $ 190,230                9.13  %       $       83,337                4.00  %                 N/A                 N/A
Tier 1 capital (to risk-weighted assets)          190,230               14.49  %              111,573                8.50  %                 N/A                 N/A
Common equity tier 1 capital ratio (to
risk-weighted assets)                             188,168               14.34  %               91,883                7.00  %                 N/A                 N/A
Total capital ratio (to risk-weighted
assets)                                           206,762               15.75  %              137,825               10.50  %                 N/A                 N/A

The Bank
Tier 1 leverage ratio (to average assets)       $ 160,223                7.83  %       $       81,833                4.00  %       $  102,291                5.00  %
Tier 1 capital (to risk-weighted assets)          160,223               12.60  %              108,063                8.50  %          101,706                8.00  %
Common equity tier 1 capital ratio (to
risk-weighted assets)                             160,223               12.60  %               88,993                7.00  %           82,636                6.50  %
Total capital ratio (to risk-weighted
assets)                                           176,239               13.86  %              133,489               10.50  %          127,133               10.00  %

December 31, 2020
The Company
Tier 1 leverage ratio (to average assets)       $ 159,656                8.78  %               72,770                4.00  %                 N/A                 N/A
Tier 1 capital (to risk-weighted assets)          159,656               13.10  %              103,559                8.50  %                 N/A                 N/A
Common equity tier 1 capital ratio (to
risk-weighted assets)                             157,594               12.94  %               85,284                7.00  %                 N/A                 N/A
Total capital ratio (to risk-weighted
assets)                                           185,008               15.19  %              127,926               10.50  %                 N/A                 N/A

The Bank
Tier 1 leverage ratio (to average assets)       $ 135,527                7.45  %               72,770                4.00  %       $   90,962                5.00  %
Tier 1 capital (to risk-weighted assets)          135,527               11.34  %              101,619                8.50  %           95,642                8.00  %
Common equity tier 1 capital ratio (to
risk-weighted assets)                             135,527               11.34  %               83,686                7.00  %           77,709                6.50  %
Total capital ratio (to risk-weighted
assets)                                           150,593               12.60  %              125,530               10.50  %          119,552               10.00  %



Contractual Obligations
We have contractual obligations to make future payments on debt agreements.
While our liquidity monitoring and management consider both present and future
demands for and sources of liquidity, the following table of contractual
commitments focuses only on future obligations and summarizes our contractual
obligations as of September 30, 2021.
                            CONTRACTUAL OBLIGATIONS
                                                                         As of September 30, 2021
                                                         Due After One          Due After Three
                                     Due in One          Through Three           Through Five           Due After 5
(in thousands)                      Year or Less             Years                   Years                 Years              Total
FHLB advances                      $         -          $           -      

$ 22,000 $ - $ 22,000 Certificates of deposit $100,000 or more

                                101,802                 82,322                     915                   -            185,039
Certificates of deposit less than
$100,000                                28,601                  4,333                     535                  20             33,489

Lease payments                           1,164                  1,724                     234                  20              3,142
Subordinated debt                            -                      -                       -              12,062             12,062
Total                              $   131,567$      88,379$       23,684$   12,102$ 255,732


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Off-Balance Sheet Items
In the normal course of business, we enter into various transactions that, in
accordance with GAAP, are not included in our consolidated balance sheets. We
enter into these transactions to meet the financing needs of our customers.
These transactions include commitments to extend credit and issue letters of
credit, which involve, to varying degrees, elements of credit risk and interest
rate risk in excess of the amounts recognized in our consolidated balance
sheets. Our exposure to credit loss is represented by the contractual amounts of
these commitments. The same credit policies and procedures are generally used in
making these commitments as for on-balance sheet instruments. We are not aware
of any accounting loss to be incurred by funding these commitments; however, we
maintain an allowance for off-balance sheet credit risk which is recorded in
other liabilities on the consolidated balance sheet.
Our commitments associated with outstanding letters of credit and commitments to
extend credit expiring by period as of the date indicated are summarized below.
Since commitments associated with letters of credit and commitments to extend
credit may expire unused, the amounts shown do not necessarily reflect actual
future cash funding requirements.
                          CREDIT EXTENSION COMMITMENTS
                                                   As of September 30,
                                                           2021                  As of December 31, 2020
(in thousands)
Unfunded lines of credit                          $           344,859          $                326,474
Commitments to originate residential loans held
for sale                                                        1,205                            11,444
Letters of credit                                               5,132                             5,102
Commitment to fund other investments                            8,000          $                      -
Total credit extension commitments                $           359,196          $                343,020


Unfunded lines of credit represent unused credit facilities to our current
borrowers. Lines of credit generally have variable interest rates. Letters of
credit are conditional commitments issued by us to guarantee the performance of
a customer to a third party. In the event of nonperformance by the customer in
accordance with the terms of the agreement with the third party, we would be
required to fund the commitment. The maximum potential amount of future payments
we could be required to make is represented by the contractual amount of the
commitment. If the commitment is funded, we would be entitled to seek recovery
from the client from the underlying collateral, which can include commercial
real estate, physical plant and property, inventory, receivables, cash and/or
marketable securities. Our policies generally require that letter of credit
arrangements contain security and debt covenants similar to those contained in
loan agreements.
We seek to minimize our exposure to loss under letters of credit and credit
commitments by subjecting them to the same credit approval and monitoring
procedures as we do for on-balance sheet instruments. The effect on our revenue,
expenses, cash flows and liquidity of the unused portions of these letters of
credit commitments cannot be precisely predicted because we do not control the
extent to which the lines of credit may be used.
Commitments to extend credit are agreements to lend funds to a customer, as long
as there is no violation of any condition established in the contract.
Commitments generally have variable interest rates, fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being fully drawn, the total
commitment amounts disclosed above do not necessarily represent future cash
requirements. We evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if considered necessary by us, upon
extension of credit is based on management's credit evaluation of the customer.
                                           64


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We enter into forward commitments for the delivery of mortgage loans in our
current pipeline. Interest rate lock commitments are entered into in order to
economically hedge the effect of changes in interest rates resulting from our
commitments to fund the loans. These commitments to fund mortgage loans to be
sold into the secondary market, along with the interest rate lock commitments
and forward commitments for the future delivery of mortgage loans to third party
investors, are considered derivatives.
The commitment to fund other investments reflects an obligation to make an
investment in a Small Business Investment Company.
                                           65


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