Blue Ridge Bankshares, Inc.: Form 10-Q for the period ended Sep 30, 2021

The following presents management’s discussion and analysis of the Company’s consolidated financial condition and the results of our operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations for the balance of 2021, or for any other period. As used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Blue Ridge Bankshares, Inc. and its consolidated subsidiaries. The term “Bank” refers to Blue Ridge Bank, National Association.

Cautionary Note About Forward-Looking Statements

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Words such as “anticipates,” “believes,” “intends,” “should,” “expects,” “will,” and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to: the effect of the COVID-19 pandemic, including its potential adverse effect on economic conditions, and the Company’s employees, customers, loan losses, and financial performance; the Company’s participation in the Paycheck Protection Program (“PPP”); changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System (the “Federal Reserve”); the quality or composition of the loan and investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company’s market area; accounting principles, policies, and guidelines; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; technological changes; fraud and cybersecurity risks; the effects of the Company’s pending merger with FVCBankcorp, Inc. (“FVCB”) or its completed merger with Bay Banks of Virginia, Inc. (“Bay Banks”) and other acquisitions the Company may make, including, without limitation, the ability to complete the FVCB merger within the expected time frame, or at all, the failure to achieve the expected revenue growth and/or expense savings from such transactions, disruptions in customer and employee relationships and business operations, and unexpected costs and difficulties integrating the companies’ business; and other factors detailed in the Company’s publicly filed documents, including the factors described in Item 1A., “Risk Factors,” in the Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), the Quarterly Report on Form 10-Q for the period ended June 30, 2021, and in this Quarterly Report on Form 10-Q. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

Merger with FVCBankcorp, Inc.

On July 14, 2021, the Company announced that it had entered into a definitive agreement pursuant to which FVCB will merge with and into the Company, with the Company surviving, in an all-stock merger of equals (the “FVCB Merger”). Shareholders of FVCB will be entitled to receive 1.1492 shares of the Company’s common stock for each share of FVCB common stock upon completion of the merger. FVCB is the holding company for FVCbank, a Virginia-chartered community bank based in Fairfax, Virginia and serving the greater Washington, D.C. and Baltimore metropolitan areas. As of September 30, 2021, FVCB had total assets of $2.0 billion. The FVCB Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of both companies. The Company has learned that the Office of the Comptroller of the Currency (the “OCC”) identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the FVCB Merger. Blue Ridge Bank has already commenced an initiative intended to fully address the OCC’s concerns. The Company anticipates the FVCB Merger will close in the second or third quarter of 2022.

Merger with Bay Banks of Virginia, Inc.

On January 31, 2021, the Company completed its merger with Bay Banks, a bank holding company conducting substantially all its operations through its bank subsidiary, Virginia Commonwealth Bank, and its wealth and trust management subsidiary, VCB Financial Group, Inc. Immediately following the Company’s merger with Bay Banks, Bay Banks’ subsidiary bank was merged with and into the Bank, while VCB Financial Group, Inc. became a subsidiary of the Company (collectively, the “Bay Banks Merger”) and was subsequently renamed as BRB Financial Group, Inc. (the “Financial Group”).

Information contained herein as of September 30, 2021 includes the balances of Bay Banks; information contained herein as of the year ended December 31, 2020 does not include the balances of Bay Banks. Information for the nine months ended September 30, 2021 includes the operations of Bay Banks for the period immediately following the effective date (January 31, 2021) of the Bay Banks Merger through September 30, 2021.

Stock Split

On April 30, 2021, the Company effected a 3-for-2 stock split (“Stock Split”) in the form of a 50% stock dividend on its common stock to shareholders of record as of April 20, 2021. Cash was paid in lieu of fractional shares based on the closing price of the Company’s common stock on the record date. References made to outstanding shares or per share amounts in the accompanying consolidated financial statements and disclosures have been retroactively adjusted to reflect the Stock Split, unless otherwise noted.

General

There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2020 Form 10-K, except for the addition of accounting for business combinations, due to the significance of the Bay Banks Merger. See Note 2 – Summary of Significant Accounting Policies in Item 8 of the Company’s 2020 Form 10-K for more information.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported.

Comparison of Financial Condition as of September 30, 2021 and December 31, 2020

Total assets as of September 30, 2021 were $2.70 billion, an increase of $1.20 billion from $1.50 billion at December 31, 2020. The increase in total assets was primarily due to the Bay Banks Merger, which increased assets by $1.22 billion at the effective date of the merger. Of the increase in total assets due to the Bay Banks Merger, $1.03 billion were loans held for investment. The purchase accounting adjustment (discount) to record the Bay Banks’ loan portfolio at estimated fair value, at the effective date of the merger, was $17.9 million, or 1.70% of the pre-adjusted portfolio balance. No allowance for loan losses (“ALL”) carried over in the business combination.

Total deposits as of September 30, 2021 were $2.20 billion, an increase of $1.26 billion from December 31, 2020, of which $1.03 billion were assumed in the Bay Banks Merger, at the effective date of the merger. The remaining increase in the first nine months of 2021 was primarily due to the general increase in liquidity in the banking system, believed to result from economic stimulus funds granted by the federal government’s response to the COVID-19 pandemic. The Company’s expanding relationships with fintech partners have resulted in approximately $52 million of deposit growth in the nine months ended September 30, 2021.

As previously reported, the majority of PPP loans were funded through the Federal Reserve Bank of Richmond’s (“FRB”) Paycheck Protection Program Liquidity Facility (“PPPLF”). FRB advances totaled $33.9 million at September 30, 2021, a decline of $247.8 million from December 31, 2020, primarily attributable to the Company’s sale of PPP loans in the second quarter of 2021, as explained below. Additionally, the Company redeemed subordinated notes with an initial aggregate principal balances of $10.0 million and $7.0 million in the second and third quarters of 2021, respectively. The Company assumed $31.9 million of subordinated debt in the Bay Banks Merger.

Total shareholders’ equity increased by $161.5 million to $269.7 million as of September 30, 2021 compared to $108.2 million at December 31, 2020, primarily attributable to $125.4 million of consideration paid in the Bay Banks Merger and net income totaling $39.7 million in the nine months ended September 30, 2021.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

For the three months ended September 30, 2021, the Company reported net income of $6.8 million, or $0.36 earnings per diluted common share, compared to $5.1 million, or $0.59 earnings per diluted common share, for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the Company reported net income of $39.7 million, or $2.26 earnings per diluted common share, compared to $12.1 million, or $1.42 earnings per diluted common share, for the nine months ended September 30, 2020.

Net income before income taxes for first nine months of 2021 included a gain of $24.3 million ($19.2 million after tax) resulting from the sale in the second quarter of 2021 of over $700 million of loans originated under the PPP.

Net income before income taxes included merger-related expenses of $1.4 million and $11.7 million, for the three and nine months ended September 30, 2021, respectively, compared to $1.3 million and $1.7 million for the three and nine months ended September 30, 2020, respectively.

Net Interest Income. Net interest income is the amount by which interest earned on assets exceeds the interest paid on interest-bearing liabilities and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings. The Company’s principal interest-earning assets are loans to businesses, real estate investors, and individuals as well as its investment securities portfolio. Interest-bearing liabilities consist primarily of negotiable order of withdrawal and savings accounts, money market accounts, certificates of deposit, and Federal Home Loan Bank of Atlanta (“FHLB”) and FRB advances. Generally, changes in net interest income are measured by the net interest rate spread and the net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income and interest expense calculated as a percentage of average interest-earning assets.

The following table presents the average balance sheets for the three months ended September 30, 2021 and September 30, 2020. Also shown are the amounts of interest earned on interest-earning assets, with related tax-equivalent yields, and interest expense on interest-bearing liabilities, with related rates, as well as a volume and rate analysis of changes in net interest income for the periods stated.

(Dollars in thousands)

Average interest-earning assets were $2.55 billion for the three months ended September 30, 2021 compared to $1.45 billion for the same period of 2020, a $1.1 billion increase. Most of this increase was attributable to acquired loans in the Bay Banks Merger, partially offset by lower average PPP loans in the 2021 period compared to the 2020 period. Total interest income (on a taxable equivalent basis) increased by $9.3 million for the three-month period ended September 30, 2021 from the same period of 2020. This increase was primarily due to higher average balances of loans, excluding PPP loans, and securities, partially offset by lower yields on interest-earning assets due to a lower interest rate environment in which interest-earning assets have re-priced and lower yields on PPP loans (discussed below). Interest income in the 2021 and 2020 periods included the amortization of PPP processing fees, net of costs, of $713 thousand and $3.8 million, respectively. Interest income in the third quarters of 2021 and 2020 included accretion of fair value adjustments (discounts) on acquired loans of $72 thousand and $189 thousand, respectively.

Average interest-bearing liabilities were $1.76 billion for the three months ended September 30, 2021 compared to $1.12 billion for the same period of 2020, a $643.7 million increase. Most of this increase was attributable to interest-bearing deposits assumed in the Bay Banks Merger and organic deposit growth, primarily attributable to general liquidity in the banking system, believed to be from economic stimulus funds granted by the federal government’s response to the COVID-19 pandemic, partially offset by lower average balances of PPPLF advances in the 2021 period compared to 2020 period. Interest expense increased by $15 thousand to $2.6 million for the three months ended September 30, 2021 compared to the same amount for the same period of 2020. Higher interest expense attributable to higher average balances of interest-bearing liabilities was partially offset by lower rates paid on deposits and borrowings due to a lower interest rate environment in the 2021 period. Cost of interest-bearing liabilities decreased to 0.60% for the third quarter of 2021 from 0.94% for the third quarter of 2020. Cost of funds were 0.43% and 0.73% for the third quarters of 2021 and 2020, respectively. Interest expense in the third quarters of 2021 and 2020 included the amortization of fair value adjustments (premium) on assumed time deposits of $827 thousand and $10 thousand, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) for the three months ended September 30, 2021 was $21.1 million as compared to $11.8 million for the same period in 2020, an increase of $9.3 million. Net interest margin was 3.32% and 3.26% for third quarters of 2021 and 2020, respectively. PPP loan processing fees, net of costs, and interest income, along with the corresponding funding costs through the PPPLF, had a 1 and 23 basis point positive effect on the Company’s net interest margin for the three months ended September 30, 2021 and 2020, respectively.

The following table presents the average balance sheets for the nine months ended September 30, 2021 and September 30, 2020. Also shown are the amounts of interest earned on interest-earning assets, with related tax-equivalent yields, and interest expense on interest-bearing liabilities, with related rates, as well as a volume and rate analysis of changes in net interest income for the periods stated.

(Dollars in thousands)

48

Average interest-earning assets were $2.69 billion for the nine months ended September 30, 2021 compared to $1.22 billion for the same period of 2020, a $1.5 billion increase. Most of this increase was attributable to acquired loans and securities in the Bay Banks Merger and PPP loans, which were originated beginning in the second quarter of 2020. Total interest income (on a taxable equivalent basis) increased by $42.1 million for the nine-month period ended September 30, 2021 from the same period of 2020. This increase was primarily due to higher average balances of loans, including PPP loans, partially offset by lower yields on interest-earning assets due to a lower interest rate environment in 2021 compared to 2020. Interest income in the 2021 and 2020 periods included the amortization of PPP processing fees, net of costs, of $16.9 million and $3.8 million, respectively. Interest income in the first nine months of 2021 and 2020 included accretion of fair value adjustments (discounts) on acquired loans of $1.3 million and $877 thousand, respectively.

Average interest-bearing liabilities were $1.95 billion for the nine months ended September 30, 2021 compared to $933.9 million for the same period of 2020, a $1.0 billion increase. Most of this increase was attributable to interest-bearing deposits assumed in the Bay Banks Merger and organic deposit growth, primarily attributable to general liquidity in the banking system, as previously noted. Additionally, the Company utilized the PPPLF offered by the FRB starting in the second quarter of 2020 to fund PPP loans. Interest expense increased by $1.0 million to $8.5 million for the nine months ended September 30, 2021 compared to $7.5 million for the same period of 2020. Higher interest expense attributable to higher average balances of interest-bearing liabilities was partially offset by lower rates paid on deposits and borrowings due to a lower interest rate environment in the 2021 period. Cost of interest-bearing liabilities decreased to 0.58% for the first nine months of 2021 from 1.08% for the same period in 2020. Cost of funds were 0.44% and 0.84% for the nine months ended September 30, 2021 and 2020, respectively. Interest expense in the first nine months of 2021 and 2020 included the amortization of fair value adjustments (premium) on assumed time deposits of $2.5 million and $13 thousand, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) for the nine months ended September 30, 2021 was $71.7 million as compared to $30.5 million for the same period in 2020, an increase of $41.2 million. Net interest margin was 3.55% and 3.34% for the nine months ended September 30, 2021 and 2020, respectively. PPP loan processing fees, net of costs, and interest income, along with the corresponding funding costs through the PPPLF, had a 23 and 10 basis point positive effect on the Company’s net interest margin for the nine months ended September 30, 2021 and 2020, respectively.

Provision for Loan Losses. The Company recorded no provision for loan losses for the three- and nine-month periods ended September 30, 2021 compared to provision expense of $4.0 million and $8.1 million for the same respective periods of 2020. In 2020, the Company increased its allowance for loan losses through the application of a qualitative factor in response to potential credit losses as a result of the COVID-19 pandemic. The decline in the Company’s allowance for loan losses in the first nine months of 2021 due to the release of the COVID-19 factor was partially offset by organic loan growth, reserve needs for loans that have migrated from the Company’s acquired loan pools, and reserve needs for fintech related loans. The Company holds no ALL for PPP loans, as these loans are fully guaranteed by the U.S. government.

Noninterest Income. The following tables present a summary of noninterest income and the dollar and percentage change for the periods presented.

(Dollars in thousands)

(Dollars in thousands)

During 2021, the Company funded over 20,000 PPP loans with aggregate principal balances of approximately $730.0 million pursuant to the Economic Aid Act, passed at the end of December 2020 ("PPP 2 loans"). Of the PPP 2 loans, the Company sold approximately 19,500 with principal balances of $712.6 million on June 28, 2021. Gross proceeds from the sale were $705.9 million and the Company recorded a pre-tax gain of $24.3 million on the sale after giving effect to $30.9 million of unearned fees, net of deferred costs, and the sale discount. The $3.7 million increase in mortgage servicing rights income in the nine months ended September 30, 2021 compared to the same period of 2020 was primarily attributable to the Company retaining servicing rights on mortgages originated and sold in the secondary market, beginning in the second quarter of 2020. The $6.7 million and $7.7 million decline in residential mortgage banking income, net, in the three and nine months ended September 30, 2021, respectively, compared to the same periods 2020 was primarily attributable to pricing compression on loans sold in the secondary market in the 2021 periods. Additionally, noninterest income in the three and nine months ended September 30, 2021 included wealth and trust management fee income of $499 thousand and $1.9 million, respectively, which was a business added with the Bay Banks Merger. Other noninterest income in the three and nine months ended September 30, 2021 included $1.0 million and $1.6 million of fair value adjustments, respectively, for the Company's investments in certain fintech companies.

Noninterest Expense. The following tables present a summary of noninterest expense and the dollar and percentage change for the periods stated.

(Dollars in thousands)

(Dollars in thousands)

Excluding merger-related expenses, noninterest expense increased $6.8 million and $31.2 million for the three and nine months September 30, 2021, compared to the same periods of 2020, primarily due to the Bay Banks Merger, which occurred in the first quarter of 2021. Higher salaries and employee benefits of $2.9 million and $16.5 million, for the three- and nine-month periods ended September 30, 2021 were primarily attributable to employees added in the Bay Banks Merger, employees added to support the Company’s noninterest income business lines, and greater incentive expense. Greater incentive expense in the nine months ended September 30, 2021 included bonuses to reward front-line and support personnel for the efforts made to fulfill PPP loans and other management incentives. Partially offsetting the higher salaries and employee benefits expense in the 2021 periods were lower salaries and employee benefit expenses of $1.1 million and $2.1 million in the Company's mortgage banking division in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. Higher noninterest expenses in other categories for both the three and nine months ended September 30, 2021 compared to the same periods in 2020 were primarily attributable to the Bay Banks Merger. Other noninterest expenses for both 2021 periods included a $1.5 million loss that resulted from duplicate PPP loan fundings and an increase in the reserve for unfunded commitments. The Company continues to utilize all available remedies for recovering the duplicative PPP loan fundings. Additionally, in the third quarter of 2021, the Company consolidated five branches across its footprints. In connection with the closures, the Company recorded $521 thousand to write-down owned properties and impair leases. These expenses are reported in occupancy and equipment and other noninterest expense in the amounts of $233 thousand and $288 thousand, respectively.

Income Tax Expense. Income tax expense for the three months ended September 30, 2021 and 2020 was $2.2 million and $1.7 million, respectively, resulting in an effective income tax rate of 24.4% and 25.2% for the respective periods. For the nine months ended September 30, 2021 and 2020, income tax expense was $11.0 million and $3.6 million, respectively, resulting in an effective income tax rate of 21.7% and 23.0% for the respective periods.

Analysis of Financial Condition

Loan Portfolio. The Company makes loans to commercial entities and to individuals. Loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan and the creditworthiness of the borrower. Credit risk tends to be geographically concentrated in that a majority of the loans are to borrowers located in the markets served by the Company. All loans are underwritten within specific lending policy guidelines that are designed to maximize the Company’s profitability within an acceptable level of business risk.

The following table presents the Company’s loan portfolio by category of loan and the percentage of loans in each category to total loans as of the dates stated.

(Dollars in thousands)

The Company acquired approximately $1.03 billion of loans (at fair value) as of January 31, 2021, as a result of the Bay Banks Merger.

In 2020, the Company participated in the PPP pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (“PPP 1”). Through the PPP 1, which is administered by the Small Business Administration (“SBA”), the federal government partnered with banks, including the Bank, to provide over $650 billion to small businesses to support payrolls and other operating expenses. PPP 1 loans have a two-year term if originated prior to June 5, 2020 or a five-year term if originated on or subsequent to June 5, 2020 and earn an annual interest rate of 1%. Banks originating PPP 1 loans earned a processing fee of 1%, 3%, or 5% of the loan amount, depending on the size of the loan. The Company originated PPP 1 loans totaling approximately $363.4 million throughout 2020, and as of September 30, 2021, $32.6 million of PPP 1 loans were outstanding, including those acquired in the Bay Banks Merger.

PPP 2 loans have a contractual term of five years and earn an annual interest rate of 1%. Banks originating PPP 2 loans earned processing fees that were tiered depending on the size of the loan. Specifically, processing fees for loans of not more than $50,000 equal 50% of the loan balance or $2,500, whichever is less; processing fees for loans more than $50,000 and not more than $350,000 equaled 5% of the loan balance, and processing fees for loans above $350,000 equaled 3% of the loan balance. As of September 30, 2021, the Company's PPP 2 loans aggregate principal and unamortized fees balances, net of deferred costs, were $14.7 million and $676 thousand, respectively

The Company believes that the majority of PPP 1 and PPP 2 loans will be forgiven, in accordance with the terms of the program, and will be paid in full pursuant to the U.S. government guarantee. As of September 30, 2021, no PPP 2 loans had been forgiven.

From the onset of the global COVID-19 pandemic, the Company has proactively addressed the needs of its commercial and individual borrowers by modifying loans allowing for the short-term deferral of principal payments or of principal and interest payments. Pursuant to the CARES Act, banks have the option to temporarily suspend certain requirements of generally accepted accounting principles related to troubled debt restructuring (“TDR”) for a limited period of time if certain conditions are met. During 2020, in response to the COVID-19 pandemic, the Company approved over 550 loan deferrals for a total of $110.6 million. In addition, during 2020, Bay Banks approved nearly 400 loan deferrals for approximately $160.0 million. At September 30, 2021, most of these loans were past the deferment period and back on normal payment schedules, and as of September 30, 2021, 16 loans were in deferment for a total of approximately $4.7 million. All loan modifications made by the Company were made on a good faith basis to borrowers who met the requirements for modifications under the CARES Act. As a result of regulatory and accounting guidance regarding such modifications, the loans were not designated as TDRs as of September 30, 2021 and December 31, 2020.

Allowance for Loan Losses. The Company prepares a quarterly analysis of the ALL, with the objective of quantifying portfolio risk into a dollar amount of inherent losses. The ALL is established through a provision for loan losses charged against income and decreased by loans charged-off (net of recoveries, if any). Management’s periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. The ALL consists of specific and general components. The specific component relates to loans that are identified as impaired and meet certain additional criteria, such as size. For these loans an allowance is established when the discounted cash flows or the net realizable value, which is equal to the estimated fair value of the underlying collateral less estimated costs to sell, of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and those loans classified that are not evaluated for impairment and is based on historical loss experience adjusted for other internal or external influences on credit quality that are not fully reflected in the historical data.

The Company follows applicable guidance issued by the Financial Accounting Standards Board. This guidance requires that losses be accrued when they are probable of occurring and can be estimated. It also requires that impaired loans, within its scope, be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, impairment may be measured based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Loans are evaluated for non-accrual status when principal or interest is delinquent for 90 days or more or when a loan is specifically determined to be impaired. Any unpaid interest previously accrued on those loans is reversed from income. Any interest payments subsequently received are recognized as income or amortized over the life of the loan depending on the specific circumstances. Interest payments received on loans where management believes a potential for loss remains are applied as a reduction of the loan principal balance.

Management believes that the Company’s ALL was adequate as of September 30, 2021 and December 31, 2020. There can be no assurance, however, that adjustments to the ALL will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; the impact of the COVID-19 pandemic; and changes in the circumstances of particular borrowers are criteria that could increase the level of the ALL required, resulting in charges to the provision for loan losses.

The following table presents an analysis of the change in the ALL by loan type as of and for the periods stated.

(Dollars in thousands)

The ALL includes specific allowances for impaired loans and a general allowance applicable to all loan categories; however, management has allocated the allowance by loan type to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts, or that the allocation indicates future trends, and does not restrict the usage of the allowance for any specific loan or category. The following table presents the allocation of the ALL by loan category and as a percentage of each category as of the dates stated.

(Dollars in thousands)

The information in the table above excludes PPP loans, which carry no ALL as they are fully guaranteed by the U.S. government.

Non-performing Assets. Non-performing assets consist of non-accrual loans, loans past due 90 days and still accruing interest, and other real estate owned (“OREO”).

OREO includes properties that have been substantively repossessed or acquired in complete or partial satisfaction of a loan. Such properties, which are held for resale, are carried at the lower of cost or fair market value, including a reduction for the estimated selling expenses.

Impaired loans also include certain loans that have been modified as TDRs where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. The Company had four TDRs totaling $235 thousand as of September 30, 2021, two of which were classified as TDRs due to a change in interest rate and payment terms and two of which were classified as TDRs due to a change in payment terms. The Company had two TDRs totaling $142 thousand as of December 31, 2020, one of which was classified as a TDR due to a change in interest rate and payment terms and the other loan due to a change in payment terms. All of these TDRs were performing in accordance with their modified terms at the respective dates and therefore excluded from the non-performing loan and non-performing asset figures in the table below.

The following table presents summary of information pertaining to non-performing assets and certain asset quality ratios as of the periods stated.

(Dollars in thousands)

The decline in the ratio of ALL to total loans held for investment, excluding PPP loans, at September 30, 2021 compared to December 31, 2020 was primarily attributable to loans acquired in the Bay Banks Merger, as no ALL carried over in the merger. The remaining purchase accounting adjustment (discount) related to loans acquired in the Bay Banks Merger and earlier acquisitions by the Company was $17.0 million at September 30, 2021. The $8.8 million increase in non-performing assets since December 31, 2020 is primarily attributable to commercial loans totaling $5.2 million to the same borrower relationship that were placed on non-accrual status in the second quarter of 2021.

Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage rate sensitivity and provide collateral for short-term borrowings. Securities in the investment portfolio classified as securities available for sale may be sold in response to changes in market interest rates, changes in the securities’ prepayment risk, increased loan demand, general liquidity needs, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s investment securities available for sale was $360.1 million as of September 30, 2021, an increase of $250.6 million from $109.5 million at December 31, 2020. The Company acquired approximately $79.5 million of securities at fair value as of the effective date of the Bay Banks Merger.

As of September 30, 2021 and December 31, 2020, the majority of the investment securities portfolio consisted of securities rated as investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default. Investment securities pledged to secure public deposits totaled $9.1 million and $12.5 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, securities with a fair value of $27.7 million and $29.4 million, respectively, were pledged to secure the Bank’s borrowing facility with the FHLB.

The Company reviews for other-than-temporary impairment of its investment securities portfolio at least quarterly. At September 30, 2021 and December 31, 2020, only investment grade securities were in an unrealized loss position or the amount of unrealized loss for the security was not significant. Investment securities with unrealized losses are generally a result of pricing changes due to recent changes in the current interest rate environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities show no indication that the contractual cash flows will not be received when due. The Company does not intend to sell nor does it believe that it will be required to sell any of its temporarily impaired securities prior to the recovery of the amortized cost. No other-than-temporary impairment has been recognized for the securities as of September 30, 2021 and December 31, 2020.

The Company holds restricted equity investments of the FRB, FHLB, and its correspondent bank. At September 30, 2021, the Company owned $6.0 million of FHLB stock, $4.9 million of FRB stock, and $468 thousand of correspondent bank stock. At December 31, 2020, the Company owned $5.8 million of FHLB stock, $2.2 million of FRB stock, and $248 thousand of correspondent bank stock. The Company also has various other equity investments, including shares in other financial institutions and fintech companies, totaling $7.9 million and $3.0 million as of September 30, 2021 and December 31, 2020, respectively, which are marked to market through the consolidated income statements each reporting period.

The Company also holds investments in early-stage focused investment funds, small business investment companies ("SBIC") , and low-income housing partnerships, which are reported in other investments on the consolidated balance sheets.

The following table presents the composition of the Company’s investment portfolio, at amortized cost, as of the dates stated.

(Dollars in thousands)

The following tables present information about the Company’s investment portfolio for the periods stated.

(Dollars in thousands)

Deposits. The principal sources of funds for the Company are core deposits (demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits, and certificates of deposit), primarily from its market area. The Company’s deposit base includes transaction accounts, time and savings accounts, and other accounts that customers use for cash management purposes and which provide the Company with a source of fee income and cross-marketing opportunities as well as a low-cost source of funds. Time and savings accounts, including money market deposit accounts, also provide a relatively stable low-cost source of funding.

Total deposits as of September 30, 2021 were $2.20 billion, an increase of $1.26 billion from December 31, 2020, of which $1.03 billion were assumed in the Bay Banks Merger as of the effective date of the merger. The Company's expanding relationships with fintech partners have resulted in approximately $52 million of deposit growth in the first nine months of 2021.

Approximately 24.6% of the Company’s deposits as of September 30, 2021 were composed of time deposits compared to 26.6% as of December 31, 2020. In contrast, approximately 31.1% of the Company’s deposits as of September 30, 2021 were composed of noninterest-bearing demand deposits compared to 35.2% as of December 31, 2020. The reduction in this ratio was primarily attributable to the Bay Banks Merger.

The following table provides the maturity distribution of certificates of deposit of $100,000 or more as of the periods stated.

(Dollars in thousands)

Borrowings. The following tables present information on the balances and interest rates on total borrowings as of and for the periods stated.

(Dollars in thousands)

FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Company’s residential, multi-family, and commercial real estate mortgage loan portfolios, as well as selected investment securities.

FRB borrowings through the PPPLF are secured by loans the Bank originated under the PPP. The PPPLF advances are at the full PPP loan value and term, have a fixed annual cost of 35 basis points, and receive favorable regulatory capital treatment.

Subordinated notes, net, totaled $40.5 million as of September 30, 2021 compared to $24.5 million as of December 31, 2020, a $16.0 million increase for the nine months ending September 30 2021, which was primarily attributable to $31.9 million of subordinated notes assumed in the Bay Banks Merger, partially offset by two subordinated note redemptions in 2021. The Company redeemed subordinated notes with an initial aggregate principal balance of $10.0 million and $7.0 million in the second and third quarters of 2021, respectively.

Liquidity. Liquidity is essential to the Company’s business. The Company’s liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that the Company may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or the Company. The Company’s ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events.

The Company has established a formal liquidity contingency plan that provides guidelines for liquidity management. For the Company’s liquidity management program, it first determines current liquidity position and then forecasts liquidity based on anticipated changes in the balance sheet. In this forecast, the Company expects to maintain a liquidity cushion. Management also stress tests the Company’s liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. Management also monitors the Company’s liquidity position through cash flow forecasting and believes its level of liquidity and capital is adequate to conduct the business of the Company.

Deposits are the primary source of the Company’s liquidity. Cash flow from amortizing assets or maturing assets provides funding to meet the needs of depositors and borrowers. The Company has unsecured federal fund lines available with correspondent banks for overnight borrowing totaling $64.0 million and $38.0 million as of September 30, 2021 and December 31, 2020, respectively. These lines bear interest at the prevailing rates for such loan and are cancellable any time by the correspondent Bank. As of September 30, 2021 and December 31, 2020, none of these lines of credit with correspondent banks were drawn upon.

In addition to deposits and federal funds lines, the Company has access to various wholesale funding markets. These markets include the brokered certificate of deposit market, listing service deposit market, and the federal funds market. The Company is a member of the IntraFi Network (formerly, Promontory Interfinancial Network), which allows banking customers to access Federal Deposit Insurance Corporation (the “FDIC”) insurance protection through the Company on deposits that exceed FDIC insurance limits. The Company also has one-way authority with the IntraFi Network for both Certificate of Deposit Account Registry Service and Insured Cash Sweep products which provides the Company the ability to access additional wholesale funding as needed.

The Company also maintains secured lines of credit with the FHLB and the FRB under which the Company can borrow up to the allowable amount for the collateral pledged. As of September 30, 2021, the Company had a credit line available of $392.2 million with the FHLB with outstanding advances totaling $125.0 million and letters of credit totaling $57.0 million, leaving the remaining credit availability of $210.2 million as of the same date. The letters of credit are for the benefits of the Commonwealth of Virginia to secure public deposits. As of December 31, 2020, outstanding FHLB advances totaled $115.0 million and letters of credit totaled $20.0 million.

The Company utilizes the FRB PPPLF to fund loans originated under the PPP, which collateralize the advances. As of September 30, 2021 and December 31, 2020, FRB borrowings under this facility totaled $33.9 million and $281.7 million, respectively.

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

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (the “Basel III rules”) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements phased-in over a multi-year schedule and fully phased-in on January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios of 2.50% for all ratios, except the tier 1 leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. Management believes as of September 30, 2021, the Bank met all capital adequacy requirement to which it is subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2021, the most recent regulatory notification, categorized the Bank as well capitalized under the regulatory framework. There are no conditions or events since that notification that management believes have changed the institution's categorization. Federal and state banking regulations place certain restrictions on dividends paid by the Company. The total amount of dividends which may be paid at any date is generally limited to retained earnings of the Company.

The following tables present the capital and capital ratios to which the Bank is subject and the amounts and ratios to be adequately and well capitalized for the dates stated. Adequately capitalized ratios include the conversation buffer.

(Dollars in thousands)

(Dollars in thousands)

59

Off-Balance Sheet Activities

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include real estate and income producing commercial properties. The approved commitments to extend credit that was available but unused as of September 30, 2021 and December 31, 2020 totaled $384.9 million and $126.0 million, respectively. The majority of the increase since year-end 2020 is attributable to the Bay Banks Merger.

Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third party. As of September 30, 2021 and December 31, 2020, commitments under outstanding performance stand-by letters of credit totaled $655 thousand and $0, respectively. Additionally, the Company issues financial stand-by letters of credit, which guarantee payment to the underlying beneficiary (i.e., third party) if the customer fails to meet its designated financial obligation. As of September 30, 2021 and December 31, 2020, commitments under outstanding financial stand-by letters of credit totaled $3.6 million and $6.1 million, respectively. The credit risk of issuing stand-by letters of credit is essentially the same as that involved in extending loans to customers.

Reserves for unfunded commitments as of September 30, 2021 and December 31, 2020 were $512 thousand and $0, respectively, and are included in other liabilities on the consolidated balances sheets.

The Company invests in various partnerships and limited liability companies, many of which invest in early stage companies operating in fintech businesses. Pursuant to these investments, the Company commits to an investment amount that may be fulfilled in future periods. At September 30, 2021, the Company has future commitments outstanding totaling $9.1 million related to these investments.

Interest Rate Risk Management

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

The Company employs an independent consulting firm to model its interest rate sensitivity that uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Assumptions for modeling are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how management expects rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts, as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two-year period and include rapid rate changes of down 100 basis points to 200 basis points and up 100 basis points to 400 basis points. The results of these simulations are then compared to the base case.

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

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2021 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Other than as set forth below, there have been no material changes to the risk factors disclosed in the 2020 Form 10-K. The following risk factors supplement, and should be read together with, the risk factors disclosed in the 2020 Form 10-K. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition, or results of operations. See also “Cautionary Note About Forward-Looking Statements,” included in Part 1, Item 2, of this Form 10-Q.

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

On July 14, 2021, the Company entered into a definitive merger agreement to acquire FVCB in an all-stock transaction. Subject to the terms and conditions stated in the merger agreement, upon the consummation of the merger, FVCB will be merged into the Company, with the Company as the surviving corporation (the “merger”), and each share of FVCB common stock will be converted into the right to receive 1.1492 shares of the Company’s common stock. At or immediately following consummation of the merger, FVCB’s wholly-owned banking subsidiary, FVCbank, will be merged with and into the Company’s wholly-owned national bank subsidiary, the Bank, with the Bank as the surviving bank (the “bank merger”).

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

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

The Company may not be able to effectively integrate the operations of FVCB into the operations of the Company.

The future operating performance of the Company and the Bank will depend, in part, on the success of the bank merger, which is expected to occur as soon as practicable after the merger. The success of the bank merger will, in turn, depend on a number of factors, including the Company’s ability to (i) integrate the operations and branches of FVCbank and the Bank, (ii) retain the deposits and customers of FVCbank and the Bank, (iii) control the incremental increase in noninterest expense arising from the merger in a manner that enables the combined bank to improve its overall operating efficiencies and (iv) retain and integrate the appropriate personnel of FVCbank into the operations of the Bank. The integration of FVCbank and the Bank following the bank merger will require the dedication of the time and resources of the banks’ management teams and may temporarily distract the management teams’ attention from the day-to-day business of the banks. If the Bank is unable to successfully integrate FVCbank, the Bank may not be able to realize expected operating efficiencies and eliminate redundant costs.

The Company will incur significant transaction and merger-related integration costs in connection with the merger.

The Company expects to incur significant costs associated with completing the merger and integrating the operations of the two companies. The Company and FVCB are continuing to assess the impact of these costs. Although the Company believes that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all. If the merger is not completed, the parties would have to recognize these expenses without realizing any of the expected benefits of the merger.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are burdensome on the Company, not presently anticipated or cannot be met.

Before the transactions contemplated by the merger agreement may be completed, various approvals or waivers must be obtained from bank regulatory authorities, including the Federal Reserve, the OCC, and the Virginia Bureau of Financial Institutions. In determining whether to grant these approvals, the applicable regulatory agencies consider a variety of factors, including the competitive impact of the proposal in the relevant geographic and banking markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and related regulations (the “Community Reinvestment Act”); and the effectiveness of the parties in combating money laundering activities. The regulatory approvals or waivers may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the merger that are not anticipated, cannot be met, or are onerous on the Company, including by delaying completion of the merger or of imposing additional costs on or limiting the revenues of the Company following the merger. Furthermore, such conditions or changes may constitute or be reasonably likely to result in a burdensome condition that may allow the Company to terminate the merger agreement. If the necessary governmental approvals or waivers contain such conditions, the business, financial condition, and results of operations of the Company following the merger may be materially adversely affected.

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

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

Any delay in completion of the merger may have a material adverse effect on the Company’s business during the pendency of the merger, and on the Company’s business and results of operations following the merger, due to potential diversion of management attention from other opportunities, constraints contained in the merger agreement on the Company’s business during the pendency of the merger, the incurrence of additional merger-related expenses, and negative reactions by markets and customers. If the merger is not completed, the ongoing business, financial condition, and results of operations of the Company may be materially adversely affected and the market price of the Company’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be completed.

In addition, the Company’s business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. If the merger agreement is terminated and the Company’s board of directors seeks another merger or business combination, the Company’s shareholders cannot be certain that the Company will be able to find another company willing to engage in a merger or business combination on more attractive terms than the merger.

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

Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the completion of the merger, as such personnel and customers may experience uncertainty about their future roles and relationships with the Company or the Bank following the merger and the bank merger. Additionally, these uncertainties could cause customers (including depositors and borrowers) to seek to change existing business relationships with FVCB or the Company or fail to extend an existing relationship with FVCB or the Company. Further, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger and the bank merger.

The merger agreement restricts the Company from taking certain actions without FVCB’s consent while the merger is pending. These restrictions could have a material adverse effect on the Company’s business, financial condition, and results of operations, including by limiting the actions that the Company may take to address a business uncertainty while the merger is pending.

Litigation against FVCB or the Company, or the members of the FVCB or the Company board of directors, could prevent or delay the completion of the merger.

Purported shareholder plaintiffs may assert legal claims related to the merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. The existence of litigation related to the merger could affect the likelihood of obtaining the required approval from the Company’s and FVCB’s shareholders. Moreover, any litigation could be time consuming and expensive, and could divert attention of the Company’s management team away from the Company’s regular business. Any lawsuit adversely resolved against FVCB, the Company or members of the FVCB or the Company’s board of directors, could cause a significant increase in merger-related costs or otherwise have a material adverse effect on the Company’s business, financial condition and results of operations.

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