# MVB Financial Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [MVB Financial Corp](/companies/mvbf.md) (CIK 1277902)
- Form: 10-Q
- Filed: 2020-11-02
- Accepted by EDGAR: Nov 2, 2020, 16:33 ET
- Period: 2020-09-30
- Accession: 0001277902-20-000158
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1277902/000127790220000158/mvbf-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1277902/000127790220000158/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $1.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $5.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $2.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $10.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $8.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $6.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $25.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.53 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.53 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 12,116,418 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 12,185,137 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $91.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-07-01 to 2020-09-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $4.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $3.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $1.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $295.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-09-30 | $2.21bn | us-gaap:Assets |
| Total liabilities | at 2020-09-30 | $1.98bn | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $29.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2020-09-30 | $234.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 109,632 characters.

The following presents management’s discussion and analysis of our consolidated financial condition at September 30, 2020 and December 31, 2019 and the results of our operations for the three and nine months ended September 30, 2020 and 2019. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in the Form 10-K.

### Forward-Looking Statements:

Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

- statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of the Company and its subsidiaries (collectively “we,” “our,” or “us”), including the Bank; and
- statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing our view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known and unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in this Management’s Discussion and Analysis section. Factors that might cause such differences include, but are not limited to:

- our ability to successfully execute business plans, manage risks, and achieve objectives;
- changes in local, national and international political and economic conditions, including without limitation changes in the political and economic climate, economic conditions and fiscal imbalances in the United States and other countries, potential or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major developments, including wars, natural disasters, epidemics and pandemics, including the COVID-19 outbreak, military actions, and terrorist attacks;
- changes in financial market conditions, either internationally, nationally, or locally in areas in which we conduct operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;
- fluctuations in markets for equity, fixed-income, commercial paper, and other securities, including availability, market liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;
- our ability to successfully conduct acquisitions and integrate acquired businesses;
- potential difficulties in expanding our businesses in existing and new markets;
- increases in the levels of losses, client bankruptcies, bank failures, claims, and assessments;
- changes in fiscal, monetary, regulatory, trade and tax policies and laws, including the recently enacted Tax Reform Act, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Federal Reserve, and the FDIC;
- the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact our ability and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;
- the impact of the Dodd-Frank Act and the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”), and rules and regulations thereunder, many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which we engage in such activities, the fees that our subsidiaries may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;
- continuing consolidation in the financial services industry; new legal claims against us, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;
- success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
- changes in consumer spending and savings habits;
- increased competitive challenges and expanding product and pricing pressures among financial institutions;
- inflation and deflation;
- technological changes and our implementation of new technologies;
- our ability to develop and maintain secure and reliable information technology systems;
- legislation or regulatory changes which adversely affect our operations or business;
- our ability to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by the FASB or regulatory agencies;
- costs of deposit insurance and changes with respect to FDIC insurance coverage levels; and
- other risks and uncertainties detailed in Part I, Item 1A, Risk Factors in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019.

Except to the extent required by law, we specifically disclaim any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

### Summary of Results of Operations

*(Dollars in thousands, except per share data)*

| Earnings and Per Share Data: | Nine Months Ended September 30 2020 | 2019 | Three Months Ended September 30 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income from continuing operations | $25,573 | $22,469 | $6,491 | $4,346 |
| Net income (loss) from discontinued operations | — | 427 | — | (19) |
| Net income | 25,573 | 22,896 | 6,491 | 4,327 |
| Net income available to common shareholders | 25,228 | 22,532 | 6,375 | 4,206 |
| Earnings per share from continuing operations - basic | 2.11 | 1.89 | 0.53 | 0.36 |
| Earnings per share from discontinued operations - basic | — | 0.04 | — | — |
| Earnings per share - basic | 2.11 | 1.93 | 0.53 | 0.36 |
| Earnings per share from continuing operations - diluted | 2.07 | 1.84 | 0.53 | 0.35 |
| Earnings per share from discontinued operations - diluted | — | 0.04 | — | — |
| Earnings per share - diluted | 2.07 | 1.88 | 0.53 | 0.35 |
| Cash dividends paid per common share | 0.27 | 0.125 | 0.09 | 0.05 |
| Book value per common share | 19.07 | 16.84 | 19.07 | 16.84 |
| Weighted average shares outstanding - basic | 11,948,857 | 11,661,581 | 11,948,989 | 11,731,774 |
| Weighted average shares outstanding - diluted | 12,185,137 | 11,957,385 | 12,116,418 | 12,098,335 |
| **Performance Ratios:** |  |  |  |  |
| Return on average assets - continuing operations 1 | 1.63% | 1.64% | 1.21% | 0.92% |
| Return on average assets - discontinued operations 1 | —% | 0.03% | —% | —% |
| Return on average assets 1 | 1.63% | 1.67% | 1.21% | 0.92% |
| Return on average equity - continuing operations 1 | 15.37% | 15.69% | 11.25% | 8.54% |
| Return on average equity - discontinued operations 1 | —% | 0.30% | —% | (0.04)% |
| Return on average equity 1 | 15.37% | 15.99% | 11.25% | 8.50% |
| Net interest margin 2 3 | 3.60% | 3.51% | 3.35% | 3.48% |
| Efficiency ratio 4 | 60.33% | 66.63% | 51.58% | 78.64% |
| Overhead ratio 1 5 | 4.85% | 4.55% | 3.40% | 4.96% |
| **Asset Quality Data and Ratios:** |  |  |  |  |
| Charge-offs | $1,890 | $676 | $111 | $— |
| Recoveries | $17 | $54 | $5 | $49 |
| Net loan charge-offs to total loans 1 6 | 0.17% | 0.06% | 0.03% | (0.01)% |
| Allowance for loan losses | $25,913 | $11,874 | $25,913 | $11,874 |
| Allowance for loan losses to total loans 7 | 1.81% | 0.86% | 1.81% | 0.86% |
| Nonperforming loans | $14,893 | $5,627 | $14,893 | $5,627 |
| Nonperforming loans to total loans | 1.04% | 0.41% | 1.04% | 0.41% |
| **Capital Ratios:** |  |  |  |  |
| Equity to assets | 10.57% | 10.51% | 10.57% | 10.51% |
| Bank Leverage ratio | 10.64% | 9.88% | 10.64% | 9.88% |
| Bank Common equity Tier 1 capital ratio | 14.63% | 11.83% | 14.63% | 11.83% |
| Bank Tier 1 risk-based capital ratio | 14.63% | 11.83% | 14.63% | 11.83% |
| Bank Total risk-based capital ratio | 15.89% | 12.62% | 15.89% | 12.62% |

1 Annualized for the quarterly periods presented

2 Net interest income as a percentage of average interest earning assets

3 Presented on a fully tax-equivalent basis

4 Noninterest expense as a percentage of net interest income and noninterest income

5 Noninterest expense as a percentage of average assets

6 Charge-offs less recoveries

7 Excludes loans held for sale

### Introduction

#### Corporate Overview

MVB Financial Corp. is a financial holding company and was organized in 2003. MVB operates principally through its wholly owned subsidiaries, MVB Bank, Inc. MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, MVB CDC, Chartwell, Paladin, and MVB Technology.

MVB Bank was chartered in 1997 and commenced operations in 1999.

In 2012, MVB Bank acquired Potomac Mortgage Group, Inc. (“PMG” which began doing business under the registered trade name “MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services company, Lender Service Provider, LLC (“LSP”). In 2013, this fifty percent interest (50%) in LSP was reduced to a twenty-five percent (25%) interest. In 2017, a forfeiture of a partial interest occurred, which increased the interest owned to thirty-three percent (33%). At this time, LSP began doing business as Lenderworks.

MVB Insurance was originally formed in 2000. In 2013, MVB Insurance became a direct subsidiary of the Company. MVB Insurance continues to operate its title insurance business, which is immaterial in terms of revenue. The Company reorganized MVB Insurance as a subsidiary of the Bank in 2016.

MVB CDC was formed in 2017 and was created as a means to provide opportunities for loans and investments that help to increase access to equity capital in under-served urban and rural areas of West Virginia and our market areas in Virginia. MVB CDC promotes specific bank-driven economic development strategies, provides for effective support for its CRA compliance strategy, and helps to support positive local reputation of the Bank through marketing and visible activities in the communities where we live and work.

Chartwell Compliance, based from Bethesda, Maryland, was acquired by MVB on September 13, 2019. Chartwell Compliance provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell will expand its services to both Fintech clients and banks, coordinating with MVB Bank’s current compliance officers and helping create and implement strategy and provide expert compliance resources to aid MVB in carrying out stringent and faster new client due diligence.

On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, personal property, and other fixed assets associated with the branch locations. The Company closed this transaction on April 24, 2020, as discussed further in Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On March 2, 2020, the Bank and PMG (dba MVB Mortgage), entered into an Agreement by and among the Bank, PMG, Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the mortgage origination services businesses of PMG and Intercoastal. Pursuant to the terms of the Agreement, on the closing date, Intercoastal converted into a Virginia limited liability company and PMG contributed substantially all of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of Intercoastal, representing 47% of the common interest of Intercoastal, as well as $7.5 million in preferred units (the “Transaction”). The completion of the Transaction was subject to certain regulatory approvals, conditions precedent and normal customary closing conditions. In the Agreement, the Bank, MVB Mortgage, and Intercoastal made customary representations, warranties, and covenants, including covenants to enter into ancillary agreements related to the Transaction and the operation of the business following the completion of the Transaction. The Company recognizes its ownership as an equity method investment, initially recorded at fair value. This transaction was closed on July 1, 2020, as discussed further in Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value. The Bank also acquired three branch locations in Barboursville, Teays Valley, and Huntington, W.Va. This transaction is discussed further in Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On April 17, 2020, Paladin Fraud, LLC, a West Virginia limited liability company and indirect wholly owned subsidiary of MVB Financial Corporation, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, and upon the terms and conditions set forth therein, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC. This transaction is discussed further in Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On August 7, 2020, MVB Technology, LLC, a newly formed West Virginia limited liability company and wholly owned subsidiary of the Bank, entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Purchase Agreement, MVB Technology acquired the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. This transaction is discussed further in Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

#### Business Overview

The Company’s primary business activities, through its subsidiaries, are primarily community banking and mortgage banking. The Bank offers its clients a full range of products and services including:

- Various demand deposit accounts, savings accounts, money market accounts, and certificates of deposit;
- Commercial, consumer, and real estate mortgage loans and lines of credit;
- Debit and credit cards;
- Cashier’s checks and money orders;
- Safe deposit rental facilities; and
- Non-deposit investment services.

The Company is also involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech. The dedicated Fintech sales team is based in Salt Lake City, UT and specializes in providing banking services to corporate Fintech clients, with an overarching focus on operational risk and compliance. This business line has the potential for fee income revenue as relationships grow.

The Bank’s financial products and services are offered through its financial service locations and automated teller machines (“ATMs”) in West Virginia and Virginia, as well as telephone and internet-based banking through both personal computers and mobile devices. Non-deposit investment services are offered through an association with a broker-dealer. The Bank has deployed Automated Interactive Teller machines (“AITs”) in several branch locations. AITs provide services by featuring video interaction with a bank employee upon request. A client can deposit cash and checks and withdraw cash, as well as a variety of other services typically occurring in a traditional branch location.

Since its opening in 1999, the Bank has experienced significant growth in assets, loans, and deposits due to strong community and client support in Marion and Harrison counties in West Virginia, expansion into Monongalia, Kanawha, Putnam, and Cabell counties in West Virginia and into Fairfax and Loudoun counties in Virginia. Since the acquisition of PMG, mortgage banking is now a much more significant focus, which has opened increased market opportunities in the Washington, DC metropolitan region, North Carolina, and South Carolina and added enough volume to further diversify the Company’s revenue stream. Mortgage banking will continue to be a focus after the recent transaction, but the activity will be captured through the Company's equity method investment in Intercoastal.

This discussion and analysis should be read in conjunction with the prior year-end audited consolidated financial statements and footnotes thereto included in the Company’s 2019 filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.

At September 30, 2020, the Company had 338 full-time equivalent employees.

The Company’s principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800. The Company’s Internet web site is www.mvbbanking.com.

### Application of Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with U. S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.

The most significant accounting policies followed by the Company are presented in Note 1, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in management’s discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and accounting for business combinations to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of losses inherent in classifications of homogeneous loans based on the Bank’s historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Non-homogeneous loans are specifically evaluated due to the increased risks inherent in those loans. The loan portfolio also represents the largest asset type in the consolidated balance sheet. Note 1, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Form 10-K, describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Allowance for Loan Losses” section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

Accounting for business combinations involves the allocation of the fair value of the purchase consideration of acquisitions to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. Purchase price allocations for business acquisitions require significant judgments, particularly with regards to the determination of value of identifiable assets, liabilities, and goodwill. Often, third-party consultants are used to assist in valuations requiring complex estimation. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of assets acquired or liabilities assumed. On the date of acquisition, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the loans are accounted for under ASC 310-30, *Loans and Debt Securities Acquired with Deteriorated Credit Quality*. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. The Company must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield which will have a positive impact on interest income. Loans that do not have evidence of credit deterioration at acquisition are accounted for under ASC 310-20, *Nonrefundable Fees and Other Costs*. For more information on the Company's business combinations, please see Note 17, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. For more information on the Company's loan portfolio, please see Note 4, “Loans and Allowance for Loan Losses” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

### Results of Operations

#### Overview of the Statements of Income

For the three months ended September 30, 2020, the Company earned $6.5 million compared to $4.3 million in the third quarter of 2019, excluding discontinued operations. Net interest income increased by $1.0 million, provision for loan losses increased by $8.0 million, noninterest income increased by $4.7 million, and noninterest expenses decreased by $5.1 million.

The increase in net interest income was driven by a decrease of $3.4 million in interest expense outpacing a decrease of $2.4 million in interest income.

The decrease in interest expense of $3.4 million was due to the cost of interest-bearing liabilities decreasing by 95 basis points, primarily due to a decrease in cost of funds on money market checking of 134 basis points and a decrease in cost of funds on certificates of deposits of 105 basis points, which was driven by a decrease in average interest-bearing liabilities of $65.3 million. The decrease in interest expense was mainly driven by a $1.1 million decrease in interest expense on certificates of deposit, through a decrease in the rates on certificates of deposits, and a $1.0 million decrease in interest expense on money market checking, as a result of a decrease in rates. Certificates of deposit decreased by $31.9 million while the cost of funds on certificates of deposit decreased by 105 basis points compared to the three months ended September 30, 2019. Money market checking increased by $145.6 million while the cost of funds on money market checking decreased by 134 basis points compared to the three months ended September 30, 2019.

The decrease in interest income was due to the tax-equivalent yield on loans and loans held for sale decreasing by 66 basis points, primarily due to a decrease in real estate loan yield of 134 basis points and a decrease in commercial loan yield of 56 basis points, offset by average loan growth of $13.4 million .

The increase in noninterest income was primarily the result of an increase in equity method investment income of $13.6 million, a gain on mortgage combination transaction of $3.3 million, and an increase in compliance consulting income of $1.1 million. This increase was offset by a decrease in mortgage fee income of $4.2 million and a decrease in the gain on derivatives of $8.6 million. The changes in the equity method investment income, gain on mortgage combination transaction, mortgage fee income, and gain on derivatives were all largely driven by the MVB Mortgage transaction.

The decrease in noninterest expense was mainly driven by the decrease in salaries and benefits of $4.9 million and the decrease in mortgage processing of $725 thousand, largely driven by the MVB Mortgage transaction. The decrease in noninterest expense was also the result of a decrease in travel, entertainment, dues and subscriptions of $501 thousand, which is mainly the result of decreased travel during the COVID-19 pandemic.

The provision for loan losses, which is a product of management’s formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provision of $8.6 million and $657 thousand were made for the three months ended September 30, 2020 and 2019, respectively. The drastic increase in loan loss provision is mainly the result of changes to the qualitative adjustment factor framework within the allowance methodology, in addition to adjustments to the risk grading of significant loans within the portfolio, changes in the outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and the resulting changes in the historical loss rates.

Management has continued to evaluate the qualitative factor framework within the allowance for loan loss methodology in order to assess how well the framework can appropriately respond to the unprecedented risk presented by the COVID-19 pandemic. As a result, the framework was significantly enhanced to consider a much greater degree of risk than when the framework was originally designed. The framework has consistently generated an adequate allowance for loan loss within a generally stable economic environment, but the onset of the pandemic made it apparent that the framework required modifications to consider this greater degree of risk. These enhancements resulted in the need for $6.6 million in additional loan loss provision in the third quarter of 2020. While the ultimate timing and severity of impacts to the economic and business conditions in which we operate are not yet fully known, it is clear that the impacts will continue to be significant and it is likely that the impacts will evolve over time as businesses and individuals learn to adapt to a new way of operating and living. The breadth of the world-wide pandemic and the fact that it impacts virtually every industry has inherently created additional risk within the loan portfolios, despite there being no change to the nature of those portfolios. Furthermore, as a result of the ongoing analysis of the loan portfolios, it has become apparent that a significant number of borrowers are experiencing a strain on their operations, and as a result present an increase in the volume and severity of problem loans. Additionally, it is evident that consumer sentiment has been impacted, although not as significantly as during the Great Recession. Other significant factors include the increasingly volatile social atmosphere, the evolving political climate as the election approaches, and the possibility and timing of a vaccine. The unprecedented initiatives of the Federal Government to provide support to the economy through new loan programs, has simultaneously served to temporarily mitigate some of the impacts to our economy and our borrowers, while also adding some degree of increased risk to lending policies and procedures as a result of the pace and manner in which these programs have been developed and made available to the public. As a result, quantifiable evidence of the impacts to our loan portfolios have not yet fully revealed themselves in terms of delinquent loans or deterioration in collateral values. Meanwhile, as of quarter-end, management had not made any significant changes to lending strategies that would impact the concentrations of credit risk within those portfolios.

Meanwhile, total loan balances decreased $66.4 million in the third quarter of 2020 versus an increase of $55.9 million in the third quarter of 2019. The commercial loan portfolio decreased by $9.0 million for the third quarter of 2020, in comparison to an increase of $39.0 million in the third quarter of 2019, while the residential mortgage loan portfolio decreased by $55.4 million in the third quarter of 2020, while increasing by $17.2 million in the third quarter of 2019. Included in the commercial and total loan volume increases are PPP loans totaling $87.9 million as of September 30, 2020. In addition, net charge-offs in the third quarter of 2020 totaled $106 thousand, in comparison to net recoveries of $49 thousand in the third quarter of 2019. Additionally, provision was impacted by a $437 thousand increase in the specific loan loss allocations in the third quarter of 2020, relative to a $981 thousand increase in the third quarter of 2019. Lastly, the risk grade adjustment of significant loans within the portfolio resulted in the need for roughly $1.4 million in additional loan loss provision.

For the nine months ended September 30, 2020, the Company earned $25.6 million compared to $22.5 million for the nine months ended September 30, 2019, excluding discontinued operations. Net interest income increased by $7.1 million, provision for loan losses increased by $14.8 million, noninterest income increased by $25.9 million, and noninterest expenses increased by $14.0 million.

The increase in net interest income was driven by a decrease of $7.1 million in interest expense outpacing interest income that remained flat. The decrease of $7.1 million in interest expense was due to a 85 basis point decrease in the cost of funds on money market checking, a 76 basis point decrease in the rates on certificates of deposits, and a 6 basis point decrease in the cost of funds on FHLB and other borrowings, offset by a $11.8 million increase in average interest-bearing liabilities. The decrease in interest expense was driven by a $1.3 million decrease in interest expense on money market checking, a $2.5 million decrease in interest expense on certificates of deposit, and a $2.2 million decrease in interest expense on FHLB and other borrowings. Average money market checking increased by $127.3 million, while the cost of funds on money market checking decreased by 85 basis points compared to the nine months ended September 30, 2019. Average certificates of deposit decreased by $15.1 million, while the cost of funds on certificates of deposit decreased by 76 basis points compared to the nine months ended September 30, 2019. Average FHLB and other borrowings decreased by $105.1 million, while the cost of funds on FHLB and other borrowings decreased by 6 basis points compared to the nine months ended September 30, 2019.

Interest income remained flat as a result of the tax-equivalent yield on loans and loans held for sale decreasing by 46 basis points, primarily due to a decrease in real estate loan yield of 63 basis points and a decrease in commercial loan yield of 44 basis points, offset by average loan growth of $146.9 million.

The increase in noninterest income was primarily the result of an increase in equity method investment income of $13.6 million, a gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $5.4 million, a bargain purchase gain of $4.7 million, a gain on mortgage combination transaction income of $3.3 million, an increase in compliance consulting income of $3.0 million, and an increase in gain on sale of securities of $1.0 million. This increase was offset by a decrease in holding gain on equity securities of $13.7 million

The increase in noninterest expense was mainly due to an increase in salaries and benefits of $8.9 million, largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team. Professional fees expense increased by $2.9 million and data processing and communications increased by $1.2 million. Of the increases in professional fees and data processing and communications expense, $1.3 million and $780 thousand, respectively, were deal and conversion costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

The provision for loan losses, which is a product of management’s formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provision of $16.4 million and $1.6 million were made for the nine months ended September 30, 2020 and 2019, respectively. The drastic increase in loan loss provision is mainly the result of changes to the qualitative adjustments factor framework within the allowance methodology, in addition to adjustments to the risk grading of significant loans within the portfolio, changes in the outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and the resulting changes in the historical loss rates.

The increase in loan loss provision is most attributable to the severe impact of the COVID-19 pandemic on the qualitative adjustment factors, as described in more detail above. The historical loss rates were also uniquely impacted during the nine months ended September 30, 2020 as a result of revisions to the portfolio segmentation, which were implemented to allow for the enhanced assessment of risk within the portfolio. More specifically, the most material enhancement included new commercial loan segments for purchased participation loans and government lease financing loans, as well as the division of the sole residential mortgage segment into a permanent mortgage segment and a construction mortgage segment. In general, this slightly reduced historical loss rates for the previously existing segments as it transitioned certain historical loan losses into the new segments. The most material impact of this enhancement was a $1.8 million charge off of a government lease financing loan stemming from the non-renewal of the underlying government contract unrelated to the COVID-19 pandemic, which was reflected in the new government lease financing segment.

Meanwhile, total loan balances decreased $16.8 million in the nine months ended September 30, 2020 versus an increase of $77.7 million in the nine months ended September 30, 2019. More specifically, the commercial loan portfolio increased by $26.9 million in 2020, in comparison to $84.0 million in 2019, while the residential mortgage loan portfolio decreased by $37.5 million in 2020, while decreasing by $2.6 million in 2019. Included in the commercial and total loan volume increases are PPP loans totaling $87.9 million as of September 30, 2020. In addition, specific loan loss allocations increased by $1.4 million in the nine months ended September 30, 2020, in comparison to $472 thousand in the nine months ended September 30, 2019. Lastly, charge-offs totaled $1.9 million during the nine months ended September 30, 2020 versus $622 thousand for the same time period in 2019.

#### Interest Income and Expense

Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest-bearing liabilities. Interest-earning assets include loans, investment securities, and certificates of deposits in other banks. Interest-bearing liabilities include interest-bearing deposits and repurchase agreements, subordinated debt, and Federal Home Loan Bank (“FHLB”) and other borrowings. Net interest income is a primary source of revenue for the bank. Changes in market interest rates, as well as changes in the mix and volume of interest-earning assets and interest-bearing liabilities impact net interest income.

Net interest margin is calculated by dividing net interest income by average interest-earning assets. This ratio serves as a performance measurement of the net interest revenue stream generated by the Company’s balance sheet. The net interest margin continues to face considerable pressure due to the current rate environment and competitive pricing of loans and deposits in the Bank’s markets.

Due to the ongoing COVID-19 pandemic, there has been a significant amount of downward movement in the Fed Funds rate during the period. To begin 2020, the Fed Funds rate was set at 1.50-1.75 due to the latest downward shift during the fourth quarter of 2019. With the economic volatility and increases in unemployment, the Federal Reserve shifted the Fed Funds rate down to 0.00-0.25 and remains at this rate as of September 30, 2020. Given all of these changes to the market rates, the Company has experienced increased pressure on net interest income.

For the three months ended September 30, 2020 versus 2019, the Company was able to grow average loans and loans held for sale balances, including the related basis reduction from the acquired First State loans, by $13.4 million to $1.50 billion. Average investment securities increased $13.8 million to $245.8 million. Average interest-bearing liabilities decreased by $65.3 million, primarily the result of a $178.0 million decrease in average FHLB and other borrowings, a $31.9 million decrease in average certificates of deposit, and a $5.4 million decrease in average subordinated debt, offset by a $145.6 million increase in average money market checking. An increase in the Company’s average non-interest balances of $271.2 million helped to maintain a 26-basis point favorable spread on the tax-equivalent net interest margin in 2020.

The tax-equivalent net interest margin for the three months ended September 30, 2020 and 2019 was 3.35% and 3.48%, respectively. Excluding the impact from the FDIC-assisted acquisition of First State, the fully-tax equivalent net interest margin for the quarter ended September 30, 2020 would have decreased 21 basis points. For the quarter ended September 30, 2020, the excess liquidity from increased cash balances accounted for 26 basis points of the decrease, the PPP loans originated during the second quarter accounted for 15 basis points of the decrease, and a $500 thousand prepayment penalty for paying off long term borrowings accounted for 10 basis points of the decrease.

The 13-basis point decrease in the tax-equivalent net interest margin for the three months ended September 30, 2020 was mainly the result of the decrease in tax-equivalent yield on earnings assets of 97 basis points outpacing the decrease in the cost of interest-bearing liabilities of 95 basis points.

The 97-basis point decrease in the tax-equivalent yield on average earning assets for the three months ended September 30, 2020 versus 2019 was primarily the result of a 66-basis point decrease in the tax-equivalent yield on loans and loans held for sale and a 25-basis point decrease in the tax-equivalent yield on investment securities. More specifically, the decrease in the tax-equivalent yield on loans and loans held for sale was driven by a decrease in the yield on commercial loans of 56 basis points and a 134-basis point decrease in yield on real estate loans.

The cost of interest-bearing liabilities decrease was mainly the result of a 457-basis point decrease in subordinated debt, a 34-basis point decrease in repurchase agreements and federal funds sold, and a 95-basis point decrease in interest-bearing deposits. More specifically, the decrease in interest-bearing deposits was as follows: a 134-basis point decrease in money market checking, a 105-basis point decrease in certificates of deposit, a 51-basis point decrease in IRAs. In addition, a $500 thousand prepayment penalty was recorded as interest expense for paying off long term borrowings, of which $10.8 million was paid off during the three months ended September 30, 2020.

For the nine months ended September 30, 2020 versus 2019, the Company was able to grow average loans and loans held for sale balances, including the related basis reduction from the acquired First State loans, by $146.9 million to $1.58 billion. Average investment securities increased $1.8 million to $229.9 million. Average interest-bearing liabilities increased by $11.8 million, primarily the result of a $127.3 million increase in average money market checking and a $16.7 million increase in average NOW, offset by a $105.1 million decrease in average FHLB and other borrowing balances, a $15.1 million decrease in average certificates of deposit and a $10.7 million decrease in average subordinated debt. An increase in the Company’s average non-interest balances of $196.7 million helped to maintain a 29-basis point favorable spread on the tax-equivalent net interest margin in 2020.

The tax-equivalent net interest margin for the nine months ended September 30, 2020 and 2019 was 3.60% and 3.51%, respectively. Excluding the impact from the FDIC-assisted acquisition of First State, the fully-tax equivalent net interest margin for the nine months ended September 30 would have decreased 11 basis points. For the nine months ended September 30, the excess liquidity from increased cash balances accounted for 10 basis points of the decrease, the PPP loans originated during the second quarter accounted for 17 basis points of the decrease, and a $500 thousand prepayment penalty for paying off long term borrowings accounted for 4 basis points of the decrease.

The nine-basis point increase in the tax-equivalent net interest margin for the nine months ended September 30, 2020 was mainly the result of the decrease in the cost of interest-bearing liabilities of 72 basis points outpacing the decrease in tax-equivalent yield on earning assets of 57 basis points.

The 72-basis point decrease in cost of interest-bearing liabilities for the nine months ended September 30, 2020 versus 2019 was mainly the result of a 405-basis point decrease in subordinated debt, a 6-basis point decrease in FHLB and other borrowings, and a 61-basis point decrease in interest-bearing deposits. More specifically, the decrease in interest-bearing deposits was as follows: a 85-basis point decrease in money market checking, a 76-basis point decrease in certificates of deposit, and a 27-basis point decrease in IRAs. In addition, a $500 thousand prepayment penalty was recorded as interest expense for paying off long term borrowings, of which $10.8 million was paid off during the three months ended September 30, 2020.

The 57-basis point decrease in the tax-equivalent yield on average earning assets for the nine months ended September 30, 2020 versus 2019 was primarily the result of a 46-basis point decrease in the tax-equivalent yield on loans and loans held for sale and a 25-basis point decrease in the tax-equivalent yield on investment securities. More specifically, the decrease in the tax-equivalent yield on loans and loans held for sale was driven by a decrease in real estate loan yield of 63 basis points and a decrease in commercial loan yield of 44 basis points.

#### Net Interest Income and Net Interest Margin (Average Balance Schedules)

The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (on a tax-equivalent basis). The average balances presented are derived from daily average balances.

*(Dollars in thousands)*

| Assets | Three Months Ended September 30, 2020 Average Balance | Interest Income/Expense | Yield/Cost | Three Months Ended September 30, 2019 Average Balance | Interest Income/Expense | Yield/Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in banks | $174,203 | $45 | 0.10% | $9,562 | $61 | 2.53% |
| CDs with other banks | 12,641 | 61 | 1.91 | 14,143 | 71 | 1.99 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 103,497 | 411 | 1.58 | 122,648 | 689 | 2.23 |
| Tax-exempt 2 | 142,301 | 1,344 | 3.75 | 109,324 | 1,113 | 4.04 |
| Loans and loans held for sale: 1 |  |  |  |  |  |  |
| Commercial | 1,160,214 | 14,108 | 4.82 | 1,002,595 | 13,599 | 5.38 |
| Tax exempt 2 | 7,752 | 91 | 4.66 | 11,229 | 127 | 4.47 |
| Real estate | 325,992 | 2,749 | 3.35 | 464,769 | 5,490 | 4.69 |
| Consumer | 6,613 | 119 | 7.14 | 8,612 | 149 | 6.86 |
| Total loans | 1,500,571 | 17,067 | 4.51 | 1,487,205 | 19,365 | 5.17 |
| Total earning assets | 1,933,213 | 18,928 | 3.88 | 1,742,882 | 21,298 | 4.85 |
| Less: Allowance for loan losses | (18,906) |  |  | (11,232) |  |  |
| Cash and due from banks | 28,299 |  |  | 18,366 |  |  |
| Other assets | 205,038 |  |  | 134,871 |  |  |
| Total assets | $2,147,644 |  |  | $1,884,887 |  |  |
| **Liabilities** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| NOW | $381,375 | $496 | 0.52% | $384,977 | $942 | 0.97% |
| Money market checking | 479,418 | 380 | 0.31 | 333,849 | 1,391 | 1.65 |
| Savings | 49,698 | 7 | 0.06 | 37,335 | 1 | 0.01 |
| IRAs | 12,389 | 44 | 1.41 | 17,342 | 84 | 1.92 |
| CDs | 334,828 | 967 | 1.15 | 366,749 | 2,035 | 2.20 |
| Repurchase agreements and federal funds sold | 10,145 | 4 | 0.16 | 9,493 | 12 | 0.50 |
| FHLB and other borrowings | 34,138 | 699 | 8.12 | 212,102 | 1,383 | 2.59 |
| Subordinated debt | 4,124 | 20 | 1.92 | 9,535 | 156 | 6.49 |
| Total interest-bearing liabilities | 1,306,115 | 2,617 | 0.79 | 1,371,382 | 6,004 | 1.74 |
| Noninterest bearing demand deposits | 542,467 |  |  | 271,294 |  |  |
| Other liabilities | 68,223 |  |  | 38,618 |  |  |
| Total liabilities | 1,916,805 |  |  | 1,681,294 |  |  |
| **Stockholders’ equity** |  |  |  |  |  |  |
| Preferred stock | 7,334 |  |  | 7,644 |  |  |
| Common stock | 12,066 |  |  | 11,773 |  |  |
| Paid-in capital | 124,003 |  |  | 119,166 |  |  |
| Treasury stock | (2,022) |  |  | (1,084) |  |  |
| Retained earnings | 90,113 |  |  | 67,312 |  |  |
| Accumulated other comprehensive (loss) | (655) |  |  | (1,218) |  |  |
| Total stockholders’ equity | 230,839 |  |  | 203,593 |  |  |
| Total liabilities and stockholders’ equity | $2,147,644 |  |  | $1,884,887 |  |  |
| Net interest spread (tax-equivalent) |  |  | 3.09% |  |  | 3.11% |
| Net interest income and margin (tax-equivalent) 2 |  | $16,311 | 3.35% |  | $15,294 | 3.48% |
| Less: Tax-equivalent adjustments |  | $(301) |  |  | $(260) |  |
| Net interest spread |  |  | 3.03% |  |  | 3.05% |
| Net interest income and margin |  | $16,010 | 3.29% |  | $15,034 | 3.42% |

1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.

2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the three months ended September 30, 2020 and 2019, which is a non-U.S. GAAP financial measure. See the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP financial measure following this table.

*(Dollars in thousands)*

| Assets | Nine Months Ended September 30, 2020 Average Balance | Interest Income/Expense | Yield/Cost | Nine Months Ended September 30, 2019 Average Balance | Interest Income/Expense | Yield/Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in banks | $77,667 | $110 | 0.19% | $8,904 | $163 | 2.45% |
| CDs with other banks | 12,667 | 187 | 1.97 | 14,498 | 216 | 1.99 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 104,450 | 1,554 | 1.98 | 127,631 | 2,336 | 2.45 |
| Tax-exempt 2 | 125,493 | 3,703 | 3.93 | 100,530 | 3,304 | 4.39 |
| Loans and loans held for sale: 1 |  |  |  |  |  |  |
| Commercial | 1,138,438 | 42,292 | 4.95 | 973,547 | 39,258 | 5.39 |
| Tax exempt 2 | 9,457 | 329 | 4.64 | 12,831 | 427 | 4.45 |
| Real estate | 428,989 | 13,402 | 4.16 | 441,238 | 15,794 | 4.79 |
| Consumer | 6,805 | 370 | 7.24 | 9,217 | 417 | 6.05 |
| Total loans | 1,583,689 | 56,393 | 4.74 | 1,436,833 | 55,896 | 5.20 |
| Total earning assets | 1,903,966 | 61,947 | 4.33 | 1,688,396 | 61,914 | 4.90 |
| Less: Allowance for loan losses | (14,857) |  |  | (11,174) |  |  |
| Cash and due from banks | 27,781 |  |  | 16,820 |  |  |
| Other assets | 178,701 |  |  | 129,594 |  |  |
| Total assets | $2,095,591 |  |  | $1,823,636 |  |  |
| **Liabilities** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| NOW | $385,413 | $2,070 | 0.72% | $368,709 | $2,510 | 0.91% |
| Money market checking | 447,219 | 2,397 | 0.71 | 319,919 | 3,721 | 1.56 |
| Savings | 43,606 | 16 | 0.05 | 39,066 | 3 | 0.01 |
| IRAs | 13,785 | 169 | 1.63 | 17,627 | 250 | 1.90 |
| CDs | 388,190 | 4,188 | 1.44 | 403,294 | 6,640 | 2.20 |
| Repurchase agreements and federal funds sold | 9,784 | 19 | 0.26 | 11,764 | 37 | 0.42 |
| FHLB and other borrowings | 75,451 | 1,524 | 2.69 | 180,552 | 3,707 | 2.75 |
| Subordinated debt | 4,124 | 78 | 2.52 | 14,821 | 728 | 6.57 |
| Total interest-bearing liabilities | 1,367,572 | 10,461 | 1.02 | 1,355,752 | 17,596 | 1.74 |
| Noninterest bearing demand deposits | 442,378 |  |  | 245,705 |  |  |
| Other liabilities | 63,853 |  |  | 31,305 |  |  |
| Total liabilities | 1,873,803 |  |  | 1,632,762 |  |  |
| **Stockholders’ equity** |  |  |  |  |  |  |
| Preferred stock | 7,334 |  |  | 7,770 |  |  |
| Common stock | 12,031 |  |  | 11,709 |  |  |
| Paid-in capital | 123,342 |  |  | 117,923 |  |  |
| Treasury stock | (1,533) |  |  | (1,084) |  |  |
| Retained earnings | 81,476 |  |  | 58,726 |  |  |
| Accumulated other comprehensive (loss) | (862) |  |  | (4,170) |  |  |
| Total stockholders’ equity | 221,788 |  |  | 190,874 |  |  |
| Total liabilities and stockholders’ equity | $2,095,591 |  |  | $1,823,636 |  |  |
| Net interest spread (tax-equivalent) |  |  | 3.31% |  |  | 3.16% |
| Net interest income and margin (tax-equivalent) 2 |  | $51,486 | 3.60% |  | $44,318 | 3.51% |
| Less: Tax-equivalent adjustments |  | $(847) |  |  | $(783) |  |
| Net interest spread |  |  | 3.26% |  |  | 3.10% |
| Net interest income and margin |  | $50,639 | 3.54% |  | $43,535 | 3.45% |

1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.

2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the nine months ended September 30, 2020 and 2019, which is a non-U.S. GAAP financial measure. See the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP financial measure following this table.

The following table reconciles, as of the dates set forth below, net interest margin on a fully tax-equivalent basis:

*(Dollars in thousands)*

| Net interest margin - U.S. GAAP basis | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $16,010 | $15,034 | $50,639 | $43,535 |
| Average interest-earning assets | 1,933,213 | 1,742,882 | 1,903,966 | 1,688,396 |
| Net interest margin | 3.29% | 3.42% | 3.54% | 3.45% |
| **Net interest margin - non-U.S. GAAP basis** |  |  |  |  |
| Net interest income | $16,010 | $15,034 | $50,639 | $43,535 |
| Plus: Impact of fully tax-equivalent adjustment | 301 | 260 | 847 | 783 |
| Net interest income on a fully tax-equivalent basis | 16,311 | 15,294 | 51,486 | 44,318 |
| Average interest-earning assets | 1,933,213 | 1,742,882 | 1,903,966 | 1,688,396 |
| Net interest margin on a fully tax-equivalent basis | 3.35% | 3.48% | 3.60% | 3.51% |

#### Noninterest Income

Mortgage fee income, gain on derivatives, interchange income, commercial swap fee income, insurance and investment services income, income on bank owned life insurance and portfolio loan sales generate the core of the Company’s noninterest income. The mortgage fee income and gain on derivatives will continue to taper off after the MVB Mortgage transaction and will be reflected in equity method investments income. Also, service charges on deposit accounts continue to be part of the core of the Company’s noninterest income and include mainly non-sufficient funds and returned check fees, allowable overdraft fees and service charges on commercial accounts.

For the three months ended September 30, 2020, noninterest income totaled $19.4 million compared to $14.7 million for the same time period in 2019. The increase in noninterest income of $4.7 million was primarily the result of an increase in equity method investment income of $13.6 million, a gain on mortgage combination transaction of $3.3 million, and an increase in compliance consulting income of $1.1 million. This increase was offset by a decrease in mortgage fee income of $4.2 million and a decrease in the gain on derivatives of $8.6 million.

The increase in equity method investment income of $13.6 million and the increase in gain on mortgage combination transaction of $3.3 million was driven by the MVB Mortgage transaction. Given the MVB Mortgage transaction, the income from mortgage operations is now recognized through the equity method investment and the gain on the transaction is recognized through the gain on mortgage combination transaction. The increase in compliance consulting income of $1.1 million was driven by the 2019 Chartwell acquisition. The decrease in both the gain on derivatives and mortgage fee income is directly related to the MVB Mortgage transaction. Also due to the MVB Mortgage transaction, the locked pipeline as of September 30, 2020 was $0 compared to $210.0 million as of September 30, 2019.

For the nine months ended September 30, 2020, noninterest income totaled $75.8 million compared to $49.8 million for the same time period in 2019. The increase in noninterest income of $25.9 million was primarily the result of an increase in equity method investment income of $13.6 million, a gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $5.4 million, a bargain purchase gain of $4.7 million, a gain on mortgage combination transaction of $3.3 million, an increase in compliance consulting income of $3.0 million, and an increase in gain on sale of securities of $1.0 million. This increase was offset by a decrease in holding gain on equity securities of $13.7 million

The increase in equity method investment income of $13.6 million and the gain on mortgage combination transaction of $3.3 million was driven by the MVB Mortgage transaction. Given the MVB Mortgage transaction, the income from mortgage operations is now recognized through the equity method investment. The increase in gain on sale of banking centers of $9.6 million was due to the Purchase and Assumption Agreement with Summit Community Bank that the Company closed in the second quarter of 2020. The increase in mortgage fee income of $5.4 million is driven by an increase of $304.4 million in mortgage loans sold for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The bargain purchase gain of $4.7 million was due to the First State acquisition. The increase in compliance consulting income of $3.0 million was driven by the 2019 Chartwell acquisition. The increase in gain on sale of securities of $1.0 million is mostly driven by the decreased rate environment driving opportunities for gains on the sale of investments. The $13.7 million decrease in holding gain on equity securities was due to an increase in the valuation of the Company’s Fintech investment portfolio during the second quarter of 2019.

#### Noninterest Expense

The Company had 338 full-time equivalent personnel at September 30, 2020, as noted, compared to 420 full-time equivalent personnel as of September 30, 2019. The decrease in full-time equivalent personnel is a direct result of the MVB Mortgage transaction. Company and Bank management will continue to strive to find new ways of increasing efficiencies and leveraging its resources, while effectively optimizing client service.

Salaries and employee benefits, occupancy and equipment, travel and entertainment, dues and subscriptions, data processing and communications, mortgage processing and professional fees generate the core of the Company’s noninterest expense. The Company’s efficiency ratio was 51.58% for the third quarter of 2020 compared to 78.64% for the third quarter of 2019. This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus noninterest income. The decreased efficiency ratio for the three months ended September 30, 2020 is the result of the growth in net interest income and noninterest income outpacing the growth in noninterest expense.

The Company had 5 separate deals take place during the second and third quarter of 2020. The deals included The First State Bank acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, the MVB Mortgage transaction and the Invest Forward, Inc. acquisition. Due to these deals, the Company incurred the following deal related costs in noninterest expense:

|  | For the three months ended September 30, 2020 | For the nine months ended September 30, 2020 |
| --- | ---: | ---: |
| Professional fees | $145 | $1,296 |
| Data processing & communications | 281 | 780 |
| Total deal-related costs | $426 | $2,076 |

For the three months ended September 30, 2020, noninterest expense totaled $18.3 million compared to $23.4 million for the same time period in 2019. The $5.1 million decrease in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense decreased by $4.9 million. The decrease is primarily driven by the MVB Mortgage transaction, which removed MVB Mortgage salaries and employee benefits expenses from being expensed through the Company.

Mortgage processing decreased by $725 thousand. The decrease in mortgage processing is mainly driven by the MVB Mortgage transaction, which removed mortgage processing from being expensed through the Company.

Travel, entertainment, dues, and subscriptions decreased by $501 thousand. The decrease in travel expense is primarily driven by the decrease in travel related to the COVID-19 pandemic.

Other operating expenses increased by $534 thousand. The increase was mainly driven by increased loan expense and OREO expense related to the First State acquisition.

Data processing and communications increased by $304 thousand. The increase in data processing and communications expense of $281 thousand was deal and conversion costs related to the First State acquisition.

Professional fees expense increased by $290 thousand. This increase in professional fees expense of $145 thousand was deal and conversion costs related to the First State acquisition.

For the nine months ended September 30, 2020, noninterest expense totaled $76.3 million compared to $62.2 million for the same time period in 2019. The $14.0 million increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased by $8.9 million. The increase was primarily the result of increased mortgage production, the build-out of other Company administration, the build-out of the Fintech team, increased incentive and stock-based compensation, and the additional team members acquired as a result of the First State acquisition, the Paladin, LLC acquisition, and the Chartwell acquisition.

Professional fees expense increased by $2.9 million. This increase in professional fees expense of $1.3 million was deal and conversion costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

Other operating expense increased by $1.3 million. This increase was largely due to amortization of intangibles related to the

2019 Chartwell acquisition and OREO expense related to the First State acquisition.

Data processing and communication expense increased by $1.2 million. The increase in data processing and communications expense of $780 thousand was deal and conversion costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

Mortgage processing decreased by $509 thousand. The decrease in mortgage processing is mainly driven by the MVB Mortgage transaction, which removed mortgage processing from being expensed through the Company.

#### Return on Average Assets (Annualized)

Excluding discontinued operations, the Company’s return on average assets was 1.21% for the third quarter of 2020, compared to 0.92% for the third quarter of 2019. The increased return for the third quarter of 2020 is a direct result of a $2.1 million increase in earnings, while average total assets increased by $262.8 million, primarily the result of a $164.6 million increase in interest-bearing deposits in banks, a $70.2 million increase in average other assets, and a $13.4 million increase in average total loans and loans held for sale.

Excluding discontinued operations, the Company’s return on average assets was 1.63% for the nine months ended September 30, 2020, compared to 1.64% for the nine months ended September 30, 2019. The decreased return for the nine months ended September 30, 2020 is a direct result of a $3.1 million increase in earnings being outpaced by an increase in average total assets of $272.0 million, primarily the result of a $146.9 million increase in average total loans and loans held for sale, a $68.8 million increase in interest-bearing deposits in banks, and a $49.1 million increase in average other assets.

#### Return on Average Equity (Annualized)

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 11.25% for the third quarter of 2020, compared to 8.54% for the third quarter of 2019. The increased return for the third quarter of 2020 is a direct result of a $2.1 million increase in earnings, while average stockholders’ equity increased by $27.2 million. The increase in average stockholders’ equity was primarily due to a $22.8 million increase in retained earnings and a $4.8 million increase in paid-in capital.

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 15.37% for the nine months ended September 30, 2020, compared to 15.69% for the nine months ended September 30, 2019. The decreased return for the nine months ended September 30, 2020 is a direct result of a $3.1 million increase in earnings, while average stockholders’ equity increased by $30.9 million. The increase in average stockholders’ equity was primarily due to a $22.8 million increase in retained earnings, a $5.4 million increase in paid-in capital, and a $3.3 million decrease in accumulated other comprehensive loss.

#### Overview of the Consolidated Balance Sheets

The greatest balance changes since December 31, 2019 were as follows: total assets increased by $270.3 million, to $2.21 billion, loans increased $54.1 million, to $1.43 billion, available-for-sale investment securities increased $62.1 million, to $298.0 million, deposits increased $633.9 million, to $1.90 billion, borrowings decreased $197.1 million, to $25.8 million, and stockholders’ equity increased by $22.2 million, to $234.1 million.

#### Cash and Cash Equivalents

Cash and cash equivalents totaled $295.8 million at September 30, 2020, compared to $28.0 million at December 31, 2019.

Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations as they come due.

With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management believes liquidity needs could be greater during this volatile time within the industry and markets. Based upon this volatility, the Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to maintain liquidity.

#### Investment Securities

Investment securities, including equity securities, totaled $322.1 million at September 30, 2020, compared to $254.3 million at December 31, 2019. As of September 30, 2020, the investment portfolio is comprised of the following mix of securities:

- 47.6% – Municipal securities
- 16.6% – U.S. Agency securities
- 21.2% – U.S. Sponsored Mortgage-backed securities
- 2.3% – Other debt securities
- 4.9% – Other securities
- 7.4% – Equity securities

The Company and Bank management monitor the earnings performance and liquidity of the investment portfolio on a regular basis through Asset and Liability Committee (“ALCO”) meetings. The ALCO also monitors net interest income and assists in the management of interest rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, sufficient liquidity is maintained to satisfy depositor requirements and the various credit needs of its clients. The Company and Bank management believe the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

Due to the COVID-19 pandemic, there has been increased volatility within the investment market. Given the balance mix of the Company to begin the year, management was able to take advantage of opportunities in selling available-for-sale investment securities for gains and purchased securities at favorable pricing levels.

#### Loans

The Company’s loan portfolio totaled $1.43 billion as of September 30, 2020 and totaled $1.37 billion as of December 31, 2019. The Bank’s lending is primarily focused in the Marion, Harrison, Monongalia, Kanawha, Putnam and Cabell counties of West Virginia, and Fairfax and Loudoun counties of Virginia, with a secondary focus on the adjacent counties. Its extended market is in the adjacent counties. The portfolio consists principally of commercial lending, mortgage lending, which includes single-family residential mortgages, and consumer lending. The growth in loans is primarily attributable to organic growth within the Bank’s primary lending areas and Northern Virginia. As of September 30, 2020 and included in the amount above, the Bank held PPP loans totaling $87.9 million and loans acquired from First State totaling $31.5 million in PCI loans and $9.8 million in performing loans.

#### Loan Concentration

At September 30, 2020 and December 31, 2019, $1.14 billion, or 79.6% and $1.06 billion, or 77.4%, respectively, of the Company's loan portfolio consisted of commercial loans and PCI commercial loans acquired from First State. A significant portion of the nonresidential real estate loan portfolio is secured by commercial real estate. The majority of nonresidential real estate loans that are not secured by real estate are lines of credit secured by accounts receivable and equipment and obligations of states and political subdivisions. While the loan concentration is in nonresidential real estate loans, the nonresidential real estate portfolio is comprised of loans to many different borrowers, in numerous different industries but primarily located in our market areas.

#### Allowance for Loan Losses

The allowance for loan losses was $25.9 million or 1.81% of total loans at September 30, 2020 compared to $11.8 million or 0.86% of total loans at December 31, 2019. The increase in this ratio was the direct result of the net impact of adjustments to the portfolio segmentation, changes in the qualitative adjustment factors, changes in the level of recognized charge-offs, changes in historical loss rates, changes in outstanding loan portfolios, and changes in the level of specific loan loss allocations. Most notably, throughout 2020, management has continued to evaluate the breadth of the current allowance methodology, in order to assess how well structured the methodology is to appropriately respond to the unprecedented risk presented by the COVID-19 pandemic. As a result, throughout the second and third quarters of the year, management has made significant enhancements to the qualitative factor framework within the methodology that have better positioned the Bank to adequately assess the risk to the loan portfolio and allocate loan loss provision accordingly.

The Bank management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity, where applicable, and changes in the local and national economy. When appropriate, management also considers public knowledge and/or verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.

#### Capital Resources

The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds, totaling $1.90 billion at September 30, 2020.

Noninterest-bearing deposits remain a core funding source for the Bank and thus, the Company. At September 30, 2020, noninterest-bearing balances totaled $642.8 million compared to $278.5 million at December 31, 2019. Of the $642.8 million, noninterest-bearing balances of $304.0 million are related to Fintech opportunities and noninterest-bearing balances of $127.7 million are related to title business funds. The Company and Bank management intend to continue to focus on finding ways of continuing to increase the base of noninterest-bearing sources.

Interest-bearing deposits totaled $1.26 billion at September 30, 2020 compared to $986.5 million at December 31, 2019.

At September 30, 2020, the Bank had brokered deposits of $15.3 million and CDs with other banks of $86.4 million. At December 31, 2019, brokered deposits totaled $63.9 million and CDs with other banks totaled $44.3 million. Due to the liquidity stress within the industry being caused by the COVID-19 pandemic, management has focused on creating liquidity in anticipation of loan deferrals and other potential cash flow disruptions. As of September 30, 2020, commercial loans totaling $41.1 million and mortgage loans totaling $15.7 million were approved for modifications such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings.

Average interest-bearing deposits totaled $1.26 billion during the third quarter of 2020 compared to $1.14 billion during the third quarter of 2019, an increase of $117.5 million.

Average noninterest bearing deposits totaled $542.5 million during the third quarter of 2020 compared to $271.3 million during the third quarter of 2019, an increase of $271.2 million.

Management will continue to emphasize deposit growth opportunities from the network of current clients and Fintech partners. The Company and Bank management will also concentrate on balancing deposit growth with adequate net interest margin to meet the Company’s strategic goals.

Along with traditional deposits, the Bank has access to both repurchase agreements, which are corporate deposits secured by pledging securities from the investment portfolio, and FHLB and other borrowings to fund its operations and investments. At September 30, 2020, repurchase agreements totaled $10.0 million compared to $10.2 million at December 31, 2019. In addition to the aforementioned funds alternatives, the Bank has access to more than $488.3 million through additional advances from the FHLB of Pittsburgh and the ability to readily sell jumbo certificates of deposits to other banks as well as brokered deposit markets.

#### Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand, and deposit withdrawals, without incurring a sustained negative impact on net interest income. It is MVB’s policy to manage liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions.

The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans, and income from loans and investment securities. During the nine months ended September 30, 2020, cash provided by financing activities totaled $331.2 million, while outflows from investing activity totaled $154.7 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the FHLB, national market certificate of deposit issuance programs, the Federal Reserve Discount Window, brokered deposits and CDARS. These external sources often provide attractive interest rates and flexible maturity dates that enable the

Bank to match funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.

The Company has an effective shelf registration covering $75 million of debt and equity securities, of which approximately $75 million remains available, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.

With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management believes liquidity needs could be greater during this volatile time within the industry and markets. Based upon this volatility, the Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to maintain liquidity.

#### Current Economic Conditions

The Company considers its primary market area to be comprised of those counties where it has a physical branch presence and their contiguous counties. This includes Marion, Harrison, Monongalia, Kanawha, Putnam, and Cabell counties of West Virginia and Fairfax and Loudoun counties of Virginia. The Bank currently operates a total of thirteen full-service banking branches: ten in West Virginia and three in Virginia.

The Company originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, the Company retains most of its originated loans (exclusive of long-term, fixed rate residential mortgages that are sold). However, loans originated in excess of the Bank’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by the Bank.

The current economic climate in the Company’s primary market areas reflect economic climates that are consistent with the general national climate. Given the recent outbreak of COVID-19, the economy has been impacted both nationally and internationally. Due to the nature of this situation, it is unclear what the duration and severity of the outbreak will be. This impact has been felt within the primary market area and unemployment rates have increased significantly. Unemployment in the United States was 7.7% and 3.3% in September 2020 and 2019, respectively.

The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:

|  | August 2020 | August 2019 |
| --- | ---: | ---: |
| Harrison County, WV | 8.2% | 4.3% |
| Marion County, WV | 9.0 | 5.0 |
| Monongalia County, WV | 6.6 | 3.7 |
| Kanawha County, WV | 9.6 | 4.6 |
| Putnam County, WV | 7.3 | 4.2 |
| Cabell County, WV | 8.3 | 4.3 |
| Fairfax County, VA | 6.0 | 2.4 |
| Loudoun County, VA | 5.4 | 2.4 |

#### Capital/Stockholders' Equity

For the nine months ended September 30, 2020, stockholders’ equity increased approximately $22.2 million to $234.1 million. This increase consists of year-to-date net income of $25.6 million, offset by dividends paid totaling $3.6 million, stock-based compensation of $1.7 million, and a decrease in other comprehensive loss of $69 thousand. As stockholders’ equity increased, the equity to assets ratio decreased 0.33% to 10.57%. The Company paid dividends to common shareholders of $3.2 million in the nine months ended September 30, 2020 and $1.5 million in the nine months ended September 30, 2019, and earned $25.6 million in the nine months ended September 30, 2020 versus $22.9 million in the nine months ended September 30, 2019, resulting in the dividend payout ratio increasing from 6.47% in the nine months ended September 30, 2019 to 12.80% in the nine months ended September 30, 2020.

At September 30, 2020, accumulated other comprehensive loss totaled $1.3 million, a decrease in the loss of $69 thousand from December 31, 2019. This change was driven by a decrease of $531 thousand in the unrealized gain on TIF bonds, a decrease of

$1.1 million in the other comprehensive loss related to the pension plan, an increase of $2.2 million in the unrealized gain on available-for-sale investment securities, and a decrease of $539 thousand in the other comprehensive income related to the investment hedge.

Treasury stock totaled 179,626 shares, up 128,549 shares from December 31, 2019 primarily due to common stock repurchased during 2020.

The primary source of funds for dividends to be paid by the Company are dividends received by the Company from the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any year exceeds that years retained net profits, as defined, plus the retained net profits, as defined, of the two preceding years.

#### Capital Requirements

The Bank’s total risk-based capital ratio increased from 12.84% at December 31, 2019 to 15.89% at September 30, 2020. The increase in this ratio was largely due to an increase in total capital of $45.5 million, driven primarily by earnings, and a decrease in risk-weighted assets of $15.2 million.

The Bank is required to comply with applicable capital adequacy standards established by the FDIC (“Capital Rules”). The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. State chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.

The Capital Rules, among other things, (i) include a “Common Equity Tier 1” (“CET1”) measure, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.

Under the Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:

- 4.5% CET1 to risk-weighted assets;
- 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
- 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
- 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio”).

The Capital Rules also include a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019. The Capital Rules also provide for a “countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

Since fully phased in on January 1, 2019, the Capital Rules require the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.

The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the regulatory burden for such smaller financial institutions. In July 2019, the bank regulatory agencies finalized the rule which applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest. The rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. Generally, the final rule was effective as of April 1, 2020, however banking organizations were permitted to use this simpler regulatory capital requirements as of January 1, 2020.

In June 2016, the FASB issued an update to the accounting standards for credit losses that included the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL becomes effective January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the implementation of CECL In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities that would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable. On November 15, 2019, the FASB issued an update which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023.

Notwithstanding the foregoing, the EGRRCPA, which was enacted on May 24, 2018, simplifies capital calculations by requiring regulators to establish for insured depository institutions under $10 billion in assets a community bank leverage ratio (“CBLR”) (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements under the Capital Rules. Such institutions that meet the CBLR will automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualify for the CBLR test based on the institution’s risk profile. In November 2019, the federal bank regulators issued a final rule on the CBLR, setting the minimum required CBLR at 9%. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulators’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the FDIA. As required by Section 4012 of the CARES Act, the federal banking agencies temporarily lowered the CBLR to 8% on April 6, 2020. These interim final rules set the CBLR at 8% through the end of 2020, 8.5% for 2021, and then re-establish it at 9% for 2022. The final rule was effective on January 1, 2020 and the CBLR framework will be available for banks to use in their March 31, 2020 Call Report. The Bank did not elect to apply the CBLR framework in the March 31, 2020 Call Report.

#### Prompt Corrective Action

The Federal Deposit Insurance Act (“FDIA”) requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio, and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

As noted above, the EGRRCPA eliminated these requirements for banks with less than $10.0 billion in assets who elect to follow the CBLR.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

At September 30, 2020, the Company is considered to be well-capitalized.

For further information regarding the capital ratios and leverage ratio of the Company and the Bank see the discussion under the section captioned “Capital/Stockholders’ Equity” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14, “Regulatory Capital Requirements” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s December 31, 2019 Annual Report on Form 10-K.

#### Commitments and Contingent Liabilities

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

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a client 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 client’s credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on management’s credit evaluation of the client.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to client. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

#### Concentration of Credit Risk

The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to clients throughout the Marion, Harrison, Monongalia, Kanawha, Putnam, and Cabell County areas of West Virginia, as well as the Northern Virginia area and adjacent counties. Collateral for loans is primarily residential and commercial real estate, personal property, and business equipment. The Company evaluates the credit worthiness of each of its clients on a case-by-case basis, and the amount of collateral it obtains is based upon management’s credit evaluation.

#### Regulatory

The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average balance maintained in accordance with such requirements was $0 on September 30, 2020 and December 31, 2019. During 2016, a deposit reclassification program was implemented and allowed the Company to reduce its requirement of reserve balances on hand in accordance with the Federal Reserve Board's daily Federal Reserve Requirement.

#### Contingent Liability

The subsidiary bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

#### Off-Balance Sheet Commitments

The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

#### Market Risk

Our operations are subject to many risks that could adversely affect our future financial condition and performance, including the market risk factors that are described in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019. Other than the information below and as discussed throughout Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q, there have been no material changes in our market risk factors from those disclosed.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

#### Effects of Inflation and Changing Prices

Substantially all of the Company’s assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the banking industry, typically monetary assets exceed monetary liabilities. Therefore, as prices increase, financial institutions experience a decline in the purchasing power of their net assets.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy, as well as financial markets. One factor that has historically had a strong relationship with inflation is the unemployment rate. This relationship is known as the Phillips Curve. The Phillips Curve presumes that as unemployment increases, inflation decreases. The intuition behind the Phillips Curve is that increased unemployment results in less consumer spending. A decline in consumer spending represents a decrease in demand in the market for goods and services and ultimately a decline in the overall level of prices for goods and services. Management expects risks to inflation to be to the downside rather than upside (the general level of prices is more likely to decrease than increase).

#### Future Outlook

The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel, technology, and processes to meet the growing compliance requirements in the industry. The Company believes it is well positioned in some of the finest markets in the State of West Virginia and the Commonwealth of Virginia and will continue to focus on the following: margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to attract core deposits to fund growth in the new markets through continued delivery of outstanding client service coupled with the highest quality products and technology. The Company is expanding the treasury services function to support the banking needs of financial and emerging technology companies, which will further enhance core deposits. In addition, the Company continues its expansion of deposit acquisition and fee income strategies through the fintech vertical. During the third quarter of 2020, the Company entered into agreements for card acquiring sponsorships and debit card program sponsorship to further enhance fee income and noninterest income.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, Management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. The Company actively participated in the Paycheck Protection Program, is evaluating other programs available to assist our clients, and is providing consumer deferrals consistent with GSE guidelines. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

There was considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who may be temporarily unable to work. The original tranche of PPP funding of $349 billion ran out 13 days after the program's implementation. The second tranche of PPP funding of $310 billion still had funds available as of June 30, 2020, the program's original closure date. On July 2, 2020, additional legislation was passed that allowed small businesses to apply for loans through August 8, 2020. The deadline to apply for PPP loans has passed as of September 30, 2020.

As of September 30, 2020, commercial loans totaling $41.1 million and mortgage loans totaling $15.7 million were approved for modifications such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings. The Company originated 455 PPP loans with original balances of $92.8 million and balances of $87.9 million as of September 30, 2020.

Additionally, management has continued to take steps to generate liquidity in anticipation of temporary loan payment deferrals or other loan payment disruptions, which are likely to materialize as a result of decreased economic activity brought on by the COVID-19 pandemic. Management sold certain bond portfolio holdings and issued brokered deposits in order to generate cash. Management also has discretion to take further gains by selling additional available-for-sale investments and is well within policy limits for non-core funding sources.

## Market risk

As filed, 4,186 characters.

The Company’s market risk is composed primarily of interest rate risk. The Asset and Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Company’s sources, uses, and pricing of funds.

### Interest Rate Sensitivity Management

The Company uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twenty-four-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities as of June 30, 2020. The model assumes changes in interest rates without any management intervention to change the composition of the balance sheet. According to the model run for the period ended June 30, 2020, over a twelve-month period, an immediate 100-basis point increase in interest rates would result in an increase in net interest income by 6.4%. An immediate 200-basis point increase in interest rates would result in an increase in net interest income by 12.3%. A 100-basis point decrease in interest rates would result in a decrease in net interest income of 5.9%. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its ALCO. The ALCO meets quarterly and has responsibility for formulating and implementing strategies to improve balance sheet positioning and reviewing interest rate sensitivity.

The Company has counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. The Company works with third-party investors that are generally well-capitalized, are investment grade, and exhibit strong financial performance to mitigate this risk. The Company monitors the financial condition of these third parties on an annual basis and the Company does not expect these third parties to fail to meet their obligations.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

## Controls and procedures

As filed, 972 characters.

The Company, under the supervision and with the participation of its management, including its President and Chief Executive Officer, along with the Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of September 30, 2020, of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s President and Chief Executive Officer, along with its Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.

There have been no material changes in the Company’s internal control over financial reporting during the third quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 11,382 characters.

Our operations are subject to many risks that could adversely affect our future financial condition and performance, including the risk factors that are described in the Form 10-K. Other than the information below and as discussed throughout Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q, there have been no material changes in our risk factors from those disclosed.

*The Company may face risks related to the recent outbreak of COVID-19, which has been declared a “pandemic” by the World Health Organization.*

The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations, and could potentially impact the Company’s clients, providers, and third parties. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in overall business activity and financial transactions, supply chain disruptions, and overall economic and financial market instability. In response to the pandemic, many states, including those where the Company primarily operates, have taken preventative and protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of homes, and ordering temporary closures of businesses that have been deemed to be non-essential. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The ultimate effects of COVID-19 on the broader economy and the markets that the Company serves are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income, and therefore, earnings, financial condition, and results of operations. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

In March 2020, the Company announced programs to support our Trusted Partners during the COVID-19 pandemic. A number of borrowers have enrolled in programs to defer all loan payments for periods up to six months. These programs may negatively impact revenue and other results of operations in the near term, and, if not effective in mitigating the effect of COVID-19 to clients, may adversely affect the business and results of operations more substantially over a longer period of time.

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 pandemic, as well as ongoing or new governmental, regulatory, and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which the Company operates. This could result in further decline in demand for banking products and services, and could negatively impact, among other things, liquidity, regulatory capital, and future growth. Any one or more of these developments could have a material adverse effect on the business, financial condition, and results of operations.

The Company is taking precautions to protect the safety and well-being of our Trusted Partners. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee's ability to provide the expected level of client support and service. If the Company is unable to recover from a business disruption on a timely basis, the business, financial condition, and results of operations could be materially and adversely affected. The Company may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect the business, financial condition and results of operations.

The extent to which COVID-19 impacts the Company's business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, the Company may continue to experience materially adverse impacts to our business as a result of the virus’ global economic impact, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future.

A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of current clients, there is typically a substantial amount of total unfunded credit commitments, which is not reflected on the balance sheet. Actual borrowing needs of clients may exceed expectations, including due to the COVID-19 pandemic, as clients’ companies may be more dependent on our credit commitments due, among other things, business challenges, a lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from private investment firms. This could adversely affect the Company's credit quality and liquidity, which could adversely affect the Company's ability to fund operations and meet obligations as they become due and could have a material adverse effect on the business, financial condition, and results of operations.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent is not yet known and the Company cannot predict the full extent of the impacts on the business, the operations, or the global economy as a whole.

*The Company may be adversely affected by the emergency actions taken by the U.S. government to mitigate the impact of the COVID-19 pandemic on the U.S. economy.*

The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy. Among other steps taken, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the interest rate on emergency lending at the Discount Window and lengthened the term of loans to 90 days. On March 27, 2020, the CARES Act was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. The SBA was tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the U.S. Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.

There can be no assurance that these interventions by the U.S. government will be successful in mitigating the impact of the COVID-19 pandemic and it is unclear what the cumulative effect of these extraordinary actions by the U.S. government will be on the economy as a whole and upon the financial condition and results of operations of the Company and its clients, both in the short-term and the long-term.

*As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company is subject to additional risks of litigation from clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.*

On March 27, 2020, President Trump signed the CARES Act which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $310 billion of PPP loan funding was authorized. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of litigation, from both clients and non-clients that contacted the Bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company and is not resolved in a favorable manner, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on the Company's business, financial condition, and results of operations.

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny the Bank's liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.

Filed Nov 2, 2020.
Source: SEC EDGAR, the filing index for accession 0001277902-20-000158. Last ingested by Listed: Nov 4, 2026, 17:18 ET. No prices; not investment advice.