BRBS 10-Q Quarterly Report Sept. 30, 2021

BRBS 10-Q Quarter ended Sept. 30, 2021

Exhibits

Exhibits

BLUE RIDGE BANKSHARES, INC.

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39165

BLUE RIDGE BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Virginia	54-1470908
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1807 Seminole Trail Charlottesville , Virginia	22835
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: ( 540 ) 743-6521

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

BRBS

NYSE American

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

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

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

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

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

As of November 1, 2021, the registrant had 18,774,932 shares of common stock, no par value per share, outstanding.


PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 20 20	3

	Consolidated Statements of Income for the three months and nine months ended September 30, 2021 and 2020 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2021 and 2020 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three months and nine months ended September 30, 2021 and 2020 (unaudited)	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	61

PART II	OTHER INFORMATION	62

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	65

Signatures		66

PART I. FINAN CIAL INFORMATION

Item 1. Financi al Statements

Blue Ridge Bankshares, Inc.

Consolidated B alance Sheets


	(unaudited)
(Dollars in thousands except share data)	September 30, 2021			December 31, 2020 (2)
ASSETS
Cash and due from banks	$	53,077		$	117,945
Federal funds sold		144,376			775
Securities available for sale, at fair value		360,098			109,475
Restricted and other equity investments		19,343			11,173
Other investments		13,550			6,565
Loans held for sale		144,111			148,209
Paycheck Protection Program loans, net of deferred fees and costs		46,648			288,533
Loans held for investment, net of deferred fees and costs		1,752,453			732,883
Less allowance for loan losses		( 12,614	)		( 13,827	)
Loans held for investment, net		1,739,839			719,056
Accrued interest receivable		9,900			5,428
Other real estate owned		227			—
Premises and equipment, net		26,963			14,831
Right-of-use asset		5,645			5,328
Bank owned life insurance		46,278			15,724
Goodwill		26,826			19,620
Other intangible assets		8,099			2,581
Mortgage derivative asset		3,456			5,293
Mortgage servicing rights, net		14,976			7,084
Mortgage brokerage receivable		4,316			8,516
Interest rate swap asset		5,838			1,716
Other assets		25,736			10,406
Total assets	$	2,699,302		$	1,498,258
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	684,859		$	333,051
Interest-bearing demand and money market deposits		828,477			282,263
Savings		144,904			78,352
Time deposits		541,964			251,443
Total deposits		2,200,204			945,109
FHLB borrowings		125,115			115,000
FRB borrowings		33,857			281,650
Subordinated notes, net		40,503			24,506
Lease liability		7,113			5,506
Interest rate swap liability		1,239			2,735
Other liabilities		21,551			15,552
Total liabilities		2,429,582			1,390,058
Commitments and contingencies (Note 14)
Stockholders’ Equity:
Common stock, no par value; 25,000,000 shares authorized; 18,776,307 and 8,577,932 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (1)		193,770			66,771
Additional paid-in capital		252			252
Retained earnings		73,189			40,688
Accumulated other comprehensive income, net of tax		2,283			264
		269,494			107,975
Noncontrolling interest		226			225
Total stockholders’ equity		269,720			108,200
Total liabilities and stockholders’ equity	$	2,699,302		$	1,498,258

(1)

Common stock as of the periods presented is reflective of the Company’s 3-for-2 stock split effective April 30, 2021.

(2)

Derived from audited December 31, 2020 Consolidated Financial Statements.

See accompanying notes to unaudited consolidated financial statements.

Blue Ridge Bankshares, Inc.

Consolidated Stat ements of Income

(unaudited)



	For the three months ended				For the nine months ended
(Dollars in thousands, except per share data)	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
INTEREST INCOME
Interest and fees on loans	$	22,294	$	13,780	$	76,248		$	35,766
Interest on securities, deposit accounts, and federal funds sold		1,460		664		3,894			2,268
Total interest income		23,754		14,444		80,142			38,034
INTEREST EXPENSE
Interest on deposits		1,622		1,515		4,844			4,889
Interest on subordinated notes		644		411		2,142			854
Interest on FHLB and FRB borrowings		364		689		1,553			1,794
Total interest expense		2,630		2,615		8,539			7,537
Net interest income		21,124		11,829		71,603			30,497
Provision for loan losses		—		4,000		—			8,075
Net interest income after provision for loan losses		21,124		7,829		71,603			22,422
NONINTEREST INCOME
Gain on sale of Paycheck Protection Program loans		—		—		24,315			—
Residential mortgage banking income, net		7,704		14,400		24,259			31,969
Mortgage servicing rights		1,827		1,645		6,905			3,241
Gain on sale of guaranteed government loans		108		516		1,325			779
Wealth and trust management		499		—		1,934			—
Service charges on deposit accounts		376		215		1,073			669
Increase in cash surrender value of bank owned life insurance		278		94		679			278
Payroll processing		223		221		706			736
Bank and purchase card, net		497		211		1,096			483
Other		2,006		311		3,460			651
Total noninterest income		13,518		17,613		65,752			38,806
NONINTEREST EXPENSE
Salaries and employee benefits		14,774		11,880		46,425			29,886
Occupancy and equipment		1,743		922		4,968			2,653
Data processing		893		656		3,272			1,649
Legal, issuer, and regulatory filing		372		291		1,437			781
Advertising and marketing		452		165		989			518
Communications		761		214		1,802			536
Audit and accounting fees		195		98		675			278
FDIC insurance		487		187		839			568
Intangible amortization		500		232		1,406			608
Other contractual services		633		516		2,152			870
Other taxes and assessments		547		280		1,973			748
Merger-related		1,441		1,264		11,697			1,710
Other		2,839		1,971		9,062			4,688
Total noninterest expenses		25,637		18,676		86,697			45,493
Income before income tax		9,005		6,766		50,658			15,735
Income tax expense		2,199		1,707		10,973			3,618
Net income	$	6,806	$	5,059	$	39,685		$	12,117
Net loss (income) attributable to noncontrolling interest		4		4		( 1	)		( 1	)
Net income attributable to Blue Ridge Bankshares, Inc.	$	6,810	$	5,063	$	39,684		$	12,116
Net income available to common stockholders	$	6,810	$	5,063	$	39,684		$	12,116
Basic and diluted earnings per common share (EPS) (1)	$	0.36	$	0.59	$	2.26		$	1.42

(1)

EPS has been adjusted for all periods presented to reflect the Company’s 3-for- 2 stock split effective April 30, 2021.

See accompanying notes to unaudited consolidated financial statements.

Blue Ridge Bankshares, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)


	For the three months ended						For the nine months ended
(Dollars in thousands)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Net income	$	6,806		$	5,059		$	39,685		$	12,117
Other comprehensive income:
Gross unrealized (losses) gains on securities available for sale arising during the period		( 866	)		331			( 3,062	)		( 340	)
Deferred income tax benefit (expense)		182			( 70	)		643			71
Unrealized (losses) gains on securities available for sale arising during the period, net of tax		( 684	)		261			( 2,419	)		( 269	)
Gross unrealized gains (losses) on interest rate swaps		972			902			5,618			( 2,956	)
Deferred income tax (expense) benefit		( 205	)		( 189	)		( 1,180	)		621
Unrealized gains (losses) on interest rate swaps, net of tax		767			713			4,438			( 2,335	)
Less:
Reclassification adjustment for gains included in net income		—			209			—			209
Adjustment for income tax expense		—			( 44	)		—			( 44	)
Reclassification adjustment for gains included in net income, net of tax		—			165			—			165
Other comprehensive income (loss), net of tax		83			1,139			2,019			( 2,439	)
Comprehensive net income	$	6,889		$	6,198		$	41,704		$	9,678
Comprehensive net loss (income) attributable to noncontrolling interest		4			4			( 1	)		( 1	)
Comprehensive net income attributable to Blue Ridge Bankshares, Inc.	$	6,893		$	6,202		$	41,703		$	9,677

See accompanying notes to unaudited consolidated financial statements.

Blue Ridge Bankshares, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)


	For the nine months ended September 30, 2021
										Accumulated
	Shares of				Additional					Other
	Common		Common		Paid-in		Retained			Comprehensive		Noncontrolling
(Dollars in thousands)	Stock (1)		Stock		Capital		Earnings			Income, net		Interest		Total
Balance at beginning of period		8,577,932	$	66,771	$	252	$	40,688		$	264	$	225	$	108,200
Net income		—		—		—		39,684			—		1		39,685
Other comprehensive income		—		—		—		—			2,019		—		2,019
Dividends on common stock		—		—		—		( 7,183	)		—		—		( 7,183	)
Issuance of common stock and other consideration paid in business combination		9,951,743		125,403		—		—			—		—		125,403
Stock option exercises		83,647		748		—		—			—		—		748
Restricted stock awards, net of forfeitures		162,985		848		—		—			—		—		848
Balance at end of period		18,776,307	$	193,770	$	252	$	73,189		$	2,283	$	226	$	269,720


	For the nine months ended September 30, 2020
										Accumulated
										Other
	Shares of				Additional					Comprehensive
	Common		Common		Paid-in		Retained			Income (Loss),			Noncontrolling
(Dollars in thousands)	Stock (1)		Stock		Capital		Earnings			net			Interest		Total
Balance at beginning of period		8,487,878	$	66,204	$	252	$	25,428		$	229		$	224	$	92,337
Net income		—		—		—		12,116			—			1		12,117
Other comprehensive loss		—		—		—		—			( 2,439	)		—		( 2,439	)
Dividends on common stock		—		—		—		( 2,437	)		—			—		( 2,437	)
Restricted stock awards, net of forfeitures		90,054		352		—		—			—			—		352
Balance at end of period		8,577,932	$	66,556	$	252	$	35,107		$	( 2,210	)	$	225	$	99,930

See accompanying notes to unaudited consolidated financial statements.


	For the three months ended September 30, 2021
										Accumulated
										Other
	Shares of				Additional					Comprehensive
	Common		Common		Paid-in		Retained			Income,		Noncontrolling
(Dollars in thousands)	Stock (1)		Stock		Capital		Earnings			net		Interest			Total
Balance at beginning of period		18,631,073	$	193,259	$	252	$	70,885		$	2,200	$	230		$	266,826
Net income (loss)		—		—		—		6,810			—		( 4	)		6,806
Other comprehensive income		—		—		—		—			83		—			83
Dividends on common stock		—		—		—		( 4,506	)		—		—			( 4,506	)
Stock option exercises		750		—		—		—			—		—			—
Restricted stock awards, net of forfeitures		144,484		511		—		—			—		—			511
Balance at end of period		18,776,307	$	193,770	$	252	$	73,189		$	2,283	$	226		$	269,720


	For the three months ended September 30, 2020
										Accumulated
										Other
	Shares of				Additional					Comprehensive
	Common		Common		Paid-in		Retained			Income (Loss),			Noncontrolling
(Dollars in thousands)	Stock (1)		Stock		Capital		Earnings			net			Interest			Total
Balance at beginning of period		8,480,432	$	66,353	$	252	$	31,675		$	( 3,349	)	$	229		$	95,160
Net income (loss)		—		—		—		5,063			—			( 4	)		5,059
Other comprehensive income		—		—		—		—			1,139			—			1,139
Dividends on common stock		—		—		—		( 1,631	)		—			—			( 1,631	)
Restricted stock awards, net of forfeitures		97,500		203		—		—			—			—			203
Balance at end of period		8,577,932	$	66,556	$	252	$	35,107		$	( 2,210	)	$	225		$	99,930

(1)

Common stock outstanding as of and for the periods presented is reflective of the Company’s 3 -for-2 stock split effective April 30, 2021.

See accompanying notes to unaudited consolidated financial statements.

Blue Ridge Bankshares, Inc.

Consolidated Statem ents of Cash Flows

(unaudited)


	For the nine months ended
(Dollars in thousands)	September 30, 2021			September 30, 2020
Cash Flows From Operating Activities
Net income	$	39,685		$	12,117
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,623			704
Deferred income taxes		( 537	)		85
Provision for loan losses		—			8,075
Accretion of fair value adjustments (discounts) on acquired loans		( 1,279	)		( 909	)
Amortization of fair value adjustments (premiums) on assumed time deposits		( 2,540	)		( 12	)
Amortization of fair value adjustments (premiums) on assumed subordinated notes		( 145	)		—
Fair value adjustments on other real estate owned		75			—
Proceeds from sale of loans held for sale		965,119			652,765
Loans held for sale, originated		( 939,377	)		( 747,771	)
Gain on sale of loans held for sale, originated		( 17,830	)		( 27,386	)
Gain on sale of Paycheck Protection Program loans		( 24,315	)		—
Loss on disposal of premises and equipment		192			116
Investment amortization expense, net		1,282			870
Amortization of subordinated debt issuance costs		192			37
Intangible amortization		1,406			608
Increase in cash surrender value of bank owned life insurance		( 679	)		( 278	)
Increase in other assets		( 6,110	)		( 28,535	)
(Decrease) increase in other liabilities		( 3,249	)		12,160
Net cash provided by (used in) operating activities		13,513			( 117,354	)
Cash Flows From Investing Activities
Net (increase) decrease in federal funds sold		( 141,869	)		480
Purchases of securities available for sale		( 224,143	)		( 38,579	)
Proceeds from calls, sales, paydowns and maturities of securities available for sale		45,553			43,452
Proceeds from calls, sales, paydowns and maturities of securities held to maturity		—			1,210
Proceeds from sale of other real estate owned		271			—
Proceeds from sale of Paycheck Protection Program loans		705,930			—
Net change in restricted equity and other investments		( 1,473	)		( 1,307	)
Net increase in Paycheck Protection Program loans		( 399,072	)		( 361,850	)
Net increase in loans held for investment		( 29,729	)		( 46,103	)
Purchase of premises and equipment		( 954	)		( 2,785	)
Proceeds from sale of premises and equipment		405			669
Purchase of bank owned life insurance		( 9,600	)		—
Capital calls of other investments		( 1,567	)		( 569	)
Net cash acquired in acquisition of Bay Banks of Virginia, Inc.		44,066			—
Distributions from other investments		247			44
Net cash used in investing activities		( 11,935	)		( 405,338	)
Cash Flows From Financing Activities:
Net increase in demand, savings and other interest-bearing deposits		312,144			193,834
Net decrease in time deposits		( 85,397	)		( 598	)
Dividends paid on common stock		( 7,183	)		( 2,436	)
Federal Home Loan Bank advances		721,000			436,900
Federal Home Loan Bank repayments		( 721,000	)		( 446,700	)
Federal Reserve Bank advances		434,336			355,484
Federal Reserve Bank repayments		( 706,944	)		( 11,008	)
Stock option exercises		748			—
Increase in federal funds purchased		—			135
Payment of subordinated notes issuance costs		—			( 349	)
Issuance of subordinated notes		—			15,000
Redemption of subordinated notes		( 14,150	)		—
Net cash (used in) provided by financing activities		( 66,446	)		540,262
Net (decrease) increase in cash and due from banks		( 64,868	)		17,570
Cash and due from banks at beginning of period		117,945			60,026
Cash and due from banks at end of period	$	53,077		$	77,596


Supplemental Schedule of Cash Flow Information
Cash paid for:
Interest	$	8,087		$	7,294
Income taxes	$	10,000		$	2,000
Non-cash investing and financing activities:
Unrealized loss on available-for-sale securities	$	( 3,062	)	$	( 340	)
Transfer of held to maturity securities to available for sale	$	—		$	10,980
Issuance of restricted stock awards, net of forfeitures	$	848		$	352
Assets acquired in business combination	$	1,224,583		$	—
Liabilities assumed in business combination	$	1,107,036		$	—
Effective settlement of subordinated notes in business combination	$	650		$	—
Change in goodwill	$	7,206		$	( 23	)

See accompanying notes to unaudited consolidated financial statements.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Organization and Basis of Presentation

Blue Ridge Bankshares, Inc. (the "Company"), a Virginia corporation, was formed in 1988 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Charlottesville, Virginia and conducts its business activities primarily through the branch offices of its wholly-owned subsidiary bank, Blue Ridge Bank, National Association (the "Bank") and its wealth and trust management subsidiary, BRB Financial Group, Inc. (the “Financial Group”). The Company exists primarily for the purposes of holding the stock of its subsidiaries, the Bank and the Financial Group.

The Bank operates under a national charter and is subject to regulation by the Office of the Comptroller of the Currency (the “OCC”). Consequently, it undergoes periodic examinations by this regulatory authority.

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

The accompanying unaudited consolidated financial statements of the Company include the accounts of the Bank, the Financial Group, PVB Properties, LLC, and MoneyWise Payroll Solutions, Inc. (net of noncontrolling interest) and were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. All significant intercompany balances and transactions have been eliminated in consolidation. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K").

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

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

On July 14, 2021, the Company and FVCBankcorp, Inc. (“FVCB”) jointly announced they had entered into a definitive agreement pursuant to which FVCB will merge with and into the Company in an all-stock merger of equals (the “FVCB Merger”). Pursuant to the agreement, shareholders of FVCB will receive 1.1492 shares of the Company’s common stock for each FVCB share held, with fractional shares paid in cash. The FVCB Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of both companies. The Company has learned that the Office of the Comptroller of the Currency (the “OCC”) identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the FVCB Merger. Blue Ridge Bank has already commenced an initiative intended to fully address the OCC’s concerns. The Company anticipates the FVCB Merger will close in the second or third quarter of 2022.

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

Correction of Immaterial Classification Errors

During the third quarter of 2021, the Company determined that its 35 % investment in a third-party insurance company, Hammond Insurance Agency, Inc. ("Hammond Insurance"), which had been reported on its consolidated balance sheets in goodwill and other intangible assets, should have been reported as other assets. Also during the third quarter of 2021, the Company determined that its acquisition of BluePoint Benefits, LLC ("BluePoint Benefits"), which had been reported on its consolidated balance sheets in other assets, should have been reported as goodwill.

The Company has changed the classification of both investments on its December 31, 2020 consolidated balance sheets. The change in the classification for the investment in Hammond Insurance resulted in a $ 613 thousand and $ 341 thousand decrease from what was previously reported in the 2020 Form 10-K in goodwill and other intangible assets, respectively, with a corresponding increase of $ 954 thousand in other investments as of December 31, 2020. The change in the classification for the investment in BluePoint Benefits resulted in a $ 340 thousand decrease from what was previously reported in the 2020 Form 10-K in other assets with a corresponding increase of the same amount in goodwill as of December 31, 2020. Neither change in classification for the Company's investment in Hammond Insurance and BluePoint Benefits affected the Company's reported earnings for 2020 or total assets for 2020 on the Company's consolidated balance sheets.

During the first quarter of 2021, the Company determined a loan arrangement with a third-party financial institution for the purpose of residential mortgage loan originations, which had been reported on its consolidated balance sheets in loans held for sale, should have been reported as loans held for investment.

The Company has changed the classification of this loan on its December 31, 2020 consolidated balance sheet to reflect it as held for investment. The change in classification resulted in a $ 30.4 million decrease from what was previously reported in the Company’s 2020 Form 10-K in loans held for sale with a corresponding increase of the same amount in loans held for investment as of December 31, 2020. There were no outstanding loans under this arrangement as of September 30, 2021.

The change in classification did not affect the Company’s reported earnings for 2020, the Company does not believe any material allowance for loan losses (“ALL”) would have been necessary for this loan as of December 31, 2020, and the Company believes its ALL was adequate as of December 31, 2020. This reclassification did not change total loans or total assets on the Company’s consolidated balance sheets.

The Company evaluated the effect of the previously noted incorrect presentations, both qualitatively and quantitatively, and concluded that its previously issued financial statements were not materially misstated due to the changes in classification.

Note 2 – Amendments to the Accounting Standards Codification

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. As a “smaller reporting company” under Securities and Exchange Commission (“SEC”) rules, the Company will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has formed a cross-functional working group to assess and implement the requirements of ASU 2016-13 by the adoption date.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries.

“Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as purchased credit-deteriorated (“PCD”) assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements.

Note 3 – Business Combinations

On January 31, 2021, the Company completed the Bay Banks Merger, which was accounted for as a business combination. At the effective date of the merger, Bay Banks’ shareholders received 0.5000 shares of the Company’s common stock in exchange for each share of Bay Banks common stock held (“Exchange Ratio”), plus cash in lieu of any fractional shares, resulting in the Company issuing 6,634,495 shares ( 9,951,743 shares on a post Stock Split basis) with an aggregate fair market value of $ 124.9 million based on the closing price of the Company’s common stock at January 29, 2021, the last trading day prior to the effective date of the merger, and paying $ 3.4 thousand in lieu of fractional shares. In addition, options to purchase 198,362 shares of Bay Banks common stock, whether vested or unvested, were converted to options to acquire 99,176 shares of the Company’s common stock ( 148,764 shares on a post Stock Split basis) at an estimated fair value of $ 472 thousand as of the merger date. Finally, Bay Banks had previously acquired $ 1.75 million of the Company’s subordinated notes, while the Bank had previously acquired $ 1.10 million of Bay Banks’ subordinated notes. In the merger, an effective settlement of the notes occurred in the amount of $ 650 thousand, which reduced the consideration paid.

The Bay Banks Merger combined two banks with complementary capabilities and geographical focus, thus provided the opportunity for the organization to leverage its existing infrastructure, including people, processes and systems, across a larger asset base.

The Company has accounted for the Bay Banks Merger under the acquisition method of accounting, whereby the acquired assets and assumed liabilities are recorded by the Company at their estimated fair values as of the effective date of the merger. Fair value estimates were based on management’s assessment of the best information available at the time of determination and are highly subjective.

The following table presents the consideration paid in the merger and the summary balance sheet of Bay Banks as of the date of the merger inclusive of estimated fair value adjustments and the allocation of consideration paid in the merger to the acquired assets and assumed liabilities. Goodwill resulting from the Bay Banks Merger was $ 7.2 million.


(Dollars in thousands, except per share data)
Consideration paid:				Reference:
Company's common shares issued		9,951,743		A
Purchase price per share	$	12.55		A, B
Value of common stock issued	$	124,928
Estimated fair value of stock options		472
Cash in lieu of fractional shares		3
Total consideration paid	$	125,403
Effective settlement of subordinated notes		( 650	)
Total consideration paid less effective settlement of subordinated notes	$	124,753
Fair value of assets acquired:
Cash and due from banks	$	44,066
Federal funds sold		1,732
Certificates of deposit		1,018
Securities available for sale		79,505
Restricted securities		4,385
Loans held for investment		1,030,433		C
Loans held for sale		3,814
Premises and equipment		15,532		D
Right-of-use asset		1,864
Other real estate owned		598
Bank owned life insurance		20,259
Mortgage servicing rights		987
Core deposit intangible		6,850		E
Deferred tax asset, net		2,685		F
Other assets		10,855		G
Total assets	$	1,224,583
Fair value of liabilities assumed:
Deposits	$	1,030,888		H
FHLB borrowings		10,124		I
FRB borrowings		24,815
Subordinated notes		31,850		J
Other liabilities		9,359
Total liabilities	$	1,107,036
Net identifiable assets acquired at fair value	$	117,547
Goodwill	$	7,206


Reference:	Explanation of reference:
A	Common shares issued and purchase price per share are presented on a post Stock Split basis .
B	The value of the shares of the Company's common stock exchanged for shares of Bay Banks common stock was based upon the closing price of the Company's common stock at January 29, 2021, the last trading day prior to the date of completion of the merger.
C	Reflective of a $ 17.9 million (or 1.70 %) fair value adjustment (discount) to the amortized cost of the loan portfolio acquired.
D	Reflective of a $ 4.4 million fair value adjustment (premium) over the net book value of premises and equipment acquired.
E	Core deposit intangible asset recorded to reflect the fair value of nonmaturity deposits, except for time deposits over $ 100,000 , assumed by the Company.
F	Reflective of a $ 2.1 million net deferred tax asset recorded on all fair value adjustments, excluding goodwill, at the statutory federal income tax rate of 21 %.
G	Reflective of a $ 203 thousand fair vale adjustment (premium) on other assets acquired.
H	Reflective of a $ 5.8 million fair value adjustment (premium) over the book value of time deposits assumed.
I	Reflective of a $ 124 thousand fair value adjustment (premium) on the $ 10 million Federal Home Loan Bank of Atlanta ("FHLB") advance assumed.
J	Reflective of a $ 950 thousand fair value adjustment (premium) over the book value of subordinated notes assumed.

Cash and cash equivalents. The carrying amounts of cash, due from banks, federal funds sold, and certificates of deposit was deemed to be a reasonable estimate of fair value.

Securities available for sale. The estimated fair value of investment securities acquired was based on quoted market and third-party broker provided prices as of the merger date.

Restricted securities. The carrying amount of restricted equity securities was used as a reasonable estimate of fair value. These investments are carried at cost as no active trading market exists.

Loans. The acquired loan portfolio was segregated into two categories for valuation purposes: purchased credit-impaired (“PCI”) and purchased performing loans. PCI loans were identified as those loans that were nonaccrual prior to the business combination and those loans that were identified as potentially impaired. Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms. Specifically, loans with a risk rating of special mention or worse, loans that had been previously restructured as a troubled debt restructuring (“TDR”), or loans that had a history of delinquent payments were deemed PCI. Performing loans were those loans that were currently performing in accordance with the loan contract and did not exhibit any significant deterioration in credit quality since origination.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the "income approach"). Performing loans were segmented into pools based on loan type including commercial mortgages, multifamily, commercial and industrial, construction and land development, consumer residential, and consumer nonresidential, and further segmented based on payment structure (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity. The estimated cash flows expected to be collected for each loan were determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates, and discount rates. Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan. Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a third-party loan review on a selection of loans within the acquired portfolio. The discount rates used were based on rates market participants may require for cash flows with similar risk characteristics at the acquisition date.

For loans that were identified as PCI, either the above income approach or the asset approach was used. The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract. Management used the asset approach for all nonaccrual

loans to reflect market participant assumptions. Under the asset approach, the fair value of each loan was determined based on the estimated fair values of the underlying collateral, less estimated costs to sell.

The methods used to estimate the fair values of loans are sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

Premises and equipment. Land and buildings (collectively, “premises”) acquired were recorded at estimated fair value as determined by third-party appraisals at or near the merger date. Equipment, including office furniture, computers, and similar assets, were recorded at the their net book values as of the merger date, which approximated fair value.

Bank owned life insurance. The carrying value of bank owned life insurance was deemed to reasonably approximate fair value. These policies are recorded at their cash surrender value, using information provided by the insurance carriers.

The following table presents the purchased performing and PCI loans receivable at the date of the Bay Banks Merger and the fair value adjustments (discounts) recorded immediately following the merger.


	As of January 31, 2021
(Dollars in thousands)	Purchased Performing			PCI			Total
Principal payments receivable	$	936,523		$	111,766		$	1,048,289
Fair value adjustment - credit and interest		( 2,784	)		( 15,072	)		( 17,856	)
Fair value of acquired loans	$	933,739		$	96,694		$	1,030,433

Core deposit intangible. Core deposit intangible ("CDI") is the measure of the value of noninterest-bearing checking, savings, interest-bearing checking, money market, and certain certificates of deposits assumed in a business combination. Certificates of deposit with balances over $100,000 and brokered deposits are excluded from evaluation, as the Company determined customer related intangible assets are non-existent for these accounts. The estimated fair value of CDI was based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative funding source. The CDI is being amortized over an estimated useful life of 10 years, which approximates the existing deposit relationships acquired.

Deposits. The fair values of deposit liabilities with no stated maturity (noninterest-bearing checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand. The estimated fair value of the certificates of deposit represents contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

FHLB borrowings. The fair value of the FHLB borrowings was estimated by discounting the future cash flows using current interest rates offered for similar advances as of the acquisition date.

FRB borrowings. The fair value of Federal Reserve Bank (“FRB”) borrowings was deemed to approximate its carrying value. These borrowings are pursuant to the FRB’s Paycheck Protection Program Liquidity Facility (“PPPLF”) and there is no comparable borrowing to advances under this facility.

Subordinated notes. The fair value of the subordinated notes was estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size near the merger date and adjusted for time to redemption or maturity.

The fair value estimates are subject to change for up to one year after the effective date of the merger, if additional information relative to effective date fair values becomes available. No adjustments have been made to the fair value estimates through September 30, 2021.

Impact of Certain Fair Value Adjustments

The net effect of the amortization and accretion of premiums and discounts associated with the fair value adjustments to assets acquired and liabilities assumed in the Bay Banks Merger had the following effect on the consolidated income statements for the three and nine months ended September 30, 2021.



(Dollars in thousands)	For the three months ended September 30, 2021			For the nine months ended September 30, 2021
Loans (1)	$	( 54	)	$	964
Time deposits (2)		827			2,465
FHLB borrowings (3)		4			10
Subordinated notes (4)		55			145
CDI (5)		( 323	)		( 880	)
Net effect to income before income taxes	$	509		$	2,704

(1) Loan discount accretion and premium (amortization) is included in the Interest and fees on loans section of Interest Income in the consolidated income statements.

(2) Time deposit premium amortization is included in the Interest on deposits section of Interest Expense in the consolidated income statements.

(3) FHLB borrowings premium amortization is included in the Interest on FHLB and FRB borrowings section of Interest Expense in the consolidated income statements.

(4) Subordinated notes premium amortization is included in the Interest on subordinated notes section of Interest Expense in the consolidated income statements.

(5) CDI amortization is included in the Intangible amortization section of Noninterest Expense in the consolidated income statements.

Pro Forma Financial Information

The following table presents the effect of the Bay Banks Merger on the Company on a pro forma basis, as if the merger had occurred at the beginning of the nine-month periods ended September 30, 2021 and 2020 and the three-month period ended September 30, 2020. Merger-related expenses of $ 1.4 million and $ 11.7 million for the three months and nine months ended September 30, 2021 and $ 1.3 million and $ 1.7 million for the three and nine months ended September 30, 2020, which are included in the Company’s consolidated income statements, are not included in the pro forma information below. Merger-related expenses incurred by Bay Banks prior to the completion of the Bay Banks Merger are not included in the Company’s consolidated income statements and are also not included in the pro forma information below. Net income includes pro forma adjustments for the accretion and amortization of estimated fair value adjustments on acquired loans and assumed time deposits and borrowings, as well as amortization of estimated CDI. An income tax rate of 21 % was used in determining pro forma net income.


	For the three months ended
(Dollars in thousands, except per share data)	September 30, 2020
Revenue (net interest income plus noninterest income)	$	42,471
Net income		8,730
Earnings per common share		0.47


	For the nine months ended
(Dollars in thousands, except per share data)	September 30, 2021		September 30, 2020
Revenue (net interest income plus noninterest income)	$	140,447	$	106,514
Net income		48,029		19,749
Earnings per common share		2.62		1.08

Note 4 – In vestments

Investment securities available for sale are carried at fair value in the consolidated balance sheets. The following tables present amortized cost and fair values of investment securities available for sale as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
State and municipal	$	41,843	$	289	$	( 280	)	$	41,852
U.S. Treasury and agencies		49,212		—		( 664	)		48,548
Mortgage backed securities		241,108		617		( 2,802	)		238,923
Corporate bonds		30,210		808		( 243	)		30,775
Total investment securities	$	362,373	$	1,714	$	( 3,989	)	$	360,098


	December 31, 2020
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
State and municipal	$	14,069	$	258	$	( 68	)	$	14,259
U.S. Treasury and agencies		2,500		—		( 91	)		2,409
Mortgage backed securities		72,337		696		( 398	)		72,635
Corporate bonds		19,755		469		( 52	)		20,172
Total investment securities	$	108,661	$	1,423	$	( 609	)	$	109,475

As of September 30, 2021 and December 31, 2020, securities with a fair value of $ 9.1 million and $ 12.5 million, respectively, were pledged with the Treasury Board of the Commonwealth of Virginia to secure public deposits.

As of September 30, 2021 and December 31, 2020, securities with a fair value of $ 27.7 million and $ 29.4 million, respectively, were pledged to secure the Bank’s borrowing facility with the FHLB.

The following table presents the amortized cost and fair value of securities available for sale by contractual maturity as of the date stated. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2021
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	694	$	694
Due after one year through five years		27,345		27,356
Due after five years through ten years		89,716		89,920
Due after ten years		244,618		242,128
Total	$	362,373	$	360,098

The following tables present a summary of unrealized losses and the length of time securities have been in a continuous loss position, by security type and number of securities, as of the dates stated.


			September 30, 2021
			Less than 12 Months					12 Months or Greater					Total
(Dollars in thousands)	Number of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal		31	$	19,291	$	( 280	)	$	—	$	—		$	19,291	$	( 280	)
U.S. Treasury and agencies		20		46,234		( 664	)		—		—			46,234		( 664	)
Mortgage backed securities		72		180,950		( 2,795	)		834		( 7	)		181,784		( 2,802	)
Corporate bonds		10		5,099		( 230	)		987		( 13	)		6,086		( 243	)
Total		133	$	251,574	$	( 3,969	)	$	1,821	$	( 20	)	$	253,395	$	( 3,989	)


			December 31, 2020
			Less than 12 Months					12 Months or Greater					Total
(Dollars in thousands)	Number of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal		6	$	3,111	$	( 68	)	$	—	$	—		$	3,111	$	( 68	)
U.S. Treasury and agencies		1		2,410		( 91	)		—		—			2,410		( 91	)
Mortgage backed securities		22		20,545		( 65	)		8,592		( 333	)		29,137		( 398	)
Corporate bonds		7		3,242		( 7	)		1,955		( 45	)		5,197		( 52	)
Total		36	$	29,308	$	( 231	)	$	10,547	$	( 378	)	$	39,855	$	( 609	)

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

Restricted equity investments consisted of stock in the FHLB (carrying value of $ 6.0 million and $ 5.8 million as of September 30 , 2021 and December 31, 2020, respectively), FRB stock (carrying value of $ 4.9 million and $ 2.2 million as of September 30 , 2021 and December 31, 2020, respectively), and stock in the Company’s correspondent bank (carrying value of $ 468 thousand and $ 248 thousand as of September 30 , 2021 and December 31, 2020, respectively). Restricted equity investments are carried at cost. The Company also has various other equity investments, including shares in other financial institutions and fintech companies, totaling $ 7.9 million and $ 3.0 million as of September 30 , 2021 and December 31, 2020, respectively, which are carried at fair value with any gain or loss reported in the consolidated income statements each reporting period.

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

Note 5 – Loans and Allowance for Loan Losses

The following table presents loans held for investment, including Paycheck Protection Program ("PPP") loans, as of the dates stated.


(Dollars in thousands)	September 30, 2021			December 31, 2020
Commercial and industrial	$	309,058		$	123,675
Paycheck Protection Program		47,325			292,068
Real estate – construction, commercial		139,286			54,702
Real estate – construction, residential		51,098			18,040
Real estate – mortgage, commercial		680,309			273,499
Real estate – mortgage, residential		499,361			213,404
Real estate – mortgage, farmland		6,317			3,615
Consumer		67,787			46,684
Gross loans		1,800,541			1,025,687
Less: Deferred loan fees, net of costs		( 1,440	)		( 4,271	)
Total	$	1,799,101		$	1,021,416

In 2020, the Company participated in the PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (“PPP 1”). Through the PPP 1, the federal government partnered with banks, including the Bank, to provide over $ 650 billion to small businesses to support payrolls and other operating expenses. PPP 1 loans have a two-year term if originated prior to June 5, 2020, or a five-year term if originated on or subsequent to June 5, 2020, and earn an annual interest rate of 1 %. Banks originating PPP 1 loans earned a processing fee of 1 %, 3 %, or 5 % of the loan amount, depending on the size of the loan. The Company originated approximately $ 363.4 million in PPP 1 loans in

2020, and as of September 30, 2021, $ 32.6 million of PPP 1 loans were outstanding, including those acquired in the Bay Banks Merger.

In 2021 the Company participated in the PPP pursuant to the Economic Aid Act, passed into law on December 27, 2020 (“PPP 2”). The PPP 2 was for applications received by May 31, 2021. The Company funded over 20,000 PPP 2 loans for approximately $ 730 million. PPP 2 loans have a contractual term of five years and earn an annual interest rate of 1 %. Banks originating PPP 2 loans earned processing fees that were tiered depending on the size of the loan. Specifically, processing fees for loans of not more than $ 50,000 equaled 50 % of the loan balance or $ 2,500 , whichever was less; processing fees for loans more than $ 50,000 and not more than $ 350,000 equaled 5 % of the loan balance, and processing fees for loans above $ 350,000 equaled 3 % of the loan balance. Of the PPP 2 loans originated in 2021, approximately 19,500 with principal balances of $ 712.6 million were sold on June 28, 2021. Gross proceeds from the sale were $ 705.9 million and the Company recorded a pre-tax gain in noninterest income of $ 24.3 million on the sale after giving effect to $ 30.9 million of unamortized fees, net of deferred costs, and the sale discount. As of September 30, 2021, the Company held PPP 2 loans with aggregate principal balances and unamortized fees, net of deferred costs, of $ 14.7 million and $ 676 thousand, respectively.

The Company believes that the majority of PPP 1 and PPP 2 loans will be forgiven, in accordance with the terms of the program, and will be paid in full pursuant to the U.S. government guarantee.

The Company is accounting for the PPP processing fees in accordance with ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, which requires fees, net of costs, to be deferred and amortized as a component of loan yield over the expected life of the loans, which the Company believes is 1.5 years for PPP 1 loans and one to three years for PPP 2 loans, depending on the individual loan balance. Of the $ 11.5 million of processing fees received in 2020 for PPP 1 loans, approximately $ 0 of unamortized fees remain as of September 30, 2021, with $ 228 thousand and $ 4.8 million recognized as a component of interest income for the three and nine months ended September 30, 2021, respectively. PPP 2 processing fees, net of costs, totaled $ 40.8 million through the first nine months of 2021, of which $ 484 thousand and $ 12.1 million were recognized as interest income for the three and nine months ended September 30, 2021, respectively, and $ 30.9 million was recognized as part of the gain on sale in the second quarter of 2021.

From the onset of the global COVID-19 pandemic, the Company has proactively addressed the needs of its commercial and individual borrowers by modifying loans allowing for the short-term deferral of principal payments or of principal and interest payments. Pursuant to the CARES Act and the Economic Aid Act, banks have the option to temporarily suspend certain requirements of GAAP related to TDRs to the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency terminates if certain conditions are met. All loan modifications made by the Company were made on a good faith basis to borrowers who met the requirements for modifications under the CARES Act. As a result of regulatory and accounting guidance regarding such modifications, the loans were not designated as TDRs as of September 30, 2021 and December 31, 2020. In response to the COVID-19 pandemic, during 2020, the Company approved over 550 loan deferrals for a total of $ 110.6 million. In addition, Bay Banks approved nearly 400 loan deferrals for approximately $ 160.0 million. Most of these loans are now past the deferment period and are back on normal payment schedules, and as of September 30, 2021, 16 loans were in deferment for a total of approximately $ 4.7 million.

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $ 517.6 million and $ 213.3 million were pledged as of September 30, 2021 and December 31, 2020, respectively. Additionally, PPP loans were pledged as collateral for PPPLF advances in the amount of $ 33.9 million and $ 281.6 million as of September 30, 2021 and December 31, 2020, respectively.

As a result of the Bay Banks Merger and the 2019 acquisition of Virginia Community Bankshares, Inc., the acquired loan portfolios were initially measured at fair value as of the respective acquisition dates and subsequently accounted for as either purchased performing loans or PCI loans. The following table presents the outstanding principal balance and related recorded investment of these acquired loans included in the consolidated balance sheets as of the dates stated.


(Dollars in thousands)	September 30, 2021		December 31, 2020
PCI loans
Outstanding principal balance	$	98,076	$	1,278
Recorded investment		84,044		1,085
Purchased performing loans
Outstanding principal balance		784,302		97,301
Recorded investment		781,348		96,317
Total acquired loans
Outstanding principal balance		882,378		98,579
Recorded investment		865,392		97,402

The following table presents the changes in the accretable yield for PCI loans for the periods stated.


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2021			2020			2021			2020
Balance, beginning of period	$	7,830		$	153		$	123		$	185
Additions		—			—			10,030			—
Accretion		( 1,239	)		( 16	)		( 3,704	)		( 48	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—			—			106			—
Other changes, net		—			—			36			—
Balance, end of period	$	6,591		$	137		$	6,591		$	137

The following tables present the aging of the recorded investment of loans held for investment as of the dates stated.


	September 30, 2021
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Past Due & Nonaccrual		PCI Loans		Current Loans			Total Loans
Commercial and industrial	$	338	$	332	$	—	$	6,270	$	6,940	$	8,947	$	293,171		$	309,058
Paycheck Protection Program		—		—		—		—		—		—		47,325			47,325
Real estate – construction, commercial		2,696		21		65		88		2,870		14,015		122,401			139,286
Real estate – construction, residential		—		—		451		254		705		—		50,393			51,098
Real estate – mortgage, commercial		2,006		15		24		3,191		5,236		52,371		622,702			680,309
Real estate – mortgage, residential		989		1,601		1,726		2,605		6,921		7,671		484,769			499,361
Real estate – mortgage, farmland		—		—		—		—		—		—		6,317			6,317
Consumer		702		236		112		369		1,419		1,040		65,328			67,787
Less: Deferred loan fees, net of costs		—		—		—		—		—		—		( 1,440	)		( 1,440	)
Total Loans	$	6,731	$	2,205	$	2,378	$	12,777	$	24,091	$	84,044	$	1,690,966		$	1,799,101


	December 31, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Past Due & Nonaccrual		PCI Loans		Current Loans			Total Loans
Commercial and industrial	$	1,117	$	—	$	—	$	1,310	$	2,427	$	—	$	121,248		$	123,675
Paycheck Protection Program		—		—		—		—		—		—		292,068			292,068
Real estate – construction, commercial		—		—		—		—		—		35		54,667			54,702
Real estate – construction, residential		262		—		—		—		262		—		17,778			18,040
Real estate – mortgage, commercial		771		211		—		3,643		4,625		808		268,066			273,499
Real estate – mortgage, residential		1,062		—		46		881		1,989		242		211,173			213,404
Real estate – mortgage, farmland		—		—		—		—		—		—		3,615			3,615
Consumer		935		334		—		714		1,983		—		44,701			46,684
Less: Deferred loan fees, net of costs		—		—		—		—		—		—		( 4,271	)		( 4,271	)
Total Loans	$	4,147	$	545	$	46	$	6,548	$	11,286	$	1,085	$	1,009,045		$	1,021,416

The following tables present the aging of the recorded investment of PCI loans as of the dates stated.


	September 30, 2021
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Commercial and industrial	$	—	$	—	$	8,947	$	8,947
Real estate – construction, commercial		21		65		13,929		14,015
Real estate – mortgage, commercial		148		24		52,199		52,371
Real estate – mortgage, residential		552		1,726		5,393		7,671
Consumer		5		—		1,035		1,040
Total PCI Loans	$	726	$	1,815	$	81,503	$	84,044


	December 31, 2020
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Real estate – construction, commercial		—		—		35		35
Real estate – mortgage, commercial		224		—		584		808
Real estate – mortgage, residential		35		—		207		242
Total PCI Loans	$	259	$	—	$	826	$	1,085

T he Company prepares a quarterly analysis of the ALL, with the objective of quantifying portfolio risk into a dollar amount of inherent losses. The ALL is increased through a provision for loan losses charged against income and decreased by loans charged-off (net of recoveries, if any). Management’s periodic evaluation of the adequacy of the ALL is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.

The ALL consists of specific and general components. The specific component relates to loans that are identified as impaired, which generally include loans risk rated substandard or worse with balances of $ 500 thousand or more and all loans classified as TDRs. For loans that are classified as impaired, an allowance is established when the discounted cash flows or the net realizable value of underlying collateral, which is equal to the estimated fair value less estimated costs to sell, of the impaired loan is lower than the carrying value of that loan. The general component covers those loans not classified as impaired and those loans classified as impaired that are not individually evaluated for impairment and is based on historical loss experience adjusted for other internal or external influences on credit quality that are not fully reflected in the historical data.

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

PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no ALL for these loans as of September 30, 2021 and December 31, 2020. In future periods, the Company may be required to establish an ALL for these loans, which would result in a provision for loan losses charged to earnings.

The following tables present a summary of the loan portfolio individually and collectively evaluated for impairment as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total
Originated and purchased performing loans:
Commercial and industrial	$	4,697	$	295,414		$	300,111
Real estate – construction, commercial		531		124,740			125,271
Real estate – construction, residential		—		51,098			51,098
Real estate – mortgage, commercial		1,333		626,605			627,938
Real estate – mortgage, residential		1,672		490,018			491,690
Real estate – mortgage, farmland		—		6,317			6,317
Consumer		—		66,747			66,747
Total originated and purchased performing loans		8,233		1,660,939			1,669,172
PCI loans:
Commercial and industrial		—		8,947			8,947
Real estate – construction, commercial		—		14,015			14,015
Real estate – mortgage, commercial		—		52,371			52,371
Real estate – mortgage, residential		—		7,671			7,671
Consumer		—		1,040			1,040
Total PCI loans		—		84,044			84,044
Gross loans		8,233		1,744,983			1,753,216
Less: Deferred loan fees, net of costs		—		( 763	)		( 763	)
Total	$	8,233	$	1,744,220		$	1,752,453


	December 31, 2020
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total
Originated and purchased performing loans:
Commercial and industrial	$	234	$	123,441		$	123,675
Real estate – construction, commercial		—		54,667			54,667
Real estate – construction, residential		—		18,040			18,040
Real estate – mortgage, commercial		1,645		271,046			272,691
Real estate – mortgage, residential		452		212,710			213,162
Real estate – mortgage, farmland		—		3,615			3,615
Consumer		—		46,684			46,684
Total originated and purchased performing loans		2,331		730,203			732,534
PCI loans:
Real estate – construction, commercial		—		35			35
Real estate – mortgage, commercial		—		808			808
Real estate – mortgage, residential		—		242			242
Total PCI loans		—		1,085			1,085
Gross loans		2,331		731,288			733,619
Less: Deferred loan fees, net of costs		—		( 736	)		( 736	)
Total	$	2,331	$	730,552		$	732,883

The tables above exclude gross PPP loans of $ 47.3 million and $ 292.1 million as of September 30, 2021 and December 2020, respectively.

The following tables present information related to impaired loans by loan type as of the dates presented.


	September 30, 2021						December 31, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and industrial	$	4,697	$	4,697	$	—	$	234	$	234	$	144
Real estate – construction, commercial		531		531		—		—		—		—
Real estate – mortgage, commercial		1,333		1,432		—		1,645		2,030		—
Real estate – mortgage, residential		1,672		1,672		—		452		571		—
With an allowance recorded:
Real estate – mortgage, commercial		—		—		—		—		—		—
Real estate – mortgage, residential		—		—		—		—		—		—
	$	8,233	$	8,332	$	—	$	2,331	$	2,835	$	144


	For the three months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	4,710	$	53	$	—	$	—
Real estate – construction, commercial		532		8		—		—
Real estate – mortgage, commercial		1,378		21		—		—
Real estate – mortgage, residential		1,421		5		696		28
With an allowance recorded:
Commercial and industrial		—		—		375		—
Real estate – mortgage, commercial		—		—		337		1
Real estate – mortgage, residential		—		—		—		—
	$	8,041	$	87	$	1,408	$	29

	For the nine months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	4,390	$	149	$	—	$	—
Real estate – construction, commercial		537		24		—		—
Real estate – mortgage, commercial		1,402		62		—		—
Real estate – mortgage, residential		1,078		11		696		28
With an allowance recorded:
Commercial and industrial		—		—		375		1
Real estate – mortgage, commercial		—		—		337		7
Real estate – mortgage, residential		—		—		—		—
	$	7,407	$	246	$	1,408	$	36

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

thousand as of December 31, 2020, one of which was classified as a TDR due to a change in interest rate and payment terms and the other loan was classified as a TDR due to a change in payment terms.

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


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2021			2020			2021			2020
ALL, beginning of period	$	13,007		$	8,206		$	13,827		$	4,572
Charge-offs
Commercial and industrial		( 18	)		—			( 968	)		—
Real estate – mortgage		( 133	)		—			( 146	)		—
Consumer		( 361	)		( 213	)		( 757	)		( 787	)
Total charge-offs		( 512	)		( 213	)		( 1,871	)		( 787	)
Recoveries
Commercial and industrial		26			33			210			34
Real estate – mortgage		5			—			108			—
Consumer		88			97			340			229
Total recoveries		119			130			658			263
Net charge-offs		( 393	)		( 83	)		( 1,213	)		( 524	)
Provision for loan losses		—			4,000			—			8,075
ALL, end of period	$	12,614		$	12,123		$	12,614		$	12,123

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

The following tables present the Company’s loan portfolio by internal loan grade as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Grade 1 Prime		Grade 2 Desirable		Grade 3 Good		Grade 4 Acceptable		Grade 5 Pass/Watch		Grade 6 Special Mention		Grade 7 Substandard		Total
Commercial and industrial	$	591	$	3,521	$	142,771	$	135,275	$	14,247	$	4,505	$	8,148	$	309,058
Paycheck Protection Program		47,325		—		—		—		—		—		—		47,325
Real estate – construction, commercial		—		516		32,633		86,430		6,845		10,849		2,013		139,286
Real estate – construction, residential		7		—		16,715		29,246		4,875		—		255		51,098
Real estate – mortgage, commercial		4,358		2,447		317,296		244,322		34,810		60,845		16,231		680,309
Real estate – mortgage residential		1,286		9,068		291,246		173,404		13,621		4,422		6,314		499,361
Real estate – mortgage, farmland		366		—		1,122		4,829		—		—		—		6,317
Consumer		339		8		17,768		47,346		1,279		489		558		67,787
Gross loans	$	54,272	$	15,560	$	819,551	$	720,852	$	75,677	$	81,110	$	33,519	$	1,800,541
Less: Deferred loan fees, net of costs																( 1,440	)
Total															$	1,799,101


	December 31, 2020
(Dollars in thousands)	Grade 1 Prime		Grade 2 Desirable		Grade 3 Good		Grade 4 Acceptable		Grade 5 Pass/Watch		Grade 6 Special Mention		Grade 7 Substandard		Total
Commercial and industrial	$	844	$	484	$	23,828	$	85,928	$	7,251	$	4	$	5,336	$	123,675
Paycheck Protection Program		292,068		—		—		—		—		—		—		292,068
Real estate – construction, commercial		—		2,143		19,524		26,324		5,916		218		577		54,702
Real estate – construction, residential		—		—		3,073		8,247		6,458		—		262		18,040
Real estate – mortgage, commercial		—		3,994		128,163		114,977		15,799		2,968		7,598		273,499
Real estate – mortgage residential		—		3,583		101,078		100,601		5,750		158		2,234		213,404
Real estate – mortgage, farmland		444		—		1,175		1,996		—		—		—		3,615
Consumer		324		36		17,062		28,033		521		1		707		46,684
Gross loans	$	293,680	$	10,240	$	293,903	$	366,106	$	41,695	$	3,349	$	16,714	$	1,025,687
Less: Deferred loan fees, net of costs																( 4,271	)
Total															$	1,021,416

Note 6 – Goodwill and Other Intangibles

Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from 5 to 12 years. Goodwill is the only intangible asset with an indefinite life on the consolidated balance sheets.

As of September 30, 2021 and December 31, 2020, the Company's goodwill totaled $ 26.8 million and $ 19.6 million, respectively.

The following table presents information on amortizable intangible assets included on the consolidated balance sheets as of the dates stated.


	Gross					Net
(Dollars in thousands)	Carrying		Accumulated			Carrying
September 30, 2021	Value		Amortization			Value
Core deposit intangibles	$	9,626	$	(2,522	)	$	7,104
Other amortizable intangibles		2,659		(1,664	)		995
Total	$	12,285	$	(4,186	)	$	8,099

	Gross					Net
(Dollars in thousands)	Carrying		Accumulated			Carrying
December 31, 2020	Value		Amortization			Value
Core deposit intangibles	$	2,776	$	(1,366	)	$	1,410
Other amortizable intangibles		2,187		(1,016	)		1,171
Total	$	4,963	$	(2,382	)	$	2,581

As a result of the Bay Banks Merger, a core deposit intangible asset of $ 6.9 million was recorded as of the acquisition date and is being amortized on an accelerated basis over 10 years using the sum-of-years digits method.

Included in other amortizable intangibles were loan servicing assets of $ 258 thousand and $ 209 thousand at September 30, 2021 and December 31, 2020, respectively, related to the sale of the government guaranteed portion of certain loans that the Company continues to service. Loan servicing assets of $ 131 thousand and $ 189 thousand were added during the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. The amortization of these intangibles is included in interest and fees on loans in the consolidated statement of income.

The Company retains servicing rights on mortgages originated and sold to the secondary market. The Company records mortgage servicing rights (“MSR”) assets initially at fair value and subsequently accounts for them under the amortization method, pursuant to which an impairment assessment is performed each reporting period. The amortization method requires that the MSR assets be recorded at the lower of cost or fair value. As of September 30, 2021 and December 31, 2020, the carrying value of MSR assets were $ 15.0 million and $ 7.1 million, respectively.

Note 7 – Other Real Estate Owned

The following table presents the number and carrying values of properties included in other real estate owned (“OREO”) as of the dates stated.


	September 30, 2021				December 31, 2020
	Number of		Carrying		Number of		Carrying
	Properties		Value		Properties		Value
Residential		—	$	—		1	$	—
Land		4		227		—		—
Total other real estate owned		4	$	227		1	$	—

The Company acquired $ 598 thousand of OREO in the Bay Banks Merger. As of September 30, 2021, the carrying value of the OREO portfolio totaled $ 227 thousand.

No residential mortgage loans were in the process of foreclosure as of September 30, 2021.

Note 8 – Borrowings

FHLB Borrowings

The Bank has a borrowing facility from the FHLB secured by certain real estate loans and pledged securities. The FHLB will lend up to 30 % of the Bank’s total assets as of the prior quarter end, subject to certain eligibility requirements, including adequate collateral. Total lendable collateral was $ 392.2 million as of September 30, 2021. The Bank had borrowings from the FHLB that totaled $ 125.1 million and $ 115.0 million as of September 30, 2021 and December 31, 2020, respectively. Of these advances, the Company assumed $ 10.1 million in the Bay Banks Merger. The borrowings also required the Bank to own $ 6.0 million and $ 5.8 million of FHLB stock, as of September 30, 2021 and December 31, 2020, respectively, which is included in restricted equity and other investments on the consolidated balance sheets.

The following table presents information regarding FHLB advances outstanding as of the date stated.


	September 30, 2021
				Stated
			Originated	Interest			Maturity
(Dollars in thousands)	Balance		Date	Rate			Date
Convertible	$	10,115	2/28/2020		0.56	%	2/28/2030
Fixed Rate Credit		15,000	7/1/2021		0.17	%	10/1/2021
Fixed Rate Credit		25,000	8/2/2021		0.16	%	11/2/2021
Fixed Rate Credit		35,000	8/6/2021		0.16	%	11/8/2021
Fixed Rate Credit		10,000	8/30/2021		0.16	%	11/30/2021
Fixed Rate Credit		10,000	8/30/2021		0.16	%	11/30/2021
Fixed Rate Credit		20,000	9/17/2021		0.19	%	12/17/2021
Total FHLB borrowings	$	125,115

As of September 30, 2021, 1-4 family residential loans held for investment with a lendable value of $ 185.5 million, multi-family residential loans with a lendable value of $ 35.0 million, commercial real estate loans with a lendable value of $ 117.3 million, 1-4 family residential loans held for sale with a lendable value of $ 27.9 million, and securities with a lendable value of $ 26.5 million were pledged against the available line of credit with the FHLB. The Bank also has letters of credit with the FHLB totaling $ 57.0 million for the purpose of collateral for public deposits with the Treasury Board of the Commonwealth of Virginia . Outstanding letters of credit reduce the available balance of the borrowing facility with the FHLB, which was $ 210.2 million as of September 30, 2021.

FRB Borrowings

In the second quarter of 2020, the Company began participating in the FRB’s PPPLF, which allowed banks to pledge PPP loans as collateral in exchange for advances. The PPPLF advances are at 100 % of the PPP loan value and term, have a fixed annual cost of 35 basis points, and receive favorable regulatory capital treatment. As of September 30, 2021, these FRB borrowings were $ 33.9 million with maturities ranging from 0.5 to 3.07 years. Of this balance, $ 24.8 million were assumed by the Company in the Bay Banks Merger. As of December 31, 2020, the Company’s FRB borrowings were $ 281.6 million with maturities ranging from 1.2 years to 4.5 years.

Other Borrowings

The Company has unsecured lines of credit with correspondent banks, which totaled $ 64.0 million and $ 38.0 million at September 30, 2021 and December 31, 2020, respectively. These lines bear interest at the prevailing rates for such loans and are cancellable any time by the correspondent bank. As of September 30, 2021 and December 31, 2020, no ne of these lines of credit with correspondent banks were drawn upon.

The Company had $ 40.5 million and $ 24.5 million of subordinated notes, net, outstanding as of September 30, 2021 and December 31, 2020, respectively. The Company assumed $ 30.9 million par value (or $ 31.9 million fair value) of subordinated notes in the Bay Banks Merger, which is composed of an issuance in October 2019 and maturing October 15, 2029 (the “2029 Bay Banks Notes”) and an issuance in May 2015 and maturing May 28, 2025 (the “2025 Bay Banks Notes”).

The 2029 Bay Banks Notes bear interest at 5.625 % per annum, through October 14, 2024, payable semi-annually in arrears. From October 15, 2024 through October 14, 2029, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Funding Rate (“SOFR”) (as defined in the 2029 Bay Banks Notes) plus 433.5 basis points, payable quarterly in arrears. The 2029 Bay Banks Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness and rank in parity with the other subordinated notes issued by the Company. Beginning on October 15, 2024 through maturity, the 2029 Bay Banks Notes may be redeemed, at the Company's option, on any scheduled interest payment date. As of September 30, 2021, the net carrying amount of the 2029 Bay Banks Notes was $ 25.8 million, inclusive of a $ 830 thousand purchase accounting adjustment (premium) recorded at the effective date of the Bay Banks Merger. For the three and nine months ended September 30, 2021, the effective interest rate on the 2029 Bay Banks Notes was 4.63 % and 4.64 %, respectively, inclusive of the amortization of the purchase accounting adjustment (premium).

The 2025 Bay Banks Notes had interest, payable on the first of March and September of each year, at a fixed interest rate of 6.50 % per year. The 2025 Bay Banks Notes were redeemable in whole or in part, without premium or penalty, at any interest payment date at the option of the Company. The Company exercised its right to redeem the 2025 Bay Banks Notes in the third quarter of 2021 and repaid the 2025 Bay Banks Notes in full.

On May 28, 2020, the Company issued a subordinated note with a principal amount of $ 15.0 million which matures on June 1, 2030 (the “2030 Note”). The 2030 Note is an unsecured, subordinated obligation of the Company and ranks junior in right of payment to the Company’s existing and future senior indebtedness and ranks in parity with the other subordinated notes issued by the Company. Beginning on June 1, 2025 through maturity, the 2030 Note may be redeemed, at the Company's option, on any scheduled interest payment date. The aggregate carrying value of the 2030 Note, including capitalized, unamortized debt issuance costs, was $ 14.7 million as of September 30, 2021. For both the three and nine months ended September 30, 2021, the effective interest rate on the 2020 Note was 6.12 %.

On November 20, 2015, the Company issued an aggregate of $ 10.0 million of subordinated notes with a maturity date of December 1, 2025 (the “2025 Notes”). The 2025 Notes could be redeemed in part or in full at any interest payment date on or after December 1, 2020, at the option of the Company. The Company exercised its right to redeem the 2025 Notes in the second quarter of 2021 and repaid the 2025 Notes in full.

Note 9 – Derivatives

The Company enters into interest rate swap agreements to facilitate the risk management strategies to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these interest rate swap agreements by entering into equal and offsetting swap agreements with highly-rated third-party financial institutions. These back-to-back interest rate swap agreements are free-standing derivatives and are recorded at fair value in the consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities).

The following tables present the notional and fair value of interest rate swap agreements recorded as other assets and other liabilities on the Company’s consolidated balance sheets as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Notional Amount		Fair Value
Interest rate swap agreement
Receive fixed/pay variable swaps	$	2,064	$	224
Pay fixed/receive variable swaps		2,064		( 224	)

	December 31, 2020
(Dollars in thousands)	Notional Amount		Fair Value
Interest rate swap agreement
Receive fixed/pay variable swaps	$	2,100	$	339
Pay fixed/receive variable swaps		2,100		( 339	)

The Company entered into various cash flow hedges as defined by ASC 815-20, Derivatives and Hedging. The objective of these interest rate swap agreements was to hedge the risk of variability in the Company’s cash flows attributable to changes in the 3-month LIBOR index rate component of forecasted three-month fixed rate funding advances from the FHLB. The hedging objective was to reduce the interest rate risk associated with the Company’s fixed rate advances from the designation date and through the maturity date. The identified hedge layers are presented in the following table (in thousands). Each hedge layer has a variable receive leg of 3-month LIBOR and a pay fixed leg of 1.80 %.


3-Month LIBOR		Cash & Securities		Period Hedged
Hedged Notional		Exposure Hedged		From	To
$	15,000	$	15,000	July 1, 2019	July 1, 2022
$	25,000	$	25,000	August 2, 2019	February 2, 2023
$	10,000	$	10,000	August 29, 2019	August 29, 2023

At the time the hedges identified in the table above expire, new hedges will begin. These new hedges are summarized in the following table (in thousands). Each hedge layer has a variable receive leg of 3-month LIBOR and a pay fixed leg ranging from 0.92 % to 0.95 %.


3-Month LIBOR		Cash & Securities		Period Hedged
Hedged Notional		Exposure Hedged		From	To
$	15,000	$	15,000	July 1, 2022	July 1, 2032
$	25,000	$	25,000	February 2, 2023	February 2, 2033
$	10,000	$	10,000	August 29, 2023	August 29, 2033

Beginning in 2020, the Company entered into three additional hedges summarized in the following table (in thousands). Each hedge layer has a variable receive leg of 3-month LIBOR and a pay fixed leg ranging from 0.83 % to 0.86 %.


3-Month LIBOR		Cash & Securities		Period Hedged
Hedged Notional		Exposure Hedged		From	To
$	20,000	$	20,000	March 13, 2020	March 13, 2030
$	35,000	$	35,000	May 6, 2020	May 6, 2027
$	10,000	$	10,000	May 29, 2020	May 29, 2027

The Company has the intent and ability to fund the 3-month rate advances during the term of these cash flow hedges. Interest rate swap assets and liabilities were $ 5.8 million and $ 1.2 million, respectively, as of September 30, 2021, and $ 1.7 million and $ 2.7 million, respectively, as of December 31, 2020. The Company had cash collateral with

the counterparties of $ 6.0 million included within other assets on the consolidated balance sheets as of September 30, 2021 and December 31, 2020.

The Bank also participates in a “mandatory” delivery program for its government guaranteed and conventional mortgage loans held for sale. Under the mandatory delivery program, loans with interest rate locks are paired with the sale of a to-be-announced mortgage-backed security bearing similar attributes. Under the mandatory delivery program, the Bank commits to deliver loans to an investor at an agreed upon price after the close of such loans. This differs from a “best efforts” delivery, which sets the sale price with the investor on a loan-by-loan basis when each loan is locked. The Bank had entered into $ 93.7 million and $ 154.3 million of rate lock commitments with borrowers, net of expected fallout, as of September 30, 2021 and December 31, 2020, respectively, and $ 144.5 million and $ 97.1 million of closed loan inventory waiting for sale, which were hedged by $ 241.6 million and $ 225.0 million in forward to-be-announced mortgage-backed securities as of September 30, 2021 and December 31, 2020, respectively. Mortgage derivative assets totaled $ 3.5 million and $ 5.3 million as of September 30, 2021 and December 31, 2020, respectively, and mortgage derivative liabilities, which are included in other liabilities on the consolidated balance sheets, were $ 0 and $ 1.6 million as of September 30, 2021 and December 31, 2020, respectively.

Note 10 – Stock-Based Compensation

The Company has granted restricted stock awards to employees and directors under the Company’s 2017 Equity Incentive Plan. The restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant, and the fair value of the award at the grant date is amortized over the requisite service period. Compensation expense recognized in the consolidated statements of income related to restricted stock awards, net of forfeitures, was $ 511 thousand and $ 848 thousand for the three and nine months ended September 30, 2021, respectively, and was $ 199 thousand and $ 331 thousand for the three and nine months ended September 30, 2020, respectively. On July 1, 2021, the Company granted restricted stock awards relating to 173,484 shares of the Company's common stock to employees and directors. At September 30, 2021, restricted stock awards relating to 237,785 shares of the Company’s common stock were outstanding and unrecognized compensation expense related to the restricted stock awards at September 30, 2021 totaled $ 3.1 million.

The Company converted fully vested options to purchase 198,362 shares of Bay Banks common stock into options to purchase 99,176 shares ( 148,764 on a post Stock Split basis) of the Company’s common stock pursuant to the Bay Banks Merger. The estimated fair value of the converted stock options as of the effective date of the merger was $ 472 thousand and included in the Bay Banks Merger consideration.

The estimated fair value of $ 472 thousand was determined using the Black-Scholes Model, which requires the use of assumptions including the risk-free interest rate, expected term, expected volatility (of the underlying stock), and expected dividend yield. The following table presents the ranges and weighted averages of assumptions used to determine the estimated fair value of the converted stock options in the Bay Banks Merger.


	As of January 31, 2021
	Range	Weighted-average
Risk free interest rate (U.S. Treasury)	0.06 % - 0.45 %	0.32 %
Expected term (years)	0.14 - 5.00	3.89
Expected volatility	21.2 % - 38.2 %	32.8 %
Expected dividend yield	2.85 %	2.85 %

The weighted-average exercise price and remaining contractual life (in years) of the stock options as of the date of the Bay Banks Merger was $ 14.83 per stock option ($ 9.89 on a post Stock Split basis) and 5.47 years, respectively.

During the nine months ended September 30, 2021, 83,647 and 380 stock options were exercised and forfeited, respectively, resulting in 64,737 options outstanding as of September 30, 2021.

Note 11 – Fair Value

The fair value of a financial instrument is the current amount that would be exchanged between willing parties in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances,

there are no quoted market prices for the various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:


Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted FRB and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

Rabbi trust assets

As a result of the Bay Banks Merger, the Company acquired and assumed a rabbi trust and deferred compensation plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities, such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets and the associated deferred compensation plan liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets.

Derivative financial instruments

Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

Cash flow hedges (interest rate swaps) hedge against the risk of variability in cash flows attributable to changes in the 3-month LIBOR index rate component of forecasted 3-month fixed rate funding advances from the FHLB. These cash flow hedges are recorded at fair value utilizing Level 2 inputs.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale
State and municipals	$	41,852	$	—	$	41,852	$	—
U.S. Treasury and agencies		48,548		—		48,548		—
Mortgage backed securities		238,923		—		238,923		—
Corporate bonds		30,775		—		30,775		—
Total securities available for sale	$	360,098	$	—	$	360,098	$	—
Other assets
Rabbi trust assets	$	963	$	963	$	—	$	—
Mortgage derivative asset		3,456		—		3,456		—
Interest rate swap asset		5,838		—		5,838		—
Other liabilities
Mortgage derivative liability	$	—	$	—	$	—	$	—
Interest rate swap liability		1,239		—		1,239		—


	December 31, 2020
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale
State and municipals	$	14,259	$	—	$	14,259	$	—
U.S. Treasury and agencies		2,409		—		2,409		—
Mortgage backed securities		72,635		—		72,635		—
Corporate bonds		20,172		—		20,172		—
Total securities available for sale	$	109,475	$	—	$	109,475	$	—
Other assets
Mortgage derivative asset	$	5,293	$	—	$	5,293	$	—
Interest rate swap asset		1,716		—		1,716		—
Other liabilities
Mortgage derivative liability	$	1,569	$	—	$	1,569	$	—
Interest rate swap liability		2,735		—		2,735		—

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

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

Mortgage Servicing Rights

The Company records MSR assets initially at fair value and subsequently accounts for them under the amortization method and performs an impairment assessment each reporting period. The amortization method requires that the MSR assets be recorded at the lower of cost or fair value.

The following tables present the change in MSR assets using Level 3 inputs as of and for the periods stated.


(Dollars in thousands)	MSR Assets
Balance, December 31, 2020	$	7,084
Acquired in Bay Banks Merger		997
Additions		9,252
Write-offs		( 616	)
Amortization		( 1,741	)
Impairments		—
Fair value adjustments		3,567
Balance, September 30, 2021 - fair value	$	18,543
Balance, September 30, 2021 - amortized cost	$	14,976


(Dollars in thousands)	MSR Assets
Balance, December 31, 2019	$	—
Additions		7,539
Write-offs		( 61	)
Amortization		( 391	)
Impairments		( 3	)
Fair value adjustments		207
Balance, December 31, 2020 - fair value	$	7,291
Balance, December 31, 2020 - amortized cost	$	7,084

A third-party model is used to determine the fair value of the Company’s MSR assets. The model establishes pools of performing loans, calculates projected future cash flows for each pool, and applies a discount rate to each pool. As of September 30, 2021 and December 31, 2020, the Company was servicing approximately $ 1.75 billion and $ 846.5 million of loans, respectively. Loans are segregated into homogenous pools based on loan term, interest rates, and other similar characteristics. Cash flows are then estimated based on net servicing fee income and utilizing assumed servicing costs and prepayment speeds. The weighted average net servicing fee income of the portfolio was 28.1 basis points as of September 30, 2021. Estimated base annual servicing costs were $ 65.00 to $ 80.00 per loan depending on the guarantor. Prepayment speeds in the model are based on empirically derived data for mortgage pool factors and differences between a mortgage pool’s weighted average coupon and its current mortgage rate. The weighted average prepayment speed assumption used in the fair value model was 12.16 % as of September 30, 2021. A base discount rate of 9.0 % to 12.0 % ( 9.30 % weighted average discount rate) was then applied to each pool’s projected future cash flows as of September 30, 2021. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSR assets are classified as Level 3.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral, if any, less estimated costs to sell, if the loan is collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value based on the borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statements or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Loans Held for Sale

Mortgage loans originated or purchased and intended for sale in the secondary market are carried at estimated market value in the aggregate. The agreed upon sales price is considered fair value as all of these loans are under agreements to sell to investors at the time of origination. This amount is generally the loan’s principal amount. Changes in fair value are recognized in the gain on sale of mortgages on the consolidated statements of income.

Other Real Estate Owned

Certain assets such as OREO are measured at fair value less estimated costs to sell. Valuation of OREO is generally determined using current appraisals from independent appraisers, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a real estate agent or broker, estimated selling costs reduce the listing price, resulting in a valuation based on Level 3 inputs.

The following tables summarize assets that were measured at fair value on a nonrecurring basis as of the dates stated.


	September 30, 2021
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	8,233	$	—	$	—	$	8,233
Loans held for sale		144,111		—		144,111		—
OREO		227		—		—		227


	December 31, 2020
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	2,187	$	—	$	—	$	2,187
Loans held for sale		148,209		—		148,209		—

The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.

Balance as of

Valuation

Unobservable

Weighted

(Dollars in thousands)

September 30, 2021

Technique

Input

Average

Impaired loans, net

8,233

Discounted appraised value

Selling costs

OREO

227

Discounted appraised value

Selling costs

Balance as of

Valuation

Unobservable

Weighted

(Dollars in thousands)

December 31, 2020

Technique

Input

Average

Impaired loans, net

2,097

Discounted appraised value

Selling costs

Discounted cash flows

Discount rate

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The carrying values of cash and due from banks and federal funds sold are of such short duration that carrying value reasonably approximates fair value (Level 1).

The carrying values of accrued interest receivable and accrued interest payable are of such short duration that carrying value reasonably approximates fair value (Level 2).

The carrying value of restricted equity investments approximates fair value based on the redemption provisions of the issuer (Level 2).

The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans, and

all other loans. The results are then adjusted to account for credit risk as described above. The fair value of the Company’s loan portfolio also considers illiquidity risk through the use of a discounted cash flow model to compensate for based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of both credit risk and illiquidity risk provides an estimated exit price for the Company’s loan portfolio. Loans held for investment are reported as Level 3.

There is no credit risk associated with PPP loans as they are fully guaranteed by the U.S. government. Further, the Company believes the PPP loans will be forgiven within 1.5 years for PPP 1 loans and between one and three years for PPP 2 loans, depending on the loan’s balance, and any fair value adjustment for potential interest rate change was considered inconsequential as of September 30, 2021. As a result, the carrying value of PPP loans reasonably approximates fair value (Level 3).

The carrying value of cash surrender value of life insurance reasonably approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information by insurance carriers (Level 2).

The carrying value of noninterest-bearing deposits approximates fair value (Level 1). The carrying values of interest-bearing demand, money market, and savings deposits approximates fair value based on their current pricing and are reported as Level 2. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period. Time deposits are reported as Level 3.

The fair value of the FHLB borrowings is estimated by discounting the future cash flows using current interest rates offered for similar advances (Level 2).

The fair value of FRB borrowings was approximated as its carrying value as there is no comparable debt to PPPLF advances (Level 2).

The fair value of the Company’s subordinated notes was estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size (Level 3).

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and these changes may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

The following tables present the estimated fair values, related carrying amounts, and valuation level of the financial instruments as of the dates stated.


	Carrying Value as of		Fair Value as of		Fair Value Measurements as of September 30, 2021
(Dollars in thousands)	September 30, 2021		September 30, 2021		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	53,077	$	53,077	$	53,077	$	—	$	—
Federal funds sold		144,376		144,376		144,376		—		—
Securities available for sale		360,098		360,098		—		360,098		—
Restricted equity and other investments		19,343		19,343		—		19,343		—
PPP loans receivable, net		46,648		46,648		—		—		46,648
Loans held for investment, net		1,739,839		1,732,771		—		—		1,732,771
Accrued interest receivable		9,900		9,900		—		9,900		—
Bank owned life insurance		46,278		46,278		—		46,278		—
Financial Liabilities
Noninterest-bearing demand deposits	$	684,859	$	684,859	$	684,859	$	—	$	—
Interest-bearing demand and money market deposits		828,477		828,477		—		828,477		—
Savings deposits		144,904		144,904		—		144,904		—
Time deposits		541,964		547,140		—		—		547,140
FHLB borrowings		125,115		124,900		—		124,900		—
FRB borrowings		33,857		33,857		—		33,857		—
Subordinated notes, net		40,503		42,048		—		—		42,048


	Carrying Value as of		Fair Value as of		Fair Value Measurements as of December 31, 2020
(Dollars in thousands)	December 31, 2020		December 31, 2020		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	117,945	$	117,945	$	117,945	$	—	$	—
Federal funds sold		775		775		775		—		—
Securities available for sale		109,475		109,475		—		109,475		—
Restricted equity investments		11,173		11,173		—		11,173		—
PPP loans receivable, net		288,533		288,533		—		—		288,533
Loans held for investment, net		719,056		720,396		—		—		720,396
Accrued interest receivable		5,428		5,428		—		5,428		—
Bank owned life insurance		15,724		15,724		—		15,724		—
Financial Liabilities
Noninterest-bearing demand deposits	$	333,051	$	333,051	$	333,051	$	—	$	—
Interest-bearing demand and money market deposits		282,263		282,263		—		282,263
Savings deposits		78,352		78,352		—		78,352		—
Time deposits		251,443		257,647		—		—		257,647
FHLB borrowings		115,000		114,983		—		114,983		—
FRB borrowings		281,650		281,650		—		281,650		—
Subordinated notes, net		24,506		25,830		—		—		25,830

Note 12 – Leases

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and such extensions are included in the calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value

guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The Company assumed five operating leases for real estate in the Bay Banks Merger. In accordance with ASC 842–Leases, the original classification of each lease was retained and not re-evaluated as part of the accounting for the business combination. The Company measured each of the assumed lease liabilities as if the lease was new, determined the appropriate lease liability and right-of-use asset fair value based on the Company’s incremental borrowing rate at merger date, and obtained independent assessments of favorable or unfavorable market terms for each lease contract.

The following tables present information about the Company’s leases as of and for the periods stated.


(Dollars in thousands)	September 30, 2021
Lease liabilities	$	7,113
Right-of-use asset	$	5,645
Weighted average remaining lease term (years)	5.89
Weighted average discount rate		2.18	%


	For the three months ended				For the nine months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Operating lease cost	$	400	$	458	$	1,806	$	1,347
Total lease cost	$	400	$	458	$	1,806	$	1,347

The following table presents a maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of the date stated.


	As of
(Dollars in thousands)	September 30, 2021
Three months ending December 31, 2021	$	507
Twelve months ending December 31, 2022		1,712
Twelve months ending December 31, 2023		1,330
Twelve months ending December 31, 2024		939
Twelve months ending December 31, 2025		785
Thereafter		2,427
Total undiscounted cash flows		7,700
Discount		( 587	)
Lease liabilities	$	7,113

Note 13 – Minimum Regulatory Capital

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (the “Basel III rules”) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements phased-in over a multi-year schedule and fully phased-in at January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios of 2.50 % for all ratios,

except the tier 1 leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. Management believes as of September 30, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to which it is subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2021, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework. There are no conditions or events since that notification that management believes have changed the institution's category.

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


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2021
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	269,123		13.15	%	$	214,936		10.50	%	$	204,701		10.00	%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	255,997		12.51	%	$	173,996		8.50	%	$	163,761		8.00	%
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	255,997		12.51	%	$	143,291		7.00	%	$	133,056		6.50	%
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.	$	255,997		9.72	%	$	105,358		4.00	%	$	131,698		5.00	%


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2020
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	109,219		13.10	%	$	87,574		10.50	%	$	83,404		10.00	%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	98,751		11.84	%	$	70,893		8.50	%	$	66,723		8.00	%
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	98,751		11.84	%	$	58,383		7.00	%	$	54,213		6.50	%
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.	$	98,751		8.34	%	$	47,363		4.00	%	$	59,180		5.00	%

The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amounts of dividends that may be paid without approval of regulatory agencies.

Note 14 – Commitments & Contingencies

In the ordinary course of operations, the Company is party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

Also, in the ordinary course of operations, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. 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 stand-by letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional commitments as it does for on-balance sheet commitments.

Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. As of September 30, 2021 and December 31, 2020, the Company had outstanding loan commitments of $ 384.9 million and $ 126.0 million, respectively.

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

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

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

Note 15 – Earnings Per Share

The following table shows the calculation of basic and diluted EPS and the weighted average number of shares outstanding used in computing EPS and the effect on the weighted average number of shares outstanding of dilutive potential common stock. Basic EPS amounts are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator). Diluted EPS amounts assume the conversion, exercise, or issuance of all potential common stock instruments, unless the effect would be to reduce the loss or increase earnings per common share. Potential dilutive common stock instruments include exercisable stock options, including those converted and assumed in the Bay Banks Merger. For the three and nine months ended September 30, 2021, stock options for 0 and 433 shares of the Company’s common stock, respectively, were not included in the computation of diluted earnings per share because their effects would have been anti-dilutive. Weighted average common shares outstanding, basic and dilutive, for all periods presented are presented on a post Stock Split basis.


	For the three months ended				For the nine months ended
(Dollars in thousands, except per share data)	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
Net income	$	6,806	$	5,059	$	39,685		$	12,117
Net loss (income) attributable to noncontrolling interest		4		4		( 1	)		( 1	)
Net income available to common shareholders	$	6,810	$	5,063	$	39,684		$	12,116
Weighted average common shares outstanding, basic		18,776,014		8,577,932		17,526,055			8,521,395
Effect of dilutive securities		22,711		—		9,341			—
Weighted average common shares outstanding, dilutive		18,798,725		8,577,932		17,535,396			8,521,395
Basic and diluted earnings per common share	$	0.36	$	0.59	$	2.26		$	1.42

Note 16 – Business Segments

The Company has identified two primary business segments, which are commercial banking and mortgage banking. Revenues from commercial banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income, and interest earned on mortgage loans held for sale.

The following tables present revenues and expenses by segment for the periods stated.


	For the three months ended September 30, 2021
(Dollars in thousands)	Commercial Banking		Mortgage Banking		Parent Only			Eliminations			Blue Ridge Bankshares, Inc. Consolidated
Revenues:
Interest income	$	23,019	$	706	$	29		$	—		$	23,754
Residential mortgage banking income, net		—		7,704		—			—			7,704
Mortgage servicing rights		—		1,827		—			—			1,827
Gain on sale of guaranteed government loans		108		—		—			—			108
Wealth and trust management		499		—		—			—			499
Service charges on deposit accounts		376		—		—			—			376
Increase in cash surrender value of bank owned life insurance		278		—		—			—			278
Payroll processing revenue		223		—		—			—			223
Bank and purchase card, net		497		—		—			—			497
Other income		979		—		1,075			( 48	)		2,006
Total income		25,979		10,237		1,104			( 48	)		37,272
Expenses:
Interest expense		1,913		73		644			—			2,630
Provision for loan losses		—		—		—			—			—
Salaries and employee benefits		7,417		7,357		—			—			14,774
Merger-related		216		—		1,225			—			1,441
Other		8,563		693		214			( 48	)		9,422
Total expense		18,109		8,123		2,083			( 48	)		28,267
Income (loss) before income taxes		7,870		2,114		( 979	)		—			9,005
Income tax expense (benefit)		1,943		421		( 165	)		—			2,199
Net income (loss)	$	5,927	$	1,693	$	( 814	)	$	—		$	6,806
Net loss attributable to noncontrolling interest		4		—		—			—			4
Net income (loss) attributable to Blue Ridge Bankshares, Inc.	$	5,931	$	1,693	$	( 814	)	$	—		$	6,810


	For the three months ended September 30, 2020
(Dollars in thousands)	Commercial Banking		Mortgage Banking		Parent Only			Eliminations			Blue Ridge Bankshares, Inc. Consolidated
Revenues:
Interest income	$	13,495	$	917	$	32		$	—		$	14,444
Residential mortgage banking income, net		—		14,400		—			—			14,400
Mortgage servicing rights		—		1,645		—			—			1,645
Gain on sale of guaranteed government loans		516		—		—			—			516
Service charges on deposit accounts		215		—		—			—			215
Increase in cash surrender value of bank owned life insurance		94		—		—			—			94
Payroll processing		221		—		—			—			221
Bank and purchase card, net		211		—		—			—			211
Other		317		—		—			( 6	)		311
Total income		15,069		16,962		32			( 6	)		32,057
Expenses:
Interest expense		2,132		72		411			—			2,615
Provision for loan losses		4,000		—		—			—			4,000
Salaries and employee benefits		3,425		8,455		—			—			11,880
Merger-related		19		—		1,245			—			1,264
Other		3,348		2,133		57			( 6	)		5,532
Total expense		12,924		10,660		1,713			( 6	)		25,291
Income (loss) before income taxes		2,145		6,302		( 1,681	)		—			6,766
Income tax expense (benefit)		523		1,276		( 92	)		—			1,707
Net income (loss)	$	1,622	$	5,026	$	( 1,589	)	$	—		$	5,059
Net loss attributable to noncontrolling interest		4		—		—			—			4
Net income (loss) attributable to Blue Ridge Bankshares, Inc.	$	1,626	$	5,026	$	( 1,589	)	$	—		$	5,063


	For the nine months ended September 30, 2021
(Dollars in thousands)	Commercial Banking			Mortgage Banking		Parent Only			Eliminations			Blue Ridge Bankshares, Inc. Consolidated
Revenues:
Interest income	$	77,501		$	2,536	$	105		$	—		$	80,142
Gain on sale of Paycheck Protection Program loans		24,315			—		—			—			24,315
Residential mortgage banking income, net		—			24,259		—			—			24,259
Mortgage servicing rights		—			6,905		—			—			6,905
Gain on sale of guaranteed government loans		1,325			—		—			—			1,325
Wealth and trust management		1,934			—		—			—			1,934
Service charges on deposit accounts		1,073			—		—			—			1,073
Increase in cash surrender value of bank owned life insurance		679			—		—			—			679
Payroll processing		706			—		—			—			706
Bank and purchase card, net		1,096			—		—			—			1,096
Other		1,817			—		1,778			( 135	)		3,460
Total income		110,446			33,700		1,883			( 135	)		145,894
Expenses:
Interest expense		6,209			188		2,142			—			8,539
Provision for loan losses		—			—		—			—			—
Salaries and employee benefits		24,118			22,307		—			—			46,425
Merger-related		9,350			—		2,347			—			11,697
Other		22,793			5,130		787			( 135	)		28,575
Total expense		62,470			27,625		5,276			( 135	)		95,236
Income (loss) before income taxes		47,976			6,075		( 3,393	)		—			50,658
Income tax expense (benefit)		10,350			1,238		( 615	)		—			10,973
Net income (loss)	$	37,626		$	4,837	$	( 2,778	)	$	—		$	39,685
Net income attributable to noncontrolling interest		( 1	)		—		—			—			( 1	)
Net income (loss) attributable to Blue Ridge Bankshares, Inc.	$	37,625		$	4,837	$	( 2,778	)	$	—		$	39,684


	For the nine months ended September 30, 2020
(Dollars in thousands)	Commercial Banking			Mortgage Banking		Parent Only			Eliminations			Blue Ridge Bankshares, Inc. Consolidated
Revenues:
Interest income	$	35,985		$	2,012	$	37		$	—		$	38,034
Residential mortgage banking income, net		—			31,969		—			—			31,969
Mortgage servicing rights		—			3,241		—			—			3,241
Gain on sale of guaranteed government loans		779			—		—			—			779
Service charges on deposit accounts		669			—		—			—			669
Increase in cash surrender value of bank owned life insurance		278			—		—			—			278
Payroll processing		736			—		—			—			736
Bank and purchase card, net		483			—		—			—			483
Other		669			—		—			( 18	)		651
Total income		39,599			37,222		37			( 18	)		76,840
Expenses:
Interest expense		6,440			243		854			—			7,537
Provision for loan losses		8,075			—		—			—			8,075
Salaries and employee benefits		9,665			20,221		—			—			29,886
Merger-related		405			—		1,305			—			1,710
Other		8,549			4,914		452			( 18	)		13,897
Total expense		33,134			25,378		2,611			( 18	)		61,105
Income (loss) before income taxes		6,465			11,844		( 2,574	)		—			15,735
Income tax expense (benefit)		1,445			2,440		( 267	)		—			3,618
Net income (loss)	$	5,020		$	9,404	$	( 2,307	)	$	—		$	12,117
Net income attributable to noncontrolling interest		( 1	)		—		—			—			( 1	)
Net income (loss) attributable to Blue Ridge Bankshares, Inc.	$	5,019		$	9,404	$	( 2,307	)	$	—		$	12,116

Note 17 – Changes to Accumulated Other Comprehensive Income, net

The following tables present components of accumulated other comprehensive income (loss) for the periods stated.


	For the three months ended September 30, 2021
(Dollars in thousands)	Net Unrealized Gains (Losses) on Available for Sale Securities			Net Unrealized Gains (Losses) on Interest Rate Swaps			Accumulated Other Comprehensive Income (Loss), net
Balance as of July 1, 2021	$	( 666	)	$	2,866		$	2,200
Change in net unrealized holding losses on securities available for sale, net of deferred tax benefit of $ 182		( 684	)		—			( 684	)
Change in net unrealized holding gains on interest rate swaps, net of deferred tax expense of $ 205		—			767			767
Balance as of September 30, 2021	$	( 1,350	)	$	3,633		$	2,283


	For the three months ended September 30, 2020
(Dollars in thousands)	Net Unrealized Gains (Losses) on Available for Sale Securities			Net Unrealized Gains (Losses) on Interest Rate Swaps			Accumulated Other Comprehensive Income (Loss), net
Balance as of July 1, 2020	$	( 107	)	$	( 3,242	)	$	( 3,349	)
Change in net unrealized holding gains on securities available for sale, net of deferred tax expense of $ 70		261			—			261
Reclassification for previously unrealized net gains recognized in net income, net of tax expense of $ 44		165			—			165
Change in net unrealized holding gains on interest rate swaps, net of deferred tax expense of $ 189		—			713			713
Balance as of September 30, 2020	$	319		$	( 2,529	)	$	( 2,210	)


	For the nine months ended September 30, 2021
(Dollars in thousands)	Net Unrealized Gains (Losses) on Available for Sale Securities			Net Unrealized Gains (Losses) on Interest Rate Swaps			Accumulated Other Comprehensive Income (Loss), net
Balance as of January 1, 2021	$	1,069		$	( 805	)	$	264
Change in net unrealized holding losses on securities available for sale, net of deferred tax benefit of $ 643		( 2,419	)		—			( 2,419	)
Change in net unrealized holding gains on interest rate swaps, net of deferred tax expense of $ 1,180		—			4,438			4,438
Balance as of September 30, 2021	$	( 1,350	)	$	3,633		$	2,283


	For the nine months ended September 30, 2020
(Dollars in thousands)	Net Unrealized Gains (Losses) on Available for Sale Securities			Net Unrealized Gains (Losses) on Interest Rate Swaps			Accumulated Other Comprehensive Income (Loss), net
Balance as of January 1, 2020	$	423		$	( 194	)	$	229
Change in net unrealized holding losses on securities available for sale, net of deferred tax benefit of $ 71		( 269	)		—			( 269	)
Reclassification for previously unrealized net gains recognized in net income, net of tax expense of $ 44		165			—			165
Change in net unrealized holding losses on interest rate swaps, net of deferred tax benefit of $ 621		—			( 2,335	)		( 2,335	)
Balance as of September 30, 2020	$	319		$	( 2,529	)	$	( 2,210	)

Note 18 – Legal Matters

On August 12, 2019, a former employee of Virginia Community Bankshares, Inc. (“VCB”) and participant in its Employee Stock Ownership Plan (the “VCB ESOP”) filed a class action complaint against VCB, Virginia Community Bank, and certain individuals associated with the VCB ESOP in the U.S. District Court for the Western District of Virginia, Charlottesville Division. The complaint alleges, among other things, that the defendants breached their fiduciary duties to VCB ESOP participants in violation of the Employee Retirement Income Security Act of 1974, as amended. The complaint alleges that the VCB ESOP incurred damages “that approach or exceed $ 12 million.” The Company automatically assumed any liability of VCB in connection with this litigation as a result of its 2019 acquisition of VCB. The outcome of this litigation is uncertain, and the plaintiff and other individuals may file additional lawsuits related to the VCB ESOP. The Company believes the claims are without merit and no loss has been accrued for this lawsuit.

On June 24, 2021, a customer of the Bank filed a purported class action complaint against the Bank in the U.S. District Court for the Western District of Virginia, Harrisonburg Division. The complaint alleged, among other things, that the Bank breached its contract with checking account customers by charging improper overdraft fees, and was seeking monetary damages, restitution, and declaratory relief arising from the alleged assessment and collection of such fees. The complaint also alleged that the aggregate claims of the putative class members exceed $ 5 million. The Company settled this lawsuit for a nominal amount in the third quarter of 2021.

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

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

Cautionary Note About Forward-Looking Statements

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

Merger with FVCBankcorp, Inc.

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

Merger with Bay Banks of Virginia, Inc.

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

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

Stock Split

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

General

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

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

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

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

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

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

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

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

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

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

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

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

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

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


	Average Balances, Income and Expense, Yields and Rates
	As of and for the three months ended September 30,
	2021								2020								Total Increase/			Increase/(Decrease) Due to
(Dollars in thousands)	Average Balance			Interest		Yield/ Rate (1)			Average Balance			Interest		Yield/ Rate (1)			(Decrease)			Volume (12)			Rate (12)
Average Assets
Taxable securities	$	335,811		$	1,317		1.57	%	$	104,796		$	562		2.15	%	$	755		$	1,239		$	(484	)
Tax-exempt securities (2)		17,048			77		1.81	%		6,217			37		2.38	%		40			64			(24	)
Total securities		352,859			1,394		1.58	%		111,013			599		2.16	%		795			1,303			(508	)
Interest-earning deposits in other banks		128,674			58		0.18	%		146,386			71		0.19	%		(13	)		(9	)		(4	)
Federal funds sold		81,772			24		0.12	%		1,629			1		0.25	%		23			49			(26	)
Loans held for sale		164,143			1,157		2.82	%		155,857			1,113		2.86	%		44			59			(15	)
Paycheck Protection Program loans (3)		86,834			713		3.28	%		357,498			3,847		4.30	%		(3,134	)		(2,912	)		(222	)
Loans held for investment (3,4,5)		1,734,393			20,424		4.71	%		679,024			8,820		5.20	%		11,605			13,710			(2,105	)
Total average interest-earning assets		2,548,675			23,770		3.73	%		1,451,407			14,451		3.98	%		9,320			12,200			(2,880	)
Less: allowance for loan losses		(12,913	)							(8,871	)
Total noninterest-earning assets		214,147								110,597
Total average assets	$	2,749,909							$	1,553,133
Average Liabilities and Stockholders’ Equity:
Interest-bearing demand, money market deposits, and savings	$	964,779		$	589		0.24	%	$	352,040		$	325		0.37	%	$	264		$	566		$	(302	)
Time deposits (6)		558,766			1,033		0.74	%		268,564			1,190		1.77	%		(157	)		1,286			(1,443	)
Total interest-bearing deposits		1,523,545			1,622		0.43	%		620,604			1,515		0.98	%		107			1,852			(1,745	)
FHLB borrowings (7)		125,117			304		0.97	%		118,587			381		1.29	%		(77	)		21			(98	)
FRB borrowings		67,121			60		0.36	%		352,558			308		0.35	%		(248	)		(250	)		2
Subordinated notes and other borrowings (8)		44,585			644		5.78	%		24,930			411		6.59	%		233			324			(91	)
Total average interest-bearing liabilities		1,760,368			2,630		0.60	%		1,116,679			2,616		0.94	%		15			1,947			(1,932	)
Noninterest-bearing demand deposits		693,200								310,829
Other noninterest-bearing liabilities		28,671								28,417
Stockholders’ equity		267,670								97,208
Total average liabilities and stockholders’ equity	$	2,749,909							$	1,553,133
Net interest income and margin (9)				$	21,140		3.32	%				$	11,835		3.26	%	$	9,305		$	10,253		$	(948	)
Cost of funds (10)							0.43	%							0.73	%
Net interest spread (11)							3.13	%							3.04	%

(1) Annualized.
(2) Computed on a fully taxable equivalent basis assuming a 21% income tax rate.
(3) Includes deferred loan fees/costs.
(4) Non-accrual loans have been included in the computations of average loan balances.
(5) Includes accretion of fair value adjustments (discounts) on acquired loans of $72 thousand and $189 thousand for the three months ended September 30, 2021 and 2020, respectively.
(6) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $827 thousand and $10 thousand for the three months ended September 30, 2021 and 2020, respectively.
(7) Includes amortization of fair value adjustments (premiums) on assumed FHLB borrowings of $4 thousand and $0 for the three months ended September 30, 2021 and 2020, respectively.
(8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $55 thousand and $0 for the three months ended September 30, 2021 and 2020, respectively.
(9) Net interest margin is net interest income divided by average interest-earning assets.
(10) Cost of funds is total interest expense divided by total interest-bearing liabilities and non-interest bearing demand deposits.
(11) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.
(12) Change in income/expense due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each.

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

and $3.8 million, respectively. Interest income in the third quarters of 2021 and 2020 included accretion of fair value adjustments (discounts) on acquired loans of $72 thousand and $189 thousand, respectively.

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

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

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


	Average Balances, Income and Expense, Yields and Rates
	As of and for the nine months ended September 30,
	2021								2020								Total Increase/			Increase/(Decrease) Due to
(Dollars in thousands)	Average Balance			Interest		Yield/ Rate (1)			Average Balance			Interest		Yield/ Rate (1)			(Decrease)			Volume (12)		Rate (12)
Average Assets
Taxable securities	$	281,227		$	3,580		1.70	%	$	105,716		$	1,841		2.32	%	$	1,739		$	3,056	$	(1,316	)
Tax-exempt securities (2)		10,810			224		2.76	%		6,276			145		3.08	%		79			105		(26	)
Total securities		292,037			3,804		1.74	%		111,992			1,986		2.36	%		1,818			3,161		(1,342	)
Interest-earning deposits in other banks		124,707			108		0.12	%		118,094			305		0.34	%		(197	)		17		(214	)
Federal funds sold		40,599			29		0.10	%		673			2		0.40	%		27			119		(92	)
Loans held for sale		145,210			2,992		2.75	%		113,016			2,420		2.86	%		572			689		(117	)
Paycheck Protection Program loans (3)		461,637			16,852		4.87	%		203,330			6,392		4.19	%		10,459			8,121		2,338
Loans held for investment (3,4,5)		1,625,405			56,404		4.63	%		670,607			26,954		5.36	%		29,451			38,376		(8,925	)
Total average interest-earning assets		2,689,595			80,189		3.98	%		1,217,712			38,059		4.17	%		42,130			50,483		(8,352	)
Less: allowance for loan losses		(13,270	)							(6,207	)
Total noninterest-earning assets		176,651								101,524
Total average assets	$	2,866,246							$	1,313,029
Average Liabilities and Stockholders’ Equity:
Interest-bearing demand, money market deposits, and savings	$	870,827		$	1,643		0.25	%	$	341,402		$	1,192		0.47	%	$	451		$	1,848	$	(1,397	)
Time deposits (6)		546,866			3,201		0.78	%		263,755			3,697		1.87	%		(496	)		3,968		(4,464	)
Total interest-bearing deposits		1,417,693			4,844		0.46	%		605,157			4,889		1.08	%		(45	)		5,816		(5,861	)
FHLB borrowings (7)		165,953			806		0.65	%		116,432			1,294		1.48	%		(488	)		550		(1,038	)
FRB borrowings		319,215			745		0.31	%		190,548			500		0.35	%		245			337		(92	)
Subordinated notes and other borrowings (8)		48,931			2,144		5.84	%		21,800			855		5.23	%		1,289			1,064		225
Total average interest-bearing liabilities		1,951,792			8,539		0.58	%		933,936			7,537		1.08	%		1,002			7,767		(6,766	)
Noninterest-bearing demand deposits		662,406								262,974
Other noninterest-bearing liabilities		16,889								22,147
Stockholders' equity		235,159								93,972
Total average liabilities and stockholders’ equity	$	2,866,246							$	1,313,029


Net interest income and margin (9)	$	71,650	3.55	%	$	30,522	3.34	%	$	41,128	$	42,716	$	(1,586	)
Cost of funds (10)			0.44	%			0.84	%
Net interest spread (11)			3.39	%			3.09	%

(1) Annualized.
(2) Computed on a fully taxable equivalent basis assuming a 21% income tax rate.
(3) Includes deferred loan fees/costs.
(4) Non-accrual loans have been included in the computations of average loan balances.
(5) Includes accretion of fair value adjustments (discounts) on acquired loans of $1.3 million and $877 thousand for the nine months ended September 30, 2021 and 2020, respectively.
(6) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $2.5 million and $13 thousand for the nine months ended September 30, 2021 and 2020, respectively.
(7) Includes amortization of fair value adjustments (premiums) on assumed FHLB borrowings of $10 thousand and $0 for the nine months ended September 30, 2021 and 2020, respectively.
(8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $145 thousand and $0 for the nine months ended September 30, 2021 and 2020, respectively.
(9) Net interest margin is net interest income divided by average interest-earning assets.
(10) Cost of funds is total interest expense divided by total interest-bearing liabilities and non-interest bearing demand deposits.
(11) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.
(12) Change in income/expense due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each.

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

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

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

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

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


	For the three months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		Change $			Change %
Residential mortgage banking income, net		7,704		14,400		(6,696	)		(46.50	%)
Mortgage servicing rights		1,827		1,645		182			11.06	%
Gain on sale of guaranteed government loans		108		516		(408	)		(79.07	%)
Wealth and trust management		499		—		499			—
Service charges on deposit accounts		376		215		161			74.88	%
Increase in cash surrender value of bank owned life insurance		278		94		184			195.74	%
Payroll processing		223		221		2			0.90	%
Bank and purchase card, net		497		211		286			135.55	%
Other		2,006		311		1,695			545.02	%
Total noninterest income	$	13,518	$	17,613	$	(4,095	)		(23.25	%)


	For the nine months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		Change $			Change %
Gain on sale of Paycheck Protection Program loans	$	24,315	$	—	$	24,315			—
Residential mortgage banking income, net		24,259		31,969		(7,710	)		(24.12	%)
Mortgage servicing rights		6,905		3,241		3,664			113.05	%
Gain on sale of guaranteed government loans		1,325		779		546			70.09	%
Wealth and trust management		1,934		—		1,934			—
Service charges on deposit accounts		1,073		669		404			60.39	%
Increase in cash surrender value of bank owned life insurance		679		278		401			144.24	%
Payroll processing		706		736		(30	)		(4.08	%)
Bank and purchase card, net		1,096		483		613			126.92	%
Other		3,460		651		2,809			431.49	%
Total noninterest income	$	65,752	$	38,806	$	26,946			69.44	%

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

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


	For the three months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		Change $		Change %
Salaries and employee benefits	$	14,774	$	11,880	$	2,894		24.36	%
Occupancy and equipment		1,743		922		821		89.05	%
Data processing		893		656		237		36.13	%
Legal, issuer, and regulatory filing		372		291		81		27.84	%
Advertising and marketing		452		165		287		173.94	%
Communications		761		214		547		255.61	%
Audit and accounting fees		195		98		97		98.98	%
FDIC insurance		487		187		300		160.43	%
Intangible amortization		500		232		268		115.52	%
Other contractual services		633		516		117		22.67	%
Other taxes and assessments		547		280		267		95.36	%
Merger-related		1,441		1,264		177		14.00	%
Other		2,839		1,971		868		44.04	%
Total noninterest expense	$	25,637	$	18,676	$	6,961		37.27	%


	For the nine months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		Change $		Change %
Salaries and employee benefits	$	46,425	$	29,886	$	16,539		55.34	%
Occupancy and equipment		4,968		2,653		2,315		87.26	%
Data processing		3,272		1,649		1,623		98.42	%
Legal, issuer, and regulatory filing		1,437		781		656		83.99	%
Advertising and marketing		989		518		471		90.93	%
Communications		1,802		536		1,266		236.19	%
Audit and accounting fees		675		278		397		142.81	%
FDIC insurance		839		568		271		47.71	%
Intangible amortization		1,406		608		798		131.25	%
Other contractual services		2,152		870		1,282		147.36	%
Other taxes and assessments		1,973		748		1,225		163.77	%
Merger-related		11,697		1,710		9,987		584.04	%
Other		9,062		4,688		4,374		93.30	%
Total noninterest expense	$	86,697	$	45,493	$	41,204		90.57	%

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

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

Analysis of Financial Condition

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

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


	September 30, 2021						December 31, 2020
(Dollars in thousands)	Amount			Percent			Amount			Percent
Commercial and industrial	$	309,058			17.2	%	$	123,675			12.1	%
Paycheck Protection Program		47,325			2.6	%		292,068			28.5	%
Real estate – construction, commercial		139,286			7.7	%		54,702			5.3	%
Real estate – construction, residential		51,098			2.8	%		18,040			1.8	%
Real estate – mortgage, commercial		680,309			37.8	%		273,499			26.7	%
Real estate – mortgage, residential		499,361			27.7	%		213,404			20.8	%
Real estate – mortgage, farmland		6,317			0.4	%		3,615			0.4	%
Consumer		67,787			3.8	%		46,684			4.4	%
Gross loans		1,800,541			100.0	%		1,025,687			100.0	%
Less: deferred loan fees, net of costs		(1,440	)					(4,271	)
Gross loans, net of deferred loans fees and costs		1,799,101						1,021,416
Less: allowance for loan losses		(12,614	)					(13,827	)
Loans held for investment, net	$	1,786,487					$	1,007,589
Loans held for sale (not included in totals above)	$	144,111					$	148,209

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

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

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

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

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

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

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

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

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

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


	For the three months ended						For the nine months ended
(Dollars in thousands)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
ALL, beginning of period	$	13,007		$	8,206		$	13,827		$	4,572
Charge-offs
Commercial and industrial		(18	)		—			(968	)		—
Real estate – mortgage		(133	)		—			(146	)		—
Consumer		(361	)		(213	)		(757	)		(787	)
Total charge-offs		(512	)		(213	)		(1,871	)		(787	)
Recoveries
Commercial and industrial		26			33			210			34
Real estate – mortgage		5			—			108			—
Consumer		88			97			340			229
Total recoveries		119			130			658			263
Net charge-offs		(393	)		(83	)		(1,213	)		(524	)
Provision for loan losses		—			4,000			—			8,075
ALL, end of period	$	12,614		$	12,123		$	12,614		$	12,123

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


	September 30, 2021					December 31, 2020
(Dollars in thousands)	$		% of Loans			$		% of Loans
Commercial and industrial	$	2,201		0.7	%	$	3,762		3.0	%
Real estate – construction, commercial		749		0.5	%		960		1.8	%
Real estate – construction, residential		160		0.3	%		150		0.8	%
Real estate – mortgage, commercial		4,681		0.7	%		4,215		1.5	%
Real estate – mortgage, residential		955		0.2	%		1,481		0.7	%
Real estate – mortgage, farmland		20		0.3	%		18		0.5	%
Consumer		3,848		5.7	%		3,241		6.9	%
	$	12,614				$	13,827

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

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

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

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

modified terms at the respective dates and therefore excluded from the non-performing loan and non-performing asset figures in the table below.

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


(Dollars in thousands)	September 30, 2021			December 31, 2020
Non-accrual loans (1)	$	12,777		$	6,583
Loans past due 90 days and still accruing (1)		2,378			46
Total non-performing loans	$	15,155		$	6,629
OREO		227			—
Total non-performing assets	$	15,382		$	6,629
ALL	$	12,614		$	13,827
Loans held for investment, including PPP loans	$	1,799,101		$	1,021,416
Loans held for investment, excluding PPP loans	$	1,752,453		$	732,883
Total assets	$	2,699,302		$	1,498,258
ALL to total loans held for investment, including PPP loans		0.70	%		1.35	%
ALL to total loans held for investment, excluding PPP loans		0.72	%		1.89	%
ALL to non-performing loans		83.23	%		208.58	%
Non-performing loans to total loans held for investment, including PPP loans		0.84	%		0.65	%
Non-performing loans to total loans held for investment, excluding PPP loans		0.86	%		0.90	%
Non-performing assets to total assets		0.57	%		0.44	%

(1) Excludes PCI loans and accruing TDRs

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

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

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

The Company reviews for other-than-temporary impairment of its investment securities portfolio at least quarterly. At September 30, 2021 and December 31, 2020, only investment grade securities were in an unrealized loss position or the amount of unrealized loss for the security was not significant. Investment securities with unrealized losses are generally a result of pricing changes due to recent changes in the current interest rate environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities show no indication that the contractual cash flows will not be

received when due. The Company does not intend to sell nor does it believe that it will be required to sell any of its temporarily impaired securities prior to the recovery of the amortized cost. No other-than-temporary impairment has been recognized for the securities as of September 30, 2021 and December 31, 2020.

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

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

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


	September 30,					December 31,
	2021					2020
(Dollars in thousands)	Amortized Cost		Percent of total			Amortized Cost		Percent of total
Available-for-sale
State and municipal	$	41,843		11.55	%	$	14,069		12.95	%
U. S. Treasury and agencies		49,212		13.58	%		2,500		2.30	%
Mortgage backed securities		241,108		66.54	%		72,337		66.57	%
Corporate bonds		30,210		8.34	%		19,755		18.18	%
Total investment securities	$	362,373		100.00	%	$	108,661		100.00	%

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


	September 30, 2021
					Weighted		Weighted
					Average Life		Average
(Dollars in thousands)	Amortized Cost		Fair Value		in Years		Yield
Available-for-sale
State and municipal	$	41,843	$	41,852		6.2		0.75	%
U. S. Treasury and agencies		49,212		48,548		8.5		1.68	%
Mortgage backed securities		241,108		238,923		7.9		1.05	%
Corporate bonds		30,210		30,775		3.5		4.68	%
Total investments	$	362,373	$	360,098		6.5		2.04	%

	December 31, 2020
					Weighted		Weighted
					Average Life		Average
(Dollars in thousands)	Amortized Cost		Fair Value		in Years		Yield
Available-for-sale
State and municipal	$	14,069	$	14,259		5.0		1.68	%
U. S. Treasury and agencies		2,500		2,409		9.6		0.87	%
Mortgage backed securities		72,337		72,635		3.8		3.37	%
Corporate bonds		19,755		20,172		3.1		3.10	%
Total investments	$	108,661	$	109,475		5.4		2.26	%

Deposits. The principal sources of funds for the Company are core deposits (demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits, and certificates of deposit), primarily from its market

area. The Company’s deposit base includes transaction accounts, time and savings accounts, and other accounts that customers use for cash management purposes and which provide the Company with a source of fee income and cross-marketing opportunities as well as a low-cost source of funds. Time and savings accounts, including money market deposit accounts, also provide a relatively stable low-cost source of funding.

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

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

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


(Dollars in thousands)	September 30, 2021		December 31, 2020
Maturing in:
3 months or less	$	74,755	$	25,211
Over 3 months through 6 months		61,709		33,963
Over 6 months through 12 months		74,986		24,675
Over 12 months		134,261		92,341
	$	345,711	$	176,190

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


	For the nine months ended September 30, 2021
(Dollars in thousands)	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB borrowings	$	125,115	$	220,115	$	165,953		0.65	%
FRB borrowings		33,857		632,540		319,215		0.31	%

	Year ended December 31, 2020
(Dollars in thousands)	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB borrowings	$	115,000	$	124,000	$	121,033		0.24	%
FRB borrowings		281,650		355,484		223,869		0.35	%

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

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

Subordinated notes, net, totaled $40.5 million as of September 30, 2021 compared to $24.5 million as of December 31, 2020, a $16.0 million increase for the nine months ending September 30 2021, which was primarily attributable to $31.9 million of subordinated notes assumed in the Bay Banks Merger, partially offset by two subordinated note

redemptions in 2021. The Company redeemed subordinated notes with an initial aggregate principal balance of $10.0 million and $7.0 million in the second and third quarters of 2021, respectively.

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

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

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

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

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

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

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

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The final rules implementing Basel Committee on Banking Supervision's capital

guidelines for U.S. banks (the “Basel III rules”) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements phased-in over a multi-year schedule and fully phased-in on January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios of 2.50% for all ratios, except the tier 1 leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. Management believes as of September 30, 2021, the Bank met all capital adequacy requirement to which it is subject.

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

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


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2021
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	269,123		13.15	%	$	214,936		10.50	%	$	204,701		10.00	%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	255,997		12.51	%	$	173,996		8.50	%	$	163,761		8.00	%
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	255,997		12.51	%	$	143,291		7.00	%	$	133,056		6.50	%
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.	$	255,997		9.72	%	$	105,358		4.00	%	$	131,698		5.00	%


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2020
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	109,219		13.10	%	$	87,574		10.50	%	$	83,404		10.00	%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	98,751		11.84	%	$	70,893		8.50	%	$	66,723		8.00	%
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.	$	98,751		11.84	%	$	58,383		7.00	%	$	54,213		6.50	%
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.	$	98,751		8.34	%	$	47,363		4.00	%	$	59,180		5.00	%

Off-Balance Sheet Activities

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

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

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

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

Interest Rate Risk Management

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

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

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

Item 3. Quantitative and Qualitati ve Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Other than as set forth below, there have been no material developments in the status of the legal proceedings previously disclosed in Part II, Item 1 of the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021.

In the ordinary course of its operations, the Company is a party to various legal proceedings. As of the date of this report, there are no pending or threatened proceedings against the Company, other than previously disclosed as stated in the preceding paragraph or as set forth below, that, if determined adversely, would have a material effect on the business, results of operations or financial position of the Company.

On June 24, 2021, a customer of the Bank filed a purported class action complaint against the Bank in the U.S. District Court for the Western District of Virginia, Harrisonburg Division. The complaint alleged, among other things, that the Bank breached its contract with checking account customers by charging improper overdraft fees, and was seeking monetary damages, restitution and declaratory relief arising from the alleged assessment and collection of such fees. The complaint also alleged that the aggregate claims of the putative class members exceed $5 million. The Company settled this lawsuit for a nominal amount in the third quarter of 2021.

Item 1A. Ri sk Factors

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

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

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

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

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

withdraw their deposits from the Company’s or FVCB’s banking subsidiaries, or other unintended consequences that could have a material adverse effect on the Company’s results of operations or financial condition after the merger. These integration matters could have an adverse effect on each of the Company and FVCB during this transition period and for an undetermined period after consummation of the merger.

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

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

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

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

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

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

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

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

Any delay in completion of the merger may have a material adverse effect on the Company’s business during the pendency of the merger, and on the Company’s business and results of operations following the merger, due to potential

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

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

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

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

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

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

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

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

Item 2. Unregistered Sales of Equi ty Securities and Use of Proceeds

None

Item 3. Defaults Upo n Senior Securities

None

Item 4. Mine Saf ety Disclosures

None

Item 5. Other Information

None

Item 6. E xhibits


2.1		Agreement and Plan of Reorganization, dated as of July 14, 2021, between Blue Ridge Bankshares, Inc. and FVCBankcorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed July 15, 2021).

31.1		Rule 13(a)-14(a) Certification of Chief Executive Officer.

31.2		Rule 13(a)-14(a) Certification of Chief Financial Officer.

32.1		Statement of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

101		The following materials from Blue Ridge Bankshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, formatted in Inline Extensible Business Reporting Language (XBRL), include: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) related notes (filed herewith).

104		The cover page from Blue Ridge Bankshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, formatted in Inline XBRL (included with Exhibit 101).

SIGNAT URES

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



	BLUE RIDGE BANKSHARES, INC.

Date: November 10, 2021	By:	/s/ Brian K. Plum
		Brian K. Plum
		President and Chief Executive Officer

	By:	/s/ Judy C. Gavant
		Judy C. Gavant
		Executive Vice President and Chief Financial Officer

TABLE OF CONTENTS

Part I. Finan Item 1. Financial Statements Item 1. Financi Note 1 Organization and Basis Of Presentation Note 2 Amendments To The Accounting Standards Codification Note 3 Business Combinations Note 4 Investments Note 4 in Note 5 Loans and Allowance For Loan Losses Note 6 Goodwill and Other Intangibles Note 7 Other Real Estate Owned Note 8 Borrowings Note 9 Derivatives Note 10 Stock-based Compensation Note 11 Fair Value Note 12 Leases Note 13 Minimum Regulatory Capital Note 14 Commitments & Contingencies Note 15 Earnings Per Share Note 16 Business Segments Note 17 Changes To Accumulated Other Comprehensive Income, Net Note 18 Legal Matters Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management S Discussion and Analysis O Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 3. Quantitative and Qualitati Item 4. Controls and Procedures Item 4. Controls Part II. Other Information Part II. Other Item 1. Legal Proceedings Item 1. Legal Item 1A. Risk Factors Item 1A. Ri Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 2. Unregistered Sales Of Equi Item 3. Defaults Upon Senior Securities Item 3. Defaults Upo Item 4. Mine Safety Disclosures Item 4. Mine Saf Item 5. Other Information Item 5. Other Item 6. Exhibits

2.1 Agreement and Plan of Reorganization, dated as of July 14, 2021, between Blue Ridge Bankshares, Inc. and FVCBankcorp, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed July 15, 2021). 31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer. 31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer. 32.1 Statement of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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