UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~March 31, 2019~~June 30, 2021

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

For the transition period from toto

Commission file number:001-38817

MainStreet Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Virginia

81-2871064

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

10089 Fairfax Boulevard, Fairfax, VA 22030

(Address of Principal Executive Offices and Zip Code)

(703)481-4567

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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

MNSB

The Nasdaq Stock Market LLC

Depositary Shares (each representing a 1/40^th
interest in a share of 7.50% Series A Fixed-Rate	MNSBP	The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock)

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 RegulationS-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, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” ~~or an~~and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

~~Large accelerated~~ Non-accelerated filer	☐ ☒	~~Accelerated filer~~ Smaller reporting company	☐ ☒

~~Non-accelerated~~ ~~filer~~	☒	~~Smaller reporting company~~	☒

Emerging growth company	☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). ☐ Yes ☒ No

~~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~~

~~MNSB~~

~~The Nasdaq Stock Market LLC~~

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of ~~May 10, 2019,~~August 9, 2021, there were ~~8,250,259~~7,550,714 outstanding shares, par value $4.00 per share, of the issuer’s common stock.

~~INDEX~~

INDEX


PART I – FINANCIAL INFORMATION	3

Item 1 – Consolidated Financial Statements	3

Notes to Consolidated Financial Statements	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	33	29

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	44	46

Item 4 – Controls and Procedures	45	46

PART II OTHER INFORMATION	45	47

Item 1 – Legal Proceedings	45	47

Item 1A – Risk Factors	45	47

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	45	47

Item 36 – ~~Defaults upon Senior Securities~~Exhibits	45	48

~~Item 4 – Mine Safety Disclosures~~SIGNATURES	45

~~Item 5 – Other Information~~	45

~~Item 6 – Exhibits~~49	46

~~SIGNATURES~~	47

PART I – FINANCIAL INFORMATION

Item 1 ~~–Consolidated~~– Consolidated Financial Statements – Unaudited

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018;~~2020 (Dollars in thousands, except share and per share data)


	At March 31, 2019 (unaudited)			At December 31, 2018 *()**			At June 30, 2021 (unaudited)		At December 31, 2020 (*)
Assets
Cash and due from banks	$	29,741		$	27,886		$	120,121	$	75,935
Federal funds sold		30,034			30,190			56,164		31,593

Cash and cash equivalents		59,775			58,076			176,285		107,528
Investment securitiesavailable-for-sale, at fair value		69,308			55,979			165,791		147,414
Investment securitiesheld-to-maturity		25,487			26,178
Investment securities held-to-maturity, at amortized cost								26,136		22,520
Restricted securities, at cost		5,732			5,894			5,039		4,616
Loans receivable, net of allowance for loan losses of $9,189 at March 31, 2019 and $8,831 at December 31, 2018		943,735			917,125
Loans held for sale								—		57,006
Loans, net of allowance for loan losses of $11,133 and $12,877, respectively								1,256,436		1,230,379
Premises and equipment, net		14,226			14,222			13,929		14,289
Other real estate owned, net								1,158		1,180
Accrued interest and other receivables		5,644			5,148			8,752		9,604
Bank owned life insurance		14,169			14,064			35,736		25,341
Other assets		8,005			3,927			18,433		23,288

Total Assets	$	1,146,081		$	1,100,613		$	1,707,695	$	1,643,165

Liabilities and Stockholders’ Equity

Liabilities
Non-interest bearing deposits	$	193,744		$	211,749		$	486,001	$	370,497
Interest bearing demand deposits		59,639			60,588			68,028		70,307
Savings and NOW deposits		61,537			51,371			72,353		74,099
Money market deposits		147,655			138,152			310,303		426,600
Time deposits		504,252			458,277			528,247		496,743

Total deposits		966,827			920,137			1,464,932		1,438,246
Federal Home Loan Bank advances		30,000			40,000
Subordinated debt, net		14,783			14,776			40,576		14,834
Other liabilities		9,488			4,449			22,559		22,420

Total Liabilities		1,021,098			979,362			1,528,067		1,475,500

Stockholders’ Equity
Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018.		—			—
Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding 8,249,759 shares (including 153,086 nonvested shares) for March 31, 2019 and 8,177,978 shares (including 133,869 nonvested shares) for December 31, 2018.		32,387			32,176
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 28,750 shares issued and outstanding as of June 30, 2021 and December 31, 2020								27,263		27,263
Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding 7,549,398 shares (including 187,882 nonvested shares) for June 30, 2021 and 7,443,842 shares (including 161,435 nonvested shares) for December 31, 2020								29,446		29,130
Capital surplus		74,353			74,256			66,667		66,116
Retained earnings		18,395			15,186			55,676		44,179
Accumulated other comprehensive loss		(152	)		(367	)

Accumulated other comprehensive income								576		977
Total Stockholders’ Equity		124,983			121,251			179,628		167,665

Total Liabilities and Stockholders’ Equity	$	1,146,081		$	1,100,613		$	1,707,695	$	1,643,165

*	Derived from audited consolidated financial statements.

See Notes to the Unaudited Consolidated Financial Statements

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income (Loss) for the Three ~~Months Ended March 31, 2019~~ and ~~2018;~~Six months ended June 30, 2021 and 2020 (Dollars in thousands, except per share data)


	For the Three Months Ended March 31,				For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019		2018		2021			2020			2021			2020
Interest Income
Interest and fees on loans	$	12,916	$	8,316	$	15,257		$	14,399		$	31,049		$	28,619
Interest on investments securities		556		341		597			496			1,127			997
Interest on federal funds sold		345		100		20			9			35			404

Total Interest Income		13,817		8,757		15,874			14,904			32,211			30,020

Interest Expense
Interest on interest bearing DDA deposits		245		164		55			36			110			153
Interest on savings and NOW deposits		73		46		47			50			89			114
Interest on money market deposits		763		264		220			474			497			1,252
Interest on time deposits		2,931		1,091		1,994			3,333			4,244			6,900
Interest on Federal Home Loan Bank advances and other borrowings		219		179		—			44			—			94
Interest on subordinated debt		238		238		567			241			805			482

Total Interest Expense		4,469		1,982		2,883			4,178			5,745			8,995

Net interest income		9,348		6,775
Provision for Loan Losses		325		635

Net interest income after provision for loan losses		9,023		6,140

Net Interest Income						12,991			10,726			26,466			21,025
Provision for (Recovery of) Loan Losses						(2,080	)		5,575			(1,760	)		5,925
Net Interest Income After (Recovery of) Provision For Loan Losses						15,071			5,151			28,226			15,100
Non-Interest Income
Deposit account service charges		370		213		621			433			1,160			920
Bank owned life insurance income		105		106		218			198			395			397
Loan swap fee income						—			423			—			826
Net gain on held-to-maturity securities						—			—			3			—
Net gain on sale of loans						130			—			474			—
Other fee income		451		189		586			264			969			589

TotalNon-Interest Income		926		508		1,555			1,318			3,001			2,732

Non-Interest Expense
Salaries and employee benefits		3,860		2,749		4,663			4,263			9,430			8,696
Furniture and equipment expenses		385		381		500			500			1,026			954
Advertising and marketing		105		156		402			191			677			447
Occupancy expenses		213		151		387			311			693			578
Outside services		227		196		280			205			616			481
Administrative expenses		167		118		141			177			291			341
Other operating expenses		1,051		826		1,500			1,713			2,950			3,005

TotalNon-Interest Expense		6,008		4,577		7,873			7,360			15,683			14,502

Income before income taxes		3,941		2,071
Income Tax Expense		694		385

Net Income	$	3,247	$	1,686

Net Income per common share:
Income (Loss) Before Income Taxes						8,753			(891	)		15,544			3,330
Income Tax Expense (Benefit)						1,627			(257	)		2,969			494
Net Income (Loss)					$	7,126		$	(634	)	$	12,575		$	2,836
Preferred Stock Dividends						539			—			1,078			—
Net Income (Loss) Available To Common Shareholders					$	6,587		$	(634	)	$	11,497		$	2,836
Net Income (Loss) Per Common Share:
Basic	$	0.39	$	0.29	$	0.87		$	(0.08	)	$	1.53		$	0.34

Diluted	$	0.39	$	0.29	$	0.87		$	(0.08	)	$	1.53		$	0.34

See Notes to the Unaudited Consolidated Financial Statements

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the ~~Three~~Six Months Ended ~~March 31, 2019~~June 30, 2021 and ~~2018~~2020 (Dollars in thousands)

   For the Three
Months Ended
March 31,
   2019    2018
Comprehensive Income, net of taxes

Net Income
   $ 3,247    $ 1,686
Other comprehensive gain (loss), net of tax:

Unrealized gains (losses) on available for sale securities arising during the period (net of tax (benefit), $56 and ($37), respectively)
   209    (140 )
Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $1 and $2, respectively)
   6    7




Other comprehensive income (loss)
   215    (133 )




Comprehensive Income
   $ 3,462    $ 1,553

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2021		2020			2021			2020
Comprehensive Income (Loss), net of taxes
Net Income (Loss)	$	7,126	$	(634	)	$	12,575		$	2,836
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period (net of tax (benefit) expense, $113 and $32, respectively, for the three months ended June 30, and ($123) and $137, respectively for the six months ended June 30).		416		121			(411	)		521
Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $1 and $1, respectively, for the three months ended June 30, and $2 and $2, respectively, for the six months ended June 30).		5		5			10			10
Other comprehensive income (loss)		421		126			(401	)		531
Comprehensive Income (Loss)	$	7,547	$	(508	)	$	12,174		$	3,367

See Notes to the Unaudited Consolidated Financial Statements

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Stockholders’ Equity for the Three ~~Months Ended March 31, 2019~~ and ~~2018~~Six months ended June 30, 2021 and 2020 (Dollars in ~~thousands, except per share data)~~thousands)

																															Accumulated Other
																	Preferred			Common			Capital				Retained				Comprehensive
																	Stock			Stock			Surplus				Earnings				Income			Total
Balance, March 31, 2021																	$	27,263		$	29,437		$	66,233			$	49,089			$	155		$	172,177
Vesting of restricted stock																		—			9			(9	)			—				—			—
Stock based compensation expense																		—			—			443				—				—			443
Dividends on preferred stock																		—			—			—				(539	)			—			(539	)
Net income																		—			—			—				7,126				—			7,126
Other comprehensive income																		—			—			—				—				421			421
Balance, June 30, 2021																	$	27,263		$	29,446		$	66,667			$	55,676			$	576		$	179,628

									Accumulated Other Comprehensive																						Accumulated Other
	Common		Capital			Retained			Accumulated Other Comprehensive							Preferred			Common			Capital				Retained				Comprehensive
	Stock		Surplus			Earnings			Income(Loss)				Total				Stock			Stock			Surplus				Earnings				Income			Total
Balance, December, 2018	$	32,176	$	74,256		$	15,186			$	(367	)		$	121,251

Balance, December 31, 2020																	$	27,263		$	29,130		$	66,116			$	44,179			$	977		$	167,665
Vesting of restricted stock		211		(211	)		—			—				—				—			316			(316	)			—				—			—
Stock based compensation expense		—		270			—			—				270				—			—			867				—				—			867
Net income		—		—			3,247			—				3,247
Change related to restricted stock awards		—		38			(38	)		—				—
Other comprehensive income		—		—			—			215				215

Balance, March 31, 2019	$	32,387	$	74,353		$	18,395		$	(152	)		$	124,983


									Accumulated Other Comprehensive
	Common		Capital			Retained			Accumulated Other Comprehensive
	Stock		Surplus			Earnings			Income(Loss)				Total
Balance, December, 2017	$	21,442	$	35,693		$	11,682			$	(20	)		$	68,797

Vesting of restricted stock		137		(137	)		—			—				—
Stock based compensation expense		—		213			—			—				213
Dividends on preferred stock																		—			—			—				(1,078	)			—			(1,078	)
Net income		—		—			1,686			—				1,686				—			—			—				12,575				—			12,575
Other comprehensive loss		—		—			—			(133	)			(133	)			—			—			—				—				(401	)		(401	)

Balance, March 31, 2018	$	21,579	$	35,769		$	13,368		$	(153	)		$	70,563

Balance, June 30, 2021																	$	27,263		$	29,446		$	66,667			$	55,676			$	576		$	179,628

										Accumulated Other
	Common			Capital			Retained			Comprehensive
	Stock			Surplus			Earnings			Income		Total
Balance, March 31, 2020	$	32,418		$	74,482		$	32,567		$	828	$	140,295
Vesting of restricted stock		15			(15	)		—			—		—
Stock based compensation expense		—			383			—			—		383
Net loss		—			—			(634	)		—		(634	)
Other comprehensive income		—			—			—			126		126
Balance, June 30, 2020	$	32,433		$	74,850		$	31,933		$	954	$	140,170

										Accumulated Other
	Common			Capital			Retained			Comprehensive
	Stock			Surplus			Earnings			Income		Total
Balance, December 31, 2019	$	32,397		$	75,117		$	29,097		$	423	$	137,034
Vesting of restricted stock		276			(276	)		—			—		—
Stock based compensation expense		—			759			—			—		759
Common stock repurchased		(240	)		(750	)		—			—		(990	)
Net income		—			—			2,836			—		2,836
Other comprehensive income		—			—			—			531		531
Balance, June 30, 2020	$	32,433		$	74,850		$	31,933		$	954	$	140,170

See Notes to the Unaudited Consolidated Financial Statements

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)


Three Months Ended March 31, 2019 and 2018	2019			2018
For the six months ended June 30,							2021			2020
Cash Flows from Operating Activities
Net income	$	3,247		$	1,686		$	12,575		$	2,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion, net		378			401			933			844
Deferred income tax benefit		(94	)		(116	)		(234	)		(2,346	)
Provision for loan losses		325			635
Provision for (recovery of) loan losses								(1,760	)		5,925
Writedown of other real estate owned								22			32
Gain on sale of loans								(474	)		—
Stock based compensation expense		270			213			867			759
Income from bank owned life insurance		(105	)		(106	)		(395	)		(397	)
Subordinated debt amortization expense		7			7			105			14
Gain on disposal of premises and equipment		(59	)		—			(30	)		(34	)
Gain on call of held-to-maturity securities								(3	)		—
Proceeds from sale of loans								31,304			—
Amortization of operating lease right-of-use assets								189			192
Change in:
Accrued interest receivable and other receivables		(503	)		(89	)		847			(2,038	)
Other assets		(3,984	)		(18	)		5,005			(8,874	)
Other liabilities		5,039			330			139			7,650

Net cash provided by operating activities		4,521			2,943			49,090			4,563

Cash Flows from Investing Activities
Activity inavailable-for-sale securities:
Payments		806			986			2,931			4,247
Maturities and repayments		30,000			30,000
Maturities								215,000			110,000
Purchases		(43,984	)		(27,025	)		(237,040	)		(112,871	)
Activity inheld-to-maturity securities:
Refunded		650			—
Purchases								(5,499	)		—
Called								1,775			—
Purchases of restricted investment in bank stock		(1,113	)		(1,644	)		(750	)		(159	)
Redemption of restricted investment in bank stock		1,275			340			327			1,275
Net (increase) decrease in loan portfolio		(26,935	)		(48,996	)		1,879			(234,512	)
Purchase of bank owned life insurance								(10,000	)		—
Proceeds from sale of premises and equipment		69			—			51			51
Purchases of premises and equipment		(280	)		(812	)		(252	)		(803	)

Net cash used in investing activities		(39,512	)		(47,151	)		(31,578	)		(232,772	)

Cash Flows from Financing Activities
Net decrease innon-interest deposits		(18,005	)		(6,777	)
Net increase in interest bearing demand, savings, and time deposits		64,695			30,056
Net increase in non-interest deposits								115,504			135,397
Net increase (decrease) in interest bearing demand, savings, and time deposits								(88,818	)		135,312
Net decrease in Federal Home Loan Bank advances and other borrowings		(10,000	)		10,349			—			(30,000	)

Net increase in subordinated debt, net issuance costs								25,637			—
Cash dividends paid on preferred stock								(1,078	)		—
Repurchases of common stock								—			(990	)
Net cash provided by financing activities		36,690			33,628			51,245			239,719

Increase (Decrease) in Cash and Cash Equivalents		1,699			(10,580	)
Increase in Cash and Cash Equivalents								68,757			11,510
Cash and Cash Equivalents,beginning of period		58,076			37,493			107,528			64,844

Cash and Cash Equivalents,end of period	$	59,775		$	26,913		$	176,285		$	76,354

Supplementary Disclosure of Cash Flow Information
Cash paid during the period for interest	$	3,929		$	1,648		$	6,265		$	9,213

Cash paid during the period for income taxes	$	—		$	1,831		$	4,104		$	1,924

Right of use assets obtained in exchange for new operating lease liabilities	$	2,647		$	—		$	1,907		$	—

Loans transferred from held-for-investment to held-for-sale							$	26,046		$	—

See Notes to the Unaudited Consolidated Financial Statements

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements

Organization

MainStreet Bancshares Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet Bank. On May 18, 2016, the stockholders of MainStreet Bank (the “Bank”) approved a Reorganization Agreement and Plan of Share Exchange (“Reorganization”) whereby the Bank would reorganize into a holding company structure. The Plan of Share Exchange called for each outstanding share of Bank common stock to be automatically converted into and exchanged for one share of the Company’s common stock, and the common stockholders of the Bank would become the common stockholders of the Company on the effective date of the Reorganization. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $1.00 per share. There is currently no28,750 shares of preferred stock outstanding. ~~There are no plans currently nor does the Board of Directors of the~~The Company ~~anticipate any need in the foreseeable future to issue shares of preferred stock.~~

~~On July 15, 2016, the Reorganization became effective, and the Bank became a wholly-owned subsidiary of the Company. The holding company~~ is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Board of Governors of the Federal Reserve ~~Board.~~System (the “Federal Reserve”).

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section 12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”

We were approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol ~~“MNSB.”~~“MNSB” as of April 22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market on the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a 140^th interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock.

MainStreet Bank (the “Bank”) is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003 and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004 and is supervised by the Bureau and the Federal ~~Reserve Bank of Richmond.~~Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of individuals, and small andmedium-sized business and professional concerns in the Washington, D.C. metropolitan area.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, ~~2018~~2020 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 1010-K filed by the Company with the ~~U.S. Securities and Exchange Commission~~SEC on ~~February 15, 2019.~~March 23, 2021. The results of operations for the three and six months ended ~~March 31, 2019~~June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019, events through the date of issuance of the financial statements included herein.~~

2021, or any other period.

Principles of Consolidation – The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and cash equivalents – For the purpose of presentation in the Statements of Cash Flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Federal funds sold.”

Investment securities – The Bank’s investment securities are classified as either held to maturity, available for sale or trading. At ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018,~~2020, the Bank held approximately ~~$25.5~~$26.1 million and ~~$26.2~~$22.5 million, respectively, in securities classified as held to maturity. The Bank held no securities classified as trading. Municipal securities that were originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. At ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018,~~2020, the unamortized unrealized loss was ~~$102,336~~$41,926 and ~~$109,420,~~$54,836, respectively, before tax, and remains in accumulated other comprehensive ~~loss,~~income, net of tax.

Securities which are not classified as held to maturity or trading are classified as securities available for sale. Securities available for sale are reported at fair value. Any unrealized gain or loss, net of applicable income taxes, is reported as a separate addition to or reduction from stockholders’ equity. Gains and losses arising from the sale of securities available for sale are recognized based on the specific identification method on a trade-date basis and included in results of operations.

Securities held to maturity ~~includes~~include securities purchased with the ability and positive intent to hold to maturity. Debt securities are stated at historical cost adjusted for amortization of premiums and accretion of discount. Any investment security, for which there has been a value impairment deemed by management to be other than temporary, is written down to its estimated ~~market value or~~ fair value with a charge to current operations.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Restricted equity securities consist of the Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of ~~$3.3~~$4.1 million and ~~$2.3 million~~$821,800 respectively, as of ~~March 31, 2019,~~June 30, 2021, compared to $3.3 million and ~~$2.4~~$1.1 million, respectively, as of December 31, ~~2018.~~2020. Restricted equity securities also consisted of $126,800 in Community Bankers Bank stock at ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018.~~2020. This restricted stock is recorded at cost because its ownership is restricted, and it lacks a market for resale. The Bank is required to maintain Federal Reserve Bank stock at a level of 6% of capital and surplus. The FHLB requires the Bank to maintain stock, at a minimum, in an amount equal to 4.5% of outstanding borrowings and 0.20% of total assets. When evaluating restricted stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Bank does not consider these investments to be impaired at ~~March 31, 2019~~June 30, 2021 or December 31, ~~2018~~2020 and no0 previous impairment has been recognized.

Loans held for sale - Loans intended for sale are recorded at the lower aggregate cost or fair value as of the balance sheet date. Gains and losses on loan sales are determined by the specific-identification method.

Loans- The Bank makes commercial and consumer loans to customers. Our recorded investment in loans that management has the intent and ability to hold for the foreseeable future, or until maturity orpay-off, generally are reported at their unpaid principal balances adjusted for charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for loan losses. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using the effective interest method. The Bank is amortizing these amounts over the contractual life of the related loans.

A loan’s past due status is based on the contractual due date of the most delinquent payment due. All loans which are 30 or more days past due at the end of the month are reported to the Board of Directors. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. It is Bank policy tocharge-off loans whose collectability is sufficiently questionable and can no longer be justified as an asset on the balance sheet. To determine if a loan should becharged-off, all possible sources of repayment are ~~analyzed,~~analysed, including: (1) the potential for future cash flow, (2) the value of the Bank’s collateral, and (3) the strength ofco-makers or guarantors. All principal and previously accrued interest is charged to the allowance for loan losses. All future payments received on the loan are credited to the allowance for loan losses as a recovery. These policies are applied consistently across our loan portfolio.

Impairment of a loan - The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of an insignificant delay in payment if the ultimate collectability of all amounts due is expected. Impairment is measured on a ~~loan by loan~~loan-by-loan basis for all commercial, construction and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Consistent with the Bank’s method for nonaccrual loans, payments on impaired loans are first applied to principal outstanding. Smaller balance consumer loans are not individually evaluated for impairment.

Troubled Debt Restructuring (TDR) occurs when the Bank agrees to modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation of a loan as a TDR, the Bank evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Bank concludes that the borrower is able to continue making such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. Restructured loans for which there was no rate concession, and therefore made at a market rate of interest, may be eligible to be removed from TDR status in periods ~~subsequent to~~after the restructuring depending on the performance of the loan. As of ~~March 31, 2019,~~June 30, 2021, and December 31, ~~2018,~~2020, the Bank had ~~approximately $3.4 million of~~0 loans classified as ~~TDR. At March 31, 2019~~TDRs. For additional discussion see “Note 3. Loans Receivable” and ~~December 31, 2018, TDR loans consisted~~“Management’s Discussion and Analysis of ~~two loans. One loan in the amount~~Financial Condition and Results of ~~approximately $1.5 million is currently performing in accordance with its modified terms. The other loan in the amount of approximately $1.9 million is onnon-accrual.~~Operations.”

Allowance for Loan Losses - The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:

~~Management believes that the collectability of the principal is unlikely regardless of delinquency status.~~
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Management believes that the collectability of the principal is unlikely regardless of delinquency status.

~~The loan is a consumer loan and is 120 days past due.~~
•
The loan is a consumer loan and is 120 days past due.

~~The loan is anon-consumer~~ ~~loan, unless the loan is well secured and recovery is probable.~~
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The loan is a non-consumer loan, and is 90 days past due, unless the loan is well secured, and recovery is probable.

~~The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.~~
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The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.

Subsequent recoveries, if any, are credited to the allowance.

The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan portfolio segment:

~~Real estate residential mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the collateral.~~
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Real estate residential mortgage loans, including equity lines of credit, carry risks associated with the continued creditworthiness of the borrower and the changes in the value of the collateral.

Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
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Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate~~loan-to-value~~ ~~standards.~~
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Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards.

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.
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Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Consumer secured loans (indirect lending) carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate~~loan-to-value~~ ~~standards and an experienced management team for this type of portfolio.~~

Consumer unsecured loans (credit cards) carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

•

Consumer secured loans (indirect lending) carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with the relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component coversnon-classified or performing loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales.~~Non-impaired~~ ~~classified loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, thannon-classified~~ ~~loans.~~ The characteristics of the loan ratings are as follows:

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
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Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as

agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

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Watch rated loans have all the characteristics of pass rated loans but show signs of emerging financial weaknesses which the Bank will continue monitoring more closely. Watch rated loans are still performing as agreed.

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Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is well-margined, well maintained, accessible and readily marketable.

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Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank would sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due.

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Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high.

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Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Watch rated loans have all the characteristics of pass rated loans but show signs of emerging financial weaknesses which the Bank will continue monitoring more closely Watch rated loans are still performing as agreed.

Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts due.

~~Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.~~

Other Real Estate Owned (“OREO”)- Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. ~~Subsequent to~~After foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, and recent sales of like properties, length of time the properties have been held and our ability and intention with regard to continued ownership of the properties. The Bank may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market values. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets and improvements are capitalized.

Interest income on loans– Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.

Generally, the Bank will return a loan to accrual status when all delinquent interest and principal becomes current and remains current for six consecutive months under the terms of the loan agreement or the loan is well-secured or in process of collection. Upon returning to accrual status, interest payments applied to the principal balance of a loan while in nonaccrual status are recognized as a yield adjustment over the remaining life.

Loan origination and commitment fees and certain related direct costs-Loan origination and commitment fees charged by the Bank and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment. The Bank amortizes these net amounts over the life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line basis over the estimated useful life of each asset, which ranges from 3 to ~~27.5~~39 years. Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Construction in progress includes assets which will be reclassified and depreciated once placed into service.

Income taxes– The Bank uses an asset and liability approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The principal items relate primarily to differences between the allowance for loan losses, deferred loan fees, and accumulated depreciation and amortization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet themore-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of ~~March 31, 2019,~~June 30, 2021, and December 31, ~~2018,~~2020, there were no0 such liabilities recorded.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional income taxes in the statement of operations.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Stock compensation plans–Stock compensation accounting guidance (FASB ASC 718, “Compensation – Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A ~~Black-Sholes~~Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards. NoNaN stock options were granted during ~~2019~~2021 and ~~2018.~~2020.

Earnings per share– Net income per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share” and has been computed based on the weighted average common shares outstanding during the ~~quarter~~three and six months ended ~~March 31 (8,242,873~~June 30, (7,546,452 and 7,535,061, respectively, for ~~2019~~2021 and ~~5,799,496~~8,263,370 and 8,275,344, respectively, for ~~2018 as adjusted for a 5% stock dividend issued April 30, 2018)~~2020). Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The only potential dilutive stock of the ~~Bank~~Company as defined in FASB ASC 260 would be stock options granted to various directors, officers, and employees of the ~~Bank.~~Company. There were no0 such options outstanding at ~~March 31, 2019~~June 30, 2021 or ~~December 31, 2018.~~June 30, 2020. Restricted stock is included in the computation of basic earnings per share as the holder is entitled to full benefits of a stockholder during the vesting period.

Off-balance sheet instruments – In the ordinary course of business, the ~~Bank~~Company has entered intooff-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded, or related fees are incurred or received.

Advertising and marketing expense – Advertising and marketing costs are expensed as incurred.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.

The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) derivative financial instruments, and (4) income taxes. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different

than originally reported. In connection with the determination of the allowances for losses on loans and valuation of other real estate owned management obtains independent appraisals for significant properties.

Fair value of financial instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Derivative Financial Instruments– The ~~Bank~~Company recognizes derivative financial instruments at fair value as either ~~an other~~another asset or other liability in the consolidated balance sheet. The ~~Bank’s~~Company’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties. Because the interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The ~~Bank’s~~Company’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 4.

Transfers of financial assets– Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Revenue Recognition

Most revenue associated with the Company’s financial instruments, including interest income and gains/losses on investment securities, derivatives and sales of financial instruments are outside the scope of ASC Topic 606. The Company’s services that fall within the scope of ASC Topic 606 are presented within noninterest income and are recognized as revenue. A description of the primary revenue streams accounted for under ASC Topic 606 follows:

Service Charges on Deposit Accounts. The Company earns fees from its deposit customers for overdraft and account maintenance services. Overdraft fees are recognized when the overdraft occurs. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the company satisfies the performance obligation.

Other Service Charges and Fees. The Company earns fees from its customers for transaction-based services. Such services include safe deposit box, ATM, stop payment, wire transfer, Small Business Administration (“SBA”) loan originations and mortgage originations. In each case, these service charges and fees are recognized in income at the time or within the same period that the Company’s performance obligation is satisfied.

Interchange Income. The Company earns interchange fees from debit and credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services.

Swap Fee Income. The Company earns fees from certain qualifying commercial loan customers for entering into interest rate swaps in order for the customer to receive a fixed rate of interest while the Company receives a floating rate. In each case, there are fees that are recognized in income as the time or within the same period that the Company’s performance obligation is satisfied.

Impact of Recently Issued Accounting Pronouncements

In June 2016, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The ~~amendments~~FASB has issued multiple updates to ASU 2016-13 as codified in ~~this ASU~~Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are ~~effective for SEC filers~~required to apply the guidance for fiscal years, and interim periods within those ~~fiscal~~ years, beginning after December 15, ~~2019.~~2022. The Company is currently assessing the impact that ASU2016-13 will have on its consolidated financial statements. The Company has formed a Committee to oversee the accounting impact of this ASU. In anticipation of the ASU, the Company ~~has entered into a contract~~is working with a third party ~~compiled~~to compile data ~~for the modeling~~ and ~~is working on developing~~develop an estimate using ~~historically~~historical and qualitative data based on the requirements of ASU~~2016-13.~~ 2016-13 and have begun to test parallel models.

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

In March 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is monitoring developments into rates that may be acceptable alternatives to LIBOR and working with those we have a relationship with that could be impacted by a change in reference rate from LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In August ~~2018,~~2020, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU2018-13,~~ ~~“Fair Value Measurement (Topic 820)~~Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): ~~Disclosure Framework—Changes to the Disclosure Requirements~~Accounting for ~~Fair Value Measurement.~~Convertible Instruments and Contracts in an Entity’s Own Equity.” The ~~amendments modify~~ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in ~~Topic 820 to add disclosures regarding changes in unrealized gains and losses,~~ the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendmentsASU are effective for fiscal years beginning after December 15, ~~2019,~~2021, and interim periods within those fiscal years. ~~Certain of~~For all other entities, the ~~amendments are to~~standard will be ~~applied prospectively while others are to be applied retrospectively.~~effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU~~2018-13~~ 2020-06 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. ASU 2019-12 was effective for the Company on January 1, 2021. There was no material impact on the Company’s consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020-01 was effective for the Company on January 1, 2021.There was no material impact on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should re-evaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Company on January 1, 2021. There was no material impact on the Company’s consolidated financial statements.

In December 2020, the Consolidated Appropriations Act of 2021 (the “CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. There was no material impact on the Company’s consolidated financial statements.

Note 2. Investment Securities

Investment securitiesavailable-for-sale was comprised of the following:


	March 31, 2019									June 30, 2021
*(Dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury Securities	$	29,994	$	—	$	(8	)	$	29,986	$	100,000	$	—	$	—		$	100,000
Collateralized Mortgage Backed		10,400		16		(127	)		10,289		27,158		207		(492	)		26,873
Subordinated Debt		2,000		28		—			2,028		6,220		45		(7	)		6,258
Municipal Securities		17,068		260		(30	)		17,298		25,345		1,290		(162	)		26,473
U.S Governmental Agencies		9,947		—		(240	)		9,707

U.S. Governmental Agencies											6,314		—		(127	)		6,187
Total	$	69,409	$	304	$	(405	)	$	69,308	$	165,037	$	1,542	$	(788	)	$	165,791

Investment securitiesheld-to-maturity was comprised of the following:


	March 31, 2019									June 30, 2021
*(Dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Municipal Securities	$	23,987	$	492	$	(126	)	$	24,353	$	18,177	$	976	$	—	$	19,153
Subordinated Debt		1,500		—	��	—			1,500		7,959		—		—		7,959

Total	$	25,487	$	492	$	(126	)	$	25,853	$	26,136	$	976	$	—	$	27,112

Investment securitiesavailable-for-sale was comprised of the following:


	December 31, 2018									December 31, 2020
*(Dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury Securities	$	29,996	$	1	$	—		$	29,997	$	90,000	$	—	$	—		$	90,000
Collateralized Mortgage Backed		4,967		21		(95	)		4,893		24,743		282		(129	)		24,896
Subordinated Debt		2,000		15		—			2,015		3,250		29		(1	)		3,278
Municipal Securities		8,869		—		(36	)		8,833		21,348		1,257		—			22,605
U.S Governmental Agencies		10,516		—		(275	)		10,241

U.S. Governmental Agencies											6,785		—		(150	)		6,635
Total	$	56,348	$	37	$	(406	)	$	55,979	$	146,126	$	1,568	$	(280	)	$	147,414

Investment securitiesheld-to-maturity was comprised of the following:


	December 31, 2018									December 31, 2020
*(Dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Municipal Securities	$	24,678	$	314	$	(260	)	$	24,732	$	20,015	$	1,058	$	—	$	21,073
Subordinated Debt		1,500		—		—			1,500		2,505		—		—		2,505

Total	$	26,178	$	314	$	(260	)	$	26,232	$	22,520	$	1,058	$	—	$	23,578

The scheduled maturities of securitiesavailable-for-sale andheld-to-maturity at ~~March 31, 2019~~June 30, 2021 were as follows:


	March 31, 2019								June 30, 2021
	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
*(Dollars in thousands)*	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	30,012	$	30,005	$	—	$	—	$	100,002	$	100,002	$	—	$	—
Due from one to five years		582		581		517		530		1,005		1,020		1,202		1,233
Due from after five to ten years		3,021		3,041		7,236		7,368		6,220		6,258		5,971		6,333
Due after ten years		35,794		35,681		17,734		17,955		57,810		58,511		18,963		19,546

Total	$	69,409	$	69,308	$	25,487	$	25,853	$	165,037	$	165,791	$	26,136	$	27,112

Securities with a fair value of ~~$265,064~~$681,180 and ~~$258,046~~$269,075 at ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018,~~2020, respectively, were pledged to secure FHLB advances.

There were ~~no sales ofavailable-for-sale~~0 securities sold from the available-for-sale portfolio for both the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 and ~~2018.~~2020. During the six months ended June 30, 2021, 1 held-to-maturity security was called and resulted in a gain of $3,197.

The following tables summarize the unrealized loss positions of securitiesavailable-for-sale andheld-to-maturity as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31, 2019															June 30, 2021
	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
*(Dollars in thousands)*	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available-for-sale:
U.S. Treasury Securities	$	29,986	$	(8	)	$	—	$	—		$	29,986	$	(8	)
Collateralized Mortgage Backed		7,385		(61	)		2,581		(66	)		9,966		(127	)	$	18,970	$	(492	)	$	—	$	—		$	18,970	$	(492	)
Municipal Securities		1,872		(21	)		1,594		(9	)		3,466		(30	)
Subordinated Debt																	1,643		(7	)		—		—			1,643		(7	)
Municipal securities																	5,395		(162	)		—		—			5,395		(162	)
U.S Governmental Agencies		1,532		(18	)		8,085		(222	)		9,617		(240	)		—		—			6,187		(127	)		6,187		(127	)

Total	$	40,775	$	(108	)	$	12,260	$	(297	)	$	53,035	$	(405	)	$	26,008	$	(661	)	$	6,187	$	(127	)	$	32,195	$	(788	)

Held-to-maturity:
Municipal securities		—		—			6,435		(126	)		6,435		(126	)

Total	$	—	$	—		$	6,435	$	(126	)	$	6,435	$	(126	)

	December 31, 2020
	Less than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available-for-sale:
Collateralized Mortgage Backed	$	14,971	$	(129	)	$	—	$	—		$	14,971	$	(129	)
Subordinated Debt		749		(1	)		—		—			749		(1	)
U.S Government Agencies		—		—			6,785		(150	)		6,785		(150	)
Total	$	15,720	$	(130	)	$	6,785	$	(150	)	$	22,505	$	(280	)

   December 31, 2018
   Less than 12 Months 12 Months or Longer Total
   Fair    Unrealized Fair    Unrealized Fair    Unrealized
(Dollars in thousands)
   Value    Loss Value    Loss Value    Loss
Available-for-sale:

Collateralized Mortgage Backed
   1,706    (14 ) 2,659    (81 ) 4,365    (95 )
Municipal Securities
   3,684    (18 ) 1,588    (18 ) 5,272    (36 )
U.S Government Agencies
   6,520    (121 ) 3,586    (154 ) 10,106    (275 )








Total
   $ 11,910    $ (153 ) $ 7,833    $ (253 ) $ 19,743    $ (406 )








Held-to-maturity:

Municipal Securities
   $ 1,025    $ (5 ) $ 8,899    $ (255 ) $ 9,924    $ (260 )








Total
   $ 1,025    $ (5 ) $ 8,899    $ (255 ) $ 9,924    $ (260 )

The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.

At ~~March 31, 2019,~~June 30, 2021, there ~~was one U.S. Treasury security with a fair value of approximately $30.0 million, five~~were 2 collateralized mortgage backed securities with fair values totaling ~~approximately $7.4~~$19.0 million ~~one U.S. government agency with a fair value totaling $1.5 million, and two municipal securities with fair values totaling $1.8 million considered temporarily impaired and~~were in an unrealized loss position of less than 12 months. At ~~March 31, 2019, there were six collateralized mortgage backed~~June 30, 2021 4 subordinated debt securities with fair values totaling ~~$2.6~~approximately $1.6 million ~~eight~~were in an unrealized loss position of less than 12 months. At June 30, 2021 4 municipal securities with fair values totaling approximately $5.4 million were in an unrealized loss position of less than 12 months. At June 30, 2021 9 U.S. government agencies with fair values totaling approximately ~~$8.1~~$6.1 million ~~and fifteen municipal securities with fair values totaling $8.0 million that~~ were in an unrealized loss position of more than 12 months. At June 30, 2021, there were 0 held-to-maturity securities in an unrealized loss position. The Bank does not consider any of the securities in the available for sale or held to maturity portfolio to be other-than-temporarily impaired at ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018. There were no securities sold during 2019 and 2018.~~2020.

All municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018~~2020 was ~~$102,336~~$41,926 and ~~$109,420,~~$54,836, respectively.

Note 3. Loans Receivable

Loans receivable were comprised of the following:


	March 31,			December 31,
*(Dollars in thousands)*	2019			2018			June 30, 2021			December 31, 2020
Residential Real Estate:
Single family	$	143,761		$	139,620		$	136,547		$	139,338
Multifamily		7,306			9,182			53,031			43,332
Farmland		817			825			848			861
Commercial Real Estate:
Owner-occupied		140,463			121,622			149,553			141,813
Non-owner occupied		269,059			256,139			353,962			325,085
Construction and Land Development		192,494			183,551			328,480			324,906
Commercial – Non Real-Estate:
Commercial & industrial		105,391			114,221
Consumer – Non Real Estate:
Commercial & Industrial								218,414			230,027
Consumer – Non Real-Estate:
Unsecured		1,429			1,402			256			241
Secured		93,870			100,875			33,387			43,832

Total Gross Loans		954,590			927,437			1,274,478			1,249,435

Less: unearned fees		(1,606	)		(1,400	)
Less: unearned fees, net								(6,909	)		(6,178	)
Less: unamortized discount on consumer secured loans		(60	)		(81	)		—			(1	)
Less: allowance for loan losses		(9,189	)		(8,831	)		(11,133	)		(12,877	)

Net Loans	$	943,735		$	917,125		$	1,256,436		$	1,230,379

The ~~secure~~unsecured consumer loans above include ~~$99,088~~$256,000 and ~~$452,190~~$241,000 of overdrafts reclassified as loans ~~for the quarters ended March 31, 2019~~at June 30, 2021 and December 31, ~~2018,~~2020, respectively.

The commercial and industrial loans above include $124.6 million and $135.2 million in Paycheck Protection Program loans at June 30, 2021 and December 31, 2020, respectively.

The ~~Bank~~Company held no$0 and $57.0 million in loans for sale at ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018.~~2020, respectively.

The following tables summarize the activity in the allowance for loan losses by loan class for the three and six months ended ~~March 31, 2019~~June 30, 2021 and ~~2018.~~2020.

Allowance for Credit Losses By Portfolio Segment

~~For the three months ended March 31, 2019~~

																Real Estate
		Real Estate
		Residential		Commercial		Construction		Consumer			Commercial		Total
For the three months ended June 30, 2021																Residential			Commercial			Construction			Consumer			Commercial			Total
*(Dollars in thousands)*	*(Dollars in thousands)*
Beginning Balance		$	1,019	$	4,299	$	1,469	$	826		$	1,218	$	8,831		$	1,200		$	6,895		$	3,492		$	146		$	1,482		$	13,215
Charge-offs			—		—		—		—			—		—			—			—			—			(4	)		—			(4	)
Recoveries			30		—		—		3			—		33			—			—			—			—			2			2
Provision			52		139		66		32			36		325			(40	)		(1,073	)		(871	)		(10	)		(86	)		(2,080	)

Ending Balance		$	1,101	$	4,438	$	1,535	$	861		$	1,254	$	9,189		$	1,160		$	5,822		$	2,621		$	132		$	1,398		$	11,133

Ending Balance:
Individually evaluated for Impairment			—	$	733		—		—			—	$	733		$	—		$	—		$	18		$	—		$	—		$	18
Collectively evaluated for Impairment		$	1,101	$	3,705	$	1,535	$	861		$	1,254	$	8,456		$	1,160		$	5,822		$	2,603		$	132		$	1,398		$	11,115

Allowance for Credit Losses By Portfolio Segment
For the three months ended March 31, 2018
For the six months ended June 30, 2021
Beginning Balance																$	1,223		$	6,552		$	3,326		$	371		$	1,405		$	12,877
Charge-offs																	—			—			—			(4	)		—			(4	)
Recoveries																	—			—			—			13			7			20
Provision																	(63	)		(730	)		(705	)		(248	)		(14	)		(1,760	)
Ending Balance																$	1,160		$	5,822		$	2,621		$	132		$	1,398		$	11,133
Ending Balance:
Individually evaluated for Impairment																$	—		$	—		$	18		$	—		$	—		$	18
Collectively evaluated for Impairment																$	1,160		$	5,822		$	2,603		$	132		$	1,398		$	11,115

		Real Estate														Real Estate
		Residential		Commercial		Construction		Consumer			Commercial		Total
For the three months ended June 30, 2020																Residential			Commercial			Construction			Consumer			Commercial			Total
*(Dollars in thousands)*
Beginning Balance		$	789	$	2,339	$	833	$	742		$	1,002	$	5,705		$	1,001		$	4,530		$	2,288		$	525		$	1,554		$	9,898
Charge-offs			—		—		—		(10	)		—		(10	)		—			—			—			—			(1,746	)		(1,746	)
Recoveries			—		1		—		2			1		4			—			—			—			—			4			4
Provision			56		254		152		90			83		635			83			2,493			585			805			1,609			5,575

Ending Balance		$	845	$	2,594	$	985	$	824		$	1,086	$	6,334		$	1,084		$	7,023		$	2,873		$	1,330		$	1,421		$	13,731

Ending Balance:
Individually evaluated for Impairment			—	$	202		—		—			—	$	202		$	—		$	—		$	—		$	—		$	1		$	1
Collectively evaluated for Impairment		$	845	$	2,392	$	985	$	824		$	1,086	$	6,132		$	1,084		$	7,023		$	2,873		$	1,330		$	1,420		$	13,730

For the six months ended June 30, 2020
Beginning Balance																$	1,030		$	4,254		$	2,180		$	568		$	1,552		$	9,584
Charge-offs																	—			(1	)		—			—			(1,793	)		(1,794	)
Recoveries																	—			—			—			3			13			16
Provision																	54			2,770			693			759			1,649			5,925
Ending Balance																$	1,084		$	7,023		$	2,873		$	1,330		$	1,421		$	13,731
Ending Balance:
Individually evaluated for Impairment																$	—		$	—		$	—		$	—		$	1		$	1
Collectively evaluated for Impairment																$	1,084		$	7,023		$	2,873		$	1,330		$	1,420		$	13,730

The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


March 31, 2019
June 30, 2021								June 30, 2021
Loans Receivable	Loans Receivable							Loans Receivable
*(Dollars in thousands)*		Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment
Residential Real Estate		$	151,884	$	1,502	$	150,382		$	190,426	$	148	$	190,278
Commercial Real Estate			409,522		1,939		407,583			503,515		1,082		502,433
Construction and Land Development			192,494		—		192,494			328,480		835		327,645
Commercial & Industrial			105,391		—		105,391			218,414		31		218,383
Consumer			95,299		—		95,299			33,643		—		33,643

Total		$	954,590	$	3,441	$	951,149		$	1,274,478	$	2,096	$	1,272,382


December 31, 2018
December 31, 2020								December 31, 2020
Loans Receivable	Loans Receivable							Loans Receivable
*(Dollars in thousands)*		Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment
Residential Real Estate		$	149,627	$	1,510	$	148,117		$	182,499	$	301	$	182,198
Commercial Real Estate			377,761		1,939		375,822			467,930		1,088		466,842
Construction and Land Development			183,551		—		183,551			324,906		—		324,906
Commercial & Industrial			114,221		—		114,221			230,027		58		229,969
Consumer			102,277		—		102,277			44,073		—		44,073

Total		$	927,437	$	3,449	$	923,988		$	1,249,435	$	1,447	$	1,247,988

The following table summarizes information in regard to impaired loans by loan portfolio class as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31, 2019						December 31, 2018						June 30, 2021						December 31, 2020
*(Dollars in thousands)*	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Residential Real Estate:
Single family	$	1,502	$	1,502	$	—	$	1,510	$	1,510	$	—	$	148	$	148	$	0	$	301	$	301	$	0

		1,502		1,502		—		1,510		1,510		—
Commercial Real Estate
Non-owner Occupied														1,082		1,082		—		1,088		1,088		—
Commercial & Industrial														31		31		—		58		58		—
Total													$	1,261	$	1,261	$	—	$	1,447	$	1,447	$	—

With an allowance recorded
Commercial Real Estate:
Owner occupied		1,939		1,939		733		1,939		1,939		733

		1,939		1,939		733		1,939		1,939		733

Construction and Land Development													$	835	$	835	$	18	$	—	$	—	$	—
Total	$	3,441	$	3,441	$	733	$	3,449	$	3,449	$	733	$	2,096	$	2,096	$	18	$	1,447	$	1,447	$	—

The following table presents additional information regarding the impaired loans for the three and six months ended ~~March 31, 2019 and March 31, 2018:~~June 30, 2021:

									Three Months Ended June 30,
									2021				2020
(Dollars in thousands)									Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized
With no related allowance recorded
Residential Real Estate:
Single family									$	225	$	2	$	306	$	3
Commercial Real Estate
Non-owner Occupied										1,081		17		1,098		—
Commercial & Industrial										37		1		460		9
Consumer
Secured										—		—		134		4
Total									$	1,343	$	20	$	1,998	$	16

With an allowance recorded
Construction and Land Development									$	835	$	5	$	64	$	1
Total									$	2,178	$	25	$	2,062	$	17

	Three Months Ended March 31,								Six Months Ended June 30,
	2019				2018				2021				2020
*(Dollars in thousands)*	Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized
With no related allowance recorded
Residential Real Estate:
Single family	$	1,506	$	15	$	1,526	$	15	$	250	$	5	$	307	$	6

		1,506		15		1,526		15
Commercial Real Estate
Non-owner Occupied										1,081		33		1,099		17
Commercial & Industrial										44		1		460		9
Consumer
Secured										—		—		137		4
Total									$	1,375	$	39	$	2,003	$	36

With an allowance recorded
Commercial Real Estate:
Owner occupied		1,939		—		1,939		—

		1,939		—		1,939		—

Construction and Land Development									$	835	$	5	$	66	$	1
Total	$	3,445	$	15	$	3,465	$	15	$	2,210	$	44	$	2,069	$	37

If interest on nonaccrual loans had been accrued, such income would have been ~~$35,155~~$0 and ~~$26,715~~$41,290 for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 and ~~2018.~~2020.

The following table presents nonaccrual loans by classes of the loan portfolio as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31,		December 31,
*(Dollars in thousands)*	2019		2018		June 30, 2021		December 31, 2020
Commercial Real Estate:
Owner occupied	$	1,939	$	1,939

Residential Real Estate
Single family					$	—	$	149
Total	$	1,939	$	1,939	$	—	$	149

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, based on ~~the basis of~~ current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, ~~Substandard~~ and ~~Doubtful~~Substandard within the Company’s internal risk rating system as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31, 2019
					Special								June 30, 2021
*(Dollars in thousands)*	Pass		Watch		Mention		Substandard		Doubtful		Total		Pass		Watch		Special Mention		Substandard		Total
Residential Real Estate:
Single Family	$	143,380	$	—	$	—	$	381	$	—	$	143,761	$	134,115	$	—	$	741	$	1,691	$	136,547
Multifamily		7,306		—		—		—		—		7,306		53,031		—		—		—		53,031
Farmland		817		—		—		—		—		817		848		—		—		—		848
Commercial Real Estate:
Owner occupied		136,747		—		—		1,777		1,939		140,463		145,443		3,239		—		871		149,553
Non-owner occupied		269,059		—		—		—		—		269,059		259,530		61,025		15,275		18,132		353,962
Construction & Land Development		192,494		—		—		—		—		192,494		308,630		19,850		—		—		328,480
Commercial – Non Real Estate:
Commercial & industrial		100,268		2,384		—		2,739		—		105,391
Commercial & Industrial														209,393		4,392		397		4,232		218,414
Consumer – Non Real Estate:
Unsecured		1,429		—		—		—		—		1,429		256		—		—		—		256
Secured		93,870		—		—		—		—		93,870		33,387		—		—		—		33,387

Total	$	945,370	$	2,384		—	$	4,897	$	1,939	$	954,590	$	1,144,633	$	88,506	$	16,413	$	24,926	$	1,274,478


	December 31, 2018
					Special
*(Dollars in thousands)*	Pass		Watch		Mention		Substandard		Doubtful		Total
Residential Real Estate:
Single Family	$	138,483	$	755	$	—	$	382	$	—	$	139,620
Multifamily		9,182		—		—		—		—		9,182
Farmland		825		—		—		—		—		825
Commercial Real Estate:
Owner occupied		117,906		1,777		—		—		1,939		121,622
Non-owner occupied		256,139		—		—		—		—		256,139
Construction & Land Development		183,551		—		—		—		—		183,551
Commercial – Non Real Estate:
Commercial & industrial		110,631		1,333	$	2,257		—		—		114,221
Consumer – Non Real Estate:
Unsecured		1,402		—		—		—		—		1,402
Secured		100,875		—		—		—		—		100,875

Total	$	918,994	$	3,865	$	2,257	$	382	$	1,939	$	927,437

	December 31, 2020
(Dollars in thousands)	Pass		Watch		Special Mention		Substandard		Total
Residential Real Estate:
Single Family	$	137,937	$	—	$	738	$	663	$	139,338
Multifamily		43,332		—		—		—		43,332
Farmland		861		—		—		—		861
Commercial Real Estate:
Owner occupied		136,257		5,556		—		—		141,813
Non-owner occupied		264,546		59,453		—		1,086		325,085
Construction & Land Development		322,149		2,757		—		—		324,906
Commercial – Non Real Estate:
Commercial & Industrial		225,012		4,059		591		365		230,027
Consumer – Non Real Estate:
Unsecured		241		—		—		—		241
Secured		43,832		—		—		—		43,832
Total	$	1,174,167	$	71,825	$	1,329	$	2,114	$	1,249,435

The following tables present the segments of the loan portfolio summarized by aging categories as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31, 2019														June 30, 2021
*(Dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Nonaccrual		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Nonaccrual
Residential Real Estate:
Single Family	$	—	$	—	$	—	$	—	$	143,761	$	143,761	$	—	$	—	$	—	$	—	$	—	$	136,547	$	136,547	$	—
Multifamily		—		—		—		—		7,306		7,306		—		—		—		—		—		53,031		53,031		—
Farmland		—		—		—		—		817		817		—		—		—		—		—		848		848		—
Commercial Real Estate:
Owner occupied		—		—		—		—		138,524		140,463		1,939		—		—		—		—		149,553		149,553		—
Non-owner occupied		—		—		—		—		269,059		269,059		—		—		—		—		—		353,962		353,962		—
Construction & Land Development		—		—		—		—		192,494		192,494		—		835		—		—		835		327,645		328,480		—
Commercial – Non Real Estate:
Commercial & industrial		—		—		—		—		105,391		105,391		—
Commercial & Industrial																—		—		—		—		218,414		218,414		—
Consumer – Non Real Estate:
Unsecured		86		—		33		119		1,310		1,429		—		—		—		—		—		256		256		—
Secured		46		—		—		46		93,824		93,870		—		—		—		—		—		33,387		33,387		—

Total	$	132	$	—	$	33	$	165	$	952,486	$	954,590	$	1,939	$	835	$	—	$	—	$	835	$	1,273,643	$	1,274,478	$	—


	December 31, 2018
*(Dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Nonaccrual
Residential Real Estate:
Single Family	$	—	$	—	$	—	$	—	$	139,620	$	139,620	$	—
Multifamily		—		—		—		—		9,182		9,182		—
Farmland		—		—		—		—		825		825		—
Commercial Real Estate:
Owner occupied		—		—		—		—		119,683		121,622		1,939
Non-owner occupied		—		—		—		—		256,139		256,139		—
Construction & Land Development		—		—		—		—		183,551		183,551		—
Commercial – Non Real Estate:
Commercial & industrial		—		—		—		—		114,221		114,221		—
Consumer – Non Real Estate:
Unsecured		50		9		11		70		1,332		1,402		—
Secured		57		5		—		62		100,813		100,875		—

Total	$	107	$	14	$	11	$	132	$	925,366	$	927,437	$	1,939

	December 31, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Nonaccrual
Residential Real Estate:
Single Family	$	—	$	—	$	—	$	—	$	139,189	$	139,338	$	149
Multifamily		—		—		—		—		42,300		42,300		—
Farmland		—		—		—		—		861		861		—
Commercial Real Estate:
Owner occupied		—		—		—		—		141,813		141,813		—
Non-owner occupied		—		—		—		—		326,117		326,117		—
Construction & Land Development		—		—		—		—		324,906		324,906		—
Commercial – Non Real Estate:
Commercial & Industrial		—		—		—		—		230,027		230,027		—
Consumer – Non Real Estate:
Unsecured		—		—		—		—		241		241		—
Secured		68		—		—		68		43,764		43,832		—
Total	$	68	$	—	$	—	$	68	$	1,249,218	$	1,249,435	$	149

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan that is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses. TDRs are restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period, ~~of time,~~ generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Troubled Debt Restructuring

According to United States generally accepted accounting principles, restructuring a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The CARES Act states that from March 1, 2020, until the end of the year (unless the President terminates the COVID-19 emergency declaration sooner), financial institutions may elect to suspend the TDR accounting principles for loan modifications related to COVID-19. The Consolidated Appropriations Act of 2021, enacted in December 2020, extended this relief to the earlier of January 1, 2022 or the first day of a bank’s fiscal year that begins after the national emergency ends.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default,

management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

As of ~~March 31, 2019,~~June 30, 2021, and December 31, ~~2018,~~2020, the Company had two loans identified as TDRs totaling $3.4 million. At March 31, 2019 and December 31, 2018, one TDR was performing in compliance with the restructured terms and on accrual status. There were no modifications to loans classified as TDRs during the three months ended March 31, 2019. No additional loan commitments were outstanding to these borrowers at March 31, 2019 and December 31, 2018. At both March 31, 2019 and December 31, 2018, there was a specific reserve of $732,892 related to one TDR.did 0t have any TDRs.

~~The following table details the Company’s TDRs that are on accrual status andnon-accrual~~ ~~status at March 31, 2019:~~

   As of March 31, 2019
   Number    Accrual
Non-
Accrual

(Dollars in thousands)
   Of Loans    Status    Status    Total TDRs
Residential Real Estate
   1    $ 1,502    $ —      $ 1,502
Commercial Real Estate
   1    —      1,939    1,939








Total
   2    $ 1,502    $ 1,939    $ 3,441

~~The following table details the Company’s TDRs that are on accrual status andnon-accrual~~ ~~status at December 31, 2018:~~

   As of December 31, 2018
   Number    Accrual
Non-
Accrual

(Dollars in thousands)
   Of Loans    Status    Status    Total TDRs
Residential Real Estate
   1    $ 1,510    $ —      $ 1,510
Commercial Real Estate
   1    —      1,939    1,939








Total
   2    $ 1,510    $ 1,939    $ 3,449

~~The carrying amount of commercial real estate in the process of foreclosure was $1.9 million and $0 at March 31, 2019 and December 31, 2018, respectively.~~

Note 4. Derivatives and Risk Management Activities

The Bank uses derivative financial instruments (or “derivatives”) primarily to ~~manage risks to the Bank associated with changing interest rates, and to~~ assist customers with their risk management objectives. The ~~Bank~~Company classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (or “interest rate loan swaps”). The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Bank receives a floating rate. Theseback-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.

The following tables summarize key elements of the Banks’s derivative instruments as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018.~~2020.


*March 31, 2019*
June 30, 2021
Customer-related interest rate contracts
*Dollars in thousands)*	Notional Amount		Positions		Assets		Liabilities		Collateral Pledges		Notional Amount		Positions		Assets		Liabilities		Collateral Pledges
Matched interest rate swap with borrower		44,841		6		2,291		—		2,530	$	209,370		38	$	4,663		—	$	15,120
Matched interest rate swap with counterparty		44,841		6		—		2,291		2,530	$	209,370		38		—	$	4,663	$	15,120


*December 31, 2018*
Customer-related interest rate contracts
*Dollars in thousands)*	Notional Amount		Positions		Assets		Liabilities		Collateral Pledges
Matched interest rate swap with borrower		36,607		5		1,192		—		1,290
Matched interest rate swap with counterparty		36,607		5		—		1,192		1,290

December 31, 2020
Customer-related interest rate contracts
Dollars in thousands)	Notional Amount		Positions		Assets		Liabilities		Collateral Pledges
Matched interest rate swap with borrower	$	210,314		38	$	12,152		—	$	15,120
Matched interest rate swap with counterparty	$	210,314		38		—	$	12,152	$	15,120

The Company is able to recognize fee income upon execution of the interest rate swap ~~contract and completed its first contract in the fourth quarter of 2018. This source of fee income is expected to continue to grow in a consistent manner going forward.~~contract. Interest rate swap fee income for the ~~quarter~~three and six months ended ~~March 31, 2019 and 2018~~June 30, 2021 were both $0, respectively. Interest rate swap income for the same period for 2020 was ~~$290,000 and $0,~~$423,000 and$826,000, respectively.

Note 5. Fair Value Presentation

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at 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 Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

In accordance with the guidance, a hierarchy of valuation techniques is 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 Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 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 that the reporting entity has the ability to access at the measurement date.



~~Level 1 –~~		~~Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.~~

~~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.~~

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 Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). 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. As of ~~March 31, 2019,~~June 30, 2021, and December 31, ~~2018,~~2020, the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities.

Derivative asset (liability) – interest rate swaps on loans

As discussed in “Note 4: Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.

The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:


	March 31, 2019								June 30, 2021
*(Dollars in thousands)*	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
*Assets:*
Investment securitiesavailable-for-sale:
U.S. Treasury Securities	$	—	$	29,986	$	—	$	29,986	$	—	$	100,000	$	—	$	100,000
Collateralized Mortgage Backed		—		10,289		—		10,289		—		26,873		—		26,873
Subordinated Debt		—		2,028		—		2,028		—		6,258		—		6,258
Municipal Securities		—		17,298		—		17,298		—		26,473		—		26,473
U.S. Government Agencies		—		9,707		—		9,707		—		6,187		—		6,187
Derivative asset – interest rate swap on loans		—		2,291		—		2,291		—		4,663		—		4,663

Total	$	—	$	71,599	$	—	$	71,599	$	—	$	170,454	$	—	$	170,454

*Liabilities:*
Derivative liability – interest rate swap on loans		—		2,291		—		2,291		—		4,663		—		4,663

Total	$	—	$	2,291	$	—	$	2,291	$	—	$	4,663	$	—	$	4,663


	December 31, 2018
*(Dollars in thousands)*	Level 1		Level 2		Level 3		Total
*Assets:*
Investment securitiesavailable-for-sale:
U.S. Treasury Securities	$	—	$	29,998	$	—	$	29,998
Collateralized Mortgage Backed		—		4,893		—		4,893
Subordinated Debt		—		2,015		—		2,015
Municipal Securities		—		8,833		—		8,833
U.S. Government Agencies		—		10,241		—		10,241
Derivative asset – interest rate swap on loans		—		1,192		—		1,192

Total	$	—	$	57,172	$	—	$	57,172

*Liabilities:*
Derivative liability – interest rate swap on loans		—		1,192		—		1,192

Total	$	—	$	1,192	$	—	$	1,192

	December 31, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
U.S. Treasury Securities	$	—	$	90,000	$	—	$	90,000
Collateralized Mortgage Backed		—		24,896		—		24,896
Subordinated Debt		—		3,278		—		3,278
Municipal Securities		—		22,605		—		22,605
U.S. Government Agencies		—		6,635		—		6,635
Derivative asset – interest rate swap on loans		—		12,152		—		12,152
Total	$	—	$	159,566	$	—	$	159,566
Liabilities:
Derivative liability – interest rate swap on loans		—		12,152		—		12,152
Total	$	—	$	12,152	$	—	$	12,152

Certain 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 oflower-of-cost-or-market accounting or write-downs of individual assets.

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

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. ~~The vast majority~~Most of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because 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 on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

~~The following table summarizes the value of theBank’s impaired loans as of March 31, 2019 and December 31, 2018 that were measured at fair value on a nonrecurring basis during the period:~~

(Dollars in thousands)
   Level 1    Level 2    Level 3    Total
Assets:

Impaired Loans

Commercial Real Estate
   $ —      $ —      $ 1,207    $ 1,207








Total
   $ —      $ —      $ 1,207    $ 1,207

Other real estate owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Statements of Income.

The ~~Bank did not have other real estate owned~~following table summarizes the value of the Bank’s assets as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018.~~

2020 that were measured at fair value on a nonrecurring basis during the period:

June 30, 2021
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Impaired Loans
Construction and Land Development	$	—	$	—	$	817	$	817
Other Real Estate Owned		—		—		1,158		1,158
Total	$	—	$	—	$	1,975	$	1,975

December 31, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Other Real Estate Owned	$	—	$	—	$	1,180	$	1,180
Total	$	—	$	—	$	1,180	$	1,180

The following table summarizes the value of the Bank’s assets as of June 30, 2021 that were measured at fair value on a nonrecurring basis during the period:

	Fair Value Measurements at June 30, 2021
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range of Inputs
Impaired Loans, net	$	817	Appraisals	Discount to reflect current market conditions or cash flows and estimated selling costs.	3% - 10%
Other Real Estate Owned, net		1,158	Appraisals	Discount to reflect current market conditions and estimated selling costs.	6% - 10%
Total	$	1,975

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. ~~Additionally, in~~In accordance with ASU2016-01, ~~which the Company adopted on January 1, 2018 on a prospective basis,~~ the Company uses the exit price notion, rather than the entry price notion, in ~~calculation~~calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.


March 31, 2019	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2021											Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
*(Dollars in thousands)*	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	29,741	$	29,741	$	29,741	$	—	$	—
Cash and cash equivalents											$	176,285	$	176,285	$	176,285	$	—	$	—
Restricted equity securities		5,732		5,732		—		5,732		—		5,039		5,039		—		5,039		—
Securities:
Available for sale		69,308		69,308		—		69,308		—		165,791		165,791		—		165,791		—
Held to maturity		25,487		25,853		—		25,853		—		26,136		27,112		—		27,112		—
Loans, net		943,735		919,905		—		—		919,905		1,256,436		1,274,955		—		—		1,274,955
Derivative asset – interest rate swap on loans		2,291		2,291		—		2,291		—		4,663		4,663		—		4,663		—
Bank owned life insurance		14,169		14,169		—		14,169		—		35,736		35,736		—		35,736		—
Accrued interest receivable		5,644		5,644		—		5,644		—		8,260		8,260		—		8,260		—
Liabilities:
Deposits	$	966,827	$	970,361	$	—	$	465,396	$	504,965	$	1,464,932	$	1,472,455	$	—	$	936,685	$	535,770
Advances from the FHLB		30,000		29,968		—		29,968		—
Derivative liability – interest rate swaps on loans		2,291		2,291		—		2,291		—		4,663		4,663		—		4,663		—
Accrued interest payable		1,643		1,643		—		1,643		—		625		625		—		625		—


December 31, 2018	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2020											Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
*(Dollars in thousands)*	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	58,076	$	58,076	$	58,076	$	—	$	—
Cash and cash equivalents											$	107,528	$	107,528	$	107,528	$	—	$	—
Restricted equity securities		5,894		5,894		—		5,894		—		4,616		4,616		—		4,616		—
Securities:
Available for sale		55,979		55,979		—		55,979		—		147,414		147,414		—		147,414		—
Held to maturity		26,178		26,323		—		26,323		—		22,520		23,578		—		23,578		—
Loans, net		917,125		897,765		—		—		897,765		1,230,379		1,259,671		—		—		1,259,671
Loans held for sale												57,006		58,930		—		—		58,930
Derivative asset – interest rate swap on loans		1,192		1,192		—		1,192		—		12,152		12,152		—		12,152		—
Bank owned life insurance		14,064		14,064		—		14,064		—		25,341		25,341		—		25,341		—
Accrued interest receivable		4,333		4,333		—		4,333		—		9,154		9,154		—		9,154		—
Liabilities:
Deposits	$	920,137	$	920,917	$	—	$	463,552	$	457,365	$	1,438,246	$	1,451,708	$	—	$	941,503	$	510,205
Advances from the FHLB		40,000		39,848		—		39,848		—
Derivative liability – interest rate swaps on loans		1,192		1,192		—		1,192		—		12,152		12,152		—		12,152		—
Accrued interest payable		1,103		1,103		—		1,103		—		490		490		—		490		—

The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. There were no changes in methodologies or transfers between levels at ~~March 31, 2019~~June 30, 2021 from December 31, ~~2018.~~2020.

Note 6. Earnings Per Common Share

Basic earnings per common share excludes dilution and is computed by dividing net income available to common ~~stockholders~~shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were no0 such potentially dilutive securities outstanding in ~~2019~~2021 or ~~2018. On April 30, 2018, the Company issued a 5% stock dividend to stockholders on record as of April 9, 2018.~~2020.

The weighted average number of shares used in the calculation of basic and diluted earnings per common share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstandingun-vested share-based payment awards that contain voting rights and rights tonon-forfeitable dividends participate in undistributed earnings with common ~~stockholders.~~shareholders.

   For the Three Months
Ended December 31
(Dollars in thousands)
   2019    2018
Net income
   $ 3,247    $ 1,686
Weighted average number of shares issued, basic and diluted₍₁₎
   8,242,873    5,799,496
Net income per share:

Basic and diluted income per share
   $ 0.39    $ 0.29

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(Dollars in thousands, except for per share data)	2021		2020			2021		2020
Net income (loss) available to common shareholders	$	6,587	$	(634	)	$	11,497	$	2,836
Weighted average number of common shares issued, basic and diluted		7,546,452		8,263,370			7,535,061		8,275,344
Net income (loss) per common share:
Basic and diluted income (loss) per common share	$	0.87	$	(0.08	)	$	1.53	$	0.34

₍₁₎

~~All share and per share amounts for 2018 reflect the effect of the 5% stock dividend on April 30, 2018.~~

Note 7. Accumulated Other Comprehensive ~~Loss~~Income

The following table presents the cumulative balances of the components of accumulated other comprehensive ~~loss~~income, net of deferred taxes, as of ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018:~~2020:

							June 30, 2021			December 31, 2020
	2019			2018
Unrealized gain/(loss) on securities	$	(93	)	$	(358	)
Unrealized gain on securities							$	754		$	1,287
Unrealized loss on securities transferred to HTM		(102	)		(109	)		(43	)		(55	)
Tax effect		43			100			(135	)		(255	)

Total accumulated other comprehensive loss	$	(152	)	$	(367	)
Total accumulated other comprehensive income							$	576		$	977

Note 8. Leases

~~On January 1, 2019, the Company adopted ASUNo. 2016-02~~ ~~“Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transition method provided by ASU2018-11~~ and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10 registration document, the implementation of the new standard resulted in recognition of a~~right-of-use~~ ~~asset~~Right-of-use assets and lease ~~liability of $2.7 million at the date of adoption, which is primarily related to the Company’s lease of premises used in operations. Theright-of-use~~ ~~asset and lease liability~~liabilities are included in other assets and other liabilities, respectively, in the Consolidated ~~Balance Sheets.~~

Statements of Financial Condition. 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. The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract.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 the Company has included such extensions in its 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.

Cash paid for amounts included in the measurement of lease liabilities during the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 was ~~$62,000. The Company adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Company measured lease expense in accordance with FASB Accounting Standards Codification Topic 840.~~$228,000. During the ~~three~~six months ended ~~March 31, 2018,~~June 30, 2021 and 2020, the Company recognized lease expense of ~~$52,000~~$300,000 and $147,000, respectively.

The Company continuously evaluates current transactions to determine whether a lease obligation should be reported. As of March 31, 2019, the Company has completed the process of registering a new branch to be located in Washington D.C. and is in the process of determining the impact of any lease obligation that will be associated with this branch.

	As of June 30,
(Dollars in thousands)	2021
Lease liabilities	$	7,806
Right-of-use assets	$	7,347
Weighted-average remaining lease term – operating leases (in months).		178.0
Weighted-average discount rate – operating leases		2.81	%

	For the six months ended June 30,
(Dollars in thousands)	2021
Lease Cost
Operating lease cost	$	300
Total lease costs	$	300
Cash paid for amounts included in measurement of lease liabilities	$	228


	~~March 31,~~
~~(Dollars in thousands)~~	~~2019~~
~~Lease liabilities~~	$	~~2,655~~
~~Right-of-use~~ ~~assets~~	$	~~2,647~~
~~Weighted-average remaining lease term – operating leases (in months).~~		~~133.5~~
~~Weighted-average discount rate – operating leases~~		~~3.60~~	%

	~~For the Three~~
	~~Months Ended~~
~~(Dollars in thousands)~~	~~March 31, 2019~~
~~Lease Cost~~
~~Operating lease cost~~	$	72

~~Total lease costs~~	$	72

~~Cash paid for amounts included in measurement of lease liabilities~~	$	62

The Company is the lessor for ~~three~~3 operating leases. One lease is extended on amonth-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. 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. Total rent income on these operating leases is approximately $6,000 per month.

During the six months ended June 30, 2021, the Company entered into 1 new operating lease. This lease is intended to be used as an operation center to accommodate the growing efforts of the Company.

As of ~~March 31, 2019,~~June 30, 2021, all of the Company’s lease obligations are classified as operating leases. The Company does ~~not~~0t have any finance lease obligations.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of ~~March 31, 2019~~June 30, 2021 is as follows:


(Dollars in thousands)
2019	$	242
2020		294
2021		298		$	329
2022		307			607
2023		315			638
2024					654
2025					671
Thereafter		1,830			6,837

Total undiscounted cash flows	$	3,286		$	9,736

Discount		(631	)		(1,930	)
Lease liabilities	$	2,655		$	7,806

~~Minimum annual rental commitments under the lease obligations are as follows as of December 31, 2018:~~

(Dollars in thousands)
2019
   $ 202
2020
   199
2021
   184
2022
   100
Thereafter
   572


   $ 1,257

~~Note 9. Subsequent Events~~

~~On February 15, 2019, MainStreet Bancshares, Inc. filed a General Form for Registration of Securities on Form 10, which we refer~~The Company has elected to asclose the ~~“Registration Statement,” to register its common stock, par value $4.00 per share, pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).~~

Effective April 18, 2019, the Company became subject to the reporting and information requirements of the Exchange Act, and as a result will file periodic reports and other information with the SEC, commencingbranch located at 4029 Chain Bridge Rd in Fairfax City effective August 27, 2021. The lease associated with this ~~Quarterly Report on Form 10-Q. Effective April 22, 2019, the Company’s securities began trading on the Nasdaq Capital Market under our current symbol “MNSB.”~~

~~On April 9, 2019, the Bank took possession~~branch is set to expire in October of a commercial property through loan foreclosure. The asset was recorded at estimated fair value less estimated costs to sell based on a recent appraisal. The difference between the recorded amount of the loan and the estimated fair value of the property was $733,000 and charged to the allowance for loan losses. The Bank had previously recorded a specific reserve for this ~~loan equal to this difference.~~year.

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

The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s ~~Registration Statement~~Annual Report on Form ~~10, as amended,~~10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, ~~2018,~~2020, previously filed with the ~~Securities and Exchange Commission (“SEC”) on February 15, 2019, and amended~~SEC on March ~~22, 2019.~~23, 2021. Results for the three ~~month period~~and six months ended ~~March 31, 2019~~June 30, 2021 are not necessarily indicative of results for the year ending December 31, ~~2019~~2021 or any future period.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:

~~generaleconomic conditions, either nationally or in our market area, that are worse than expected;~~
•
the impact of the novel coronavirus disease (COVID-19) outbreak and measures taken in response for which future developments are highly uncertain and difficult to predict;

~~competition among depository and other financial institutions, particularly intensified competition for deposits;~~
•
general economic conditions, either nationally or in our market area, that are worse than expected;

~~inflation and a currently rising interest rate environment that may reduce our margins or reduce the fair value of financial instruments;~~
•
competition among depository and other financial institutions, particularly intensified competition for deposits;

~~adverse changes in the securities markets;~~
•
inflation and an interest rate environment that may reduce our margins or reduce the fair value of our financial instruments;

~~changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;~~
•
adverse changes in the securities markets;

~~our ability to enter new markets successfully and capitalize on growth opportunities;~~
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;

~~our ability to successfully integrate acquired entities;~~
•
the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations;

~~changes in consumer spending, borrowing and savings habits;~~
•
our ability to enter new markets successfully and capitalize on growth opportunities;

~~changes in accounting policies and practices;~~
•
our ability to successfully integrate acquired entities;

~~changes in our organization, compensation and benefit plans;~~
•
changes in consumer spending, borrowing and savings habits;

~~our ability to retain key employees;~~
•
changes in accounting policies and practices;

~~changes in our financial condition or results of operations that reduce capital;~~
•
changes in our organization, compensation and benefit plans;

~~changes in the financial condition or future prospects of issuers of securities that we own;~~
•
our ability to attract and retain key employees;

~~the concentration of our business in the Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on this market;~~
•
changes in our financial condition or results of operations that reduce capital;

•

changes in the financial condition or future prospects of issuers of securities that we own;

•

the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on those markets;

~~adequacy of our allowance for loan losses;~~
•
adequacy of or increases in the allowance for loan losses;

~~deterioration of our asset quality;~~
•
cyber threats, attacks or other data security events;

~~future performance of our loan portfolio with respect to recently originated loans;~~
•
fraud or misconduct by internal or external parties;

~~additional risks related to new lines of business, products, product enhancements or services;~~
•
reliance on third parties for key services;

results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action;
•
deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures;

~~the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;~~
•
future performance of our loan portfolio with respect to recently originated loans;

~~liquidity, interest rate and operational risks associated with our business; and~~
•
additional risks related to new lines of business, products, product enhancements or services;

~~implications of our status as a smaller reporting company and as an emerging growth company~~
•
results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action;

•

the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;

•

liquidity, interest rate and operational risks associated with our business;

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implications of our status as a smaller reporting company and as an emerging growth company; and

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a work stoppage, forced quarantine, or other interruption or the unavailability of key employees.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form10-Q to reflect future events or developments.

Overview

~~The Company~~As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiary, and the “Bank” refers to MainStreet Bank.

MainStreet Bancshares, Inc. is a ~~community-based~~ commercial bank holding ~~company. The~~company that owns 100% of MainStreet Bank, isa community bank focused on serving the borrowing, cash management and depository needs of small to medium-sized businesses and professional practices and retail customers. We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a ~~locally-focused~~local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.

We believe we have ~~built~~ a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.

We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to ~~the most~~up-to-date banking technology. These ~~unique~~ systems and our highly skilled staff have allowed us to compete ~~aggressively~~ with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from ~~the~~our competition. We strive to be the leading community bank in our market.

We offer a full range of banking services to individuals, small to medium-sized businesses and ~~professionals~~professional service organizations through both traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits up to ~~$140~~$150 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.

Our products and services include: ~~free~~ business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. ~~Free internet~~Internet account access is available for all personal and business accounts, ~~free~~ internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.

Both the Company and the Bank are incorporated in and chartered by the Commonwealth of ~~Virginia and members~~Virginia. The Bank is a member of the Federal Reserve ~~System. The Bank’s~~System, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate ~~six~~seven Bank ~~branches~~branches; located in Herndon, Fairfax, Fairfax City, McLean, Clarendon, and Leesburg ~~Virginia.~~Virginia, and one in Washington D.C. We have notified our regulators that we will close the branch located at 4029 Chain Bridge Rd in Fairfax City on August 27, 2021. The branch team and all of the relationships maintained at this branch will transfer to the headquarters branch, which is less than 2 miles away. No action by our branch customers will be necessary.

The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is~~www.mstreetbank.com~~. www.mstreetbank.com. The information contained on our website shall not be considered part of this ~~Memorandum and the Investor Presentation,~~Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.

COVID-19 Pandemic

The effects of the COVID-19 pandemic and resulting economic conditions have impacted our business and financial results and could continue to impact our business and results of operations in several ways in the future, including without limitation in areas related to credit, collateral, customer demand, operations, interest rate risk, liquidity and litigation, as described in more detail below. The extent to which the Company’s business will continue to be negatively affected by the pandemic will depend on future developments, which are highly uncertain and cannot be reasonably predicted.

Credit Risk. The risk of timely loan repayment and the value of collateral supporting our loans are affected by the strength of our borrowers’ businesses. New concerns about the additional spread of COVID-19 have caused, and are likely to continue to cause, business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. To date the effects of COVID-19 have not resulted in widespread and sustained repayment shortfalls on loans in our portfolio. However, if these negative effects continue, and are widespread and sustained, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available

collateral is not sufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, our ability to liquidate real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for, or profitability of, our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making business decisions or may delay our taking certain remediation actions. In addition, we have unfunded commitments to extend credit to customers. Increased borrowings under these commitments could adversely impact our liquidity.

To support our communities and actively assist our customers during the pandemic, we participated in the Paycheck Protection Program (“PPP”), a program established by the CARES Act to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. PPP loans are fully guaranteed by the Small Business Administration (“SBA”) and provide for full forgiveness of the loans during a specified forgiveness period that meet specific guidelines provided by the SBA. The deadline to apply for PPP loans was initially June 30, 2020 and was later extended to August 8, 2020; the CAA, enacted in December 2020, reopened and expanded the PPP. Small businesses and other entities and individuals can apply for PPP loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Since the PPP was expanded in December 2020, the Company has originated 572 additional PPP loans in the amount of $87.3 million, as we continue to help our community recover from the pandemic.

PPP loans are subject to regulatory requirements that would require forbearance of loan payments for a specified time or that could limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, or if the borrower defaults and the SBA determines there is a deficiency in the way any PPP loans were originated, funded or serviced by the Bank, we would be subject to repayment risk as well as the heightened risk of holding these loans at unfavorable interest rates as compared to loans that we would have otherwise made.

Business Continuity Planning Risk. Our financial condition and results of operations may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to severe disruption and volatility in capital markets. Furthermore, many of the governmental actions in response to the pandemic have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly changing. Future effects of COVID-19 on economic activity could negatively affect the future banking products we provide and could result in a decline in loan originations.

Operational Risk. As of June 30, 2021, 94% of our employees have been vaccinated for the coronavirus. Nevertheless, current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we modified our business practices with a portion of our employees working remotely from their homes to minimize interruptions of our operations. Technology in employees’ homes may be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk.

We rely on many third parties in our business operations. Many of these parties may limit the availability and access of their services. If third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Interest Rate Risk. Our net interest income, lending activities, deposits, investment portfolio, cash flows and profitability are and are likely to continue to be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. On March 15, 2020, the Federal Reserve lowered its target range for the federal funds rate to a range from 0 to 0.25 percent, and has since maintained that range, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices will likely cause a loss of future net interest income and a decrease in current fair market values of our investment portfolio and other assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Liquidity. Federal, state and local governments have mandated or encouraged financial institutions to accommodate borrowers and other customers affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to our measures to address the potential effects from negative economic conditions noted above, the Company has instituted a program to help COVID-19 impacted customers. This program includes waiving certain fees and charges and offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19. The Company’s liquidity could be negatively impacted if a significant number of customers apply and are approved for the deferral of payments or request additional deferrals. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on our customers, the negative effects on our business and results of operations may be more substantial and may continue over a longer period. A significant amount of loan growth during 2020 was a direct result of PPP loans. This loan growth is likely to end in the near-term.

Litigation Risk. Although the Company has taken and continues to take precautions to protect the safety and well-being of its employees, no assurance can be given that the steps being taken will be adequate or appropriate. Concerns have been expressed regarding possible employee lawsuits for tort claims related to the COVID-19 pandemic, including class action lawsuits alleging that unsafe workplaces have caused employees to contract COVID-19 or subjected them to the risk of exposure. Possible statutory defenses may mitigate the risk of liability in any such lawsuits; however, the availability of such defenses is uncertain and cannot be predicted at this time.

The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. Offices of state attorneys general and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations that entitle the Bank to rely on borrower certifications, and they may take more aggressive actions against the Bank for alleged violations of the provisions governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that solicited the Bank for PPP loans, regarding its process and procedures used to process applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition, and results of operations. On Friday, March 13, 2020, President Trump declared a national emergency caused by the COVID-19 pandemic. The federal and state guidelines issued in connection with this national emergency to curb the spread of the COVID-19 pandemic have caused economic disruption across nearly every industry as well as significant unemployment. The Commonwealth of Virginia and the District of Columbia instituted stay at home guidelines with an exception made for essential businesses. Both jurisdictions consider banking to be an essential business.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (IBOR) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (ARRs) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations, and financial results.

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

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of ~~March 31, 2019~~June 30, 2021 have remained unchanged from the disclosures presented in our Annual Report on Form ~~10 Registration,~~10-K, for the year ended December 31, ~~2018,~~2020, other than the items discussed in our Recently ~~Adopted~~Issued Accounting Pronouncements.

~~Comparison of Statements of Financial Condition at March 31, 2019 and at December 31, 2018~~

~~Total Assets~~

Total assets increased $45.5 million, or 4.1%, to $1.2 billion at March 31, 2019 from $1.1 billion at December 31, 2018. The increase was primarily the result of increases of $26.6 million in loans receivable, $13.3 million in available for sale securities and $4.1 million in other assets.

~~Investment Securities~~

Investment securities increased $12.6 million, or 15.4%, from $82.2 million at December 31, 2018 to $94.8 million at March 31, 2019. The increase was primarily in the available for sale portfolio, particularly in the municipal and collateralized mortgage backed portfolios. At March 31, 2019, our~~held-to-maturity~~ ~~portion of the securities portfolio, at amortized cost, was $25.5 million, and ouravailable-for-sale~~ ~~portion of the securities portfolio, at fair value, was $69.3 million compared to ourheld-to-maturity~~ ~~portion of the securities portfolio of $26.2 million and ouravailable-for-sale~~ ~~portion of the securities portfolio of $56.0 million at December 31, 2018.~~

~~Net Loans~~

Net loans increased $26.6 million, or 2.9%, to $943.7 million at March 31, 2019 from $917.1 million at December 31, 2018. Residential real estate loans increased $2.3 million, or 1.5%, to $151.9 million at March 31, 2019 from $149.6 million at December 31, 2018. Commercial real estate loans increased by $31.8 million from $377.8 million at December 31, 2018 to $409.5 million at March 31, 2019. Commercial and industrial loans decreased by $8.8 million from $114.2 million at December 31, 2018 to $105.4 million at March 31, 2019. Construction loans increased $8.9 million to $192.5 million at March 31, 2019 from $183.6 million at December 31, 2018. Consumer loans decreased by $7.0 million from $102.3 million at December 31, 2018 to $95.3 million at March 31, 2019.

~~Deposits~~

Deposits increased $46.7 million, or 5.1%, to $966.8 million at March 31, 2019 from $920.1 million at December 31, 2018. Our core deposits decreased $19.6 million, or (3.3%), to $566.4 million at March 31, 2019 from $586.0 million at December 31, 2019. Certificates of deposit increased $46.0 million, or 10.0%, to $504.2 million at March 31, 2019 from $458.3 million at December 31, 2018. The increase in certificate of deposits was primarily the result of increased brokered deposits in order to continue funding the loan growth over the quarter.

Comparison of Statements of Income for the Three Months Ended ~~March 31, 2019~~June 30, 2021 and ~~2018~~2020

General

Net income increased ~~$1.6~~$7.8 million to ~~$3.2~~$7.1 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$1.7 million~~a net loss of $634,000 for the three months ended ~~March 31, 2018.~~June 30, 2020. The increase in net income for the three months ended ~~March 31, 2019~~June 30, 2021 was primarily due to an increase in net interest income of $2.3 million over the same period in 2020, as well as a recovery of loan loss provision. During the three months ended June 30, 2021, the Company recognized a recovery of loan loss provision of $2.1 million, which significantly decreased from a $5.6 million provision expense over the ~~Bank’s loan portfolio, an increase~~same period in~~non-interest~~ ~~income of $418,000, of which $290,000 was provided by loan swap fees, and a decrease of $310,000~~ 2020. The change in provision expense was related to the uncertainty of the COVID 19 pandemic during 2020. Net income was affected by increases of $400,000 in salaries and employee benefits for ~~loan losses~~the three months ended June 30, 2021 compared to the same period in ~~2018.~~2020.

Interest Income

Total interest income increased ~~$5.1 million,~~$970,000, or ~~57.8%~~6.5%, to ~~$13.8~~$15.9 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$8.8~~$14.9 million for the three months ended ~~March 31, 2018.~~June 30, 2020. The increase was primarily the result of an increase in interest and fees on loans of ~~$4.6 million,~~$858,000 and an increase in interest on investment securities of ~~$215,000 and an increase on interest on federal funds sold and interest-earning deposits of $245,000.~~$101,000. Total average interest-earning assets increased ~~$302.4~~$226.2 million, to ~~$1.1~~$1.64 billion for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$767.5 million~~$1.41 billion for the same period in ~~2018~~2020 primarily ~~as a result~~because of an increase in the average balance of loans of ~~$255.2~~$89.5 million, a ~~$12.4~~$17.6 million increase in the average balance of investment securities and aan increase in the average balance of federal funds sold and interest-earning deposits with banks of ~~$34.8~~$119.1 million. The average yield on our interest-earning assets ~~increased 61~~decreased 34 basis points to ~~5.17%~~3.89% for the three months ended ~~March 31, 2019~~June 30, 2021 as compared to ~~4.56%~~4.23% for the three months ended ~~March 31, 2018~~June 30, 2020 primarily asbecause of lower average yields on interest earning assets due to market conditions, loans related to PPP lending with a ~~result~~rate of ~~a higher average yield on~~1%, and the ~~loan portfolio.~~Federal Reserve lowering the federal interest rates to near 0%.

Interest and fees on loans increased ~~$4.6 million~~$858,000, to ~~$12.9~~$15.3 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$8.3~~$14.4 million for the same period in ~~2018.~~2020. This increase was primarily due to an increase in average loans outstanding of ~~$241.0~~$89.5 million, which increased to ~~$943.7 million~~$1.30 billion as of ~~March 31, 2019~~June 30, 2021 from ~~$702.7 million~~$1.21 billion as of ~~March 31, 2018.~~June 30, 2020. Included in average loans for the three months ended June 30, 2021, $161.8 million was attributable to average PPP loans. In addition to the growth in the loan portfolio the Federal ~~Reserves raised~~Reserve decreased the federal interest rate byto a range of 0 - 25 basis points ~~four times throughout 2018,~~towards the end first quarter of 2020 and have remained there, which ~~increased~~caused decreased yields on the Bank’s asset sensitive balance sheet. The average yield on loans ~~increased 64~~decreased 6 basis points, or ~~13.1%~~1.3%, for the three months ended ~~March 31, 2019~~June 30, 2021 as compared to the three months ended ~~March 31, 2018.~~June 30, 2020.

Interest income on federal funds sold and interest-earning deposits increased by ~~$245,000~~$11,000 to ~~$345,000~~$20,000 for the three months ended ~~March 31, 2019,~~June 30, 2021, from ~~$100,000~~$9,000 for the three months ended ~~March 31, 2018.~~June 30, 2020. The increase was primarily due to ana significant increase ~~average yield and~~in the average balance on these deposits. ~~The average yield increased 79 basis points, to 2.12% for the three months ended March 31, 2019 from 1.33% for the three months ended March 31, 2018.~~ The average balance of interest-earning deposits and federal funds sold increased ~~$34.8~~$119.1 million to ~~$64.9~~$245.3 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$30.1~~$126.2 million for the same period in 2020. The average yield remained the same at 0.03% for the three months ended ~~March 31, 2018.~~June 30, 2021 and 2020. The Bank held higher average balances in these accounts during the second quarter of 2021 while determining strategic alternatives to deploy this capital.

Interest on investment securities increased by ~~$215,000~~$101,000 to ~~$556,000~~$597,000 for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$341,000~~$496,000 for the three months ended ~~March 31, 2018, respectively.~~June 30, 2020. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total ~~$149,320~~$26,000, or ~~72.1%~~9.0%, to ~~$356,440~~$320,000 for the three months ended ~~March 31, 2019,~~June 30, 2021, from ~~$207,120~~$293,000 for the three months ended ~~March 31, 2018. Mortgage backed~~June 30, 2020. Mortgage-backed securities increased by ~~$33,644~~$38,000, or ~~105.0%~~52.2%, to ~~$65,683~~$112,000 for the three months ended ~~March 31, 2019,~~June 30, 2021, from ~~$32,039~~$74,000 for the three months ended ~~March 31, 2018.~~June 30, 2020. The average yield on total securities ~~increased 81~~decreased 8 basis points, to ~~3.24%~~2.64% for the three months ended ~~March 31, 2019~~June 30, 2021, from ~~2.43%~~2.72% for the same period in ~~2018, as increased~~2020. As a decrease in market rates resulted in ~~higher~~stagnant yielding ~~investments. The~~investments, investment income increased accordingly due to the average balance of investment securities ~~increased~~increasing by ~~$12.4~~$17.6 million, to ~~$68.6~~$90.8 million for the three months ended ~~March 31, 2019,~~June 30, 2021, from ~~$56.1~~$73.2 million for the three months ended ~~March 31, 2018.~~June 30, 2020

Interest Expense

Total interest expense ~~increased $2.5~~decreased $1.3 million, to ~~$4.5~~$2.9 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$2.0~~$4.2 million for the three months ended ~~March 31, 2018,~~June 30, 2020, primarily due to a ~~$1.8~~$1.3 million ~~increase~~decrease in interest expense on time deposits and a ~~$499,000~~$254,000 decrease in interest expense on money market deposits. These decreases were offset by an increase of $326,000 increase in interest expense ~~money market deposits.~~primarily due to newly issued subordinated debt for the three months ended June 30, 2021 over the three months ended June 30, 2020.

Interest expense on deposits ~~increased $2.4~~decreased $1.6 million, to ~~$4.0~~$2.3 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$1.6~~$3.9 million for the three months ended ~~March 31, 2018~~June 30, 2020 primarily as a result of a decrease in average interest-bearing deposit yields. The decrease of expenses due to average yields was offset by an increase in average ~~interest bearing deposits~~deposit balances of ~~$224.5~~$69.5 million to ~~$727.2 million~~$1.0 billion during the three months ended ~~March 31, 2019~~June 30, 2021 as compared to ~~$502.6~~$932.1 million for the three months ended ~~March 31, 2018.~~June 30, 2020. The increase in the average balance of interest-bearing deposits was primarily as a result of a ~~$160.7~~$51.2 million increase in the average balance of ~~our time~~interest-bearing demand deposit accounts ~~and~~offset by a ~~$47.6~~$10.0 million ~~increase~~decrease in the average balance of ~~our money market~~time deposits. The large increase in ~~the average balance of our time~~interest-bearing demand deposits was primarily ~~a result of retail growth~~driven by accounts opened and ~~brokered deposits obtained through a~~funded in connection with PPP loans as well as our business bankers executing on our deposit ~~placement network on a reciprocal basis, such that amounts are under the standard FDIC insurance maximum of $250,000 making the deposits eligible for FDIC insurance.~~gathering strategy. The average cost of deposits was ~~221~~93 basis points for the three months ended ~~March 31, 2019~~June 30, 2021, compared to ~~124~~168 basis points for the three months ended ~~March 31, 2018.~~June 30, 2020. The average rate paid on money market deposits ~~increased 102~~decreased 36 basis points to ~~2.12%~~0.27% for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~1.10%~~0.63% for the three months ended ~~March 31, 2018.~~June 30, 2020. The ~~increase in the balance of our certificates of~~average rate paid on interest-bearing demand deposits ~~of $160.7 million from $307.3 million~~decreased 50 basis points to 0.32% for the three months ended ~~March 31, 2018 to $468.0 million~~June 30, 2021 from 0.82% for the three months ended March 31, 2019 was primarily the result of the Company’s retail growth strategies. The Bank’s core time deposits increased the average balance of certificate of deposits by $142.4 million for the three months ended March 31, 2019.June 30, 2020. The average cost of certificates of deposit ~~increased~~decreased by ~~109~~96 basis points to ~~2.51%~~1.48% for the three months ended ~~March 31, 2019~~June 30, 2021 as compared to ~~1.42%~~2.44% for the three months ended ~~March 31, 2018.~~June 30, 2020. The ~~increase~~decrease in the average cost of ~~certificates of deposit~~interest-bearing demand deposits for the three months ended ~~March 31, 2019~~June 30, 2021, in addition to a low-rate environment, was the result of ~~increases in short term market interest rates~~our continued effort to attract and ~~additional higher interest brokered~~retain low-cost deposits and reducing our reliance on wholesale deposits as compared to the three months ended ~~March 31, 2018.~~June 30, 2020.

Interest expense on advances from the Federal Home Loan Bank ~~increased $46,000~~decreased $44,000 to ~~$218,000~~$0 for the three months ended ~~March 31, 2019~~June 30, 2021, from ~~$172,000~~$44,000 for the three months ended ~~March 31, 2018~~June 30, 2020 as a result of ~~an increase in the average rate~~no outstanding advances on the Federal Home Loan Bank advances ~~which increased to 2.56%~~ for the three months ended ~~March 31, 2019~~June 30, 2021 from 1.56% for the three months ended March 31, 2018 due to increases in advance rates. Offsetting this increase was a decrease in the average balance of the Federal Home Loan Bank advances. The average balance of the Federal Home Loan Bank advances decreased $9.9 million to $34.1$10.0 million for the three months ended ~~March 31, 2019 from $44.0~~June 30, 2020. The average balance of subordinated debt increased $24.9 million for the three months ended ~~March 31, 2018 primarily~~June 30, 2021, due to an additional $30 million in new low cost subordinated debt issued in the ~~repayment of advances.~~three months ended June 30, 2021.

Net Interest Income

Net interest income increased approximately ~~$2.6~~$2.3 million, or ~~38.0%~~21.1%, to ~~$9.3~~$13.0 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$6.8~~$10.7 million for the three months ended ~~March 31, 2018 as a result~~June 30, 2020 because of our net interest-earning assets increasing ~~$88.6~~$141.8 million to ~~$293.7~~$597.5 million for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~$205.1~~$455.7 million for the three months ended ~~March 31, 2018. Our~~June 30, 2020. The interest rate spread ~~decreased~~increased by 2830 basis points to ~~2.87%~~2.78% for the three months ended ~~March 31, 2019~~June 30, 2021 from ~~3.15%~~2.48% for the three months ended ~~March 31, 2018. Our~~June 30, 2020. The net interest margin ~~decreased~~increased by 313 basis points from ~~3.53%~~3.05% for the three months ended ~~March 31, 2018~~June 30, 2020 to ~~3.50%~~3.18% for the three months ended ~~March 31, 2019.~~June 30, 2021. The net interest margin, excluding PPP loans for the three months ended June 30, 2021, was 3.10%, a increase of 2 basis points from the same period in 2020. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin excluding PPP income, which is a non-GAAP financial measure, to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.


	For the Three Months Ended March 31,																For the Three Months Ended June 30,
	2019								2018								2021								2020
	Average Balance			Interest Income/ Expense		Yield/ Cost (5)			Average Balance			Interest Income/ Expense		Yield/ Cost (5)			Average Balance			Interest Income/ Expense		Yield/ Cost (5)			Average Balance			Interest Income/ Expense		Yield/ Cost (5)
	(Dollars in thousands)																(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	936,401		$	12,916		5.52	%	$	681,232		$	8,316		4.88	%	$	1,302,722		$	15,257		4.70	%	$	1,213,250		$	14,399		4.76	%
Investment securities		68,550			556		3.24	%		56,111			341		2.43	%		90,820			597		2.64	%		73,186			496		2.72	%
Federal funds and interest-bearing deposits		64,944			345		2.12	%		30,117			100		1.33	%		245,257			20		0.03	%		126,164			9		0.03	%

Total interest-earning assets		1,069,895		$	13,817		5.17	%		767,460		$	8,757		4.56	%		1,638,799		$	15,874		3.89	%		1,412,600		$	14,904		4.23	%
Non-interest-earning assets		36,788								31,711								69,950								69,741

Total assets	$	1,106,683							$	799,171							$	1,708,749							$	1,482,341

Interest-bearing liabilities:
Interest-bearing demand deposits	$	56,701		$	245		1.73	%	$	51,240		$	164		1.28	%	$	68,714		$	55		0.32	%	$	17,507		$	36		0.82	%
Money market deposits		143,825			763		2.12	%		96,256			264		1.10	%		322,332			220		0.27	%		303,118			474		0.63	%
Savings and NOW deposits		58,616			73		0.50	%		47,807			46		0.38	%		71,747			47		0.26	%		62,733			50		0.32	%
Time deposits		468,009			2,931		2.51	%		307,343			1,091		1.42	%		538,766			1,994		1.48	%		548,728			3,333		2.44	%

Total interest-bearing deposits		727,151			4,012		2.21	%		502,646			1,565		1.24	%		1,001,559			2,316		0.93	%		932,086			3,893		1.68	%
Federal funds purchased		139			1		2.88	%		920			7		3.04	%		1			—		—			1			—		—
Federal Home Loan Bank advances		34,111			218		2.56	%		44,026			172		1.56	%		—			—		—			10,000			44		1.76	%
Subordinated debt		14,780			238		6.44	%		14,752			238		6.45	%		39,716			567		5.73	%		14,816			241		6.52	%

Total interest-bearing liabilities		776,181		$	4,469		2.30	%		562,344		$	1,982		1.41	%		1,041,276		$	2,883		1.11	%		956,903		$	4,178		1.75	%
Non-interest-bearing liabilities:
Demand deposits and other liabilities		207,180								166,988								491,857								383,480

Total liabilities		983,361								729,332								1,533,133								1,340,383
Stockholders’ Equity		123,322								69,839

Total liabilities and Stockholders’ equity	$	1,106,683							$	799,171

Stockholders’ equity																		175,616								141,958
Total liabilities and stockholders’ equity																	$	1,708,749							$	1,482,341
Net interest income				$	9,348							$	6,775							$	12,991							$	10,726

Interest rate spread (2)							2.87	%							3.15	%							2.78	%							2.48	%

Net interest-earning assets (3)	$	293,714							$	205,116							$	597,523							$	455,697

Net interest margin (4)							3.50	%							3.53	%							3.18	%							3.05	%

Net interest margin, excluding PPP loans																							3.10	%							3.08	%
Average interest-earning assets to average interest-bearing liabilities		137.84	%							136.48	%							157.38	%							147.62	%

(1)	Includes loans classified asnon-accrual

(2)	Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)	Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)	Net interest margin represents net interest income divided by total average interest-earning assets.

(5)	Annualized.

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	For the Three Months Ended
	June 30, 2021 and 2020
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	1,976		$	(1,118	)	$	858
Investment securities		195			(94	)		101
Federal funds and interest-bearing deposits		11			-			11
Total interest-earning assets		2,182			(1,212	)		970
Interest-bearing liabilities:
Interest-bearing demand deposits		161			(142	)		19
Money market deposit accounts		192			(446	)		(254	)
Savings and NOW accounts		32			(35	)		(3	)
Time deposits		(59	)		(1,280	)		(1,339	)
Total deposits		326			(1,903	)		(1,577	)
Federal Home Loan Bank advances		(22	)		(22	)		(44	)
Subordinated debt		522			(196	)		326
Total interest-bearing liabilities		826			(2,121	)		(1,295	)
Change in net interest income	$	1,356		$	909		$	2,265

Provision for Loan Losses

Management believes that the provision recorded for the period ended June 30, 2021 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, and credit quality. In performing our assessment of the allowance for loan losses as of June 30, 2021, management compiled and analysed extensive amounts of information, including additional relief requested and conversations with borrowers, to make an objective estimate of potential losses caused by the COVID-19 pandemic. Using that information, we stressed the portfolio through the lens of an escalated economic shutdown that is above and beyond a normal operating environment. Because this stressed economy is the result of a health pandemic, there is uncertainty about the duration COVID-19 will have on our borrowers. In response to this uncertainty, we created and incorporated a COVID-19 qualitative factor within our allowance to isolate and monitor going forward the heightened stresses our borrowers are facing. We will continuously review the loan portfolio to determine the depth and breadth of potential loan losses associated with the pandemic. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the loan portfolio that may arise from this crisis, additional provision expenses may be required. The Board and management agreed to continue to work expeditiously with borrowers to analyze the loan portfolio with a goal of timely identifying, provisioning, and reporting probable losses that could occur throughout the course of the pandemic.

The provision for loan losses, which is an operating expense, is maintained to ensure that the allowance for loan losses is maintained at levels we consider necessary and appropriate to absorb both probable and reasonably estimated credit losses at a balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed monthly and provisions are made for loan losses as required in order to maintain the allowance.

Provision for loan losses decreased by $7.7 million to a recovery of loan loss provision of $2.1 million for the three months ended June 30, 2021 from provision expense of $5.6 million for the three months ended June 30, 2020 primarily as a result of how strong the loan portfolio has endured the pandemic. Management believes the special provision expenses added to the balance sheet as of June 30, 2020 are no longer needed at this time, given the credit metrics we have seen in the portfolio. The recovery of provision expense was offset by provision expense needed for additional loan growth. The increase in loan originations, which totaled approximately $8.2 million for the three months ended June 30, 2020 compared to loan originations, of $49.0 million for the three months ended June 30, 2021, excluding loans originated through the PPP. The Company has not provisioned any allowance for loan losses for PPP loans as they are guaranteed by SBA. Non-performing loans decreased $1.3 million from $1.3 million at June 30, 2020 to $0 as of June 30, 2021. During the three months ended June 30, 2021, special mention loans decreased $13.7 million for a balance of $16.4 million, compared to the same period in 2020. Substandard loans increased $20.6 million as of June 30, 2021 compared to June 30, 2020. Of the substandard loans as of June 30, 2021, 87.9% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the three months ended June 30, 2021, there were $4,000 of charge-offs incurred, and recoveries of $2,000 were received.

Non-Interest Income

Non-interest income increased $237,000, or 18.0%, to $1.6 million for the three months ended June 30, 2021 from $1.3 million for the three months ended June 30, 2020. The increase in non-interest income was primarily due to increases in deposit account service fees of $188,000 and $322,000 in other fee income for the three months ended June 30, 2021. The deposit account services fees increased primarily due to more customer activity in the three months ended June 30, 2021 than the same period in 2020. These increases were offset by a decrease in fee income related to loan swaps of $423,000. The Company continues to focus on increasing fee income through loan swaps strategically.

Non-Interest Expense

Non-interest expense increased $513,000, or 7.0%, to $7.9 million for the three months ended June 30, 2021 from $7.4 million for the three months ended June 30, 2020 primarily because of increases in salary and employee benefits of $400,000 and advertising and marketing expenses of $211,000. Salaries and employee benefits expense increased by $400,000 to $4.7 million for the three months ended June 30, 2021 from $4.3 million for the three months ended June 30, 2020. Advertising and marketing expenses increased $211,000, or 110.5%, to $402,000 for the three months ended June 30, 2021 from $191,000 for the three months ended June 30, 2020 due to new strategic partnerships and timing of initiatives. Franchise taxes increased approximately $44,000 to $386,000 for the three months ended June 30, 2021 from $342,000 for the three months ended June 30, 2020 because of the increase in the Company’s capital as of June 30, 2021 compared to the balance sheet as of June 30, 2020. FDIC insurance premiums decreased approximately $70,000 to $360,000 for the three months ended June 30, 2021 from $430,000 for the three months ended June 30, 2020.

Income Tax Expense

Income tax expense increased $1.9 million, or 733.1%, to a tax expense of $1.6 million for the three months ended June 30, 2021 from a tax benefit of $257,000 for the three months ended June 30, 2020. The increase in federal income tax expense for the three months ended June 30, 2021 compared to the same period a year ago was driven by the increase in income before income taxes of $9.6 million, to income before income tax of $8.8 million as of June 30, 2021 compared to a loss before income tax benefit of $891,000 for the same period in the prior year. As a result of expanding into the District of Columbia, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $90,000 for the three months ended June 30, 2021. For the three months ended June 30, 2021, the Company had an effective tax expense rate of 18.6%, compared to effective tax benefit rate of 28.8% for the three months ended June 30, 2020.

Comparison of Statements of Income for the Six Months Ended June 30, 2021 and 2020

General

Net income increased $9.7 million, to $12.6 million for the six months ended June 30, 2021, from $2.8 million for the six months ended June 30, 2020. The increase in net income for the six months ended June 30, 2021 was primarily due to a decrease in provision for loan losses in response to the strong credit profile through the pandemic. In addition to the decrease in provision for loan losses, the Bank saw an increase in net interest income of $5.4 million, and an increase in non-interest income of $269,000.

Interest Income

Total interest income increased $2.2 million, or 7.3%, to $32.2 million for the six months ended June 30, 2021, from $30.0 million for the six months ended June 30, 2020. The increase was primarily the result of an increase in interest and fees on loans of $2.4 million, an increase in interest on investment securities of $130,000 and offset by a decrease on interest on federal funds sold and interest-earning deposits of $369,000. Total average interest-earning assets increased $280.3 million, to $1.6 billion for the six months ended June 30, 2021, from $1.3 billion for the same period in 2020 primarily as a result of an increase in the average balance of loans of $175.1 million, a $16.8 million increase in the average balance of investment securities and an increase in the average balance of federal funds sold and interest-earning deposits with banks of $88.4 million. The average yield on our interest-earning assets decreased 51 basis points to 4.01% for the six months ended June 30, 2021 as compared to 4.52% for the six months ended June 30, 2020 primarily as a result of a lower average yield on the loan portfolio.

Interest and fees on loans increased $2.4 million to $31.0 million for the six months ended June 30, 2021 from $28.6 million for the same period in 2020. This increase was primarily due to an increase in average loans outstanding of $175.1 million, which increased to $1.3 billion as of June 30, 2021 from $1.1 billion as of June 30, 2020. During the six months ended June 30, 2020, the Federal Reserve lowered the federal funds interest rate to a range of 0 - 25 basis points, which decreased yields on the Bank’s asset sensitive balance sheet. The average yield on loans decreased 30 basis points, to 4.78% for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Interest income on federal funds sold and interest-earning deposits decreased by $369,000 to $35,000 for the six months ended June 30, 2021, from $404,000 for the six months ended June 30, 2020. The decrease was primarily due to a significant decrease average yield and despite an increase in average balance on these deposits. The average yield decreased 59 basis points, to 0.03% for the six months ended June 30, 2021 from 0.62% for the six months ended June 30, 2020. The average balance of interest-earning deposits and federal funds sold increased $88.4 million to $219.6 million for the six months ended June 30, 2021 from $131.2 million for the six months ended June 30, 2020.

Interest on investment securities increased by $130,000 to $1.1 million for the six months ended June 30, 2021 from $997,000 for the six months ended June 30, 2020. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $55,000, or 9.4%, to $647,000 for the six months ended June 30, 2021, from $591,000 for the six months ended June 30, 2020. Mortgage backed securities increased by $19,000, or 12.8%, to $170,000 for the six months ended June 30, 2021, from $151,000 for the six months ended June 30, 2020. The average yield on securities decreased 21 basis points to 2.52% for the six months ended June 30, 2021 from 2.73% for the same period in 2020, as decreased market rates resulted in lower yielding investments. The average balance of investment securities increased by $16.8 million to $90.3 million for the six months ended June 30, 2021, from $73.5 million for the six months ended June 30, 2020.

Interest Expense

Total interest expense decreased $3.3 million to $5.7 million for the six months ended June 30, 2021 from $9.0 million for the six months ended June 30, 2020, primarily due to a $2.7 million decrease in interest expense on time deposits and a $755,000 decrease in interest expense on money market deposits. These decreases were offset by an increase in interest expense on subordinated of $323,000.

Interest expense on deposits decreased $3.5 million, to $4.9 million for the six months ended June 30, 2021 from $8.4 million for the six months ended June 30, 2020 primarily as a result of a decrease in average interest-bearing deposit yields despite an increase in average interest bearing balances of $103.5 million to $1.0 billion during the six months ended June 30, 2021 as compared to $912.8 million for the six months ended June 30, 2020. The increase in the average balance of interest-bearing deposits was primarily as a result of a $100.8 million increase in the average balance of our money market deposit accounts and a $43.0 million increase in the average balance of our interest-bearing demand deposits. The large increase in money market and demand deposits was primarily driven by accounts opened and funded in connection with PPP loans. The decrease in the average balance of our time deposits was primarily a result of a focused effort to replace wholesale deposits with lower cost core deposits. The average cost of deposits was 98 basis points for the six months ended June 30, 2021 compared to 186 basis points for the six months ended June 30, 2020. The average rate paid on money market deposits decreased 68 basis points to 0.27% for the six months ended June 30, 2021 from 0.95% for the six months ended June 30, 2020. The decrease in the average balance of our certificates of deposits of $48.5 million from $557.9 million for the six months ended June 30, 2020 to $509.5 million for the six months ended June 30, 2021 was primarily the result of the Company’s strategy to replace wholesale deposits with core deposits. The average cost of certificates of deposit decreased by 81 basis points to 1.68% for the six months ended June 30, 2021 as compared to 2.49% for the six months ended June 30, 2020. The increase in the average balance of our interest-bearing demand deposits of $43.0 million from $25.5 million for the six months ended June 30, 2020 to $68.6 million for the six months ended June 30, 2021, was primarily driven by the Bank’s effort to increase our low cost deposits and reduce our reliance on wholesale deposits.

Interest expense on advances from the Federal Home Loan Bank decreased $94,000 to $0 for the six months ended June 30, 2021, from $94,000 for the six months ended June 30, 2020, as a result of an decrease in the average balance of the Federal Home Loan Bank advances of $10.2 million to $0 for the six months ended June 30, 2021 from $10.2 million for the six months ended June 30, 2020.

Net Interest Income

Net interest income increased approximately $5.4 million, or 9.3%, to $26.5 million for the six months ended June 30, 2021 from $21.0 million for the six months ended June 30, 2020 as a result of our net interest-earning assets increasing $174.5 million to $577.4 million for the six months ended June 30, 2021 from $403.0 million for the six months ended June 30, 2020. Our interest rate spread increased by 31 basis points to 2.90% for the six months ended June 30, 2021 from 2.59% for the six months ended June 30, 2020. Our net interest margin increased by 13 basis points from 3.16% for the six months ended June 30, 2020 to 3.29% for the six months ended June 30, 2021.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

	For the Six Months Ended June 30,
	2021								2020
	Average Balance			Interest Income/ Expense		Yield/ Cost (5)			Average Balance			Interest Income/ Expense		Yield/ Cost (5)
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	1,311,085		$	31,049		4.78	%	$	1,135,995		$	28,619		5.08	%
Investment securities		90,347			1,127		2.52	%		73,512			997		2.73	%
Federal funds and interest-bearing deposits		219,648			35		0.03	%		131,239			404		0.62	%
Total interest-earning assets		1,621,080		$	32,211		4.01	%		1,340,746		$	30,020		4.52	%
Non-interest-earning assets		70,337								64,550
Total assets	$	1,691,417							$	1,405,296
Interest-bearing liabilities:
Interest-bearing demand deposits	$	68,556		$	110		0.32	%	$	25,532		$	153		1.21	%
Money market deposits		367,424			497		0.27	%		266,638			1,252		0.95	%
Savings and NOW deposits		70,875			89		0.25	%		62,716			114		0.37	%
Time deposits		509,465			4,244		1.68	%		557,921			6,900		2.49	%
Total interest-bearing deposits		1,016,320			4,940		0.98	%		912,807			8,419		1.86	%
Federal funds purchased		—			—		—			1			—		—
Federal Home Loan Bank advances		—			—		0.00	%		10,165			94		1.86	%
Subordinated debt		27,346			805		5.94	%		14,813			482		6.56	%
Total interest-bearing liabilities		1,043,666		$	5,745		1.11	%		937,786		$	8,995		1.93	%
Non-interest-bearing liabilities:
Demand deposits and other liabilities		474,566								326,949
Total liabilities		1,518,232								1,264,735
Stockholders’ Equity		173,185								140,561
Total liabilities and Stockholders’ equity	$	1,691,417							$	1,405,296
Net interest income				$	26,466							$	21,025
Interest rate spread (2)							2.90	%							2.59	%
Net interest-earning assets (3)	$	577,414							$	402,960
Net interest margin (4)							3.29	%							3.16	%
Net interest margin, excluding PPP loans (5)							3.15	%							3.18	%
Average interest-earning assets to average interest-bearing liabilities		155.33	%							142.97	%

(1)	Includes loans classified as non-accrual

(2)	Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)	Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)	Net interest margin represents net interest income divided by total average interest-earning assets.

(5)	Annualized.

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns.

	For the Six Months Ended
	June 30, 2021 and 2020
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	6,685		$	(4,255	)	$	2,430
Investment securities		328			(198	)		130
Federal funds and interest-bearing deposits		489			(858	)		(369	)
Total interest-earning assets		7,502			(5,311	)		2,191
Interest-bearing liabilities:
Interest-bearing demand deposits		286			(329	)		(43	)
Money market deposit accounts		992			(1,747	)		(755	)
Savings and NOW accounts		36			(61	)		(25	)
Time deposits		(560	)		(2,096	)		(2,656	)
Total deposits		754			(4,233	)		(3,479	)
Federal Home Loan Bank advances		(47	)		(47	)		(94	)
Subordinated debt		456			(133	)		323
Total interest-bearing liabilities		1,163			(4,413	)		(3,250	)
Change in net interest income	$	6,339		$	(898	)	$	5,441

   For the Three Months Ended
March 31, 2019 vs 2018
   Increase (Decrease) Due to    Total
Increase
(Decrease)
   Volume    Rate
   (In thousands)
Interest-earning assets:

Loans
   $ 3,407    $ 1,193    $ 4,600
Investment securities
   86    129    215
Federal funds and interest-bearing deposits
   162    83    245






Total interest-earning assets
   3,655    1,405    5,060






Interest-bearing liabilities:

Interest-bearing demand deposits
   19    62    81
Money market deposit accounts
   173    326    499
Savings and NOW accounts
   11    16    27
Time deposits
   745    1,095    1,840






Total deposits
   948    1,499    2,447
Federal funds purchased
   (6 )    —      (6 )
Federal Home Loan Bank advances
   (217 )    263    46
Subordinated debt
   —      —      —






Total interest-bearing liabilities
   725    1,762    2,487






Change in net interest income
   $ 2,930    $ (357 )    $ 2,573

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of~~non-performing~~ ~~loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available or economic conditions change.~~

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a monthly basis and provisions are made for loan losses as required in order to maintain the allowance.

Provision for loan losses decreased by ~~$310,000~~$7.7 million, to ~~$325,000~~a recovery of loan loss provision of $1.8 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021, from ~~$635,000~~loan loss provision expense of $5.9 million for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 primarily as a direct result of ~~reduction~~additional provisions added due to uncertainty around the COVID-19 pandemic in 2020. In addition, loan originations ~~which totaled approximately $48.9~~decreased $28.2 million, from $126.9 million for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 compared to loan originations of ~~$26.9~~$98.7 million, excluding PPP loans, for the ~~three~~six months ended ~~March 31, 2019.~~June 30, 2021. Non-performing loans ~~remained relatively flat with only a slight increase of $33,000, or 1.71%~~decreased $1.3 million, from ~~$1.9~~$1.3 million at ~~March 31, 2018~~June 30, 2020 to ~~$2.0~~$0 million as of ~~March 31, 2019, as a result of a temporary increase in unsecured credit card debt.~~June 30, 2021. During the ~~three~~six months ended March 31, 2019, substandard loans increased $4.5 million, however, the increase was isolated to two relationships. Management believes there is no risk of loss on either relationship and the downgrades were only cautionary due to temporary conditions. Neither of these borrowing relationships met the definition of impaired at this time. During the three months ended March 31, 2019,June 30, 2021, there were no$4,000 in total charge-offs and recoveries of ~~$33,200~~$20,000 were received. During the ~~three~~six months ended ~~March 31, 2018,~~June 30, 2020, total charge-offs of ~~$10,200~~$1.8 million were recorded and recoveries received totaled ~~$3,700.~~

$16,000.

Non-Interest Income

Non-interest income increased ~~$418,000,~~$269,000, or ~~82.3%~~9.8%, to ~~$926,000~~$3.0 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$508,000~~$2.7 million for the ~~three~~six months ended ~~March 31, 2018.~~June 30, 2020. The increase innon-interest income was primarily due to aan increase in ~~loan fees from loan interest rate swaps~~net gains on sold loans of ~~$290,000~~$474,000 and $380,000 in other fee income for the ~~three~~six months ended ~~March 31, 2019. The Bank closed its first interest rate swap in~~June 30, 2021. Of the ~~fourth quarter~~$474,000 gains on sold loans, $130,000 was related to the sale of ~~2018 and expects continued use~~SBA guaranteed portions of ~~this product throughout 2019.~~loans. In addition, deposit account service fees increased ~~$157,000~~$240,000 to ~~$370,000~~$1.2 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$213,000~~$920,000 for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 primarily as a result of an increased customer deposit ~~portfolio.~~portfolio and activity. The increase innon-interest income was partially offset by a decrease of ~~$28,000 other~~$826,000 in loan swap fee income for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 compared to the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020.

~~Non-Interest~~ ~~Expense~~

Non-Interest Expense

Non-interestexpense increased ~~$1.4~~$1.2 million or ~~31.3%~~8.1% to ~~$6.0~~$15.7 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021, from ~~$4.6~~$14.5 million for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020, primarily as a result of increases in salary and employee benefits of ~~1.1 million~~$734,000 and ~~other operating~~advertising and marketing expenses of ~~$225,000.~~$230,000. Salaries and employee benefits expense increased by ~~$1.1 million~~$734,000 to ~~$3.9~~$9.4 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$2.7~~$8.7 million for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 primarily as a result of adding ~~thirteen~~eight employees and the ~~increases in additional health insurance premium expense~~related salary and benefit expenses for these additional employees. ~~Other operating~~Advertising and marketing expenses increased ~~$225,000,~~$230,000, or ~~27.2%~~51.5%, to ~~$1.1 million~~$677,000 for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$826,000~~$447,000 for the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 due to ~~increases in~~new strategic partnerships and timing of marketing initiatives. Outside service and professional ~~and consulting~~ fees ~~for strategic planning and growth and fees related to deposits obtained through a deposit placement network on a reciprocal basis. Franchise tax~~ increased approximately ~~$136,000~~$135,000 to ~~$307,000~~$616,000 for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$171,000~~$481,000 for the ~~three~~six months ended ~~March 31, 2018 as a result of~~June 30, 2020. The increase in non-interest expense was offset by decreases in administrative expenses which decreased approximately $50,000 to $291,000 for the ~~growth~~six months ended June 30, 2021, from $341,000 for the ~~Bank has experienced on the balance sheet as of March 31, 2019 compared to the balance sheet as of March 31, 2018.~~six months ended June 30, 2020

Income Tax Expense

Income tax expense increased ~~$309,000,~~$2.5 million, or ~~80.3%~~501.0%, to ~~$694,000~~$3.0 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 from ~~$385,000~~$494,000 for the ~~three~~six months ended ~~March 31, 2018.~~June 30, 2020. The increase in federal income tax expense for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 compared to the same period a year ago is driven by the increase in income before income taxes of ~~$3.9~~$12.2 million, or ~~90.3% as of March 31, 2019~~366.8%, to $15.5 million for the six months ended June 30, 2021 compared to ~~$2.1~~$3.3 million for the same period in the prior year. As a result of expanding into the District of Columbia, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $150,000 for the six months ended June 30, 2021. For the ~~three~~six months ended ~~March 31, 2019,~~June 30, 2021, the Bank had an effective federal tax rate of ~~17.6%~~19.1%, compared to effective federal tax rate of ~~18.6%~~14.8% for the ~~three~~six months ended ~~March~~June 30, 2020.

Comparison of Statements of Financial Condition at June 30, 2021 and at December 31, ~~2018.~~2020

~~Non-Performing~~Total Assets ~~We definenon-performing~~

Total assets increased $64.5 million, or 3.9%, to $1.7 billion at June 30, 2021 from $1.6 billion at December 31, 2020. The increase was primarily the result of increases in the loan portfolio of $26.1 million, $10.4 million in bank owned life insurance and $68.8 million in cash equivalents. These increases were offset by a decrease of $57.0 million in loans held for sale as of June 30, 2021.

Investment Securities

Investment securities increased $22.0 million, or 12.9%, from $169.9 million at December 31, 2020 to $191.9 million at June 30, 2021. The increase was primarily in the available-for-sale portfolio, particularly in U.S treasury securities. At June 30, 2021, our held-to-maturity portion of the securities portfolio, at amortized cost, was $26.1 million, and our available-for-sale portion of the securities portfolio, at fair value, was $165.8 million compared to our held-to-maturity portion of the securities portfolio of $22.5 million and our available-for-sale portion of the securities portfolio of $147.4 million at December 31, 2020.

Net Loans

Net loans ~~that are eithernon-accruing~~increased $26.1 million, or ~~accruing whose payments are 90 days or more past due,non-accruing~~ ~~troubled debt restructurings and consumer debt whose payments are 120 days or more pastdue. Non-performing~~ ~~assets, includingnon-performing~~ ~~loans and other~~2.1%, to $1.26 billion at June 30, 2021 from $1.23 billion at December 31, 2020. Residential real estate ~~owned, totaled $1.9~~loans increased $6.9 million, or ~~0.17% of total assets,~~3.8%, to $190.4 million at ~~March 31, 2019. There was onenon-accruing~~ ~~troubled debt restructurings~~June 30, 2021 from $183.5 million at ~~March 31, 2019 and~~ December 31, ~~2018.~~ 2020. Commercial real estate loans increased by $36.6 million from $466.9 million at December 31, 2020 to $503.5 million at June 30, 2021. Commercial and industrial loans decreased by $11.6 million from $230.0 million at December 31, 2020 to $218.4 million at June 30, 2021. Paycheck Protection Program loans comprised $124.6 million of this portfolio as of June 30, 2021. Commercial and industrial loans, excluding PPP loans, decreased by $1.0 million from December 31, 2020 to June 30, 2021. Construction loans increased $3.6 million to $328.5 million at June 30, 2021 from $324.9 million at December 31, 2020. Consumer loans decreased by $10.4 million from $44.1 million at December 31, 2020 to $33.6 million at June 30, 2021. The $10.4 million decrease in consumer loans is a result of management’s decision to let indirect lending portfolio amortize off the balance sheet.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:

	For the Six Months Ended June 30,			For the Year Ended December 31,
	2021			2020
	(Dollars in thousands)
Balance at beginning of year	$	12,877		$	9,584
Charge-offs:
Commercial real estate		—			(1	)
Commercial and industrial		—			(1,792	)
Consumer		(4	)		(60	)
Total charge-offs		(4	)		(1,853	)
Recoveries:
Residential real estate		—			2
Commercial and industrial		7			1,526
Consumer		13			8
Total recoveries		20			1,536
Net (charge-offs) recoveries		16			(317	)
Provision for loan losses		(1,760	)		3,610
Balance at end of period	$	11,133		$	12,877
Ratios:
Net charge offs to average loans outstanding		0.00	%		0.03	%
Allowance for loan losses to non-performing loans at end of period	N/A				8,642.28
Allowance for loan losses to gross loans at end of period		0.87	%		1.03	%
Allowance for loan losses to gross loans at end of period, excluding PPP loans		0.97	%		1.16	%

Deposits

Deposits increased $26.7 million, or 1.9% to $1.46 billion at June 30, 2021 from $1.44 billion at December 31, 2020. Our core deposits increased $535.4 million, or 81.8%, to $1.19 billion at June 30, 2021 from $654.2 million at December 31, 2020. The increase in core deposits primarily was driven by accounts generated to service the PPP loans the Bank generated and new deposit growth initiatives. Non-interest bearing demand deposits increased $115.5 million, or 31.2%, to $486.0 million at June 30, 2021 from $370.5 million at December 31, 2020. Certificates of deposit increased $31.5 million, or 6.3%, to $528.2 million at June 30, 2021 from $496.7 million at December 31, 2020. Offsetting these increases was a decrease in money market deposits of $116.3 million, or 27.3%, to $310.3 million at June 30, 2021 from $426.6 million at December 31, 2020. The decrease in money market deposit accounts was primarily the result of executing on a strategy to continue decreasing our cost of funds.

Nonperforming Assets

The following table ~~sets forth the amounts and categories of ournon-performing~~presents information regarding nonperforming assets at the dates ~~indicated. There were four accruing consumer loans past due 120 days or more at March 31, 2019 and no loans accruing past due 90 days or more at December 31, 2018.~~

   At March 31, At December 31,
   2019 2018
   (Dollars in thousands)
Non-accrual loans:

Commercial real estate
   $ 1,939 $ 1,939


Totalnon-accrual loans
   1,939 1,939
Consumer loans accruing past 120 days:

Credit card
   33 —
Totalnon-performing loans
   1,972 1,939
Totalnon-performing assets
   $ 1,972 $ 1,939


Ratios:

Totalnon-performing loans to gross loans receivable
   0.21 % 0.21 %
Totalnon-performing loans to total assets
   0.17 % 0.18 %
Totalnon-performing assets to total assets
   0.17 % 0.18 %

~~Allowance for Loan Losses~~

~~The following table sets forth activity in our allowance for loan losses for the periods indicated.~~indicated:

   For the
Three Months
Ended
March 31,
   2019 2018
   (Dollars in
thousands)
Balance at beginning of year
   $ 8,831 $ 5,705
Charge-offs:

Consumer
   —   (10 )


Total charge-offs
   —   (10 )


Recoveries:

Residential real estate
   30 —
Commercial real estate
   —   1
Commercial and industrial
   —   1
Consumer
   3 2


Total recoveries
   33 4


Net recoveries (charge-offs)
   33 (6 )
Provision for loan losses
   325 635


Balance at end of period
   $ 9,189 $ 6,334


Ratios:

Net recoveries (charge-offs) to average loans outstanding
   0.0 % 0.0 %
Allowance for loan losses tonon-performing loans at end of period
   4.66 3.27
Allowance for loan losses to gross loans at end of period
   0.96 % 0.89 %

	June 30,			December 31,
	2021			2020
	(Dollars in thousands)
Non-accrual loans:
Residential Real Estate	$	—		$	149
Total non-accrual loans		—			149
Total non-performing loans		—			149
Other real estate owned		1,158			1,180
Total non-performing assets	$	1,158		$	1,329
Ratios:
Total non-performing loans to gross loans receivable		0.00	%		0.01	%
Total non-performing loans to total assets		0.00	%		0.01	%
Total non-performing assets to total assets		0.07	%		0.08	%

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities; however, the Company also utilizes ~~brokered~~wholesale deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no Federal Home Loan Bank advances ~~of $30.0 million~~ outstanding ~~with~~and unused borrowing capacity of ~~$275.0~~$435.9 million as of ~~March 31, 2019.~~June 30, 2021. The Company has the ability to borrow up to 100% of our PPP outstanding loan balances as of June 30, 2021, through the Paycheck Protection Program Lending Facility, however we were able to fund these loans through our own capital at this time. Additionally, at ~~March 31, 2019,~~June 30, 2021, we had the ability to borrow ~~$12.0~~up to $104.0 million from ~~the Community Bankers’ Bank, $7.0 million from Pacific Coast Bankers Bank, $15.0 million from CenterState Bank, and $9.0 million from Zions Bank.~~other financial institutions.

The Board of ~~Director~~Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of ~~March 31, 2019.~~June 30, 2021.

We monitor and adjust our investments in liquid assets based upon our assessment ~~of: (1)~~of expected loan demand; ~~(2)~~ expected deposit flows; ~~(3)~~ yields available on interest-earning deposits and securities; and ~~(4)~~ the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits andshort-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At ~~March 31, 2019,~~June 30, 2021, cash and cash equivalents totaled ~~$59.8~~$176.3 million. Securities classified asavailable-for-sale, which provide additional sources of liquidity, totaled ~~$69.3~~$165.8 million at ~~March 31, 2019.~~June 30, 2021.

Our cash flows are ~~comprised of~~provided by and used in three primary ~~classifications: cash flows from~~activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was ~~$4.5~~$49.1 million and ~~$2.9~~$4.6 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 and ~~March 31, 2018,~~June 30, 2020, respectively. There were no sales of securities in the six months ended June 30, 2021, however one held-to maturity security was called while in a gain position of $3,000. There were no sales of securities for the six months ended June 30, 2020. Net cash used in investing activities, which ~~consists~~consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was ~~$39.5~~$31.6 million and ~~$47.2~~$232.8 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 and ~~March 31, 2018,~~June 30, 2020, respectively. ~~During the three months ended March 31, 2019 and 2019, there were no sales ofavailable-for-sale~~ ~~securities.~~ Net cash provided by financing activities was ~~$36.7~~$51.2 million and ~~$33.6~~$239.7 million for the ~~three~~six months ended ~~March 31, 2019~~June 30, 2021 and ~~2018,~~2020, respectively, which consisted primarily of increases in non-interest bearing deposits of ~~$46.7~~$115.5 million and ~~$23.3~~subordinated debt net of issuance costs of $25.6 million offset by ~~net repayments~~decreases in interest-bearing deposits of ~~$10.0~~$88.8 million ~~and an additional funding of $10.3 from the Federal Home Loan Bank~~ for the ~~three~~six months ended ~~March 31, 2019 and 2018, respectively.~~June 30, 2021.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position ~~on a daily basis.~~daily. We anticipate that we ~~will~~ have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of ~~March 31, 2019,~~June 30, 2021, totaled ~~$346.2~~$267.3 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, ~~and~~ Federal Home Loan Bank ~~advances.~~advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on ~~past~~ experience that a significant portion of such deposits will remain with us. We ~~have the ability to~~can attract and retain deposits by adjusting the interest rates offered.

Capital ~~Management~~.Management. MainStreet Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for

calculating risk-weighted assets by assigning balance sheet assets andoff-balance sheet items to broad risk categories. At ~~March 31, 2019,~~June 30, 2021, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

Regulatory Capital

Information presented for ~~March 31, 2019~~June 30, 2021 and December 31, ~~2018,~~2020, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components,risk- weightings and other factors.

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to aphase-in period for certain provisions). Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer ~~is being phased in from 0.0%~~ for ~~2015 to 2.50% by 2019. The capital conservation buffer for 2019~~2021 is 2.50% ~~and 1.875% for 2018.~~. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total capital,

Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of ~~March 31, 2019,~~June 30, 2021, the Company and the Bank ~~meets~~meet all capital adequacy requirements to which iteach is subject.

The ~~Company’s and~~ Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

   Actual Capital Adequacy
Purposes To Be Well Capitalized
Under the Prompt
Corrective Action
Provision
(Dollars in thousands)
   Amount    Ratio Amount    Ratio Amount    Ratio
As of March 31, 2019

Total capital (to risk-weighted assets)

Consolidated
   $ 147,188    13.55 % $ 86,911    > 8.0 % N/A    N/A
Bank
   $ 146,153    13.45 % $ 86,911    > 8.0 % $ 108,639    >10.0 %
Common equity tier 1 capital (to risk-weighted

Consolidated
   $ 124,716    11.48 % $ 48,887    > 4.5 % N/A    N/A
Bank
   $ 136,964    12.61 % $ 48,887    > 4.5 % $ 86,911    > 8.0 %
Tier 1 capital (to risk-weighted assets)

Consolidated
   $ 124,981    11.50 % $ 65,183    > 6.0 % N/A    N/A
Bank
   $ 136,964    12.38 % $ 65,183    > 6.0 % $ 86,911    > 8.0 %
Tier 1 capital (to average assets)

Consolidated
   $ 124,716    11.28 % $ 44,245    > 4.0 % N/A    N/A
Bank
   $ 136,964    12.61 % $ 44,245    > 4.0 % $ 55,307    > 5.0 %
As of December 31, 2018

Total capital (to risk-weighted assets)

Consolidated
   $ 143,728    13.89 % $ 82,807    > 8.0 % N/A    N/A
Bank
   $ 142,360    13.75 % $ 82,807    > 8.0 % $ 103,509    > 10.0 %
Common equity tier 1 capital (to risk-weighted assets)

Consolidated
   $ 121,621    11.75 % $ 46,579    > 4.5 % N/A    N/A
Bank
   $ 133,529    12.90 % $ 46,579    > 4.5 % $ 82,807    > 8.0 %
Tier 1 capital (to risk-weighted assets)

Consolidated
   $ 121,254    11.71 % $ 62,105    > 6.0 % N/A    N/A
Bank
   $ 133,529    12.90 % $ 62,105    > 6.0 % $ 82,807    > 8.0 %
Tier 1 capital (to average assets)

Consolidated
   $ 121,621    11.30 % $ 43,056    > 4.0 % N/A    N/A
Bank
   $ 133,529    12.41 % $ 43,056    > 4.0 % $ 53,820    > 5.0 %

	Actual					Capital Adequacy Purposes			To Be Well Capitalized Under the Prompt Corrective Action Provision
(Dollars in thousands)	Amount		Ratio			Amount		Ratio	Amount		Ratio
As of June 30, 2021
Total capital (to risk-weighted assets)	$	212,423		16.25	%	$	104,592	≥ 8.0%	$	130,740	> 10.0%
Common equity tier 1 capital (to risk-weighted assets)	$	201,290		15.40	%	$	58,833	≥ 4.5%	$	104,592	> 8.0%
Tier 1 capital (to risk-weighted assets)	$	201,290		15.40	%	$	78,444	≥ 6.0%	$	104,592	> 8.0%
Tier 1 capital (to average assets)	$	201,290		11.78	%	$	68,344	≥ 4.0%	$	85,430	> 5.0%
As of December 31, 2020
Total capital (to risk-weighted assets)	$	189,534		14.60	%	$	103,872	≥ 8.0%	$	129,840	≥ 10.0%
Common equity tier 1 capital (to risk-weighted assets)	$	176,657		13.61	%	$	58,428	≥ 4.5%	$	103,872	≥ 8.0%
Tier 1 capital (to risk-weighted assets)	$	176,657		13.61	%	$	77,904	≥ 6.0%	$	103,872	≥ 8.0%
Tier 1 capital (to average assets)	$	176,657		10.78	%	$	65,557	≥ 4.0%	$	81,946	≥ 5.0%

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments.As a financial services provider, we routinely are a party to various financial instruments withoff-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At ~~March 31, 2019,~~June 30, 2021, we had outstanding loan commitments of ~~$292.8~~$275.7 million and outstandingstand-by letters of credit of ~~$712,000.~~$190,000. We anticipate that we will have sufficient funds available to meet our current lending commitments.

Use of Certain Non-GAAP Financial Measures

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures include adjusted net interest income and net interest margin.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.

	For the three months ended June 30,						For the six months ended June 30,
		2021			2020			2021			2020
Net interest margin adjusted
Net interest income (GAAP)	$	12,991		$	10,726		$	26,466		$	21,025
Less: PPP fees recognized		1,180			591			2,821			591
Less: PPP interest income earned		404			338			790			338
Net interest income, excluding PPP income (non-GAAP)		11,407			9,797			22,855			20,096

Average interest earning assets (GAAP)		1,638,799			1,412,600			1,621,080			1,340,746
Less: average PPP loans		161,784			135,247			158,029			67,623
Average interest earning assets, excluding PPP (non-GAAP)		1,477,015			1,277,353			1,463,051			1,273,123
Net interest margin, excluding PPP (non-GAAP)		3.10	%		3.08	%		3.15	%		3.18	%

	As of June 30,
		2021			2020
Allowance for loan losses, adjusted
Allowance for loan losses (GAAP)	$	11,133		$	13,731
Total gross loans (GAAP)		1,274,478			1,280,502
Less: PPP loans		124,578			171,650
Total gross loans, excluding PPP loans (non-GAAP)		1,149,900			1,108,852
Allowance for loan losses to total loans, excluding PPP (non-GAAP)		0.97	%		1.24	%

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies

Item 4 – Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of ~~March 31, 2019.~~June 30, 2021. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules13a-15(f) and15(d)-15(f) under the Exchange Act) occurred during the ~~first~~second fiscal quarter of ~~2019~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting with the Company’s transition to a remote/work from home environment.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At ~~March 31, 2019,~~June 30, 2021, the Company iswas not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.

Item 1A – Risk Factors

Not required for smaller reporting companies. Reference is made to “Risk Factors” in our ~~Registration Statement~~Annual Report on Form ~~10,~~10-K for the year ended December 31, 2020, filed with the SEC on ~~February 15, 2019,~~March 23, 2021. For a discussion of certain risk factors affecting the Company, see our disclosure under “Forward-Looking Statements” and ~~amended on March 22, 2019.~~“COVID-19 Pandemic” is Part I, Item 2 in this Form 10-Q.

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

~~(a) Not applicable~~The Company did not repurchase common shares during the three months ended June 30, 2021.

~~(b) Not applicable~~

~~(c) Not Applicable~~

~~Item 3 – Defaults upon Senior Securities~~

~~Not Applicable~~

~~Item 4 – Mine Safety Disclosures~~

~~Not Applicable~~

~~Item 5 – Other Information~~

~~None~~

Item 6 – Exhibits

31.1
~~31.1~~		Rule13a-14(a) Certification of the Chief Executive Officer *

31.2		Rule13a-14(a) Certification of the Chief Financial Officer *

32.0		Section 1350 Certification *

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

*	~~Filed herewith~~
101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL (included with Exhibit 101)

*	Filed herewith

SIGNATURES

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


			MAINSTREET BANCHSHARES, INC
			(Registrant)

Date: ~~May 15, 2019~~August 12, 2021	By:	~~By:~~	/s/ Jeff W. Dick
			Jeff W. Dick
			Chairman & Chief Executive Officer
			(Principal Executive ~~Officer~~Officer)

Date: ~~May 15, 2019~~August 12, 2021	By:	~~By:~~	/s/ Thomas J. Chmelik
			Thomas J. Chmelik
			Senior Executive Vice President and
			Chief Financial Officer
			(Principal Financial ~~and Accounting~~ Officer)

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