2020 Annual Report

increase in salaries and employee benefits, a $734,000 increase in occupancy and equipment, and a $565,000 increase in professional and consulting fees. The increases were partially offset by a decrease of $180,000 in FDIC Insurance Assessment due to a credit from the FDIC for a portion of premiums previously paid to the DIF that became refundable when the DIF exceeded 1.38% of insured deposits, which occurred during the year ended December 31, 2019. The Company has no remaining credits as of December 31, 2019.

Full-time equivalent employees increased from 140 as of December 31, 2018, to 160 as of December 31, 2019.

The efficiency ratio was 47.4% for the year ended December 31, 2019, a marginal increase over 46.5% for the year ended December 31, 2018. The amortization of tax credit investments elevated the level of operating expenses in both years, and while the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes the impact of the amortization of tax credit investments, increased slightly to 43.3% for the year ended December 31, 2019, compared to 41.7% for the year ended December 31, 2018. The following table presents the major components of noninterest expense for the year ended December 31, 2020, compared to the year ended December 31, 2019, and the year ended December 31, 2019, compared to the year ended December 31, 2018: Noninterest Expense: Salaries and Employee Benefits. . . . . . . . . . . . . . . . . . $ 25,568 $ 22,076 $ 3,492 $ 22,076 $ 18,620 $ 3,456 Occupancy and Equipment . . . . . . . . . . . . . . . . . . . . . 3,258 3,085 173 3,085 2,351 734 FDIC Insurance Assessment . . . . . . . . . . . . . . . . . . . . 788 735 53 735 915 (180) Data Processing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 647 380 647 470 177 Professional and Consulting Fees . . . . . . . . . . . . . . . . 1,966 1,690 276 1,690 1,125 565 Information Technology and Telecommunications . . 1,374 996 378 996 932 64 Marketing and Advertising . . . . . . . . . . . . . . . . . . . . . 788 1,507 (719) 1,507 1,342 165 Intangible Asset Amortization . . . . . . . . . . . . . . . . . . . 191 191 — 191 191 — Amortization of Tax Credit Investments. . . . . . . . . . . 738 3,225 (2,487) 3,225 3,293 (68) FHLB Advance Prepayment Fees . . . . . . . . . . . . . . . . 7,043 — 7,043 — — — Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,646 2,780 (134) 2,780 2,323 457 Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,387 $ 36,932 $ 8,455 $ 36,932 $ 31,562 $ 5,370 The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet growth, particularly occupancy and equipment expenses related to the new corporate headquarters. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent, which is evident in the stable nature of the adjusted efficiency ratio. Income Tax Expense The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. The Company’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income. Year Ended December 31, Year Ended December 31, Increase/ Increase/ (dollars in thousands) 2020 2019 (Decrease) 2019 2018 (Decrease)

2020 Compared to 2019

Income tax expense was $8.5 million for the year ended December 31, 2020, compared to $6.9 million for the year ended December 31, 2019. The effective combined federal and state income tax rate for the year ended

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