MainStreet Bancshares, Inc. 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   Common Stock   Our common stock is traded on the Nasdaq Capital Market under the symbol “MNSB.” At December 31, 2022, the Company had approximately 240 shareholders of record. This total does not reflect shares held in nominee or “street name” accounts through various firms.   Dividends   Holders of our common stock are only entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available for dividends. As the Company is a financial holding company and does not engage directly in business activities of a material nature, its ability to pay dividends on our common stock will depend, in large part, upon the receipt of dividends from the Bank. Any future determination relating to our dividend policy will be made by the Board of Directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, our ability to service debt obligations senior to our common stock, banking regulations, contractual, legal, tax and regulatory restrictions, and limitations on the payment of dividends by the Company to its shareholders or by the Bank, and such other factors as the Board of Directors may deem relevant. During the fiscal year ended December 31, 2022, the Company declared and paid four cash dividends.   Holders of the common stock are subject to priority dividend rights of any holders of preferred stock then outstanding. There were 28,750 shares of preferred stock outstanding at December 31, 2022.   A discussion of applicable regulatory restrictions on dividends by the Company and the Bank is provided in Item 1 (“Business”) under “Supervision, Regulation and Other Factors – Payment of Dividends.”   Securities Authorized For Issuance Under Equity Compensation Plans   The following table provides information concerning securities authorized for issuance under equity compensation plans, the weighted average price of such securities and the number of securities remaining available for future issuance, as of December 31, 2022.   Equity Compensation Plan Category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted- average exercise price of outstanding options, warrants and rights (1)     Number of securities remaining and available for future issuance (2)   Plans approved by shareholders     259,036     $ —       280,607   Plans not approved by shareholders     —       —       —   Total     259,036     $ —       280,607     (1) Restricted stock shares were not included when calculating the weighted-average exercise price. (2) Remaining shares available for issuance include 280,607 shares under the 2019 Equity Incentive Plan (“2019 Plan”). Shares remaining to be issued subsequent to December 31, 2022 under the 2019 Plan can be issued either as a restricted stock grant or upon exercise of stock options.   Unregistered Sales and Issuer Repurchases of Common Stock   Unregistered Sales of Common Stock   Set forth below is information concerning sales of common stock by the Company during the past 3 years that were not registered under the Securities Act.     30     In 2019, the Board of Directors of the Bank and the Bank’s shareholders approved the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other selected employees and directors with additional incentives to promote growth and performance. The terms and conditions of the 2019 Plan were subsequently converted into and deemed to be the terms and conditions of a substantially identical Company incentive compensation plan. To date, a total of 369,393 shares of restricted common stock have been awarded under the 2019 Plan. During 2022, 101,876 shares of restricted common stock vested from shares issued under both the 2019 Plan and the Bank's 2016 Equity Incentive Plan ("2016 Plan"). See Note 18 of Notes to Consolidated Financial Statements. In August 2019, the Company registered with the SEC, on Form S-8, the shares of common stock that would then be issuable under the 2019 Plan. As a result of the stockholders’ approval of the 2019 Plan, no additional awards were made under the 2016 Plan. All awards that were then outstanding under the 2016 Plan remained outstanding in accordance with their terms.   Repurchases of Common Stock   On October 22, 2020, the Company announced that the Board of Directors had authorized a plan to repurchase up to $17.0 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The new stock repurchase program replaces the Company’s previous program. During the year ended December 31, 2022 the Company repurchased 62,041 shares under this plan. The Company did not repurchase any common shares during the year ended December 31, 2021.   On May 18, 2022, the Company announced that the Board of Directors had authorized a new plan to repurchase up to $7.5 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The new stock repurchase program replaces the Company’s previous program. During the year ended December 31, 2022, the Company repurchased 222,652 shares under this plan. Collectively, the Company repurchased 284,693 shares of common stock during the fiscal year December 31, 2022. The Company did not repurchase common stock during the fourth quarter of 2022.     (Dollars in thousands, except for per share amounts)   Total Number of Shares Purchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs     Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs   October 1, 2022 - October 31, 2022     —     $ —       —     $ —   November 1, 2022 - November 30, 2022     —     $ —       —     $ —   December 1, 2022 - December 31, 2022     —     $ —       —     $ —   Total     —               —             Preferred Stock and Depositary Shares   On September 15, 2020, the Company closed its underwritten public offering of 1,000,000 depositary shares, each representing 1/40th of a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”). On September 25, 2020, the Company completed the sale of an additional 150,000 depositary shares pursuant to the underwriters’ full exercise of their over-allotment option to purchase additional depositary shares.   Trading the depositary shares on the Nasdaq Capital Market commenced on September 16, 2020, under the symbol “MNSBP.”   The Board of Directors declared a quarterly cash dividend on the outstanding shares of the Series A Preferred Stock each quarter in agreement with the depositary share offering. Each declared cash dividend equated to approximately $0.47 per depositary share, or $18.75 per share of Series A Preferred Stock outstanding.     Item 6. [Reserved]   31       Item   7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the years ended December 31, 2022 and 2021. The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Company. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements.   Forward-Looking Statements   This Annual Report on Form 10-K 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:     • general economic conditions, either nationally or in our market area, that are worse than expected;     • competition among depository and other financial institutions, particularly intensified competition for deposits;     • inflation and an interest rate environment that may reduce our margins or reduce the fair value of financial instruments;     • adverse changes in the securities markets;     • 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 enter new markets successfully and capitalize on growth opportunities;     • our ability to successfully integrate acquired entities;     • changes in consumer spending, borrowing and savings habits;     • changes in accounting policies and practices;     • changes in our organization, compensation and benefit plans;     • our ability to attract and retain key employees;     • 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 this market;     • adequacy of our allowance for credit losses;     • deterioration of our asset quality;     • cyber threats, attacks or events     • reliance on third parties for key services     • future performance of our loan portfolio with respect to recently originated loans;     • additional risks related to new lines of business, products, product enhancements or 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;     • 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;     • implications of our status as a smaller reporting company and as an emerging growth company; and     • a work stoppage, forced quarantine, or other interruption or the unavailability of key employees.   32     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 Form 10-K to reflect future events or developments. The discussion of the critical accounting policies and analysis set forth below is intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Form 10-K.   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.   The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, and (3) derivative financial instruments. 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.   Allowance for Loan Losses : Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated probable incurred losses inherent in the loan portfolio. Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. Accounting standards require that loan losses be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.   The allowance consists of a specific component and a general component. 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 impaired collateral dependent loans, an updated appraisal will typically be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with 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 covers non-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, than non-classified loans.   Estimates for the allowance for loan losses are determined by analyzing historical losses, historical migration to charge-off experience, current trends in delinquencies and charge-offs, the results of regulatory examinations and changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimate for the allowance for loan losses are considerations with respect to the impact of current economic events. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which the Company conducts business.   While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates. A detailed discussion of the methodology used in determining the allowance for loan losses is included in Note 1, Basis of Presentation, in Notes to Consolidated Financial Statements.   Fair Value of Financial Instruments : A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These include investment securities available for sale and interest rate loan swaps on qualifying commercial loans. Periodically, the estimation of fair value also affects investment securities held to maturity when it is determined that an impairment write-down is other than temporary. Fair value determination is also relevant for certain other assets such as other real estate owned, which is recorded at the lower of the recorded balance or fair value, less estimated costs to sell. The determination of fair value also impacts certain other assets that are periodically evaluated for impairment using fair value estimates, including impaired loans.   Fair value is generally based upon quoted market prices, when available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as other unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.   33     See Note 20, Fair Value Presentation, in Notes to Consolidated Financial Statements for a detailed discussion of determining fair value, including pricing validation processes.   Derivative Financial Instruments:  The Bank recognizes derivative financial instruments at fair value as either other assets or other liabilities in the consolidated balance sheet. The Bank’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 interest rate swaps with loan customers and dealer counterparties are described more fully in Note 19 in the December 31, 2022, Consolidated Financial Statements.   Selected Financial Data   The following table sets forth summarized historical consolidated financial information for each of the periods indicated. This information should be read together with the accompanying consolidated financial statements included in this Form 10-K. The historical information indicated as of and for the years ended December 31, 2022,and 2021 has been derived from the Company's audited consolidated financial statements for the years ended December 31, 2022, and 2021. Historical results set forth below and elsewhere in this Form 10-K are not necessarily indicative of future performance       At December 31,       2022     2021       (In thousands)   Selected Financial Condition Data:                 Total assets   $ 1,925,751     $ 1,647,402   Total cash and cash equivalents     130,600       93,199   Total investment securities     80,273       120,262   Loans receivable, net     1,579,950       1,341,760   Bank-owned life insurance     37,249       36,241   Premises and equipment, net     14,709       14,863   Computer software, net of amortization     9,149       2,493   Total deposits     1,512,889       1,411,963   FHLB advances and other borrowings     100,000       —   Subordinated debt     72,245       29,294   Total stockholders’ equity     198,282       188,788     34         For the year ended December 31,       2022     2021       (In thousands)   Selected Operating Data:                 Interest income   $ 83,845     $ 64,199   Interest expense     13,836       10,663                     Net interest income     70,009       53,536   Provision for (recovery of) loan losses     2,398       (1,175 )                   Net interest income after provision for (recovery of) loan losses     67,611       54,711   Total non-interest income     4,834       6,110   Total non-interest expenses     39,057       32,865                     Income before income taxes     33,388       27,956   Income tax expense     6,714       5,785                     Net income     26,674       22,171   Less: Preferred stock dividends     2,156       2,156   Net income available to common shareholders   $ 24,518     $ 20,015                     Basic and diluted net income per common share   $ 3.26     $ 2.65         At or For the Years Ended December 31,       2022     2021   Performance Ratios:                 Return on average assets     1.53 %     1.32 % Return on average equity     13.98 %     12.38 % Interest rate spread     3.66 %     2.94 % Net interest margin (1)     4.19 %     3.33 % Efficiency ratio (2)     52.19 %     55.10 % Non-interest expense to average assets     2.24 %     1.95 % Average interest-earning assets to average interest-bearing liabilities     164.68 %     159.31 % Per share Data and Shares Outstanding                 Earnings per common share (basic and diluted)   $ 3.26     $ 2.65   Book value per common share   $ 22.98     $ 21.27   Dividends per common share   $ 0.25     $ —   Tangible book value per common share   $ 21.75     $ 20.94   Market value per common share   $ 27.49     $ 24.59   Weighted average common shares (basic and diluted)     7,529,382       7,559,310   Common shares outstanding at end of period     7,442,743       7,595,781   Capital Ratios (Bank)                 Common equity tier 1(CET1) capital to risk-weighted assets     15.47 %     15.23 % Total risk-based capital to risk-weighted assets     16.27 %     16.06 % Tier 1 capital to risk-weighted assets     15.47 %     15.23 % Tier 1 capital to average assets     15.05 %     12.90 % Asset Quality Ratios                 Allowance for loan losses as a percentage of total loans     0.88 %     0.86 % Allowance for loan losses as a percentage of non-performing assets     N/A       15.09   Net charge-offs to average outstanding loans during the period     0.00 %     0.00 % Non-performing loans as a percentage of total loans     0.00 %     0.00 % Non-performing assets as a percentage of total assets     0.00 %     0.05 % Other Data:                 Common equity / total assets     8.88 %     9.80 % Total equity / total assets     10.30 %     11.46 % Average equity to average assets     10.94 %     10.63 % Number of offices     6       6   Number of full-time equivalent employees     168       138     (1) Non-GAAP; refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures” of this Form 10-K. (2) Efficiency ratio is calculated as non-interest expense as a percentage of net interest income and non-interest income.   35     Analysis of Results of Operations for the Years Ended December 31, 2022 and 2021   Net Income   The following table sets forth the principal components of net income for the periods indicated.       For the Year Ended December 31,       2022     2021     % Change       (In thousands)   Interest income   $ 83,845     $ 64,199       30.60 % Interest expense     13,836       10,663       29.76 % Net interest income     70,009       53,536       30.77 % Provision for (recovery of) loan losses     2,398       (1,175 )     304.09 % Net interest income after provision     67,611       54,711       23.58 % Non-interest income     4,834       6,110       -20.88 % Non-interest expense     39,057       32,865       18.84 % Net income before income taxes     33,388       27,956       19.43 % Income tax expense     6,714       5,785       16.06 % Net income     26,674       22,171       20.31 % Less: Preferred stock dividends     2,156       2,156       0.00 % Net income available to common shareholders   $ 24,518     $ 20,015       22.50 %   Net income for the year ended December 31, 2022, was $26.7 million, an increase of $4.5 million, or 20.3% compared to $22.2 million earned during the year ended December 31, 2021. The increase in net income was due to $16.5 million of additional net interest income, primarily driven by increased volume of loans and increase in interest rates. The increase net interest income was offset by an increase in non-interest expenses of $6.2 million primarily in salaries and employee benefits and general operating expenses.   Net Interest Income and Net Interest Margin   Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the interest expense paid on all funding sources by average earning assets. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net interest income and net interest margin.   Net interest income before provision for or recovery of loan losses totaled $70.0 million for the year ended December 31, 2022, compared to $53.5 million for the year ended December 31, 2021. The increase in net interest income was driven by an increase in loan production and increase in interest rates on variable rate credits and loans that repriced during the year ended December 31, 2022.   The net interest margin was 4.19% for the year ended December 31, 2022, compared to 3.35% for the year ended December 31, 2021, on a fully tax equivalent basis. The increase in net interest margin primarily resulted from an increase of income on our interest earning assets that outpaced the increase on average rates of our cost of funds, primarily in interest-bearing deposits,  money market deposits and other borrowings. The increase in the federal funds target rate will impact wholesale deposits that will reprice in a higher interest rate environment, which will increase margin pressure on our loan portfolio and other interest earning assets.    The yield for the year ended December 31, 2022 for the loan portfolio was 5.47% compared to 4.79% for the year ended December 31, 2021. The increase primarily reflects the maturity of lower yielding loans and higher yields on new and variable rate loans based on higher interest rates during the year. The Federal Reserve increased its targeted benchmark interest rate 425 - 450 basis points by the year end, which impacted yields obtained on new loans throughout the year.   For the year ended December 31, 2022, the yield on the taxable investment securities portfolio was 2.20% compared to 2.08% for the year ended December 31, 2021. For the year ended December 31, 2022, the yield on the tax-exempt investment securities portfolio was 3.48% compared to 3.42% for the year ended December 31, 2021. The increase in both categories was primarily due to rates on variable securities increasing with the current rate environment and lower yields on investment securities maturing during the period.   The rate paid on interest bearing deposits increased to 1.14% during the year ended December 31, 2022, from 0.90% during the year ended December 31, 2021. This increase was a result of higher rates paid on all outstanding deposits in conjunction with the increasing rate environment throughout the year.   36     The rate paid on FHLB borrowings for the year ended December 31, 2022 was 1.45% compared to the prior year when the bank did not have any FHLB borrowings outstanding.    The following table sets forth the major components of net interest income and the related yields and rates for the year ended December 31, 2022, compared to the year ended December 31, 2021.   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 Year Ended December 31,       2022     2021       Average Balance     Interest Income/ Expense (5)     Yield/ Cost (5)     Average Balance     Interest Income/ Expense (5)     Yield/ Cost (5)       (Dollars in thousands)   Interest-earning assets:                                                 Loans (1)   $ 1,442,716     $ 78,872       5.47 %   $ 1,289,445     $ 61,743       4.79 % Investment securities                                                 Taxable     72,809       1,603       2.20 %     60,732       1,263       2.08 % Tax-exempt     38,528       1,339       3.48 %     39,170       1,341       3.42 % Federal funds and interest-bearing deposits     122,596       2,312       1.89 %   $ 216,436       134       0.06 % Total interest-earning assets   $ 1,676,649     $ 84,126       5.02 %     1,605,783     $ 64,481       4.02 % Non-interest-earning assets     67,380                       79,357                   Total assets   $ 1,744,029                     $ 1,685,140                   Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 85,566     $ 601       0.70 %   $ 67,897     $ 229       0.34 % Money market deposits     137,066       1,547       1.13 %     333,160       772       0.23 % Savings and NOW deposits     63,401       203       0.32 %     74,975       165       0.22 % Time deposits     642,918       8,202       1.28 %     498,001       7,613       1.53 % Total interest-bearing deposits   $ 928,951     $ 10,553       1.14 %   $ 974,033     $ 8,779       0.90 % Federal funds purchased     2       —       —       —       —       —   Federal Home Loan Bank advances     23,986       347       1.45 %     —       —       —   Subordinated debt     65,176       2,936       4.50 %     33,953       1,884       5.55 % Total interest-bearing liabilities   $ 1,018,115     $ 13,836       1.36 %   $ 1,007,986     $ 10,663       1.06 % Non-interest-bearing liabilities:                                                 Demand deposits and other liabilities     535,075                       498,031                   Total liabilities   $ 1,553,190                     $ 1,506,017                   Stockholders’ Equity     190,839                       179,123                   Total liabilities and Stockholders’ equity   $ 1,744,029                     $ 1,685,140                   Net interest income           $ 70,290                     $ 53,818           Interest rate spread (2)                     3.66 %                     2.96 % Net interest-earning assets (3)   $ 658,534                     $ 597,797                   Net interest margin (4)                     4.19 %                     3.35 % Average interest-earning assets to average interest-bearing liabilities     164.68 %                     159.31 %                   (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) Income and yields for all periods are reported on a tax-equivalent basis using the federal statutory rate of 21%. Non-GAAP; refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures” of this Form 10-K.   37     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 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 Twelve Months Ended       December 31, 2022 and 2021       Increase (Decrease) Due to     Total Increase       Volume     Rate     (Decrease)       (In thousands)   Interest-earning assets:                         Loans   $ 7,806     $ 9,323     $ 17,129   Investment securities     263       75       338   Federal funds and interest-bearing deposits     (79 )     2,257       2,178   Total interest-bearing assets   $ 7,990     $ 11,655     $ 19,645   Interest-bearing liabilities:                         Interest-bearing demand deposits   $ 73     $ 299     $ 372   Money market deposit accounts     (683 )     1,458       775   Savings and NOW deposits     (28 )     66       38   Time deposits     1,972       (1,383 )     589   Total deposits   $ 1,334     $ 440     $ 1,774   Federal Home Loan Bank advances     347       —       347   Subordinated debt     1,464       (412 )     1,052   Total interest-bearing liabilities     3,145       28       3,173   Change in net interest income   $ 4,845     $ 11,627     $ 16,472     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.   The provision for loan losses increased to a loan loss provision of $2.4 million for the year ended December 31, 2022, compared to the prior year which ended as a recovery of loan loss provision of $1.2 million. The increase is a return to a normal provision for loan losses due to loan growth. The prior year was a direct result of recovering the special COVID-19 pandemic provision that was provisioned for in 2021. Loan originations increased $24.4 million, which totaled $575.6 million for the year ended December 31, 2021 compared to loan originations of $599.9 million for the year ended December 31, 2022. Non-performing loans were $0 at December 31, 2021 and $21,000 at December 31, 2022.   On September 22, 2022, the Company completed the sale of a loan note for a customer that had stopped making payments and declared bankruptcy. The Company incurred a loss of $211,000 on this transaction that was properly accounted for in its Statement of Income as a loss on the sale of a loan. This credit had previously identified weaknesses and deemed to be of substandard quality with an appropriate reserve allocation. We determined that the best course of action was to sell the note at a discount to an interested party. Had the loan sale not occurred, the Company would have recorded a specific allocation to the provision for loan losses and proceeded with an orderly liquidation of collateral.   During the year ended December 31, 2022, substandard loans increased $4.2 million for a balance of $9.5 million. During the year ended December 31, 2022, special mention loans decreased $16.9 million to $0. During the year ended December 31, 2022, watch list loans decreased $45.6 million to $25.0 million. Management does not believe any loss currently exists in these loans. During the year ended December 31, 2022, there were no charge-offs and recoveries of $19,000 were received. During the year ended December 31, 2021, there were $32,000 in charge-offs recorded and recoveries received of $27,000.   38     Non-Interest Income   Our primary sources of non-interest income are service charges on deposit accounts, such as interchange fees and statement fees, income earned on bank owned life insurance, fees earned from executing interest rate swaps on commercial loans, and gains realized on the sale of the guaranteed portion of Small Business Administration (“SBA”) loans.   The following table presents, for the periods indicated, the major categories of non-interest income:       For the Year Ended December 31,       2022     2021     % Change       (In thousands)   Non-interest income                         Deposit account service charges   $ 2,420     $ 2,426       -0.25 % Bank owned life insurance income     1,008       900       12.00 % Loan swap fee income     619       83       645.78 % Net gain on called held-to-maturity securities     4       6       -33.33 % Net gain (loss) on sale of loans     (168 )     847       -119.83 % Other fee income     951       1,848       -48.54 % Total non-interest income   $ 4,834     $ 6,110       -20.88 %   Non-interest income decreased $1.3 million, or 20.9%, to $4.8 million for the year ended December 31, 2022 from $6.1 million for the year ended December 31, 2021. The decrease in non-interest income was primarily due to mortgage originations and other loan fees were down $382,000 and $528,000, respectively for the year ended December 31, 2022. Fees earned on interest rate swaps for commercial loans increased $536,000, or 645.8%, to $619,000 for the year ended December 31, 2022 from $83,000 for the year ended December 31, 2021. This increase was purely related to the volume of interest rate swaps entered into during 2021 compared to 2022. Bank owned life insurance income increased $108,000 for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to the rising rate environment throughout 2022. The deposit service fees largely remained consistent for the year ended December 31, 2022, as compared to the same period in 2021.   Non-Interest Expense   Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, communications, travel, meals, training, supplies and postage. The following table presents, for the periods indicated, the major categories of non-interest expense:       For the Year Ended December 31,       2022     2021     % Change       (In thousands)   Non-interest expense                         Salaries and employee benefits   $ 23,801     $ 19,305       23.29 % Occupancy expenses     1,471       1,541       -4.54 % Furniture and equipment expenses     2,786       2,468       12.88 % Advertising and marketing     2,304       1,565       47.22 % Outside services     2,075       1,394       48.85 % Administrative expenses     872       685       27.30 % Franchise tax     1,430       1,544       -7.38 % FDIC insurance     637       1,051       -39.39 % Data processing     1,303       1,189       9.59 % Other real estate expenses, net     38       84       -54.76 % Other operating expenses     2,340       2,039       14.76 % Total non-interest expense   $ 39,057     $ 32,865       18.84 %   39     Non-interest expense increased $6.2 million or 18.8% to $39.1 million for the year ended December 31, 2022 from $32.9 million for the year ended December 31, 2021 primarily as a result of increases in salary and employee benefits of $4.5 million, advertising and marketing expenses of $739,000 and outside services of $681,000. Salaries and employee benefits expense increased by $4.5 million to $23.8 million for the year ended December 31, 2022 from $19.3 million for the year ended December 31, 2021 primarily as a result of increasing our personnel team members by 30 employees. Advertising and marketing increased $739,000, or 47.2%, to $2.3 million for the year ended December 31, 2022 from $1.6 million for the year ended December 31, 2021. Outside service expenses increased $681,000, or 48.9%, to $2.1 million for the year ended December 31, 2022, due to investments in the Company’s payments division and other technological infrastructure. Offsetting these increases, our FDIC insurance decreased approximately $414,000 to $637,000 for the year ended December 31, 2022 from $1.1 million for the year ended December 31, 2021. This decrease was attributed to continued financial strength that resulted in a reduction of FDIC assessments.   Income Tax Expense   Income tax expense increased $929,000, or 16.1%, to $6.7 million for the year ended December 31, 2022 from $5.8 million for the year ended December 31, 2021. The increase in federal income tax expense for the year ended December 31, 2022 compared to the same period a year earlier was driven by the increase in income before income taxes of $5.4 million, or 19.4%, to $33.4 million as of December 31, 2022 compared to $28.0 million for the same period in the prior year. The Company is able to apply and claim a research and development tax credit for its associated work in developing a software platform. In addition, the Company has invested in projects that generate tax credits through the Low Income Housing Tax Credits ("LIHTC") program as well as NMTC projects. As a result of tax regulation, the Company has included assessments in income tax expense for state tax liabilities during 2022. For the year ended December 31, 2022, the Bank had an effective tax rate of 20.1%, compared to effective federal tax rate of 20.7% for the year ended December 31, 2021.     Analysis of Results of Operations for the Year Ended December 31, 2022   Net Income   The following table sets forth the principal components of net income (loss) for the Avenu division of MainStreet Bank for the periods indicated. All amounts set forth are included in the Results of Operations for the Year Ended December 31, 2022 and 2021 for MainStreet Bancshares, Inc. unless indicated otherwise.       For the Year Ended December 31,       2022     2021     % Change       (In thousands)   Income Statement                         Service charge income   $ 912     $ 904       0.88 % Other income     94       46       104.35 % Income from deposits (1)     1,097       50       2094.00 % Total income     2,103       1,000       110.30 %                           Salaries and employee benefits     1,178       521       126.10 % Outside services     544       235       131.49 % Compliance expenses     209       —       100.00 % Other operating expenses     605       113       435.40 % Total expense     2,536       869       191.83 % Net income (loss) before taxes   $ (433 )     131       -430.53 %   (1) Determined by funds transfer pricing of non-interest bearing deposits using the weighted average Effective Fed Funds Rate during fiscal year ended December 31, 2022.   For the year ended December 31, 2022, the Avenu division recorded a net loss of $433,000. As the Company develops the software and ramps up the resources needed to operate a new division, elevated levels of non-interest expenses were anticipated. The Avenu division held $62.9 million in average non-interest bearing deposits which provides tremendous value to the Company, while simultaneously establishing a new division. Avenu is developing a comprehensive hosted BaaS software platform that will provide Fintechs with a subledger integrated within a regulatory compliant framework, easily connectable application programming interfaces ("APIs"), and access to banking payment networks. The goal for the Avenu team is to deploy the platform in 2023.   Comparison of Statements of Financial Condition at December 31, 2022 and at December 31, 2021   Total Assets   Total assets increased $278.3 million, or 16.9%, to $1.9 billion at December 31, 2022 from $1.6 billion at December 31, 2021. The increase was primarily the result of increases of $240.7 million in gross loans receivable, $37.4 million in cash equivalents, and $25.4 million in other assets. These increases were offset by a decrease in availabe-for-sale securities of $37.3 million, attributable to not purchasing treasury securities as part of our income tax strategy.   40     Investment Securities   We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital and liquidity requirements. Our investment policy is established and reviewed annually by the Board of Directors. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, subordinated debt of other financial institutions, equity securities, certain bankers’ acceptances and federal funds.   Our investment objectives are to maintain high asset quality, to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. The Board of Directors has the overall responsibility for the investment portfolio, including approval of our investment policy. The Board of Directors is also responsible for implementation of the investment policy and monitoring investment performance. The Board of Directors reviews the status of the investment portfolio on a quarterly basis, or more frequently if warranted.   Generally accepted accounting principles require that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent to hold such security. Debt securities available for sale are reported at fair value, while debt securities held to maturity are reported at amortized cost. We do not maintain a trading portfolio. Establishing a trading portfolio would require specific authorization by the Board of Directors.   The total investment securities portfolio, including both investment securities available for sale and investment securities held to maturity, was $80.3 million at December 31, 2022, a decrease of $40.0 million compared with December 31, 2021. At December 31, 2022, the investment securities portfolio includes $62.6 million of investment securities available for sale and $17.6 million of investment securities held to maturity compared to $99.9 million of investment securities available for sale and $20.3 million of investment securities held to maturity at December 31, 2021.   The Company did not sell any securities within the investment portfolio for the year ended December 31, 2022 or 2021.   While all securities are reviewed by the Company for other-than-temporary impairments (“OTTI”), the securities that typically are impacted by credit impairment are non-agency collateralized mortgage obligations and asset-backed securities. Refer to Note 3, in Notes to Consolidated Financial Statements for further details. To date, we have had no OTTI.   Portfolio Maturities and Yields . The composition and maturities of the investment securities portfolio at December 31, 2022, are summarized in the following table. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust. The Company does invest in both taxable and non-taxable municipal securities. No material changes occurred in the non-taxable security portfolio for the year ended December 31, 2022.                       More than One Year     More than Five Years     More than                               One Year or Less     through Five Years     through Ten Years     Ten Years     Total               Weighted             Weighted             Weighted             Weighted                     Weighted       Amortized     Average     Amortized     Average     Amortized     Average     Amortized     Average     Amortized     Fair     Average       Cost     Yield (1)     Cost     Yield (1)     Cost     Yield (1)     Cost     Yield (1)     Cost     Value     Yield (1)       (Dollars in thousands)           Securities available for sale:                                                                                         Collateralized Mortgage Securities   $ —       —     $ —       —     $ 481       2.60 %   $ 26,320       1.78 %   $ 26,801     $ 22,227       1.79 % Subordinated Debt     —       —       —       —       9,970       3.89 %     —       —       9,970       8,827       3.89 % Municipal Securities                                                                                         Taxable     —       —       1,000       3.42 %     1,425       1.55 %     8,250       2.44 %     10,675       7,966       2.41 % Tax-exempt     —       —       —       —       1,180       4.36 %     21,643       3.48 %     22,823       20,175       3.53 % U.S. Government Agencies     —       —       —       —       —       —       3,470       5.01 %     3,470       3,436       5.01 %                                                                                           Total   $ —       —     $ 1,000       3.42 %   $ 13,056       3.54 %   $ 59,683       2.67 %   $ 73,739     $ 62,631       2.85 %                                                                                           Securities held to maturity:                                                                                         Municipal Securities                                                                                         Tax-exempt   $ 264       3.35 %   $ 1,073       3.84 %   $ 7,328       3.80 %   $ 6,477       3.77 %   $ 15,142     $ 14,940       3.78 % Subordinated Debt     —       —       —       —       2,500       5.60 %     —       —       2,500       2,500       5.60 %                                                                                           Total Securities   $ 264       3.35 %   $ 1,073       3.84 %   $ 9,828       4.25 %   $ 6,477       3.77 %   $ 17,642     $ 17,440       4.04 %     (1) Yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%   41     Loan Portfolio   Our primary source of income is derived from interest earned on loans. Our loan portfolio consists of loans secured by real estate as well as commercial business loans and consumer loans, substantially all of which are secured by corresponding deposits at the Bank. Our loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential builders and individuals. Our owner occupied and investment commercial real estate loans, residential construction loans and commercial business loans provide us with higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, and are complemented by our relatively lower risk residential real estate loans to individuals. Our lending activities are principally directed to our market area consisting of the Washington, D.C. and Northern Virginia metropolitan areas.   Loan Portfolio Maturities and Yields . The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2022. Demand loans, having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.       As of December 31, 2022       Single-Family     Multi-Family     Farmland     Owner Occupied     Non-owner Occupied       (In thousands)   Amounts due in:                                         One year or less   $ 36,251     $ 29,677     $ 84     $ 5,378     $ 89,345   After one year through two years     12,950       51,249       —       19,215       36,248   After two years through three years     6,551       1,757       —       2,441       7,756   After three years through five years     31,803       62,656       —       29,474       85,289   After five years through ten years     77,335       68,959       —       153,349       209,164   After ten years through fifteen years     1,602       1,326       71       17,357       44,476   After fifteen years     12,123       —       —       1,160       76   Total   $ 178,615     $ 215,624     $ 155     $ 228,374     $ 472,354         Construction and Land Development     Commercial and Industrial     Consumer     Total Loan Portfolio Maturities   Amounts due in:   (In thousands)           One year or less   $ 176,062     $ 24,363     $ 5,564     $ 366,724   After one year through two years     22,851       22,566       3,906       168,985   After two years through three years     8,000       7,440       2,187       36,132   After three years through five years     68,380       22,794       1,508       301,904   After five years through ten years     88,612       18,608       —       616,027   After ten years through fifteen years     28,115       —       171       93,118   After fifteen years     1,763       1,580       —       16,702   Total   $ 393,783     $ 97,351     $ 13,336     $ 1,599,592     The following table sets forth our fixed and adjustable-rate loans at December 31, 2022, that are contractually due after December 31, 2022.       Due After December 31, 2022       Fixed     Adjustable               Rates     Rates     Total       (In thousands)   Residential real estate:                         Single family   $ 41,640     $ 136,975     $ 178,615   Multifamily     124,596       91,028       215,624   Farmland     155       —       155   Commercial real estate:                         Owner occupied     97,884       130,490       228,374   Non-owner occupied     151,840       320,514       472,354   Construction and land development     46,843       346,940       393,783   Commercial – non-real estate:                         Commercial and industrial     46,669       50,682       97,351   Consumer – non-real estate:                         Unsecured     1,984       —       1,984   Secured     9,909       1,443       11,352   Totals   $ 521,520     $ 1,078,072     $ 1,599,592     42     The following table shows our loan originations, participations, purchases, sales and repayment activities for the periods indicated.       Years Ended December 31,       2022     2021       (In thousands)   Total loans at beginning of year:   $ 1,358,935     $ 1,249,435   Loans originated:                 Real estate loans:                 Residential real estate:                 Single family     48,488       61,578   Multifamily     78,061       85,890   Farmland     —       488   Commercial real estate:                 Owner occupied     71,869       49,593   Non-owner occupied     126,244       70,672   Construction and land development     232,322       194,797   Commercial – non-real estate:                 Commercial and industrial     39,977       110,929   Consumer – non-real estate:                 Unsecured     1,984       185   Secured     973       1,427   Total loans originated:     599,918       575,559                     Loan principal repayments:                 Principal repayments     359,261       492,105                     Loans transferred to (from) loans held for sale:                 Transfers from loans held for sale     —       (26,046 )                   Net loan activity     240,657       109,500                     Total loans at the end of year   $ 1,599,592     $ 1,358,935     Loans, net of unearned income, totaled $1.6 billion at December 31, 2022, an increase of $240.7 million from December 31, 2021. The increase in total loans was primarily driven by growth in the overall loan portfolio, with significant increases in multifamily residential real estate, as well as the owner occupied and non-owner occupied commercial real estate portfolio.   Asset Quality   The Company’s asset quality remained strong during the year ended December 31, 2022. Nonperforming assets, which includes nonaccrual loans, accruing loans 90 days past due, accruing troubled debt restructured (“TDR”) loans 90 days past due, and other real estate owned totaled $21,000 at December 31, 2022, and $775,000 million at December 31, 2021.   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.   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.   43     As a percentage of total assets, nonperforming assets were 0.00% at December 31, 2022, compared with 0.05% at December 31, 2021. As of December 31, 2022, the Company had no loans placed on nonaccrual status.   See Note 1, Organization, Basis of Presentation, and Impact of Recently Issued Accounting Pronouncements and Note 5, Allowance for Loan Losses, in Notes to Consolidated Financial Statements for further information on the Company’s credit grade categories, which are derived from standard regulatory rating definitions.   The following table summarizes asset quality information at December 31, 2022, and December 31, 2021.       December 31,     December 31,       2022     2021       (Dollars in thousands)   Loans accruing past 90 days:                 Commercial and industrial   $ 15     $ —   Consumer non real estate - secured     6       —   Total non-performing loans     21       —   Other real estate owned     —       775   Total non-performing assets   $ 21     $ 775   Ratios:                 Total non-performing loans to gross loans receivable     0.00 %     0.00 % Total non-performing loans to total assets     0.00 %     0.00 % Total non-performing assets to total assets     0.00 %     0.05 %   There was no interest income that would have been recorded for the years ended December 31, 2022 and 2021 had non-accruing loans been current according to their original terms.    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 suspension applies during the modification.  A modification can be a forbearance agreement, a new repayment plan, interest rate modification, or any other arrangement that defers or delays the payment of principal or interest.  This provision applies only to loans that were current or less than 30 days past due on payments as of December 31, 2019.    The agencies are to defer to the financial institutions to suspend the TDR requirements.  Financial institutions may presume that borrowers current on payments are not experiencing financial difficulties at modification to determine TDR status, and no further TDR analysis is required for each loan modification in the program.  Examiners will exercise judgment in reviewing loan modifications, including TDRs, will not automatically adversely risk rate credits affected by COVID-19, and will not criticize prudent efforts to modify the terms on existing loans to affected customers.   As of December 31, 2022, there were no loans not disclosed in the above table, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.   Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable and estimable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loans losses which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss or loan pools, the fair value of the underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. An integral part of their examination process, the Federal Reserve Board will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.   44     The following table sets forth activity in our allowance for loan losses for the periods indicated.       For the Year Ended December 31,     For the Year Ended December 31,       2022     2021       (Dollars in thousands)   Balance at beginning of year   $ 11,697     $ 12,877   Charge-offs:                 Consumer     —       (32 ) Total charge-offs     —       (32 ) Recoveries:                 Commercial and industrial     —       11   Consumer     19       16   Total recoveries     19       27   Net (charge-offs) recoveries     19       (5 ) Provision for (recovery of) loan losses     2,398       (1,175 ) Balance at end of period   $ 14,114     $ 11,697   Ratios:                 Net charge offs to average loans outstanding (annualized)     0.00 %     0.00 % Allowance for loan losses to non-performing loans at end of period     0.15 %     N/A   Allowance for loan losses to gross loans at end of period     0.88 %     0.86 %   At December 31, 2022, our allowance for loan losses represented 0.88% of total loans and had only $21,000 in non-performing loans. The allowance for loan losses increased to $14.1 million at December 31, 2022 from $11.7 million at December 31, 2021 as a direct result of normal loan provisions in conjunction with loan growth throughout the year. There were $19,000 in net loan recoveries and $5,000 in net loan charge-offs during the years ended December 31, 2022 and December 31, 2021, respectively.   45     Allocation of Allowance for Loan Losses . The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.       At December 31,       2022     2021   (Dollars in thousands)   Allowance for Loan Losses     Percent of Allowance in Each Category to Total Allocated Allowance     Percent of Loans in Each Category to Total Loans     Allowance for Loan Losses     Percent of Allowance in Each Category to Total Allocated Allowance     Percent of Loans in Each Category to Total Loans   Residential Real Estate:                                                 Single family   $ 1,240       8.8 %     11.2 %   $ 1,119       9.6 %     11.9 % Multifamily     906       6.4 %     13.5 %     551       4.7 %     10.1 % Farmland     —       —       0.0 %     2       0.0 %     0.1 % Commercial Real Estate:                                                 Owner occupied     2,102       14.9 %     14.3 %     1,859       15.9 %     12.7 % Non-owner occupied     5,057       35.8 %     29.5 %     3,830       32.7 %     26.6 % Construction and Land Development     3,347       23.7 %     24.6 %     2,697       23.1 %     24.8 % Commercial – Non Real Estate:                                                 Commercial and industrial     1,418       10.0 %     6.1 %     1,540       13.2 %     12.1 % Consumer – Non Real Estate:                                                 Unsecured     —       —       0.1 %     32       0.3 %     0.0 % Secured     44       0.4 %     0.7 %     67       0.6 %     1.7 %                                                   Total   $ 14,114       100.0 %     100.0 %   $ 11,697       100.0 %     100.0 %   Funding Activities   Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense. The Company also utilizes brokered 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   Deposits   Total deposits increased by $100.9 million from December 31, 2021 to December 31, 2022. Brokered deposits, which are included in the table below, totaled $317.3 million and $245.5 million at December 31, 2022, and December 31, 2021, respectively. The following table presents the Company’s average deposits segregated by major category for the year ended December 31, 2022:       At December 31,       2022     2021       Average Balance     Percent     Weighted Average Rate     Average Balance     Percent     Weighted Average Rate       (Dollars in thousands)   Deposit type:                                                 Interest-bearing demand   $ 85,566       5.85 %     0.70 %   $ 67,897       4.68 %     0.34 % Money market     137,066       9.37 %     1.13 %   $ 333,160       22.93 %     0.23 % Savings and NOW     63,401       4.33 %     0.32 %   $ 74,975       5.16 %     0.22 % Time deposits     642,918       43.93 %     1.28 %   $ 498,001       34.28 %     1.53 % Interest-bearing deposits     928,951       63.48 %     1.14 %     974,033       67.05 %     0.90 %                                                   Non-interest bearing demand     534,338       36.52 %             478,727       32.95 %                                                           Total deposits   $ 1,463,289       100.00 %     0.72 %   $ 1,452,760       100.00 %     0.60 %   The overall increase in total deposits were primarily driven by an increase in non-interest bearing demand deposits and time deposits largely due to our deposit gather strategies. These increases were partially offset by a decrease in money market deposits. Non-interest bearing deposits increased from December 31, 2022, compared to December 31, 2021 primarily as a result of increased efforts Company wide to replace higher cost of funds with sticky lower cost deposit accounts.   46     At December 31, 2022, the Company had $486.9 million in total deposits in excess of the FDIC insurance limit of $250,000.   Certificates of deposit in amounts in excess of the FDIC insurance limit of $250,000 totaled approximately $331.3 million. The following table sets forth the maturity of these certificates as of December 31, 2022.       December 31, 2022       (In thousands)   Maturity period:         Three months or less   $ 113,962   Over three through six months     93,817   Over six through twelve months     85,494   Over twelve months through three years     37,984   Over three years     —             Total   $ 331,257     47     The following table sets forth all of our time deposits classified by interest rate as of the dates indicated.       At December 31,       2022     2021       (In thousands)   Interest Rate Range:                 0.01 – 0.99%   $ 260,427     $ 274,274   1.00 – 1.99%     94,188       19,596   2.00 – 2.99%     129,629       144,731   3.00 and greater     123,897       20,547   Total   $ 608,141     $ 459,148     The following table sets forth by interest rate ranges information concerning the maturities of our certificates of deposit as of December 31, 2022.         Period to Maturity                         Less Than or Equal to One Year     More Than One to Two Years     More Than Two to Three Years     More Than Three Years     Total     Percent of Total Certificate Accounts         (Dollars in thousands)   Interest Rate Range:                                                   0.01 – 0.99%     $ 252,571     $ 5,725     $ 1,715     $ 416     $ 260,427       42.82 % 1.00 – 1.99%       50,554       39,174       4,364       96       94,188       15.49 % 2.00 – 2.99%       103,216       26,339       74       —       129,629       21.32 % 3.00 and greater       110,543       11,601       1,091       662       123,897       20.37 % Total     $ 516,884     $ 82,839     $ 7,244     $ 1,174     $ 608,141       100.00 %   Borrowed Funds   We may obtain advances from the Federal Home Loan Bank of Richmond upon the security of the common stock we own in that bank and certain of our residential and commercial mortgage loans, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.   At December 31, 2022 and 2021, we were permitted to borrow up to an aggregate total of $465.0 million and $414.0 million, respectively, from the Federal Home Loan Bank of Richmond. There were Federal Home Loan Bank borrowings outstanding of $100.0 million and $0 at December 31, 2022, and December 31, 2021, respectively. Additionally, we had credit availability of $104.0 million with correspondent banks for short-term liquidity needs, if necessary. No borrowings were outstanding at December 31, 2022 and 2021, under this facility.     Liquidity and Capital Resources   Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves.   The Company assesses liquidity needs on a daily basis using a sophisticated monitoring system that identifies daily sources and uses for a rolling 30-day period. The Company also assesses liquidity needs under various scenarios of market conditions, asset growth and changes in credit ratings. The assessment includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. The assessment provides regular monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.   The asset portion of the balance sheet provides liquidity primarily through unencumbered debt securities available for sale, loan principal and interest payments, maturities and prepayments of investment securities held to maturity and, to a lesser extent, sales of investment debt securities available for sale. Other short-term investments such as federal funds sold and maturing interest- bearing deposits with other banks, are additional sources of liquidity.   48     The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and noninterest-bearing deposit accounts and through FHLB and other borrowings. Brokered deposits, federal funds purchased, and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs.   In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a bank holding company that is a separate legal entity from the Bank. The Company requires cash for various operating needs that could include payment of dividends to its stockholder, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits and other such items. Any future dividends must be set forth in the Company's capital plans before any dividends can be paid.   The Company’s ability to raise funding at competitive prices is affected by the rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. Management meets with the rating agencies on a routine basis to discuss the current outlook for the Company.   The Board of Director's 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 December 31, 2022.   We monitor and adjust our investments in liquid assets based upon our assessment of: (1) 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 and short-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 December 31, 2022, cash and cash equivalents totaled $130.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $62.6 million at December 31, 2022.   Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $33.5 million and $29.1 million for the twelve months ended December 31, 2022, and December 31, 2021, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $228.7 million and $60.5 million for the twelve months ended December 31, 2022, and December 31, 2021, respectively. There were no sales of available-for-sale debt securities in 2022 or 2021. Net cash provided by financing activities was $232.6 million and used in financing activities was $14.2 million for the twelve months ended December 31, 2022 and 2021, respectively, which consisted primarily of increases in interest bearing deposits and FHLB advances for the twelve months ended December 31, 2022. There were no net repayments from the Federal Home Loan Bank for year ended 2022.   We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of December 31, 2022, totaled $516.9 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds in the normal course of business, including other deposits and Federal Home Loan Bank advances. 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 attract and retain deposits by adjusting the interest rates offered. Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth.   Regulatory Capital   The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.   49     The federal regulatory capital rules apply to all depository institutions as well as to bank holding companies with consolidated assets of $3 billion or more. However, the regulatory capital requirements generally do not apply on a consolidated basis to a bank holding company with total consolidated assets of less than $3 billion unless the holding company: (1) is engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (2) conducts significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; or (3) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission. The Federal Reserve may apply the regulatory capital standards at its discretion to any bank holding company, regardless of asset size, if such action is warranted for supervisory purposes.   Because the Company has total consolidated assets of less than $3 billion and does not engage in activities that would trigger application of the federal regulatory capital rules, it is not at present subject to consolidated capital requirements under the such rules.   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 a phase-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 was phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2022 and 2021 is 2.50%. 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 December 31, 2022, the Company and the Bank meets all capital adequacy requirements to which it is subject.   As of December 31, 2022 and 2021, the most recent notification from the Federal Reserve Bank of Richmond categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity Tier 1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.   The Bank’s actual regulatory capital amounts and ratios as of December 31, 2022 and 2021 are presented in the table below.       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 December 31, 2022                                                 Total capital (to risk-weighted assets)   $ 286,572       16.27 %   $ 140,929       ≥ 8.0%     $ 176,161       ≥ 10.0%   Common equity tier 1 capital (to risk-weighted assets)   $ 272,458       15.47 %   $ 79,272       ≥ 4.5%     $ 114,504       ≥ 6.5%   Tier 1 capital (to risk-weighted assets)   $ 272,458       15.47 %   $ 105,696       ≥ 6.0%     $ 140,929       ≥ 8.0%   Tier 1 capital (to average assets)   $ 272,538       15.05 %   $ 72,435       ≥ 4.0%     $ 90,544       ≥ 5.0%   As of December 31, 2021                                                 Total capital (to risk-weighted assets)   $ 227,359       16.06 %   $ 113,249       ≥ 8.0%     $ 141,562       ≥ 10.0%   Common equity tier 1 capital (to risk-weighted assets)   $ 215,662       15.23 %   $ 63,703       ≥ 4.5%     $ 92,015       ≥ 6.5%   Tier 1 capital (to risk-weighted assets)   $ 215,662       15.23 %   $ 84,937       ≥ 6.0%     $ 113,249       ≥ 8.0%   Tier 1 capital (to average assets)   $ 215,662       12.90 %   $ 66,898       ≥ 4.0%     $ 83,622       ≥ 5.0%     Non-GAAP Measures   In reporting the results of December 31, 2022, the Company has provided supplemental performance measures on an operating basis. These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.   Net interest margin on a fully tax equivalent (FTE) basis, provides valuable additional insight into the net interest margin and the impact that investments in tax-exempt securities have on our financial metrics. The entire FTE adjustment is attributable to the interest tax effect on tax-exempt securities, using the statutory federal income tax rate of 21%.   The Company believes that tangible common stockholders equity, excluding intangible assets, is a meaningful supplement to GAAP financial measures and useful to investors because it provides an additional measure to calculate the book value of our common shares by removing the value of a subjective portion of our balance sheet.   50     The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31,       For the year ended December 31,   (Dollars in thousands)   2022     2021   Net interest margin (FTE)                 Net interest income (GAAP)   $ 70,009     $ 53,536   FTE adjustment on tax-exempt securities     281       282   Net interest income (FTE) (non-GAAP)     70,290       53,818                     Average interest earning assets   $ 1,676,649       1,605,783   Net interest margin (GAAP)     4.18 %     3.33 % Net interest margin (FTE) (non-GAAP)     4.19 %     3.35 %                   Stockholders equity, adjusted                 Total stockholders equity (GAAP)   $ 198,282     $ 188,788   Less: preferred stock     (27,263 )     (27,263 ) Total common stockholders equity (GAAP)     171,019       161,525   Less: intangible assets     9,149       2,493   Tangible common stockholders equity (non-GAAP)     161,870       159,032                     Shares outstanding     7,442,743       7,595,781   Tangible book value per common share (non-GAAP)   $ 21.75     $ 20.94     51