MainStreet Bancshares, Inc. 10-Q

main20230331_10q.htm       UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.   20549 FORM 10-Q (Mark One)   ☒          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended March 31, 2023   OR   ☐          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from   to                                         to                                           Commission file number: 001-38817   MainStreet Bancshares, Inc. (Exact Name of Registrant as Specified in Its Charter) Virginia   81-2871064 (State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)   10089 Fairfax Boulevard , Fairfax , VA 22030 (Address of Principal Executive Offices and Zip Code)   ( 703 ) 481-4567 (Registrant ’ s Telephone Number, Including Area Code)   Not applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act. Title   of   each   class   Trading Symbol(s)   Name   of   each   exchange on   which registered Common Stock   MNSB   The Nasdaq Stock Market   LLC           Depositary Shares (each representing a 1/40 th interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock)   MNSBP   The Nasdaq Stock Market LLC   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒   Yes     ☐  No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒   Yes     ☐  No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.   Large accelerated filer   ☐   Accelerated filer   ☐         Non-accelerated filer   ☒   Smaller reporting company   ☒         Emerging growth company   ☒           If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☒   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐   Yes    ☒  No   Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 8, 2023, there were 7,522,297 outstanding shares, par value $4.00 per share, of the issuer’s common stock.           INDEX   PART I – FINANCIAL INFORMATION 3     Item 1 – Consolidated Financial Statements 3     Notes to Consolidated Financial Statements 8     Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 22     Item 3 – Quantitative and Qualitative Disclosures about Market Risk 33     Item 4 – Controls and Procedures 33     PART II – OTHER INFORMATION 34     Item 1 – Legal Proceedings 34     Item 1A – Risk Factors 34     Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 35     Item 6 – Exhibits 35     SIGNATURES 36   2      PART I – FINANCIAL INFORMATION   Item   1 – Consolidated Financial Statements – Unaudited     MAINSTREET BANCSHARES, INC. AND SUBSIDIARY   Consolidated Statements of Financial Condition as of  March 31, 2023 and December 31, 2022 (Dollars in thousands, except share data)       At March 31, 2023 (unaudited)     At December 31, 2022 (*)   Assets                 Cash and due from banks   $ 225,334     $ 48,931   Federal funds sold     —       81,669   Cash and cash equivalents     225,334       130,600   Investment securities available-for-sale, at fair value     63,209       62,631   Investment securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 0 and $ 0 , respectively.     17,616       17,642   Restricted securities, at amortized cost     22,436       24,325   Loans, net of allowance for credit losses of $ 15,435 and $ 14,114 , respectively     1,617,275       1,579,950   Premises and equipment, net     14,521       14,709   Accrued interest and other receivables     9,744       9,581   Bank owned life insurance     37,503       37,249   Computer software, net of amortization     10,559       9,149   Other assets     36,811       39,915   Total Assets   $ 2,055,008     $ 1,925,751   Liabilities and Stockholders’ Equity                 Liabilities                 Non-interest bearing deposits   $ 487,875     $ 550,690   Interest bearing demand deposits     100,522       80,099   Savings and NOW deposits     53,499       51,419   Money market deposits     260,316       222,540   Time deposits     730,076       608,141   Total deposits     1,632,288       1,512,889   Federal fund borrowed     60,696       —   Federal Home Loan Bank advances     45,000       100,000   Subordinated debt, net     72,344       72,245   Allowance for credit losses on off-balance sheet credit exposure     1,178       —   Other liabilities     38,514       42,335   Total Liabilities     1,850,020       1,727,469   Stockholders’ Equity                 Preferred stock, $ 1.00 par value, 2,000,000 shares authorized; 28,750 shares issued and outstanding as of March 31, 2023 and December 31, 2022     27,263       27,263   Common stock, $ 4.00 par value, 10,000,000 shares authorized; issued and outstanding 7,524,277 shares (including 228,505 nonvested shares) for March 31, 2023 and 7,442,743 shares (including 259,036 nonvested shares) for December 31, 2022     29,185       28,736   Capital surplus     64,213       63,999   Retained earnings     91,991       86,830   Accumulated other comprehensive loss     ( 7,664 )     ( 8,546 ) Total Stockholders’ Equity     204,988       198,282   Total Liabilities and Stockholders’ Equity   $ 2,055,008     $ 1,925,751     *         Derived from audited consolidated financial statements.   See Notes to the Unaudited Consolidated Financial Statements   3       MAINSTREET BANCSHARES,   INC. AND SUBSIDIARY   Unaudited Consolidated Statements of Income for the Three months ended March 31, 2023 and 2022 (Dollars in thousands, except per share data)       For the Three Months Ended March 31,       2023     2022   Interest Income                 Interest and fees on loans   $ 26,731     $ 16,685   Interest on investments securities                 Taxable securities     518       357   Tax-exempt securities     264       272   Interest on federal funds sold and interest bearing deposits     1,132       34   Total Interest Income     28,645       17,348   Interest Expense                 Interest on interest bearing DDA deposits     343       65   Interest on savings and NOW deposits     108       37   Interest on money market deposits     1,203       119   Interest on time deposits     4,144       1,431   Interest on federal funds borrowed     38       —   Interest on Federal Home Loan Bank advances     906       31   Interest on subordinated debt     812       468   Total Interest Expense     7,554       2,151   Net Interest Income     21,091       15,197   Provision For Credit Losses - Loans     415       800   Recovery of Credit Losses - Off-Balance Sheet Credit Exposure     ( 132 )     —   Net Interest Income After Provision For (Recovery of) Credit Losses     20,808       14,397   Non-Interest Income                 Deposit account service charges     590       611   Bank owned life insurance income     255       251   Net gain on sale of loans     —       43   Other fee income     158       257   Total Non-Interest Income     1,003       1,162   Non-Interest Expense                 Salaries and employee benefits     7,621       5,548   Furniture and equipment expenses     498       657   Advertising and marketing     797       406   Occupancy expenses     486       341   Outside services     490       368   Administrative expenses     215       210   Other operating expenses     1,596       1,433   Total Non-Interest Expense     11,703       8,963   Income Before Income Taxes     10,108       6,596   Income Tax Expense     1,957       1,173   Net Income   $ 8,151     $ 5,423   Preferred Stock Dividends     539       539   Net Income Available To Common Shareholders   $ 7,612     $ 4,884   Earnings Per Common Share:                 Basic   $ 1.01     $ 0.64   Diluted   $ 1.01     $ 0.64     See Notes to the Unaudited Consolidated Financial Statements   4       MAINSTREET BANCSHARES,   INC. AND SUBSIDIARY   Unaudited Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2023 and 2022 (Dollars in thousands)       For the Three Months Ended March 31,       2023     2022   Comprehensive Income, net of taxes                 Net Income   $ 8,151     $ 5,423   Other comprehensive income (loss), net of tax (benefit):                 Unrealized gain (loss) on available for sale securities arising during the period (net of tax (benefit), $ 254 and ($1,008) , respectively, for the three months ended March 31)     880       ( 3,799 ) Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $ 0 and $ 1 , respectively, for the three months ended March 31)     2       4   Other comprehensive income (loss)     882       ( 3,795 ) Comprehensive Income   $ 9,033     $ 1,628     See Notes to the Unaudited Consolidated Financial Statements   5       MAINSTREET BANCSHARES,   INC. AND SUBSIDIARY   Unaudited Consolidated Statements of Stockholders’ Equity for the Three months ended March 31, 2023 and 2022 (Dollars in thousands)                                       Accumulated Other               Preferred     Common     Capital     Retained     Comprehensive               Stock     Stock     Surplus     Earnings     Loss     Total   Balance, December 31, 2022   $ 27,263     $ 28,736     $ 63,999     $ 86,830     $ ( 8,546 )   $ 198,282   Cumulative change in accounting principle (Note 3)     —       —       —       ( 1,699 )     —     $ ( 1,699 ) Vesting of restricted stock     —       449       ( 449 )     —       —       —   Stock based compensation expense     —       —       663       —       —       663   Dividends on preferred stock - ($ 0.47 per depositary share)     —       —       —       ( 539 )     —       ( 539 ) Dividends on common stock - ($ 0.10 per share)     —       —       —       ( 752 )     —       ( 752 ) Net income     —       —       —       8,151       —       8,151   Other comprehensive income     —       —       —       —       882       882   Balance, March 31, 2023   $ 27,263     $ 29,185     $ 64,213     $ 91,991     $ ( 7,664 )   $ 204,988                                           Accumulated Other               Preferred     Common     Capital     Retained     Comprehensive               Stock     Stock     Surplus     Earnings     Income (Loss)     Total   Balance, December 31, 2021   $ 27,263     $ 29,466     $ 67,668     $ 64,194     $ 197     $ 188,788   Vesting of restricted stock     —       376       ( 376 )     —       —       —   Stock based compensation expense     —       —       570       —       —       570   Common stock repurchased     —       ( 200 )     ( 1,064 )     —       —       ( 1,264 ) Dividends on preferred stock - ($ 0.47 per depositary share)     —       —       —       ( 539 )     —       ( 539 ) Dividends on common stock - ($ 0.05 per share)     —       —       —       ( 387 )     —       ( 387 ) Net income     —       —       —       5,423       —       5,423   Other comprehensive loss     —       —       —       —       ( 3,795 )     ( 3,795 ) Balance, March 31, 2022   $ 27,263     $ 29,642     $ 66,798     $ 68,691     $ ( 3,598 )   $ 188,796     See Notes to the Unaudited Consolidated Financial Statements   6       MAINSTREET BANCSHARES,   INC. AND SUBSIDIARY   Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)   For the three months ended March 31,   2023     2022   Cash Flows from Operating Activities                 Net income   $ 8,151     $ 5,423   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation, amortization, and accretion, net     560       558   Deferred income tax expense     589       432   Provision for credit losses     283       800   Loss on sale of other real estate owned     —       74   Gain on sale of loans     —       ( 43 ) Stock based compensation expense     663       570   Income from bank owned life insurance     ( 255 )     ( 251 ) Subordinated debt amortization expense     99       38   Gain on disposal of premises and equipment     ( 39 )     —   Amortization of operating lease right-of-use assets     79       77   Change in:                 Accrued interest receivable and other receivables     ( 163 )     721   Other assets     2,688       319   Other liabilities     ( 3,821 )     ( 1,405 ) Net cash provided by operating activities     8,834       7,313   Cash Flows from Investing Activities                 Activity in available-for-sale securities:                 Payments     476       2,406   Maturities     —       20,000   Purchases     —       ( 51,249 ) Activity in held-to-maturity securities:                 Called     —       1,550   Purchases of equity securities     ( 82 )     —   Proceeds on sale of loans     —       371   Proceeds on sale of other real estate owned     —       701   Purchases of restricted investment in bank stock     ( 4,536 )     ( 2,398 ) Redemption of restricted investment in bank stock     6,375       750   Net increase in loan portfolio     ( 38,635 )     ( 72,606 ) Computer software developed     ( 1,410 )     ( 1,413 ) Proceeds from sale of premises and equipment     39       —   Purchases of premises and equipment     ( 131 )     ( 296 ) Net cash used in investing activities     ( 37,904 )     ( 102,184 ) Cash Flows from Financing Activities                 Net decrease in non-interest deposits     ( 62,815 )     ( 16,518 ) Net increase in interest bearing demand, savings, and time deposits     182,214       39,499   Net increase (decrease) in Federal Home Loan Bank advances     ( 55,000 )     40,000   Net increase in federal funds borrowed     60,696       —   Net increase in subordinated debt, net issuance costs     —       42,623   Cash dividends paid on preferred stock     ( 539 )     ( 539 ) Cash dividends paid on common stock     ( 752 )     ( 387 ) Repurchases of common stock     —       ( 1,264 ) Net cash provided by financing activities     123,804       103,414   Increase in Cash and Cash Equivalents     94,734       8,543   Cash and Cash Equivalents, beginning of period     130,600       93,199   Cash and Cash Equivalents, end of period   $ 225,334     $ 101,742   Supplementary Disclosure of Cash Flow Information                 Cash paid during the period for interest   $ 5,243     $ 1,683   Cash paid during the period for income taxes   $ 3,430     $ 1,591   Net unrealized gain (loss) on securities available-for-sale   $ 1,134     $ ( 3,795 ) Net cumulative change in accounting principle   $ ( 1,699 )   $ —     See Notes to the Unaudited Consolidated Financial Statements   7     MAINSTREET BANCSHARES,   INC. AND SUBSIDIARY   Notes to Unaudited Consolidated Financial Statements     Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements   Organization   MainStreet Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose primary activity is the ownership and management of MainStreet Bank (the “Bank”). On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $ 4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $ 1.00 per share. There are currently 28,750 shares of preferred stock outstanding. The Company is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).   On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10” ), pursuant to Section 12 (b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section  2 (a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b - 2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the SEC.   The Company was approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April  22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a 1/40 th  ownership interest in a share of 7.50 % Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock.   The Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March  28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March  16, 2004. The Bank commenced regular operations on May  26, 2004, and is supervised by the Bureau and the Federal Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of retail customers, small and medium-sized businesses and professionals in the Washington, D.C. metropolitan area.   In September  2021, MainStreet Bancshares, Inc. established MainStreet Community Capital, LLC, a wholly owned subsidiary, to be a community development entity (“CDE”). This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE. In January 2023, MainStreet Community Capital submitted an application to apply for the 2022 NMTC program allocation. Allocation awards are expected to be announced during the fourth quarter of 2023.   On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu™, a division of MainStreet Bank. Avenu™ provides an embedded banking solution that connects our partners (fintechs, application developers, money movers, and entrepreneurs) directly and seamlessly to our Software as a Service (SaaS) solution.  Our SaaS solution is entering beta testing with a soft launch scheduled for the second quarter of 2023.     Basis of Presentation   The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10 -Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.   The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2022 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form  10 -K filed by the Company with the SEC on March 23, 2023. The results of operations for the  three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 , or any other period.   Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.   8     The Company’s critical accounting policies relate to ( 1 ) the allowance for credit losses on loans, ( 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. In connection with the determination of the allowances for credit losses on loans management obtains independent appraisals for significant properties.   Summary of Significant Accounting Policies Adoption of New Accounting Standards:  On January 1, 2023, the Company adopted ASU 2016 - 13 Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by the lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such changes is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that is is more likely than not they will be required to sell.   The Company adopted ASC 326 and all the subsequent amendments there to effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior periods amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $ 1.7 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment includes an increase in allowance for credit reserves of $ 2.2 million and an increase in net deferred tax assets of $ 506,000 .   The following table illustrates the impact of ASC 326.       January 1, 2023                             (Dollars in thousands)   As Reported Under ASC 326     Pre-ASC 326 Adoption     Impact of ASC 326 Adoption   Assets:                         Loans                         Residential Real Estate   $ 2,205     $ 2,146     $ 59   Commercial Real Estate     7,773       7,159       614   Construction and Land Development     3,366       3,347       19   Commercial & Industrial     1,590       1,418       172   Consumer     75       44       31   Total Allowance for Credit Losses on Loans   $ 15,009     $ 14,114     $ 895   Liabilities:                         Off-Balance Sheet Credit Exposure     1,310       —       1,310   Total Allowance for Credit Losses on Loans   $ 16,319     $ 14,114     $ 2,205     The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest   Allowance for Credit Losses - Loans   The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.   The allowance for credit losses represents management's estimate of lifetime credit losses inherent in the loans as of the balance sheet date. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, concentrations or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or vacancy rates, consumer price index and projected federal funds target rate and future unemployment rates.   The allowance for credit losses on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses on loans using the following methods: Portfolio segments are grouped in homogenous pools that mirror the loan pools described in Federal Financial Institutions Examination Council Call Report however we are able to group these pools into the following segments:   • Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards • Construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. • Residential real estate mortgage loans, including equity lines of credit, carry risks associated with the continued creditworthiness of the borrower and the changes in the value of the collateral. • Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision. • Consumer secured loans (indirect lending) carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio. • Consumer unsecured loans carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.   For each homogenous loan pool, the Company elected to use the Weighted Average Remaining Life (“WARM”) methodology for calculating historical and future loss reserves. The WARM methodology calculates the average annual historical charge-off rate of a homogenous loan pool and multiplies that rate by the pool's remaining life to estimate the allowance for credit losses. Quantitative assumptions included are below:   Remaining life - For amortizing assets, the remaining life is calculated by taking the contractual life and adjusting it by any expected scheduled payments as well as prepayments. An important assumption in the calculation of remaining life is an “exit event” which would be deemed as the end of life of a loan. Examples of exit events included in our model are: 1 ). A change in maturity date of 90 days or more and 2 ). A loan changing it’s loan pool classification.   Loss Rate - Loss rates are calculated quarterly and aggregated to determine an annual loss rate. Our methodology uses actual Company data utilizing a straight average over the time periods included. Recoveries are netted against charge-offs and loss rates are floored at 0% with no ability to have “negative” loss rates.   Loss Rate Lookback - By utilizing the WARM method, management is also evaluating future economic conditions. Using historical loan portfolio performance data in certain economic conditions, gives us an idea of how to adjust for potential credit exposure in similar future environments. While subject to change at each quarterly meeting, we have elected to make our base case scenario for future economic environments. This evaluation will be subject to change given the circumstances evaluated at each quarter.   Historical Losses - Quantitative loss estimation models have been developed based largely on call report data from 2004  through the current period and the economic conditions during the same time period. Within our historical losses calculation, the Company projects out the loss environment for the subsequent two quarters, based largely on the preceding four quarters. After that period, the historical loss percentage reverts back to the lifetime historical mean over a four quarter progression.   Additionally, the allowance for credit losses on loans calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.   Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.   Allowance for Credit Losses - Off-Balance Sheet Credit Exposures   The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company classified off-balance sheet exposure in similar pools as the funded loan portfolio and determined that qualitative and quantitative risk factors assessed to the funded loan pool are also evident for the unfunded loan pool of similar type, adjusted for likelihood of funding and any other relevant metrics. The allowance for unfunded commitments is identified separately on the Company’s consolidated balance sheets.   Allowance for Credit Losses - Held-to-Maturity Securities   The Company measures expected credit losses on held-to-maturity (HTM) securities on a collective basis by major security type and credit ratings. Accrued interest receivable on these securities are excluded from the estimate of credit losses. For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings. The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The adoption of CECL had an insignificant impact on the Company's held-to-maturity securities portfolio.   Governance   The Company’s Allowance Committee, contains representatives from both the Company’s finance and credit teams, is responsible for approving the Company’s estimate of expected credit losses. The Allowance Committee considers the quantitative model results and qualitative factors when approving the final ACL. The Company’s ACL model is subject to the Company’s model risk management standards.   Impact of Recently Issued Accounting Pronouncements   In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020 - 04 “Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021 - 01 “Reference Rate Reform (Topic 848 ): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.  The Company has inventoried the financial instruments that will be impacted by ASU 2020 - 04 and are  assessing ASU 2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.    In December 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022 - 06, “Reference Rate Reform (Topic 848 ): Deferral of the Sunset Date of Topic 848”. ASU 2022 - 06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.   To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.   The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022 - 06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.    In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023 - 02, “Investments—Equity Method and Joint Ventures (Topic 323 ): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023 - 02 to have a material impact on its consolidated financial statements.   9       Recently Adopted Accounting Developments   In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.”  The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.   ASU 2016 - 13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and an adjustment to the Company’s reserve for unfunded loan commitments, was $ 2.2 million. The adjustment net of tax recorded to shareholders’ equity totaled $ 1.7 million.     In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022 - 02 was effective for the Company on January 1, 2023. There was no material impact to the Company's consolidated financial statements or related disclosures.     Note 2. Investment Securities     The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses. Upon further analysis, the Company did not record an allowance for credit losses on its securities held-to-maturity portfolio as of March 31, 2023.   Investment securities available-for-sale was comprised of the following:       March 31, 2023   (Dollars in thousands)   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Collateralized Mortgage Backed   $ 26,365     $ —     $ ( 4,232 )   $ 22,133   Subordinated Debt     9,970       —       ( 1,287 )     8,683   Municipal Securities:                                 Taxable     10,669       —       ( 2,311 )     8,358   Tax-exempt     22,784       45       ( 2,155 )     20,674   U.S. Governmental Agencies     3,395       2       ( 36 )     3,361   Total   $ 73,183     $ 47     $ ( 10,021 )   $ 63,209     10     Investment securities held-to-maturity was comprised of the following:       March 31, 2023   (Dollars in thousands)   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Municipal Securities:                                 Tax-exempt   $ 15,116     $ 51     $ ( 149 )   $ 15,018   Subordinated Debt     2,500       —       —       2,500   Total   $ 17,616     $ 51     $ ( 149 )   $ 17,518       Investment securities available-for-sale was comprised of the following:       December 31, 2022   (Dollars in thousands)   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Collateralized Mortgage Backed   $ 26,801     $ —     $ ( 4,574 )   $ 22,227   Subordinated Debt     9,970       —       ( 1,143 )     8,827   Municipal Securities:                                 Taxable     10,675       —       ( 2,709 )     7,966   Tax-exempt     22,823       10       ( 2,658 )     20,175   U.S. Governmental Agencies     3,470       2       ( 36 )     3,436   Total   $ 73,739     $ 12     $ ( 11,120 )   $ 62,631     Investment securities held-to-maturity was comprised of the following:       December 31, 2022   (Dollars in thousands)   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Municipal Securities:                                 Tax-exempt   $ 15,142     $ 35     $ ( 237 )   $ 14,940   Subordinated Debt     2,500       —       —       2,500   Total   $ 17,642     $ 35     $ ( 237 )   $ 17,440     Credit Quality Indicators and Allowance for Credit Losses - HTM   For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings. The Company’s HTM securities ACL was immaterial at  March 31, 2023 . The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The majority of the Company’s HTM securities with credit risk are obligations of states and political subdivisions.   The following table presents the amortized cost of HTM securities as of  March 31, 2023  and  December 31, 2022 by security type and credit rating:     (Dollars in thousands)   Municipal Securities     Subordinated Debt     Total HTM securities   March 31, 2023                         Credit Rating:                         AAA/AA/A   $ 15,116     $ —     $ 15,116   Not Rated - Non Agency     —       2,500       2,500   Total   $ 15,116     $ 2,500     $ 17,616   December 31, 2022                         Credit Rating:                         AAA/AA/A   $ 15,142     $ —     $ 15,142   Not Rated - Non Agency     —       2,500       2,500   Total   $ 15,142     $ 2,500     $ 17,642       The scheduled maturities of securities available-for-sale and held-to-maturity at  March 31, 2023 were as follows:       March 31, 2023       Available-for-Sale     Held-to-Maturity   (Dollars in thousands)   Amortized Cost     Fair Value     Amortized Cost     Fair Value   Due in one year or less   $ —     $ —     $ 264     $ 263   Due from one to five years     1,000       971       2,900       2,903   Due from after five to ten years     13,036       11,462       7,990       8,013   Due after ten years     59,147       50,776       6,462       6,339   Total   $ 73,183     $ 63,209     $ 17,616     $ 17,518     11     The scheduled maturities of securities available-for-sale and held-to-maturity at  December 31, 2022 were as follows:       December 31, 2022       Available-for-Sale     Held-to-Maturity   (Dollars in thousands)   Amortized Cost     Fair Value     Amortized Cost     Fair Value   Due in one year or less   $ —     $ —     $ 264     $ 262   Due from one to five years     1,000       963       1,073       1,073   Due from after five to ten years     13,056       11,583       9,828       9,819   Due after ten years     59,683       50,085       6,477       6,286   Total   $ 73,739     $ 62,631     $ 17,642     $ 17,440     Securities with a fair value of $ 18.4 million and $ 3.6 million were pledged at March 31, 2023 and December 31, 2022 , respectively,   The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of March 31, 2023 and December 31, 2022 :       March 31, 2023       Less than 12 Months     12 Months or Longer     Total   (Dollars in thousands)   Fair Value     Unrealized Loss     Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   Available-for-sale:                                                 Collateralized Mortgage Backed   $ —     $ —     $ 22,055     $ ( 4,232 )   $ 22,055     $ ( 4,232 ) Subordinated Debt     474       ( 26 )     7,459       ( 1,261 )     7,933       ( 1,287 ) Municipal securities:                                                 Taxable     971       ( 29 )     7,387       ( 2,282 )     8,358       ( 2,311 ) Tax-exempt     7,400       ( 126 )     10,393       ( 2,029 )     17,793       ( 2,155 ) U.S Governmental Agencies     1,754       ( 1 )     991       ( 35 )     2,745       ( 36 ) Total   $ 10,599     $ ( 182 )   $ 48,285     $ ( 9,839 )   $ 58,884     $ ( 10,021 )       December 31, 2022       Less than 12 Months     12 Months or Longer     Total   (Dollars in thousands)   Fair Value     Unrealized Loss     Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   Available-for-sale:                                                 Collateralized Mortgage Backed   $ 2,021     $ ( 151 )   $ 20,206     $ ( 4,423 )   $ 22,227     $ ( 4,574 ) Subordinated Debt     3,357       ( 393 )     4,720       ( 750 )     8,077       ( 1,143 ) Municipal Securities:                                                 Taxable     1,377       ( 198 )     6,589       ( 2,511 )     7,966       ( 2,709 ) Tax-exempt     11,028       ( 838 )     7,663       ( 1,820 )     18,691       ( 2,658 ) U.S Government Agencies     1,768       ( 2 )     1,018       ( 34 )     2,786       ( 36 ) Total   $ 19,551     $ ( 1,582 )   $ 40,196     $ ( 9,538 )   $ 59,747     $ ( 11,120 ) Held-to-maturity:                                                 Municipal Securities   $ 10,599     $ ( 237 )   $ —     $ —     $ 10,599     $ ( 237 ) Total   $ 10,599     $ ( 237 )   $ —     $ —     $ 10,599     $ ( 237 )   Unrealized losses on each of the major categories of securities have not been recognized into income because all the securities are of high credit quality (rated A or higher, if rated), management does not intend to sell and it is unlikely management will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. The fair value is expected to recover as the securities approach maturity. The following description provides the number of investment positions in an unrealized loss position and approximate duration of that loss position.   At  March 31, 2023 , there were twenty-five collateralized mortgage backed securities totaling $ 22.1 million in an unrealized loss position of more than 12 months. At  March 31, 2023  there was one  subordinated debt security with a fair value totaling approximately $ 474,000  in an unrealized loss position of less than 12 months and twenty securities totaling $ 7.5  million in an unrealized loss position of more than 12 months. At  March 31, 2023   fifteen  municipal securities with fair values totaling approximately $ 8.4 million were in an unrealized loss position of less than 12 months and twenty-five  securities totaling $ 17.8  million in an unrealized loss position of more than 12 months. At  March 31, 2023   one  U.S. government agency with a fair value totaling approximately $ 1.8  million was in an unrealized loss position of less than 12 months and seven government agency securities with a fair value of $ 1.0 million  were in an unrealized loss position of more than 12 months.    Certain municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at March 31, 2023 and December 31, 2022 was $ 6,170 and $ 8,228 , respectively.   12       Note 3. Loans Receivable   Loans receivable were comprised of the following:   (Dollars in thousands)   March 31, 2023     December 31, 2022   Residential Real Estate:                 Single family   $ 179,507     $ 178,615   Multifamily     211,988       215,624   Farmland     153       155   Commercial Real Estate:                 Owner-occupied     266,929       228,374   Non-owner occupied     470,090       472,354   Construction and Land Development     415,078       393,783   Commercial – Non Real-Estate:                 Commercial & Industrial     86,937       97,351   Consumer – Non Real-Estate:                 Unsecured     204       1,984   Secured     7,330       11,352   Total Gross Loans     1,638,216       1,599,592   Less: unearned fees, net     ( 5,506 )     ( 5,528 ) Less: allowance for credit losses - loans     ( 15,435 )     ( 14,114 ) Net Loans   $ 1,617,275     $ 1,579,950     The unsecured consumer loans above include $ 204,000 and $ 2.0 million of overdrafts reclassified as loans at March 31, 2023 and December 31, 2022 , respectively.   13     The following tables summarize the activity in the allowance for credit losses on loans by loan class for the three months ended March 31, 2023 and 2022 .   Allowance   for   Credit   Losses   By   Portfolio   Segment       Real Estate                           For the three months ended March 31, 2023   Residential     Commercial     Construction     Commercial     Consumer     Total   (Dollars in thousands)                                                 Beginning Balance, prior to adoption of ASC 326   $ 2,146     $ 7,159     $ 3,347     $ 1,418     $ 44     $ 14,114   Impact of adopting ASC 326     59       614       19       172       31       895   Recoveries     8       —       —       —       3       11   Provision for credit losses     ( 18 )     475       181       ( 170 )     ( 53 )     415   Ending Balance   $ 2,195     $ 8,248     $ 3,547     $ 1,420     $ 25     $ 15,435   Ending Balance:                                                 Individually evaluated for Impairment   $ —     $ —     $ —     $ —     $ —     $ —   Collectively evaluated for Impairment   $ 2,195     $ 8,248     $ 3,547     $ 1,420     $ 25     $ 15,435         Real Estate                           For the three months ended March 31, 2022   Residential     Commercial     Construction     Commercial     Consumer     Total   (Dollars in thousands)                                                 Beginning Balance   $ 1,672     $ 5,689     $ 2,697     $ 1,540     $ 99     $ 11,697   Recoveries     —       —       —       —       3       3   Provision     307       589       60       ( 150 )     ( 6 )     800   Ending Balance   $ 1,979     $ 6,278     $ 2,757     $ 1,390     $ 96     $ 12,500   Ending Balance:                                                 Individually evaluated for Impairment   $ —     $ —     $ —     $ —     $ —     $ —   Collectively evaluated for Impairment   $ 1,979     $ 6,278     $ 2,757     $ 1,390     $ 96     $ 12,500       14     Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, based on current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for credit losses. Loans not classified are rated pass.   The following tables summarize the amortized cost basis by aggregate Pass and criticized categories of Watch, Special Mention, and Substandard within the Company’s internal risk rating system as of March 31, 2023 and December 31, 2022 . At these dates no loans were classified as doubtful.       Term Loans Amortized Cost Basis by Origination Year                   March 31, 2023                                                                 (Dollars in thousands)   2023     2022     2021     2020     2019     Prior     Revolving Loans     Total   Residential Real Estate - Single Family                                                                 Pass   $ 9,120     $ 34,712     $ 25,740     $ 34,578     $ 12,697     $ 23,120     $ 37,517     $ 177,484   Watch     —       —       —       1,321       —       —       149       1,470   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       272       281       —       553   Total Residential Real Estate - Single Family   $ 9,120     $ 34,712     $ 25,740     $ 35,899     $ 12,969     $ 23,401     $ 37,666     $ 179,507                                                                     Residential Real Estate - Multifamily                                                                 Pass   $ —     $ 56,056     $ 70,194     $ 37,433     $ 28,916     $ 10,513     $ 8,876     $ 211,988   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       —       —       —       —   Total Residential Real Estate - Multifamily   $ —     $ 56,056     $ 70,194     $ 37,433     $ 28,916     $ 10,513     $ 8,876     $ 211,988                                                                     Residential Real Estate - Farmland                                                                 Pass   $ —     $ —     $ —     $ —     $ —     $ 153     $ —     $ 153   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       —       —       —       —   Total Residential Real Estate - Farmland   $ —     $ —     $ —     $ —     $ —     $ 153     $ —     $ 153                                                                     Commercial Real Estate - Owner Occupied                                                                 Pass   $ 40,670     $ 56,385     $ 41,350     $ 36,399     $ 35,628     $ 42,137     $ 13,223     $ 265,792   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       1,137       —       —       1,137   Total Commercial Real Estate - Owner Occupied   $ 40,670     $ 56,385     $ 41,350     $ 36,399     $ 36,765     $ 42,137     $ 13,223     $ 266,929                                                                     Commercial Real Estate - Non-Owner Occupied                                                                 Pass   $ 9,985     $ 100,375     $ 56,594     $ 65,596     $ 16,135     $ 161,849     $ 25,267     $ 435,801   Watch     —       —       —       —       6,025       19,778       —       25,803   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       7,858       628       —       8,486   Total Commercial Real Estate - Non-Owner Occupied   $ 9,985     $ 100,375     $ 56,594     $ 65,596     $ 30,018     $ 182,255     $ 25,267     $ 470,090                                                                     Construction & Land Development                                                                 Pass   $ —     $ 24,115     $ 10,221     $ 12,774     $ 35     $ 8,523     $ 359,410     $ 415,078   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       —       —       —       —   Total Construction & Land Development   $ —     $ 24,115     $ 10,221     $ 12,774     $ 35     $ 8,523     $ 359,410     $ 415,078                                                                     Commercial & Industrial                                                                 Pass   $ 1,721     $ 5,207     $ 13,232     $ 4,451     $ 2,601     $ 12,688     $ 46,258     $ 86,158   Watch     —       —       —       —       —       458       316       774   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       5       —       —       —       —       5   Total Commercial & Industrial   $ 1,721     $ 5,207     $ 13,237     $ 4,451     $ 2,601     $ 13,146     $ 46,574     $ 86,937                                                                     Consumer - Unsecured                                                                 Pass   $ —     $ —     $ —     $ —     $ —     $ —     $ 204     $ 204   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       —       —       —       —   Total Consumer - Unsecured   $ —     $ —     $ —     $ —     $ —     $ —     $ 204     $ 204                                                                     Consumer - Secured                                                                 Pass   $ —     $ 297     $ 7     $ 83     $ 2,206     $ 4,625     $ 112     $ 7,330   Watch     —       —       —       —       —       —       —       —   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       —       —       —       —       —       —   Total Consumer - Secured   $ —     $ 297     $ 7     $ 83     $ 2,206     $ 4,625     $ 112     $ 7,330                                                                     Total                                                                 Pass   $ 61,496     $ 277,147     $ 217,338     $ 191,314     $ 98,218     $ 263,608     $ 490,867     $ 1,599,988   Watch     —       —       —       1,321       6,025       20,236       465       28,047   Special Mention     —       —       —       —       —       —       —       —   Substandard     —       —       5       —       9,267       909       —       10,181   Total   $ 61,496     $ 277,147     $ 217,343     $ 192,635     $ 113,510     $ 284,753     $ 491,332     $ 1,638,216     15         December 31, 2022   (Dollars in thousands)   Pass     Watch     Special Mention     Substandard     Total   Residential Real Estate:                                         Single Family   $ 178,172     $ —     $ —     $ 443     $ 178,615   Multifamily     215,624       —       —       —       215,624   Farmland     155       —       —       —       155   Commercial Real Estate:                                         Owner occupied     227,231       —       —       1,143       228,374   Non-owner occupied     439,537       24,897       —       7,920       472,354   Construction & Land Development     393,783       —       —       —       393,783   Commercial – Non Real Estate:                                         Commercial & Industrial     97,246       97       —       8       97,351   Consumer – Non Real Estate:                                         Unsecured     1,984       —       —       —       1,984   Secured     11,352       —       —       —       11,352   Total   $ 1,565,084     $ 24,994     $ —     $ 9,514     $ 1,599,592     The following tables present the amortized cost basis by segments of the loan portfolio summarized by aging categories as of March 31, 2023 and December 31, 2022 :       March 31, 2023   (Dollars in thousands)   30-59 Days Past Due     60-89 Days Past Due     Greater than 90 Days     Total Past Due     Current     Total Loans Receivable     Nonaccrual   Residential Real Estate:                                                         Single Family   $ —     $ —     $ —     $ —     $ 179,507     $ 179,507     $ —   Multifamily     —       —       —       —       211,988       211,988       —   Farmland     —       —       —       —       153       153       —   Commercial Real Estate:                                                         Owner occupied     —       —       —       —       266,929       266,929       —   Non-owner occupied     —       —       —       —       470,090       470,090       —   Construction & Land Development     —       —       —       —       415,078       415,078       —   Commercial – Non Real Estate:                                                         Commercial & Industrial     —       —       15       15       86,922       86,937       —   Consumer – Non Real Estate:                                                         Unsecured     —       —       —       —       204       204       —   Secured     32       8       —       40       7,290       7,330       —   Total   $ 32     $ 8     $ 15     $ 55     $ 1,638,161     $ 1,638,216     $ —         December 31, 2022   (Dollars in thousands)   30-59 Days Past Due     60-89 Days Past Due     Greater than 90 Days     Total Past Due     Current     Total Loans Receivable     Nonaccrual   Residential Real Estate:                                                         Single Family   $ —     $ —     $ —     $ —     $ 178,615     $ 178,615     $ —   Multifamily     —       —       —       —       215,624       215,624       —   Farmland     —       —       —       —       155       155       —   Commercial Real Estate:                                                         Owner occupied     —       —       —       —       228,374       228,374       —   Non-owner occupied     —       —       —       —       472,354       472,354       —   Construction & Land Development     —       —       —       —       393,783       393,783       —   Commercial – Non Real Estate:                                                         Commercial & Industrial     —       —       15       15       97,336       97,351       —   Consumer – Non Real Estate:                                                         Unsecured     —       —       —       —       1,984       1,984       —   Secured     11       12       6       29       11,323       11,352       —   Total   $ 11     $ 12     $ 21     $ 44     $ 1,599,548     $ 1,599,592     $ —     There were no loans placed on nonaccrual with an allowance for credit losses as of March 31, 2023 and December 31, 2022 .    The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:   ● Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. ● Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. ● Home equity lines of credit are generally secured by second mortgages on residential real estate property. ● Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral The following table details the amortized cost of collateral dependent loans:   (Dollars in thousands)   March 31, 2023   Residential Real Estate:         Single family   $ 148   Total   $ 148       The Company did not modify any loans during the three months ended March 31, 2023.   As of  March 31, 2023  there were no real estate loans in the process of foreclosure.   16     Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.   December 31, 2022   Loans Receivable   (Dollars in thousands)   Ending Balance     Ending Balance: Individually Evaluated for Impairment     Ending Balance: Collectively Evaluated for Impairment   Residential Real Estate   $ 394,394     $ 149     $ 394,245   Commercial Real Estate     700,728       —       700,728   Construction and Land Development     393,783       —       393,783   Commercial & Industrial     97,351       —       97,351   Consumer     13,336       —       13,336   Total   $ 1,599,592     $ 149     $ 1,599,443     Prior to the adoption of ASU 2016 - 13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans could include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The tables below include all loans that were individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. The following table presents loans individually evaluated for impairment by class of loans, as of December 31, 2022:     December 31, 2022   (Dollars in thousands)   Recorded Investment     Unpaid Principal Balance     Related Allowance   With no related allowance recorded                         Residential Real Estate:                         Single family   $ 149     $ 149     $ —   Total   $ 149     $ 149     $ —     The following table presents information related to the average recorded investment and interest income recognized on impaired loans, for the three months ended March 31, 2022 :     Three Months Ended March 31,       2022   (Dollars in thousands)   Average Record Investment     Interest Income Recognized   With no related allowance recorded                 Residential Real Estate:                 Single family   $ 148     $ 3   Commercial Real Estate                 Non-owner Occupied     1,080       22   Total   $ 1,228     $ 25         Unfunded Commitments   The Company maintains an allowance for credit losses on off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on funded loans. The allowance for credit losses for off-balance sheet credit exposure of $ 1.2 million and $ 0 million at March 31, 2023 and December 31, 2022, respectively, is classified on the balance sheet within Other Liabilities. The following table presents the balance and activity in the allowance for credit losses for off-balance sheet credit exposure for the three months ended March 31, 2023 .   (Dollars in thousands)   Total Allowance for Credit Losses on Off-Balance Sheet Credit Exposure   Balance, December 31, 2022   $ —   Adjustment to allowance for off-balance sheet credit losses upon adoption of ASU 2016-13     1,310   Recovery of allowance for off-balance sheet credit losses     ( 132 ) Balance, March 31, 2023   $ 1,178       Note 4. Intangible Assets   The carrying amount of computer software developed was $ 10.6 million and $ 9.1  million at March 31, 2023 and December 31, 2022 . The following table presents the carrying amount of computer software developed as of  March 31, 2023  and  December 31, 2022 .       As of March 31, 2023     As of December 31, 2022   (Dollars in thousands)   Gross Carrying Amount     Accumulated Amortization     Gross Carrying Amount     Accumulated Amortization   Amortizable intangible assets:                                 Computer software   $ 10,559     $ —     $ 9,149     $ —   Total   $ 10,559     $ —     $ 9,149     $ —     The Company is still in the development stage of computer software where costs are capitalized. Capitalization ceases when the software is substantially complete and ready for its intended use. At that time the intangible asset will be amortized on a straight-line basis over the estimated useful life of the asset. As of  March 31, 2023 , the Company has not recorded any amortization on its intangible computer software. We anticipate the amortization period for intangible computer software to be ten years, once placed in service.     Note 5. Derivatives and Risk Management Activities   The Company uses derivative financial instruments (“derivatives”) primarily to assist customers with their risk management objectives. The Company classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (“interest rate loan swaps”). The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.   The following tables summarize key elements of the Company’s derivative instruments as of March 31, 2023 and December 31, 2022 .   March 31, 2023                                         Customer-related interest rate contracts                                         Dollars in thousands)   Notional Amount     Positions     Assets     Liabilities     Collateral Pledges   Matched interest rate swap with borrower   $ 247,966       45       —     $ 19,322     $ —   Matched interest rate swap with counterparty   $ 247,966       45     $ 19,322       —     $ —     17     December 31, 2022                                         Customer-related interest rate contracts                                         Dollars in thousands)   Notional Amount     Positions     Assets     Liabilities     Collateral Pledges   Matched interest rate swap with borrower   $ 245,717       44     $ —       23,896     $ 3,034   Matched interest rate swap with counterparty   $ 245,717       44       23,896     $ —     $ 3,034     The Company is able to recognize fee income upon execution of the interest rate swap contract. The Company did not record any interest rate swap fee income for the three months ended March 31, 2023 and 2022 .   Note 6. Fair Value Presentation   In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.   The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is the most representative of fair value under current market conditions.   In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:   Level  1  –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.   Level  2  –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.   Level  3  –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.   The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:   Securities available for sale   Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level  3 of the valuation hierarchy. As of March 31, 2023 , and December 31, 2022 , the Bank’s entire portfolio of available for sale securities are considered to be Level  2 securities, with the exception of one subordinated debt security which is considered a Level 3.   Derivative asset (liability)  – interest rate swaps on loans   As discussed in “Note 5: “Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level  2.   18     The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 :       March 31, 2023   (Dollars in thousands)   Level 1     Level 2     Level 3     Total   Assets:                                 Investment securities available-for-sale:                                 Collateralized Mortgage Backed   $ —     $ 22,133     $ —     $ 22,133   Subordinated Debt     —       8,433       250       8,683   Municipal Securities:                                 Taxable     —       8,358       —       8,358   Tax-exempt     —       20,674       —       20,674   U.S. Government Agencies     —       3,361       —       3,361   Derivative asset – interest rate swap on loans     —       19,322       —       19,322   Total   $ —     $ 82,281     $ 250     $ 82,531   Liabilities:                                 Derivative liability – interest rate swap on loans     —       19,322       —       19,322   Total   $ —     $ 19,322     $ —     $ 19,322         December 31, 2022   (Dollars in thousands)   Level 1     Level 2     Level 3     Total   Assets:                                 Investment securities available-for-sale:                                 Collateralized Mortgage Backed   $ —     $ 22,227     $ —     $ 22,227   Subordinated Debt     —       8,577       250       8,827   Municipal Securities:                                 Taxable     —       7,966       —       7,966   Tax-exempt     —       20,175       —       20,175   U.S. Government Agencies     —       3,436       —       3,436   Derivative asset – interest rate swap on loans     —       23,896       —       23,896   Total   $ —     $ 86,277     $ 250     $ 86,527   Liabilities:                                 Derivative liability – interest rate swap on loans   $ —       23,896     $ —       23,896   Total   $ —     $ 23,896     $ —     $ 23,896       During the  three months ended March 31, 2023 there were no changes to the fair value of level three instruments.   Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.   The Company did not have any assets that were measured at fair value on a nonrecurring basis as of March 31, 2023  or  December 31, 2022 .   Fair Value of Financial Instruments   FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. In accordance with ASU 2016 - 01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.   The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.   March 31, 2023   Carrying     Estimated     Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs     Significant Unobservable Inputs   (Dollars in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets:                                         Cash and cash equivalents   $ 225,334     $ 225,334     $ 225,334     $ —     $ —   Securities:                                         Available for sale     63,209       63,209       —       62,959       250   Held to maturity     17,616       17,518       —       17,518       —   Restricted securities     22,436       22,436       —       22,436       —   Loans, net     1,617,275       1,594,624       —       1,594,624       —   Derivative asset – interest rate swap on loans     19,322       19,322       —       19,322       —   Bank owned life insurance     37,503       37,503       —       37,503       —   Accrued interest receivable     8,592       8,592       —       8,592       —   Liabilities:                                         Deposits   $ 1,632,288     $ 1,606,102     $ —     $ 902,212     $ 703,890   Federal funds borrowed     60,696       60,585       —       —       60,585   Advances from the FHLB     45,000       44,994       —       —       44,994   Subordinated debt, net     72,344       63,891       —       63,891       —   Derivative liability – interest rate swaps on loans     19,322       19,322       —       19,322       —   Accrued interest payable     2,967       2,967       —       2,967       —     19     December 31, 2022   Carrying     Estimated     Quoted Prices in Active Markets for Identical Assets     Significant Other Observable Inputs     Significant Unobservable Inputs   (Dollars in thousands)   Amount     Fair Value     Level 1     Level 2     Level 3   Assets:                                         Cash and cash equivalents   $ 130,600     $ 130,600     $ 130,600     $ —     $ —   Securities:                                         Available for sale     62,631       62,631       —       62,381       250   Held to maturity     17,642       17,440       —       17,440       —   Restricted securities     24,325       24,325       —       24,325       —   Loans, net     1,579,950       1,584,533       —       —       1,584,533   Derivative asset – interest rate swap on loans     23,896       23,896       —       23,896       —   Bank owned life insurance     37,249       37,249       —       37,249       —   Accrued interest receivable     8,779       8,779       —       8,779       —   Liabilities:                                         Deposits   $ 1,512,889     $ 1,503,869     $ —     $ 904,978     $ 599,121   Advances from the FHLB     100,000       99,983       —       —       99,983   Subordinated debt, net     72,245       64,235       —       64,235       —   Derivative liability – interest rate swaps on loans     23,896       23,896       —       23,896       —   Accrued interest payable     896       896       —       896       —     The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. There were no changes in methodologies or transfers between levels at March 31, 2023 and December 31, 2022 .     Note 7. Earnings Per Common Share   Basic earnings per common share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were no such potentially dilutive securities outstanding in 2023  or 2022.   The weighted average number of shares used in the calculation of basic and diluted earnings per common share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstanding un-vested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.       For the Three Months Ended March 31,   (Dollars in thousands, except for per share data)   2023     2022   Net income   $ 8,151     $ 5,423   Preferred stock dividends     ( 539 )     ( 539 ) Net income available to common shareholders   $ 7,612     $ 4,884   Weighted average number of common shares issued, basic and diluted     7,517,213       7,647,519   Earnings per common share:                 Basic and diluted income available per common share   $ 1.01     $ 0.64      20       Note 8. Accumulated Other Comprehensive Loss   The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes, as of March 31, 2023 and December 31, 2022 :       March 31, 2023     December 31, 2022   Unrealized loss on securities   $ ( 9,974 )   $ ( 11,108 ) Unrealized loss on securities transferred to HTM     ( 6 )     ( 8 ) Tax benefit     2,316       2,570   Total accumulated other comprehensive loss   $ ( 7,664 )   $ ( 8,546 )     Note 9. Leases   Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Statements of Financial Condition. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor.   Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.   Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2023  was $ 111,000 . During the three months ended March 31, 2023  and 2022 , the Company recognized lease expense of $ 121,000 and $ 121,000 , respectively.       As of March 31,   (Dollars in thousands)   2023   Lease liabilities   $ 7,235   Right-of-use assets   $ 6,570   Weighted-average remaining lease term – operating leases (in months).     16.3   Weighted-average discount rate – operating leases     2.80 %       For the three months ended March 31,   (Dollars in thousands)   2023   Lease Cost         Operating lease cost   $ 121   Total lease costs   $ 121   Cash paid for amounts included in measurement of lease liabilities   $ 111     The Company is the lessor for three operating leases. One lease is extended on a month-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Total rent income on these operating leases is approximately $ 6,000 per month.   As of  March 31, 2023 , all of the Company’s lease obligations are classified as operating leases. The Company does not have any finance lease obligations.   21     A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of  March 31, 2023 is as follows:   (Dollars in thousands)         2023   $ 528   2024     654   2025     671   2026     689   2027     587   Thereafter     5,561   Total undiscounted cash flows   $ 8,690   Discount     ( 1,455 ) Lease liabilities   $ 7,235         Item   2 – Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2022, previously filed with the SEC on March 23, 2023. Results for the three months ended March 31, 2023 are not necessarily indicative of results for the year ending December 31, 2023 or any future period.   Forward-Looking Statements   This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:     ● 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 certain of our 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;     ● the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations;     ● 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 those markets;     ● adequacy of or increases in the allowance for credit losses;   22       ● cyber threats, attacks or other data security events;     ● fraud or misconduct by internal or external parties;     ● reliance on third parties for key services;     ● deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures;     ● 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 credit 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;      ● a work stoppage, forced quarantine, or other interruption or the unavailability of key employees; and         ● other risk factors and information included in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q.   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-Q to reflect future events or developments.   Overview   As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiaries, and the “Bank” refers to MainStreet Bank.   MainStreet Bancshares, Inc.   MainStreet Bancshares, Inc. is a bank holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC.    The Company and its subsidiaries are incorporated in and chartered by the Commonwealth of Virginia. The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com. The information contained on our website shall not be considered part of this Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.   MainStreet Bank   MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, Leesburg in Virginia, and one in Washington D.C.   We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.   We believe we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.   We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to up-to-date banking technology. These systems and our highly skilled staff have allowed us to compete with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from our competition. We strive to be the leading community bank in our market.   23     We offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides FDIC insurance on deposits up to $150 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.   Our products and services include: business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Internet account access is available for all personal and business accounts, internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.   Avenu TM   On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu TM , a division of MainStreet Bank. Avenu TM represents the Company’s suite of Banking as a Service (“BaaS”) solutions designed to meet the banking needs of Fintech customers. We believe our approach to providing a proprietary BaaS solution is unique. Our transformational subledger combined with our high-touch compliance training goes beyond the industry standards to ensure that our Fintech partners will prosper. This division of MainStreet Bank currently serves money service businesses, payment processers, and BaaS customers and provides the Bank with valuable low-cost deposits and additional streams of fee income. Our BaaS solution is in the late stage of development. A major component of the BaaS solution includes a fintech core, which is Software as a Service (SaaS).   MainStreet Community Capital, LLC   In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for New Market Tax Credit (“NMTC”) allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”).   Impact of Inflation   The United States is experiencing rising inflation. In response, the Federal Open Markets Committee (FOMC) raised the Federal Funds rate 425 basis points throughout 2022.  During the quarter ended March 31, 2023, the FOMC has raised rates an additional 50 basis points for a total of 475 basis points in the preceding twelve months. In addition to raising the Federal Funds rate, the Federal Reserve may take other means necessary to fulfill its dual mandate.      The effects of rising inflation and the actions of the Federal Reserve, as well as the economy at large may impact the Bank’s customers, including their willingness and ability to repay their obligations, to invest, to save or to spend. This impact could affect the Bank’s customers general appetite for banking products and the credit health of the Bank’s customer base. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.   Critical Accounting Policies   The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.   Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021.  The Company has opted to use the published Secured Overnight Funding Rate (SOFR) as a substitute and replacement for any financial instruments that are or would otherwise be tied to the LIBOR index.   24     Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2023, since our Annual Report on Form 10-K for the year ended December 31, 2022 was filed, we have adopted the current expected credit loss standard. Any additional changes are discussed in our Recently Issued Accounting Pronouncements.   Comparison of Statements of Income for the Three Months Ended March 31, 2023 and 2022   General   Total revenue increased $11.1 million to $29.6 million for the three months ended March 31, 2023 from $18.5 million for the three months ended March 31, 2022. These increases in total revenue were offset by increases in total expenses. Total expenses increased $8.2 million to $19.3 million for the three months ended March 31, 2023 from $11.1 million for the three months ended March 31, 2022.  The increase in revenue for the three months ended March 31, 2023 was primarily due to increases in net interest income of $5.9 million over the same period in 2022. Income was positively impacted by interest earned on federal funds sold, which earned $1.1 million in additional interest for the three months ended March 31, 2023 than the same period in 2022. These increases in income were offset by increases of $2.1 million in salaries and employee benefits for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Net income increased $2.7 million to $8.2 million for the three months ended March 31, 2023 from $5.4 million for the three months ended March 31, 2022.   Interest Income   Total interest income increased $11.3 million, or 65.1%, to $28.6 million for the three months ended March 31, 2023 from $17.3 million for the three months ended March 31, 2022. The increase was primarily the result of an increase in interest and fees on loans of $10.0 million and an increase in interest on federal funds sold of $1.1 million. Total average interest-earning assets increased $253.9 million, to $1.83 billion for the three months ended March 31, 2023 from $1.57 billion for the same period in 2022 primarily because of an increase of $222.0 million in the average balance of loans, an increase of $34.9 million in the average balance of federal funds sold and interest-earning deposits, and was offset by a $3.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 188 basis points to 6.37% for the three months ended March 31, 2023 as compared to 4.49% for the three months ended March 31, 2022 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 475 basis points over the course of the previous year.   Interest and fees on loans increased $10.0 million, to $26.7 million for the three months ended March 31, 2023 from $16.7 million for the same period in 2022. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $222.0 million, which increased to $1.60 billion for the three months ended March 31, 2023 from $1.38 billion for the three months ended March 31, 2022. The average yield on loans increased 187 basis points, or 38.0%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The Federal Reserve increased the federal interest rate by 50 basis points throughout the quarter so the impact of these additional increases will not be fully demonstrated until the following quarter.   Interest income on federal funds sold and interest-earning deposits increased by $1.1 million to $1.1 million for the three months ended March 31, 2023, from $0.0 million for the three months ended March 31, 2022. The increase was primarily due to an increase in the average yield on these deposits as well as the average balances increasing over the same time period. The average balance of interest-earning deposits and federal funds sold increased $34.9 million to $118.7 million for the three months ended March 31, 2023 from $83.8 million for the same period in 2022. The average yield increased to 3.87% for the three months ended March 31, 2023 from 0.16% for the same period in 2022.    25     Interest on investment securities increased by $151,000 to $852,000 for the three months ended March 31, 2023 from $701,000 for the three months ended March 31, 2022 on a fully tax-equivalent basis. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $42,000, or 12.5%, to $377,000 for the three months ended March 31, 2023, from $335,000 for the three months ended March 31, 2022. Interest on mortgage-backed securities increased by $18,000, or 18.0%, to $118,000 for the three months ended March 31, 2023, from $100,000 for the three months ended March 31, 2022. Subordinated debt interest income increased by $9,000, or 7.4%, to $133,000 for the three months ended March 31, 2023, from $124,000 for the three months ended March 31, 2022. The average yield on taxable securities increased  95 basis points, to 2.92%  and the average yield on tax-exempt securities increased 4 basis points, to 3.57% on a tax equivalent basis for the three months ended March 31, 2023, from 1.97% and 3.53%, respectively, for the same period in 2022. As increased market rates resulted in investment income rising despite the average balance of investment securities decreasing by $3.1 million, to $109.9 million for the three months ended March 31, 2023, from $113.0 million for the three months ended March 31, 2022.   I nterest Expense   Total interest expense increased $5.4 million, to $7.6 million for the three months ended March 31, 2023 from $2.2 million for the three months ended March 31, 2022, primarily due to a $2.7 million increase in interest expense on time deposits and a $1.1 million increase in interest expense on money market deposits. There were additional increases in interest expense primarily due to the increase in average yield and average outstanding balance of advances from the Federal Home Loan Bank that were included in the three months ended March 31, 2023 over the three months ended March 31, 2022   Interest expense on deposits increased $4.1 million to $5.8 million for the three months ended March 31, 2023 from $1.7 million for the three months ended March 31, 2022 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $156.0 million to $1.03 billion during the three months ended March 31, 2023 as compared to $877.8 million for the three months ended March 31, 2022. The increase in the average balance of interest-bearing deposits was primarily a result of a $13.0 million increase in the average balance of interest-bearing demand deposit accounts and by a $216.7 million increase in the average balance of time deposits. The average cost of deposits was 227 basis points for the three months ended March 31, 2023, compared to 76 basis points for the three months ended March 31, 2022. The average rate paid on money market deposits increased 199 basis points to 2.17% for the three months ended March 31, 2023 from 0.18% for the three months ended March 31, 2022. The average rate paid on interest-bearing demand deposits increased 130 basis points to 1.67% for the three months ended March 31, 2023 from 0.37% for the three months ended March 31, 2022 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 123 basis points to 2.50% for the three months ended March 31, 2023 as compared to 1.27% for the three months ended March 31, 2022. The increase in the average balance of interest-bearing demand deposits for the three months ended March 31, 2023, primarily was the result of our continued effort to attract and retain low-cost deposits, and to reduce our reliance on wholesale deposits.   The average balance of subordinated debt increased $28.3 million for the three months ended March 31, 2023, due to an additional $43.9 million issued in late March of 2022 and was fully captured in the three months ended March 31, 2023.   Net Interest Income   Net interest income increased approximately $5.9 million, or 38.8%, to $21.1 million for the three months ended March 31, 2023 from $15.2 million for the three months ended March 31, 2022 because of our net interest-earning assets increasing $26.0 million to $641.4 million for the three months ended March 31, 2023 from $615.4 million for the three months ended March 31, 2022. The interest rate spread increased by 21 basis points to 3.79% for the three months ended March 31, 2023 from 3.58% for the three months ended March 31, 2022, on a tax equivalent basis. The net interest margin increased by 76 basis points from 3.93% for the three months ended March 31, 2022 to 4.69% for the three months ended March 31, 2023 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.   26     Average Balances, Net Interest Income, Yields Earned and Rates Paid   The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.       For the Three Months Ended March 31,       2023     2022       Average Balance     Interest Income/ Expense(6)     Yield/ Cost(5)(6)     Average Balance     Interest Income/ Expense(6)     Yield/ Cost(5)(6)       (Dollars in thousands)   Interest-earning assets:                                                 Loans(1)   $ 1,599,756     $ 26,731       6.78 %   $ 1,377,723     $ 16,685       4.91 % Investment securities:                                                 Taxable     71,933       518       2.92 %     73,413       357       1.97 % Tax-exempt     37,941       334       3.57 %     39,545       344       3.53 % Federal funds and interest-bearing deposits     118,670       1,132       3.87 %     83,754       34       0.16 % Total interest-earning assets     1,828,300     $ 28,715       6.37 %     1,574,435     $ 17,420       4.49 % Non-interest-earning assets     57,371                       88,386                   Total assets   $ 1,885,671                     $ 1,662,821                   Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 83,388     $ 343       1.67 %   $ 70,403     $ 65       0.37 % Savings and NOW deposits     51,943       108       0.84 %     82,758       37       0.18 % Money market deposits     225,037       1,203       2.17 %     267,905       119       0.18 % Time deposits     673,441       4,144       2.50 %     456,782       1,431       1.27 % Total interest-bearing deposits     1,033,809       5,798       2.27 %     877,848       1,652       0.76 % Federal funds purchased     2,965       38       5.20 %     1       —       —   Federal Home Loan Bank advances     77,833       906       4.72 %     37,167       31       0.34 % Subordinated debt     72,306       812       4.55 %     43,995       468       4.31 % Total interest-bearing liabilities     1,186,913     $ 7,554       2.58 %     959,011     $ 2,151       0.91 % Non-interest-bearing liabilities:                                                 Demand deposits and other liabilities     497,155                       514,101                   Total liabilities     1,684,068                       1,473,112                   Stockholders’ equity     201,603                       189,709                   Total liabilities and stockholders’ equity   $ 1,885,671                     $ 1,662,821                   Net interest income           $ 21,161                     $ 15,269           Interest rate spread(2)                     3.79 %                     3.58 % Net interest-earning assets(3)   $ 641,387                     $ 615,424                   Net interest margin(4)                     4.69 %                     3.93 % Average interest-earning assets to average interest-bearing liabilities     154.0 %                     164.17 %                   (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 average interest–bearing liabilities. (4) Net interest margin represents net interest income divided by total average interest-earning assets. (5) Annualized. (6) Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.”   27     Rate/ Volume Analysis   The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.   For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.       For the Three Months Ended       March 31, 2023 and 2022       Increase (Decrease) Due to     Total Increase       Volume     Rate     (Decrease)       (Dollars in thousands)   Interest-earning assets:                         Loans   $ 2,988     $ 7,058     $ 10,046   Investment securities:                         Taxable     (49 )     210       161   Tax exempt     (33 )     23       (10 ) Federal funds and interest-bearing deposits     19       1,079       1,098   Total interest-earning assets     2,925       8,370       11,295   Interest-bearing liabilities:                         Interest-bearing demand deposits     14       264       278   Savings and NOW accounts     (136 )     1,220       1,084   Money market deposit accounts     (93 )     164       71   Time deposits     892       1,821       2,713   Total deposits     677       3,469       4,146   Fed funds purchased     38       —       38   Federal Home Loan Bank advances     68       807       875   Subordinated debt     287       57       344   Total interest-bearing liabilities     1,070       4,333       5,403   Change in net interest income   $ 1,855     $ 4,037     $ 5,892     Provision for Credit Losses   Management believes that the provision recorded for the period ended March 31, 2023 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, credit quality and supportable forecasts. We will continuously review the credit portfolio to determine the depth and breadth of potential credit losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the credit portfolio that may arise, additional provision expenses may be required.   The provision for credit losses, which is an operating expense, is maintained to ensure that the allowance for credit losses is maintained at levels we consider necessary and appropriate to absorb expected credit losses at a balance sheet date. In determining the level of the allowance for credit and off-balance sheet losses, we consider past and current loss experience, evaluations of real estate collateral, current future economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for credit losses is assessed monthly and provisions are made for credit losses as required in order to maintain the overall allowance.   The provision for credit losses on loans decreased by $385,000 to a provision for loan losses of $415,000 for the three months ended March 31, 2023 from a provision for credit losses on loans of $800,000 for the three months ended March 31, 2022. Loan originations, which totaled approximately $174.2 million for the three months ended March 31, 2022 decreased $128.7 million compared to loan originations, of $45.5 million for the three months ended March 31, 2023. The Company did not have any non-performing loans at March 31, 2022 or March 31, 2023.   The provision for credit losses on off-balance sheet credit exposure decreased by $132,000 to a recovery for credit losses on off-balance sheet credit exposure of $132,000 for the three months ended March 31, 2023.    During the three months ended March 31, 2023, there were no significant changes in loans graded as special mention. Substandard loans decreased $667,000 as of March 31, 2023 for a balance of $10.2 million. Of the substandard loans as of March 31, 2023, 83% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the three months ended March 31, 2023, there were no charge-offs incurred, and recoveries of $11,000 were received.   28     Non-Interest Income   Non-interest income decreased $159,000, or 13.7%, to $1.0 million for the three months ended March 31, 2023 from $1.2 million for the three months ended March 31, 2022. The decrease in non-interest income was primarily due to decreases in mortgage origination and other fee income in the three months ended March 31, 2023 compared to the same period in 2022. The Company continues to focus on increasing fee income as it strategically benefits our customers.   Non-Interest Expense   Non-interest expense increased $2.7 million, or 30.6%, to $11.7 million for the three months ended March 31, 2023 from $9.0 million for the three months ended March 31, 2022 primarily because of increases in salary and employee benefits of $2.1 million and advertising and marketing expenses of $391,000. Salaries and employee benefits expense increased by $2.1 million to $7.6 million for the three months ended March 31, 2023 from $5.5 million for the three months ended March 31, 2022 primarily as a result of twenty-nine new employees and the related salary and benefit expenses for these additional employees. Advertising and marketing expenses increased $391,000, or 96.3%, to $797,000 for the three months ended March 31, 2023 from $406,000 for the three months ended March 31, 2022 due to timing and new initiatives to further enhance the Company's brand. Franchise taxes increased approximately $112,000 to $459,000 for the three months ended March 31, 2023 from $347,000 for the three months ended March 31, 2022 because of the make up of the Company’s capital as of March 31, 2023 compared to the balance sheet as of March 31, 2022. Offsetting these increases was a decrease in furniture and equipment expenses of $159,000, or 24.2%, to 498,000 for the three months ended March 31, 2023 from $657,000 for the three months ended March 31, 2022 due to more normalized expense levels for furniture and equipment.   Income Tax Expense   Income tax expense increased $784,000, or 66.8%, to a tax expense of $2.0 million for the three months ended March 31, 2023 from a tax expense of $1.2 million for the three months ended March 31, 2022. The increase in federal income tax expense for the three months ended March 31, 2023 compared to the same period a year ago was driven by the increase in income before income taxes of $3.5 million, to income before income tax of $10.1 million for the three months ended March 31, 2023 compared to income before income tax expense of $6.6 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $102,000 for its associated work in developing a software platform in 2022. The Company also invests in projects that have tax credit benefits in order to help reduce it's overall tax liability. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $254,000 for the three months ended March 31, 2023. For the three months ended March 31, 2023, the Company had an effective tax expense rate of 19.4%, compared to effective tax expense rate of 17.8% for the three months ended March 31, 2022.   Comparison of Statements of Financial Condition at March 31, 2023 and December 31, 2022   Total Assets   Total assets increased $129.3 million, or 6.7%, to $2.1 billion at March 31, 2023 from $1.9 billion at December 31, 2022. The increase was primarily the result of increases in the loan portfolio of $37.3 million, and cash and due from banks of $94.7 million as of March 31, 2023.   Investment Securities   Investment securities decreased $1.3 million, or 1.3%, from $104.6 million at December 31, 2022 to $103.3 million at March 31, 2023. The decrease was primarily due to amortization of certain restricted stock securities and fluctuations of restricted stock held in connection to FHLB advances. At March 31, 2023, our held-to-maturity portion of the securities portfolio, at amortized cost, was $17.6 million, and our available-for-sale portion of the securities portfolio, at fair value, was $63.2 million compared to our held-to-maturity portion of the securities portfolio of $17.6 million and our available-for-sale portion of the securities portfolio of $62.6 million at December 31, 2022.   Net Loans   Net loans increased $37.3 million, or 2.4%, to $1.62 billion at March 31, 2023 from $1.58 billion at December 31, 2022. Residential real estate loans decreased $2.7 million, or 0.7%, to $391.6 million at March 31, 2023 from $394.4 million at December 31, 2022. Commercial real estate loans increased by $36.3 million from $700.7 million at December 31, 2022 to $737.0 million at March 31, 2023. Commercial and industrial loans decreased by $10.4 million from $97.4 million at December 31, 2022 to $86.9 million at March 31, 2023. Paycheck Protection Program ("PPP") loans comprised $1.3 million of this portfolio as of March 31, 2023. Construction loans increased $21.3 million to $415.1 million at March 31, 2023 from $393.8 million at December 31, 2022. Consumer loans decreased by $5.8 million from $13.3 million at December 31, 2022 to $7.5 million at March 31, 2023. The $5.8 million decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.   29     Allowance for Credit Losses - Loans   The allowance for credit losses on loans represents an amount that, in our judgment, will be adequate to absorb current and expected losses in the loan portfolio. The provision for credit losses on loans increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:       For the Three Months Ended March 31,     For the Year Ended December 31,       2023     2022       (Dollars in thousands)   Balance at beginning of year   $ 14,114     $ 11,697   Impact of adopting ASC 326     895       —   Recoveries:                 Residential real estate     8       —   Consumer     3       19   Total recoveries     11       19   Net recoveries     11       19   Provision for credit losses - loans     415       2,398   Balance at end of period     15,435     $ 14,114   Ratios:                 Net recoveries to average loans outstanding     0.00 %     0.00 % Non-performing loans to allowance for credit losses at end of period     0.10 %     0.15 % Allowance for credit losses on loans to gross loans at end of period     0.94 %     0.88 %   Deposits   Deposits increased $119.4 million, or 7.9% to $1.63 billion at March 31, 2023 from $1.51 billion at December 31, 2022. Our core deposits decreased $1.3 million, or 0.01%, to $1.16 billion at March 31, 2023 from $1.16 billion at December 31, 2022. Non-interest bearing demand deposits decreased $62.8 million, or 1.4%, to $487.9 million at March 31, 2023 from $550.7 million at December 31, 2022. Interest bearing demand deposits increased $20.4 million, or 25.5%, to $100.5 million at March 31, 2023 from $80.1 million at December 31, 2022. Certificates of deposits increased $121.9 million, or 20.1%, to $730.1 million at March 31, 2023 from $608.1 million at December 31, 2022.  Money market demand deposits increased $37.8 million, or 17.0%, to $260.3 million at March 31, 2023 from $222.5 million at December 31, 2022. The increase in interest bearing deposit accounts and time deposits were primarily the result of executing on a strategy to continue increasing our deposit base commensurate with our loan growth.   Nonperforming Assets   The following table presents information regarding nonperforming assets at the dates indicated:       March 31,     December 31,       2023     2022       (Dollars in thousands)   Loans accruing past 90 days                 Commercial and industrial     15       15   Consumer     —       6   Total non-performing loans     15       21   Total non-performing assets   $ 15     $ 21   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 %     0.00 %   30     Liquidity and Capital Resources   Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities; however, the Company also utilizes wholesale deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had $45.0 million of Federal Home Loan Bank advances outstanding and an additional secured borrowing capacity of $436.1 million as of March 31, 2023. Additionally, at March 31, 2023, we had the ability to borrow up to $129.0 million from other financial institutions.   The Board of Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of March 31, 2023.   We monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and 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 March 31, 2023, cash and cash equivalents totaled $225.3 million. The Company has availability on secured and unsecured lines for an additional $565.1 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $63.2 million at March 31, 2023.    Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was $8.8 million and $7.3 million for the three months ended March 31, 2023 and March 31, 2022, respectively. There were no sales of securities in the three months ended March 31, 2023 or for three months ended March 31, 2022. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $37.9 million and $102.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively. Net cash provided by financing activities was $123.8 million and $103.4 for the three months ended March 31, 2023 and 2022, respectively, which consisted primarily of increases in federal funds borrowed of $60.7 and increases in interest bearing deposits of $182.2 million for the three months ended March 31, 2023.   We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of March 31, 2023, totaled $419.7 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.   Effects of Inflation.  Inflation has caused a substantial rise in interest rates during 2022 and 2023, which has had a negative effect in the securities market. As a result of rising interest rates, the Company has recorded an accumulated other comprehensive loss on securities available for sale of approximately $7.7 million as compared to recording other comprehensive loss in the amount of $8.5 million as of December 31, 2022.  Thus, this has ran counter to total equity growth during 2022 and 2023 even though net earnings has been strong. Management does not anticipate these losses to be other than temporary as these unrealized losses do not currently appear related to any credit deterioration within the portfolio but from higher interest rates.   Capital Management.  MainStreet Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2023, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.   Regulatory Capital   Information presented for March 31, 2023 and December 31, 2022, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.   31     The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 is 2.50%. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2023, the Bank meet all capital adequacy requirements to which each is subject.   The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):       Actual     Capital Adequacy Purposes     To Be Well Capitalized Under the Prompt Corrective Action Provision   (Dollars in thousands)   Amount     Ratio     Amount     Ratio     Amount     Ratio   As of March 31, 2023                                                 Total capital (to risk-weighted assets)   $ 293,662       16.35 %   $ 143,682       ≥ 8.0%     $ 179,603       > 10.0%   Common equity tier 1 capital (to risk-weighted assets)   $ 278,227       15.49 %   $ 80,821       ≥ 4.5%     $ 116,742       > 6.5%   Tier 1 capital (to risk-weighted assets)   $ 278,227       15.49 %   $ 107,762       ≥ 6.0%     $ 143,682       > 8.0%   Tier 1 capital (to average assets)   $ 278,227       14.69 %   $ 75,785       ≥ 4.0%     $ 94,732       > 5.0%   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%     Off-Balance Sheet Arrangements and Contractual Obligations   Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2023, we had outstanding loan commitments of $429.0 million and no outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.   Use of Certain Non-GAAP Financial Measures   The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures include adjusted net interest income and net interest margin.   Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.   32          For the three months ended March 31,   (Dollars in thousands, except for per share data)   2023     2022   Net interest margin, fully-taxable equivalent (FTE)                 Net interest income (GAAP)   $ 21,091     $ 15,197   FTE adjustment on tax-exempt securities     70       72   Net interest income (FTE) (non-GAAP)   $ 21,161     $ 15,269                     Average interest earning assets     1,828,300       1,574,435   Net interest margin (GAAP)     4.68 %     3.91 % Net interest margin (FTE) (non-GAAP)     4.69 %     3.93 %    Item   3 – Quantitative and Qualitative Disclosures about Market Risk   Not required for smaller reporting companies   Item   4 – Controls and Procedures   Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2023. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.   No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the first fiscal quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting as the Company implemented the current expected credit loss accounting standard.   33     PART II – OTHER INFORMATION   Item   1 – Legal Proceedings   At March 31, 2023, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.   Item   1A – Risk Factors   For detailed information about certain risk factors that could materially affect our business, financial condition, results of operations or prospects, see “Risk Factors” in Part I, Item 1A of our 2022 Annual Report on Form 10-K. Set forth below are additional risk factors.   Defaults by or deteriorating asset quality of other financial institutions could adversely affect us.   Financial institutions are often interrelated as a result of trading, clearing, counterparty, or other relationships. For example, we execute transactions with financial institution counterparties. These transactions may expose us to counterparty credit risk that could ultimately result in a loss on default. Such a loss could have an effect on our financial condition. Further, actions taken by governments and/or regulatory bodies in response to financial crises affecting the banking system and financial markets, such as nationalization, conservatorship, receivership, or other intervention could have an adverse effect.    The results of mainstream media and social media contagion and speculation could impact the banking system and have an adverse effect on us.     The results of poorly executed decisions in a financial institution of significant size can negativ ely impact other financial institutions, despite the quality of leadership and decision making of the other financial institutions or their ability to effectively identify, measure, manage and control risk.   Misinformed or inaccurate reporting regarding an incident or incidents  can impact the broader banking industry. Any adverse financial market or economic condition could be reported in a way to exert downward pressure on the price of financial institution securities and could negatively impact credit availability for certain issuers without regard to their underlying financial strength.   This contagion risk can also occur when a perceived lack of trust in the banking system spreads throughout the industry based upon the results of a few poorly managed larger financial institutions.    Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   The Company did not repurchase common shares during the three months ended March 31, 2023.   (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   January 1, 2023 - January 31, 2023     —     $ —       —     $ 2,152   February 1, 2023 - February 28, 2023     —     $ —       —     $ 2,152   March 1, 2023 - March 31, 2023     —     $ —       —     $ 2,152   Total     —     $ —       —     $ —       34     Item   6 – Exhibits   31.1   Rule 13a-14(a) Certification of the Chief Executive Officer *       31.2   Rule 13a-14(a) Certification of the Chief Financial Officer *       32.0   Section 1350 Certification *       101.INS   Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document       101.SCH   Inline XBRL Taxonomy Extension Schema Document       101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document       101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document       101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document       101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document       101   The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)       104   The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (included with Exhibit 101)     *         Filed herewith   35     SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.           MAINSTREET BANCHSHARES, INC         (Registrant)           Date: May 12, 2023   By:   /s/ Jeff W. Dick         Jeff W. Dick         Chairman & Chief Executive Officer         (Principal Executive Officer)           Date: May 12, 2023   By:   /s/ Thomas J. Chmelik         Thomas J. Chmelik         Senior Executive Vice President and         Chief Financial Officer         (Principal Financial Officer)   36