What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-03-20 compared with 2023-03-23 · 489 added, 279 removed, 518 unchanged (60% of the section changed)

Market for Registrant ’

s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Capital Market under the symbol “MNSB.”

At December 31, 2022, the Company had approximately 240 shareholders of record.

This total does not reflect shares held in nominee or “street name”

accounts through various firms.

Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Capital Market under the symbol “MNSB.” At December 31, 2023, the Company had approximately 227 shareholders of record.

This total does not reflect shares held in nominee or “street name” accounts through various firms.

Holders of our common stock are only entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available for dividends.

As the Company is a financial holding company and does not engage directly in business activities of a material nature, its ability to pay dividends on our common stock will depend, in large part, upon the receipt of dividends from the Bank.

As the Company is a financial holding company and does not engage directly in business activities of a material nature, its ability to pay dividends on its common stock will depend, in large part, upon the receipt of dividends from the Bank.

Any future determination relating to our dividend policy will be made by the Board of Directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, our ability to service debt obligations senior to our common stock, banking regulations, contractual, legal, tax and regulatory restrictions, and limitations on the payment of dividends by the Company to its shareholders or by the Bank, and such other factors as the Board of Directors may deem relevant.

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Holders of the common stock are subject to priority dividend rights of any holders of preferred stock then outstanding.

There were 28,750 shares of preferred stock outstanding at December 31, 2022.

A discussion of applicable regulatory restrictions on dividends by the Company and the Bank is provided in Item 1 (“Business”) under “Supervision, Regulation and Other Factors –

Payment of Dividends.”

There were 28,750 shares of preferred stock outstanding at December 31, 2023.

A discussion of applicable regulatory restrictions on dividends by the Company and the Bank is provided in Item 1 (“Business”) under “Dividends, Capital Distributions, and Other Payments.”

Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides information concerning securities authorized for issuance under equity compensation plans, the weighted average price of such securities and the number of securities remaining available for future issuance, as of December 31, 2022.

Equity Compensation Plan Category

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Restricted stock shares were not included when calculating the weighted-average exercise price.

Remaining shares available for issuance include 280,607 shares under the 2019 Equity Incentive Plan (“2019 Plan”).

Shares remaining to be issued subsequent to December 31, 2022 under the 2019 Plan can be issued either as a restricted stock grant or upon exercise of stock options.

Remaining shares available for issuance include 188,397 shares under the 2019 Equity Incentive Plan (“2019 Plan”).

Shares remaining to be issued subsequent to December 31, 2023 under the 2019 Plan can be issued either as a restricted stock grant or upon exercise of stock options.

Unregistered Sales and Issuer Repurchases of Common Stock

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Set forth below is information concerning sales of common stock by the Company during the past 3 years that were not registered under the Securities Act.

In 2019, the Board of Directors of the Bank and the Bank’s shareholders approved the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other selected employees and directors with additional incentives to promote growth and performance.

The terms and conditions of the 2019 Plan were subsequently converted into and deemed to be the terms and conditions of a substantially identical Company incentive compensation plan.

To date, a total of 369,393 shares of restricted common stock have been awarded under the 2019 Plan.

During 2022, 101,876 shares of restricted common stock vested from shares issued under both the 2019 Plan and the Bank's 2016 Equity Incentive Plan ("2016 Plan").

To date, a total of 461,603 shares of restricted common stock have been awarded under the 2019 Plan.

During 2023, (117,408) shares of restricted common stock vested from shares issued under both the 2019 Plan and the Bank's 2016 Equity Incentive Plan ("2016 Plan").

See Note 18 of Notes to Consolidated Financial Statements.

In August 2019, the Company registered with the SEC, on Form S-8, the shares of common stock that would then be issuable under the 2019 Plan.

As a result of the stockholders’

approval of the 2019 Plan, no additional awards were made under the 2016 Plan. All awards that were then outstanding under the 2016 Plan remained outstanding in accordance with their terms.

As a result of the stockholders’ approval of the 2019 Plan, no additional awards were made under the 2016 Plan.

All awards that were then outstanding under the 2016 Plan remained outstanding in accordance with their terms.

Repurchases of Common Stock

On October 22, 2020, the Company announced that the Board of Directors had authorized a plan to repurchase up to $17.0 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.

The new stock repurchase program replaces the Company’s previous program.

During the year ended December 31, 2022 the Company repurchased 62,041 shares under this plan.

The Company did not repurchase any common shares during the year ended December 31, 2021.

On May 18, 2022, the Company announced that the Board of Directors had authorized a new plan to repurchase up to $7.5 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.

The new stock repurchase program replaces the Company’s previous program.

On May 18, 2022, the Company announced that the Board of Directors had authorized a plan to repurchase up to $7.5 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.

The new stock repurchase program replaces the Company’s previous program.

During the year ended December 31, 2023, the Company repurchased 8,000 shares under this plan.

Collectively, the Company repurchased 284,693 shares of common stock during the fiscal year December 31, 2022.

The Company did not repurchase common stock during the fourth quarter of 2023.

(Dollars in thousands, except for per share amounts)

Total Number of

(or Approximate

Dollar Value)

of Shares that

Under the Plans

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs

October 1, 2023 - October 31, 2023

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Preferred Stock and Depositary Shares

On September 15, 2020, the Company closed its underwritten public offering of 1,000,000 depositary shares, each representing 1/40th of a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”).

On September 25, 2020, the Company completed the sale of an additional 150,000 depositary shares pursuant to the underwriters’

full exercise of their over-allotment option to purchase additional depositary shares.

Trading the depositary shares on the Nasdaq Capital Market commenced on September 16, 2020, under the symbol “MNSBP.”

On September 25, 2020, the Company completed the sale of an additional 150,000 depositary shares pursuant to the underwriters’ full exercise of their over-allotment option to purchase additional depositary shares.

Trading the depositary shares on the Nasdaq Capital Market commenced on September 16, 2020, under the symbol “MNSBP.”

The Board of Directors declared a quarterly cash dividend on the outstanding shares of the Series A Preferred Stock each quarter in agreement with the depositary share offering.

Each declared cash dividend equated to approximately $0.47 per depositary share, or $18.75 per share of Series A Preferred Stock outstanding.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the years ended December 31, 2023 and 2022.

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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:

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;

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additional risks related to new lines of business, products, product enhancements or services;

results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action;

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;

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The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry.

The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, and (3) derivative financial instruments.

The Company’s critical accounting policies relate to (1) the allowance for credit losses, (2) fair value of financial instruments, and (3) derivative financial instruments.

These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements.

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Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Allowance for Loan Losses :

Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated probable incurred losses inherent in the loan portfolio.

Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio.

Accounting standards require that loan losses be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.

The allowance consists of a specific component and a general component.

The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

For impaired collateral dependent loans, an updated appraisal will typically be ordered if a current one is not on file.

Appraisals are performed by independent third-party appraisers with relevant industry experience.

Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate.

The general component covers non-classified or performing loans and those loans classified as substandard or special mention that are not impaired.

The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales.

Non-impaired classified loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than non-classified loans.

Estimates for the allowance for loan losses are determined by analyzing historical losses, historical migration to charge-off experience, current trends in delinquencies and charge-offs, the results of regulatory examinations and changes in the size, composition and risk assessment of the loan portfolio.

Also included in management’s estimate for the allowance for loan losses are considerations with respect to the impact of current economic events.

These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which the Company conducts business.

While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates.

Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.

A detailed discussion of the methodology used in determining the allowance for loan losses is included in Note 1, Basis of Presentation, in Notes to Consolidated Financial Statements.

Allowance for Credit Losses :

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASC 326).

This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit.

Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

Organization, Basis of Presentation, Summary of Significant Accounting Policies, and Impact of Recently Issued Accounting Pronouncements for a more detailed description of methodology and impact of adoption.

Fair Value of Financial Instruments :

A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss).

These include investment securities available for sale and interest rate loan swaps on qualifying commercial loans.

Periodically, the estimation of fair value also affects investment securities held to maturity when it is determined that an impairment write-down is other than temporary.

Periodically, the estimation of fair value also affects investment securities held to maturity when it is determined that the Company should record an allowance for credit losses on a security.

Fair value determination is also relevant for certain other assets such as other real estate owned, which is recorded at the lower of the recorded balance or fair value, less estimated costs to sell.

The determination of fair value also impacts certain other assets that are periodically evaluated for impairment using fair value estimates, including impaired loans.

The determination of fair value also impacts certain other assets that are periodically evaluated for impairment using fair value estimates, including individually evaluated loans.

Fair value is generally based upon quoted market prices, when available.

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Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.

These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as other unobservable parameters.

Any such valuation adjustments are applied consistently over time.

While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

See Note 20, Fair Value Presentation, in Notes to Consolidated Financial Statements for a detailed discussion of determining fair value, including pricing validation processes.

Derivative Financial Instruments:

 The Bank recognizes derivative financial instruments at fair value as either other assets or other liabilities in the consolidated balance sheet.

The Bank’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties.

Because the interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or noninterest expense, as applicable.

The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 19 in the December 31, 2022, Consolidated Financial Statements.

The Bank recognizes derivative financial instruments at fair value as either other assets or other liabilities in the consolidated statement of financial condition.

The Bank’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties.

Because the interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as non-interest income or non-interest expense, as applicable.

The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 19 in the December 31, 2023, Consolidated Financial Statements.

Selected Financial Data

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This information should be read together with the accompanying consolidated financial statements included in this Form 10-K.

The historical information indicated as of and for the years ended December 31, 2022,and 2021 has been derived from the Company's audited consolidated financial statements for the years ended December 31, 2022, and 2021.

The historical information indicated as of and for the years ended December 31, 2023,and 2022 has been derived from the Company's audited consolidated financial statements for the years ended December 31, 2023, and 2022.

Historical results set forth below and elsewhere in this Form 10-K are not necessarily indicative of future performance

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Total deposits

FHLB advances and other borrowings

FHLB advances

Federal funds purchased

Subordinated debt

Total stockholders’

Allowance for credit losses on off-balance sheet credit exposure

Total stockholders’ equity

For the year ended December 31,

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Net interest income

Provision for (recovery of) loan losses

Net interest income after provision for (recovery of) loan losses

Provision for credit losses

Net interest income after provision for credit losses

Total non-interest income

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Net income available to common shareholders

Basic and diluted net income per common share

Basic and diluted earnings per common share

At or For the Years Ended December 31,

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Asset Quality Ratios

Allowance for loan losses as a percentage of total loans

Allowance for loan losses as a percentage of non-performing assets

Allowance for credit losses on loans as a percentage of total loans

Allowance for credit losses on loans as a percentage of non-performing loans

Net charge-offs to average outstanding loans during the period

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Common equity / total assets

Total equity / total assets

Average equity to average assets

Tangible equity / tangible assets

Average tangible equity to average tangible assets

Number of offices

Number of full-time equivalent employees

refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

section “Non-GAAP Measures”

of this Form 10-K.

refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures” of this Form 10-K.

Efficiency ratio is calculated as non-interest expense as a percentage of net interest income and non-interest income.

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Net interest income

Provision for (recovery of) loan losses

Provision for credit losses

Net interest income after provision

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Net income available to common shareholders

Net income for the year ended December 31, 2022, was $26.7 million, an increase of $4.5 million, or 20.3% compared to $22.2 million earned during the year ended December 31, 2021.

The increase in net income was due to $16.5 million of additional net interest income, primarily driven by increased volume of loans and increase in interest rates. The increase net interest income was offset by an increase in non-interest expenses of $6.2 million primarily in salaries and employee benefits and general operating expenses.

Net income for the year ended December 31, 2023, was $26.6 million, a decrease of $0.1 million, or 0.3% compared to $26.7 million earned during the year ended December 31, 2022.

The decrease in net income was due to increases in interest expense of $34.3 million and an increase of non-interest expenses of $6.1 million compared to the same period in the prior year.

Despite increases in interest expense, net interest income increased $5.9 million, primarily driven by increased volume of loans and increase in interest rates.

Net Interest Income and Net Interest Margin

Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds.

Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the interest expense paid on all funding sources by average earning assets.

Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net interest income and net interest margin.

Net interest income before provision for or recovery of loan losses totaled $70.0 million for the year ended December 31, 2022, compared to $53.5 million for the year ended December 31, 2021.

The increase in net interest income was driven by an increase in loan production and increase in interest rates on variable rate credits and loans that repriced during the year ended December 31, 2022.

The net interest margin was 4.19% for the year ended December 31, 2022, compared to 3.35% for the year ended December 31, 2021, on a fully tax equivalent basis.

The increase in net interest margin primarily resulted from an increase of income on our interest earning assets that outpaced the increase on average rates of our cost of funds, primarily in interest-bearing deposits,  money market deposits and other borrowings.

The increase in the federal funds target rate will impact wholesale deposits that will reprice in a higher interest rate environment, which will increase margin pressure on our loan portfolio and other interest earning assets. 

The yield for the year ended December 31, 2022 for the loan portfolio was 5.47% compared to 4.79% for the year ended December 31, 2021.

The increase primarily reflects the maturity of lower yielding loans and higher yields on new and variable rate loans based on higher interest rates during the year.

The Federal Reserve increased its targeted benchmark interest rate 425 - 450 basis points by the year end, which impacted yields obtained on new loans throughout the year.

For the year ended December 31, 2022, the yield on the taxable investment securities portfolio was 2.20% compared to 2.08% for the year ended December 31, 2021.

For the year ended December 31, 2022, the yield on the tax-exempt investment securities portfolio was 3.48% compared to 3.42% for the year ended December 31, 2021.

The increase in both categories was primarily due to rates on variable securities increasing with the current rate environment and lower yields on investment securities maturing during the period.

The rate paid on interest bearing deposits increased to 1.14% during the year ended December 31, 2022, from 0.90% during the year ended December 31, 2021.

This increase was a result of higher rates paid on all outstanding deposits in conjunction with the increasing rate environment throughout the year.

The rate paid on FHLB borrowings for the year ended December 31, 2022 was 1.45% compared to the prior year when the bank did not have any FHLB borrowings outstanding. 

Net interest income before provision for or recovery of credit losses totaled $75.9 million for the year ended December 31, 2023, compared to $70.0 million for the year ended December 31, 2022.

The net interest margin was 4.08% for the year ended December 31, 2023, compared to 4.19% for the year ended December 31, 2022, on a fully tax equivalent basis.

The decrease in net interest margin primarily resulted from an increase of interest expense on our interest bearing liabilities that outpaced the increase in interest income.

The primary drivers of increased interest expense came from money market and time deposits.

The increase in the federal funds target rate impacted our maturing wholesale deposits that had to reprice in a higher interest rate environment, which increased margin pressure on our loan portfolio and other interest earning assets.

Management made efforts to replace these deposits with callable wholesale deposits, allowing more optionality for future rate movements.

The yield for the year ended December 31, 2023 for the loan portfolio was 7.00% compared to 5.47% for the year ended December 31, 2022.

The increase primarily reflects the maturity of lower yielding loans and higher yields on new and variable rate loans based on higher interest rates during the year.

The Federal Reserve increased its targeted benchmark interest rate to a range of 525 - 550 basis points in 2023, which impacted yields obtained on new loans throughout the year.

For the year ended December 31, 2023, the yield on the taxable investment securities portfolio was 2.67% compared to 2.20% for the year ended December 31, 2022.

For the year ended December 31, 2023, the yield on the tax-exempt investment securities portfolio was 3.57% compared to 3.48% for the year ended December 31, 2022.

The increase in both categories was primarily due to rates on variable securities increasing with the current rate environment and lower yields on investment securities maturing during the period.

The rate paid on interest bearing deposits increased to 3.61% during the year ended December 31, 2023, from 1.14% during the year ended December 31, 2022.

This increase was a result of higher rates paid on all outstanding deposits in conjunction with the increasing rate environment throughout the year.

The rate paid on FHLB borrowings and federal funds purchased for the year ended December 31, 2023 was 4.90% and 5.36%, respectively, compared to the prior year of 1.45% for FHLB borrowings and no interest paid on federal funds purchased.

The following table sets forth the major components of net interest income and the related yields and rates for the year ended December 31, 2023, compared to the year ended December 31, 2022.

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.

All average balances are based on daily balances.

For the Year Ended December 31,

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Total liabilities

Stockholders’

Total liabilities and Stockholders’

Stockholders’ Equity

Total liabilities and Stockholders’ equity

Net interest income

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Includes loans classified as non-accrual.

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

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

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

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

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

Income and yields for all periods are reported on a tax-equivalent basis using the federal statutory rate of 21%.

refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

section “Non-GAAP Measures”

of this Form 10-K.

refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures” of this Form 10-K.

Rate/ Volume Analysis

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

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated.

The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).

The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).

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Total deposits

Federal funds purchased

Federal Home Loan Bank advances

2 unchanged sentences

Change in net interest income

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date.

In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans.

Provision for Credit Losses

We establish a provision for credit losses, which is charged to operations, in order to maintain the allowance for credit losses at a level we consider necessary to absorb expected credit losses that are both probable and reasonably estimated at the 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 and 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 or economic conditions change.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available.

The allowance for loan losses is assessed on a monthly basis and provisions are made for loan losses as required in order to maintain the allowance.

The provision for loan losses increased to a loan loss provision of $2.4 million for the year ended December 31, 2022, compared to the prior year which ended as a recovery of loan loss provision of $1.2 million. The increase is a return to a normal provision for loan losses due to loan growth.

The prior year was a direct result of recovering the special COVID-19 pandemic provision that was provisioned for in 2021.

Loan originations increased $24.4 million, which totaled $575.6 million for the year ended December 31, 2021 compared to loan originations of $599.9 million for the year ended December 31, 2022.

Non-performing loans were $0 at December 31, 2021 and $21,000 at December 31, 2022.

The allowance for credit losses on loans is assessed on a monthly basis and provisions are made for credit losses on loans as required in order to maintain the allowance.

The allowance for off-balance sheet credit is assessed quarterly and provisions are made to maintain the allowance.

The provision for credit losses on loans decreased to a loan loss provision of $1.9 million for the year ended December 31, 2023, compared to the prior year which ended at loan loss provision of $2.4 million.

The provision for credit losses on off-balance sheet exposure was a net recovery of $301 from the original establishment of $1.3 million upon the adoption of CECL.

The decrease in provision for credit losses on loans was primarily driven by loan growth as well as increasing qualitative factors within our model assumptions for increased levels of past dues and potential weaknesses in underlying collateral for certain asset classes.

The recovery of credit losses for off-balance sheet exposure was driven by fluctuations in our revolving credit line utilization rates as of December 31, 2023.

Loan originations decreased $152.3 million, which totaled $599.9 million for the year ended December 31, 2022 compared to loan originations of $447.6 million for the year ended December 31, 2023.

Non-performing loans were $21,000 at December 31, 2022 and $1.0 million at December 31, 2023.

On September 22, 2022, the Company completed the sale of a loan note for a customer that had stopped making payments and declared bankruptcy.

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Had the loan sale not occurred, the Company would have recorded a specific allocation to the provision for loan losses and proceeded with an orderly liquidation of collateral.

During the year ended December 31, 2022, substandard loans increased $4.2 million for a balance of $9.5 million.

During the year ended December 31, 2022, special mention loans decreased $16.9 million to $0.

During the year ended December 31, 2022, watch list loans decreased $45.6 million to $25.0 million.

Management does not believe any loss currently exists in these loans.

During the year ended December 31, 2022, there were no charge-offs and recoveries of $19,000 were received.

During the year ended December 31, 2021, there were $32,000 in charge-offs recorded and recoveries received of $27,000.

During the year ended December 31, 2023, substandard loans increased $11.7 million for a balance of $21.2 million.

During the year ended December 31, 2023, special mention loans increased $19.0 million to $19.0 million.

During the year ended December 31, 2023, watch list loans increased $33.7 million to $58.7 million.

Management does not believe any significant loss exposure currently exists in these loans.

During the year ended December 31, 2023, there was $468,000 in charge-offs recorded and recoveries of $22,000 were received.

During the year ended December 31, 2022, there were no charge-offs recorded and recoveries received of $19,000.

Non-Interest Income

Our primary sources of non-interest income are service charges on deposit accounts, such as interchange fees and statement fees, income earned on bank owned life insurance, fees earned from executing interest rate swaps on commercial loans, and gains realized on the sale of the guaranteed portion of Small Business Administration (“SBA”) loans.

The following table presents, for the periods indicated, the major categories of non-interest income:

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Total non-interest income

Non-interest income decreased $1.3 million, or 20.9%, to $4.8 million for the year ended December 31, 2022 from $6.1 million for the year ended December 31, 2021.

The decrease in non-interest income was primarily due to mortgage originations and other loan fees were down $382,000 and $528,000, respectively for the year ended December 31, 2022.

Fees earned on interest rate swaps for commercial loans increased $536,000, or 645.8%, to $619,000 for the year ended December 31, 2022 from $83,000 for the year ended December 31, 2021.

This increase was purely related to the volume of interest rate swaps entered into during 2021 compared to 2022.

Non-interest income decreased $1.2 million, or 24.7%, to $3.6 million for the year ended December 31, 2023 from $4.8 million for the year ended December 31, 2022.

The decrease in non-interest income was primarily due to a decrease in swap fee income and mortgage origination fees decreasing $379,000 for the year ended December 31, 2023.

The Company did not recognize any fees on interest rate swaps for commercial loans for the year ended December 31, 2023 down from $619,000 for the year ended December 31, 2022.

The Company also recognized $251,000 in planned operating losses in other fee income related to two New Market Tax Credit investments during the year ended December 31, 2023.

Bank owned life insurance income increased $61,000 for the year ended December 31, 2023, compared to the year ended December 31, 2022, due to the rising rate environment throughout 2023.

The deposit service fees largely remained consistent for the year ended December 31, 2022, as compared to the same period in 2021.

The deposit service fees decreased $271,000 for the year ended December 31, 2023, as compared to the same period in 2022, due to a decrease in customer activity.

Non-Interest Expense

7 unchanged sentences

Salaries and employee benefits

Occupancy expenses

Furniture and equipment expenses

Advertising and marketing

Occupancy expenses

Outside services

Administrative expenses

Franchise tax

1 unchanged sentence

Data processing

Other real estate expenses, net

Administrative expenses

Other operating expenses

Total non-interest expense

Non-interest expense increased $6.2 million or 18.8% to $39.1 million for the year ended December 31, 2022 from $32.9 million for the year ended December 31, 2021 primarily as a result of increases in salary and employee benefits of $4.5 million, advertising and marketing expenses of $739,000 and outside services of $681,000.

Salaries and employee benefits expense increased by $4.5 million to $23.8 million for the year ended December 31, 2022 from $19.3 million for the year ended December 31, 2021 primarily as a result of increasing our personnel team members by 30 employees.

Advertising and marketing increased $739,000, or 47.2%, to $2.3 million for the year ended December 31, 2022 from $1.6 million for the year ended December 31, 2021.

Outside service expenses increased $681,000, or 48.9%, to $2.1 million for the year ended December 31, 2022, due to investments in the Company’s payments division and other technological infrastructure.

Offsetting these increases, our FDIC insurance decreased approximately $414,000 to $637,000 for the year ended December 31, 2022 from $1.1 million for the year ended December 31, 2021.

This decrease was attributed to continued financial strength that resulted in a reduction of FDIC assessments.

Non-interest expense increased $6.1 million or 15.5% to $45.1 million for the year ended December 31, 2023 from $39.1 million for the year ended December 31, 2022 primarily as a result of increases in salary and employee benefits of $4.5 million, FDIC insurance of $494,000 and Franchise tax of $405,000.

Salaries and employee benefits expense increased by $4.5 million to $28.3 million for the year ended December 31, 2023 from $23.8 million for the year ended December 31, 2022 primarily as a result of increasing our personnel team members by 18 employees.

FDIC insurance increased $494,000, or 77.6%, to $1.1 million for the year ended December 31, 2023 from $637,000 for the year ended December 31, 2022.

While the Company was not included in the special assessment directly related to four bank failures, the FDIC is increasing the reserve ratio within its insurance fund.

Franchise tax expense increased $405,000, or 28.3%, to $1.8 million for the year ended December 31, 2023, due to consistent growth of the Company's capital and earnings profile.

Many of the non-interest expense categories remained consistent for the year ended December 31, 2023 compared to the year ended December 31, 2022 as management continues to exercise judicious expense controls.

Income Tax Expense

Income tax expense increased $929,000, or 16.1%, to $6.7 million for the year ended December 31, 2022 from $5.8 million for the year ended December 31, 2021.

The increase in federal income tax expense for the year ended December 31, 2022 compared to the same period a year earlier was driven by the increase in income before income taxes of $5.4 million, or 19.4%, to $33.4 million as of December 31, 2022 compared to $28.0 million for the same period in the prior year.

The Company is able to apply and claim a research and development tax credit for its associated work in developing a software platform.

In addition, the Company has invested in projects that generate tax credits through the Low Income Housing Tax Credits ("LIHTC") program as well as NMTC projects.

As a result of tax regulation, the Company has included assessments in income tax expense for state tax liabilities during 2022.

For the year ended December 31, 2022, the Bank had an effective tax rate of 20.1%, compared to effective federal tax rate of 20.7% for the year ended December 31, 2021.

Income tax expense decreased $475,000, or 7.1%, to $6.2 million for the year ended December 31, 2023 from $6.7 million for the year ended December 31, 2022.

The decrease in federal income tax expense for the year ended December 31, 2023 compared to the same period a year earlier was driven by continued investments in projects that provide tax credit incentives and further the mission of our community development entity.

The Company is able to apply and claim a research and development tax credit for its associated work in developing a software platform.

The Company has invested in projects that generate tax credits through the Low Income Housing Tax Credits ("LIHTC") program as well as NMTC projects.

As a result of tax regulation, the Company has included assessments in income tax expense for state tax liabilities during 2023.

For the year ended December 31, 2023, the Bank had an effective tax rate of 19.0%, compared to effective federal tax rate of 20.1% for the year ended December 31, 2022.

Avenu, a division of MainStreet Bank

Analysis of Results of Operations for the Year Ended December 31, 2023

The following table sets forth the principal components of net income (loss) for the Avenu division of MainStreet Bank for the periods indicated.

All amounts set forth are included in the Results of Operations for the Year Ended December 31, 2022 and 2021 for MainStreet Bancshares, Inc.

All amounts set forth are included in the Results of Operations for the Year Ended December 31, 2023 and 2022 for MainStreet Bancshares, Inc.

unless indicated otherwise.

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Net income (loss) before taxes

Determined by funds transfer pricing of non-interest bearing deposits using the weighted average Effective Fed Funds Rate during fiscal year ended December 31, 2022.

For the year ended December 31, 2022, the Avenu division recorded a net loss of $433,000.

As the Company develops the software and ramps up the resources needed to operate a new division, elevated levels of non-interest expenses were anticipated.

The Avenu division held $62.9 million in average non-interest bearing deposits which provides tremendous value to the Company, while simultaneously establishing a new division. Avenu is developing a comprehensive hosted BaaS software platform that will provide Fintechs with a subledger integrated within a regulatory compliant framework, easily connectable application programming interfaces ("APIs"), and access to banking payment networks.

The goal for the Avenu team is to deploy the platform in 2023.

Determined by funds transfer pricing of non-interest bearing deposits using the weighted average Effective Fed Funds Rate during fiscal year ended December 31, 2023 and 2022.

For the year ended December 31, 2023, the Avenu division recorded net income of $51,000.

As the Company develops the software and ramps up the resources needed to operate a new division, elevated levels of non-interest expenses are anticipated.

The Avenu division held $45.0 million in average non-interest bearing deposits which provides tremendous value to the Company, while simultaneously establishing a new division.

Avenu is developing a comprehensive hosted BaaS software platform that will provide Fintechs with a subledger integrated within a regulatory compliant framework, easily connectable application programming interfaces ("APIs"), and access to banking payment networks.

The Avenu team will deploy the platform in 2024.

Comparison of Statements of Financial Condition at December 31, 2023 and at December 31, 2022

Total assets increased $278.3 million, or 16.9%, to $1.9 billion at December 31, 2022 from $1.6 billion at December 31, 2021. The increase was primarily the result of increases of $240.7 million in gross loans receivable, $37.4 million in cash equivalents, and $25.4 million in other assets.

These increases were offset by a decrease in availabe-for-sale securities of $37.3 million, attributable to not purchasing treasury securities as part of our income tax strategy.

Total assets increased $109.7 million, or 5.7%, to $2.0 billion at December 31, 2023 from $1.9 billion at December 31, 2022.

The increase was primarily the result of increases of $127.5 million in gross loans receivable, $5.5 million in computer software, and $2.8 million in accrued interest receivables.

These increases were offset by a decrease in available-for-sale securities of $2.7 million and a decrease of $5.0 in other assets, which was primarily impacted by fluctuations in market value of our executed loan swaps.

Investment Securities

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital and liquidity requirements.

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements, assist in achieving Community Reinvestment Act (CRA) objectives, and meet regulatory capital and liquidity requirements.

Our investment policy is established and reviewed annually by the Board of Directors.

We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, subordinated debt of other financial institutions, equity securities, certain bankers’

acceptances and federal funds.

Our investment objectives are to maintain high asset quality, to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return.

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Establishing a trading portfolio would require specific authorization by the Board of Directors.

The total investment securities portfolio, including both investment securities available for sale and investment securities held to maturity, was $80.3 million at December 31, 2022, a decrease of $40.0 million compared with December 31, 2021.

At December 31, 2022, the investment securities portfolio includes $62.6 million of investment securities available for sale and $17.6 million of investment securities held to maturity compared to $99.9 million of investment securities available for sale and $20.3 million of investment securities held to maturity at December 31, 2021.

The total investment securities portfolio, including both investment securities available for sale and investment securities held to maturity, was $77.2 million at December 31, 2023, a decrease of $3.1 million compared with December 31, 2022.

At December 31, 2023, the investment securities portfolio includes $59.9 million of investment securities available for sale and $17.3 million of investment securities held to maturity compared to $62.6 million of investment securities available for sale and $17.6 million of investment securities held to maturity at December 31, 2022.

The Company did not sell any securities within the investment portfolio for the year ended December 31, 2023 or 2022.

While all securities are reviewed by the Company for other-than-temporary impairments (“OTTI”), the securities that typically are impacted by credit impairment are non-agency collateralized mortgage obligations and asset-backed securities.

Refer to Note 3, in Notes to Consolidated Financial Statements for further details.

To date, we have had no OTTI.

For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

If the Company has the intent to sell the security, or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value, and the entire loss is recorded in earnings.

Portfolio Maturities and Yields .

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Yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%

Weighted average yield is calculated as the tax-equivalent yield on a pro rata basis for each security based on its relative amortized cost.

Loan Portfolio

43 unchanged sentences

Construction and land development

Commercial –

non-real estate:

Commercial – non-real estate:

Commercial and industrial

Consumer –

non-real estate:

Consumer – non-real estate:

The following table shows our loan originations, participations, purchases, sales and repayment activities for the periods indicated.

10 unchanged sentences

Construction and land development

Commercial –

non-real estate:

Commercial – non-real estate:

Commercial and industrial

Consumer –

non-real estate:

Consumer – non-real estate:

Total loans originated:

1 unchanged sentence

Principal repayments

Loans transferred to (from) loans held for sale:

Transfers from loans held for sale

Net loan activity

Total loans at the end of year

Loans, net of unearned income, totaled $1.6 billion at December 31, 2022, an increase of $240.7 million from December 31, 2021.

The increase in total loans was primarily driven by growth in the overall loan portfolio, with significant increases in multifamily residential real estate, as well as the owner occupied and non-owner occupied commercial real estate portfolio.

Loans, net of unearned income, totaled $1.7 billion at December 31, 2023, an increase of $127.5 million from December 31, 2022.

The increase in total loans was primarily driven by growth in the overall loan portfolio, with increases in multifamily residential real estate, as well as in construction and land development credits.

A significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C.

metropolitan area and secured by real estate or other collateral in that market.

Although these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the Washington, D.C.

metropolitan real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position.

While our basic market area is the Washington, D.C.

metropolitan area, the Bank has made loans outside that market area where the applicant is an existing customer, and the nature and quality of such loans was consistent with the Company's lending policies.

The federal banking Agencies issued guidance in 2006 which addresses institutions’ with increased concentrations of commercial real estate (CRE) loans.

The guidance does not establish specific CRE lending limits;

rather, it promotes sound risk management practices and appropriate levels of capital that will enable institutions to continue to pursue CRE lending in a safe and sound manner.

In developing this guidance, the Agencies recognized that different types of CRE lending present different levels of risk, and that consideration should be given to the lower risk profiles and historically superior performance of certain types of CRE, such as well-structured multifamily housing finance, when compared to others, such as speculative office space construction.

As discussed under “CRE Concentration Assessments,” institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions for risk management purposes.

The guidance focuses on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment or through an abundance of caution.

Thus, for the purposes of the guidance, CRE loans include those loans with risk profiles sensitive to the condition of the general CRE market (for example, market demand, changes in capitalization rates, vacancy rates, or rents).

CRE loans are land development and construction loans (including 1- to 4-family residential and commercial construction loans) and other land loans.

CRE loans also include loans secured by multifamily property, and nonfarm nonresidential property where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property.

Excluded from the scope of this Guidance are loans secured by nonfarm nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

As part of their ongoing supervisory monitoring processes, the Agencies use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk.

An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis of the level and nature of its CRE concentration risk:

Total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s total risk-based capital;

Total commercial real estate loans as defined in this guidance represent 300 percent or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.

The Agencies use the criteria as a preliminary step to identify institutions that may have CRE concentration risk.

Because regulatory reports capture a broad range of CRE loans with varying risk characteristics, the supervisory monitoring criteria do not constitute limits on an institution’s lending activity but rather serve as high-level indicators to identify institutions potentially exposed to CRE concentration risk.

The Company holds a concentration in commercial real estate loans.

As of December 31, 2023, construction, land development and other land loans represented 137.7% of consolidated risk-based capital.

Total commercial real estate loans as defined by the Agency guidance represented 372.5% of consolidated risk-based capital.

During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 55%.

The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio.

The Board of Directors has established internal maximum limits on CRE as an asset class overall as well as sub limits within CRE by property class, to better manage and control the exposure to property classes during periods of changing economic conditions.

The Board of Directors also has minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

Our risk management process begins with a robust underwriting program.

The underwriting and risk rating of all loans is completed by an underwriting team that is independent of the originating lender(s).

The underwriting analysis of commercial real estate loans includes pre-origination stress testing utilizing the portfolio stress testing methods to fully understand the potential exposure before we originate the credit.

Once originated, each loan receives ongoing quarterly stress tests to evaluate the risk profile over the life of the credit.

We stress test earning assets on a quarterly basis and measure the results against the Bank's risk-based capital.

For commercial loans, residential real estate loans, owner-occupied commercial real estate loans and consumer installment loans, we multiply the total outstanding amount for each loan category by our highest quarter historical loss for that category as a surrogate in order to calculate a stressed loss.

For our non-owner occupied commercial real estate loans, we use three separate methodologies in our stress test.

If a property fails more than one of the three tests, we extend the test with the highest exposure value and add an additional 10% for selling costs.

An immediate and sustained 3.0% increase in interest rates,

An immediate and sustained 5.0% increase in vacancy rates, and

An immediate and sustained 2.0% change in the capitalization rate, or “cap rate.”

We stress test the construction lending portfolio by applying exponential discounting (using a "k factor" of 2) to each project based upon its percentage of completion.

The project is stressed using the as-is and as-complete appraised values and assumes 10% selling costs.

For all other loans, we utilize the Bank's historic loss rates or if not available, the average loss rates of UBPR Group 4 banks, for bank owned life insurance we utilize default rates from S&P Global ratings, and for securities we obtain an independent fair market value and if it is less than the book value, we subtract the fair market value from the book value to determine the stress loss.

For The following table shows the Company's earning assets and the results of the stress test performed for the periods indicated.

December 31, 2023

Outstanding Balance

Stress Test Results (1)

Stressed Loss Percent

(Dollars in thousands)

Earning Asset Component

Non-Owner Occupied CRE

All Other Loans

AFS Securities

Swap Portfolio

Bank Owned Life Insurance

(1) Net tax effective loss at the statutory rate of 21%

December 31, 2022

Outstanding Balance

Stress Test Results (1)

Stressed Loss Percent

(Dollars in thousands)

Earning Asset Component (2)

Non-Owner Occupied CRE

All Other Loans

(1) Net tax effective loss at the statutory rate of 21%

(2) The Company began stressing all earning assets beginning March 31, 2023.

The total estimated stress test loss is deducted from capital and we recalculate the capital ratios.

As shown in the tables below, as of December 31,

2022 the post-stress capital ratios well exceed our Board target ratios as well as Agency minimums (with buffer).

December 31, 2023 Bank Capital Adequacy Ratios Pre- and Post-Stress (Tax-Effective)

Well Capitalized with Buffer

Bank Minimum Target

As of December 31, 2023

Post Stress, Low Estimate

Post Stress, High Estimate

Community Bank Leverage Ratio

Leverage Ratio

Total Risk-Based Capital

Tier 1 Risk-Based Capital

Common Equity Tier 1 Risk-Based Capital

December 31, 2022 Bank Capital Adequacy Ratios Pre- and Post-Stress (Tax-Effective)

Well Capitalized with Buffer

Bank Minimum Target

As of December 31, 2022

Post Stress, Low Estimate

Post Stress, High Estimate

Community Bank Leverage Ratio

Leverage Ratio

Total Risk-Based Capital

Tier 1 Risk-Based Capital

Common Equity Tier 1 Risk-Based Capital

The Company employs an external loan review firm to conduct ongoing reviews of the loan portfolio.

During the year ended December 31, 2023, the independent external loan review firm reviewed approximately 55% of the entire portfolio by outstanding dollar balance.

The external review did not identify any material underwriting or ongoing portfolio management concerns.

The following two tables break down the December 31, 2023 and December 31, 2022 non-owner occupied CRE portfolio balances by showing the current balance in each sub-category and location.

The tables also display very favorable weighted average interest rates and weighted average loan-to-values for both periods.

The weighted average occupancy percentages are also broadly favorable for both periods.

December 31, 2023

(Dollars in thousands)

Non-Owner Occupied CRE (2)

Weighted Average Rate

Weighted Average Loan-to-Value (1)

Weighted Average Occupancy %

Office to Residential Conversion

Retail/Commercial

Total Non-Owner Occupied CRE

Construction and Land Development

Retail/Commercial

Total Construction and Land Development

Total Construction, Land Development, and Non-Owner Occupied CRE

Loan-to-value is based on maximum potential outstanding at time of origination

Non-owner occupied includes multifamily call code 1D

December 31, 2022

(Dollars in thousands)

Non-Owner Occupied CRE (2)

Weighted Average Rate

Weighted Average Loan-to-Value (1)

Weighted Average Occupancy %

Office to Residential Conversion

Retail/Commercial

Total Non-Owner Occupied CRE

Construction and Land Development

Retail/Commercial

Total Construction and Land Development

Total Construction, Land Development, and Non-Owner Occupied CRE

Loan-to-value is based on maximum potential outstanding at time of origination

Non-owner occupied includes multifamily call code 1D

The Company also underwrites and originates owner-occupied commercial real estate loans.

These loans are typically term loans made to support properties that rely upon the operations of the business occupying the property for repayment.

The Agencies specifically excluded owner-occupied commercial real estate from their concentration guidance, as the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

The following two tables depict a well-diversified portfolio of owner-occupied commercial real estate as of December 31, 2023 and December 31, 2022.

The properties are distributed nicely among the Company's footprint.

This loan segment continues to perform very well and is supported by strong loan-to-values (LTVs).

The following table sets forth our owner-occupied CRE portfolio by the business industry groups that occupy the properties for the periods indicated.

December 31, 2023

(Dollars in thousands)

Owner Occupied CRE

Weighted Average Rate

Weighted Average Loan-to-Value (1)

Accommodation and food services

Administrative and support

Arts and recreation

Construction services

Education services

Manufacturing

Religious and other

Professional, scientific, tech services

Real estate and rental leasing

Wholesale trade

Total Owner Occupied CRE

December 31, 2022

(Dollars in thousands)

Owner Occupied CRE

Weighted Average Rate

Weighted Average Loan-to-Value (1)

Accommodation and food services

Administrative and support

Arts and recreation

Construction services

Education services

Manufacturing

Religious and other

Professional, scientific, tech services

Real estate and rental leasing

Wholesale trade

Total Owner Occupied CRE

The risk profile of real estate properties within our market can vary depending upon location.

Therefore, we have disaggregated our stress testing of construction projects further by segmenting the loans into two groupings, those inside a 15-mile radius of Washington, D.C.

and those outside that radius.

For example, during the 2009 recession, the peak-to-trough drop in property values inside the beltway was less than 10% (CoreLogic, 2019).

The Board determined that loans made inside a 15-mile radius of Washington, D.C.

carry less geographic risk than those made outside of that radius.

The graphic below is a geopoint map that depicts all construction loans, non-owner occupied CRE loans, and owner-occupied CRE loans, with a majority of all loan types concentrated within a 15-mile radius of Washington, D.C.

Asset Quality

The Company’s asset quality remained strong during the year ended December 31, 2022.

Nonperforming assets, which includes nonaccrual loans, accruing loans 90 days past due, accruing troubled debt restructured (“TDR”) loans 90 days past due, and other real estate owned totaled $21,000 at December 31, 2022, and $775,000 million at December 31, 2021.

A loan’s past due status is based on the contractual due date of the most delinquent payment due.

The Company’s asset quality remained strong during the year ended December 31, 2023.

Nonperforming assets, which includes nonaccrual loans, accruing loans 90 days past due, and other real estate owned totaled $1,004,000 at December 31, 2023, and $21,000 at December 31, 2022.

A loan’s past due status is based on the contractual due date of the most delinquent payment due.

All loans which are 30 or more days past due at the end of the month are reported to the Board of Directors.

4 unchanged sentences

A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports.

Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

As a percentage of total assets, nonperforming assets were 0.00% at December 31, 2022, compared with 0.05% at December 31, 2021.

As of December 31, 2022, the Company had no loans placed on nonaccrual status.

See Note 1, Organization, Basis of Presentation, and Impact of Recently Issued Accounting Pronouncements and Note 5, Allowance for Loan Losses, in Notes to Consolidated Financial Statements for further information on the Company’s credit grade categories, which are derived from standard regulatory rating definitions.

As a percentage of total assets, nonperforming assets were 0.05% at December 31, 2023, compared with 0.00% at December 31, 2022.

As of December 31, 2023, the Company had $1.0 million in loans on nonaccrual status.

See Note 1, Organization, Basis of Presentation, and Impact of Recently Issued Accounting Pronouncements and Note 5, Allowance for Credit Losses, in Notes to Consolidated Financial Statements for further information on the Company’s credit grade categories, which are derived from standard regulatory rating definitions.

The following table summarizes asset quality information at December 31, 2023, and December 31, 2022.

(Dollars in thousands)

Non-accrual loans:

Residential real estate

Single family

Commercial and industrial

Total non-accrual loans

Loans accruing past 90 days:

2 unchanged sentences

Total non-performing loans

Other real estate owned

Total non-performing assets

1 unchanged sentence

Total non-performing loans to total assets

Total non-performing assets to total assets

There was no interest income that would have been recorded for the years ended December 31, 2022 and 2021 had non-accruing loans been current according to their original terms. 

According to United States generally accepted accounting principles, restructuring a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. 

The CARES Act states that from March 1, 2020, until the end of the year (unless the President terminates the COVID-19 emergency declaration sooner), financial institutions may elect to suspend the TDR accounting principles for loan modifications related to COVID-19.

The Consolidated Appropriations Act of 2021, enacted in December 2020, extended this relief to the earlier of January 1, 2022, or the first day of a bank’s fiscal year that begins after the national emergency ends. 

The suspension applies during the modification. 

A modification can be a forbearance agreement, a new repayment plan, interest rate modification, or any other arrangement that defers or delays the payment of principal or interest. 

This provision applies only to loans that were current or less than 30 days past due on payments as of December 31, 2019. 

The agencies are to defer to the financial institutions to suspend the TDR requirements. 

Financial institutions may presume that borrowers current on payments are not experiencing financial difficulties at modification to determine TDR status, and no further TDR analysis is required for each loan modification in the program. 

Examiners will exercise judgment in reviewing loan modifications, including TDRs, will not automatically adversely risk rate credits affected by COVID-19, and will not criticize prudent efforts to modify the terms on existing loans to affected customers.

As of December 31, 2022, there were no loans not disclosed in the above table, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

Analysis and Determination of the Allowance for Loan Losses.

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable and estimable credit losses inherent in the loan portfolio.

The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions.

Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term.

The allowance is increased by a provision for loans losses which is charged to expense and reduced by full and partial charge-offs, net of recoveries.

Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses.

Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss or loan pools, the fair value of the underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

An integral part of their examination process, the Federal Reserve Board will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.

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

Total non-accrual loans to gross loans receivable

Interest income that would have been recorded for the years ended December 31, 2023 and 2022 had non-accruing loans been current according to their original terms was $133,092 and $0, respectively.

Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans.

When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses.

The amount of the principal forgiveness is deemed to be uncollectible;

therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions.

Typically, one type of concession, such as a term extension, is granted initially.

If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The Company further describes loans that were modified during the year ended December 31, 2023 in Note 5 of Notes to Consolidated Financial Statements.

Analysis and Determination of the Allowance for Credit Loss on Loans.

The allowance for credit losses on loans is maintained at a level which, in management’s judgment, is adequate to absorb probable and estimable future credit losses in the loan portfolio.

Allowances for individually evaluated loans are generally determined based on collateral values.

Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on individually evaluated loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term.

The allowance is increased by a provision for credit losses on loans which is charged to expense and reduced by full and partial charge-offs, net of recoveries.

Changes in the allowance relating to individually evaluated loans are charged or credited to the provision for credit losses on loans.

Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan losses on loan pools, the fair value of the underlying collateral, current and future economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

An integral part of their examination process, the Federal Reserve Board will periodically review our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses.

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 change 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 not 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, net of taxes, as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The transition adjustment includes an increase in allowance for credit losses of $2.2 million and an increase in net deferred tax assets of $506,000.

The following table sets forth activity in our allowance for credit losses on loans for the periods indicated.

For the Year Ended December 31,

2 unchanged sentences

Balance at beginning of year

Total charge-offs

Current expected credit losses, nonrecurring adoption

Commercial and industrial

Total charge-offs

Residential real estate

Total recoveries

Net (charge-offs) recoveries

Provision for (recovery of) loan losses

Provision for credit losses - loans

Balance at end of period

Net charge offs to average loans outstanding (annualized)

Allowance for loan losses to non-performing loans at end of period

Allowance for loan losses to gross loans at end of period

At December 31, 2022, our allowance for loan losses represented 0.88% of total loans and had only $21,000 in non-performing loans.

The allowance for loan losses increased to $14.1 million at December 31, 2022 from $11.7 million at December 31, 2021 as a direct result of normal loan provisions in conjunction with loan growth throughout the year. There were $19,000 in net loan recoveries and $5,000 in net loan charge-offs during the years ended December 31, 2022 and December 31, 2021, respectively.

Allocation of Allowance for Loan Losses .

The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated.

The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

Net charge offs to average loans outstanding

Allowance for credit losses on loans to non-performing loans at end of period

Allowance for credit losses on loans to gross loans at end of period

The following table summarizes our net charge-off activity by loan segment for the periods indicated.

At December 31,

(Dollars in thousands)

Allowance for Loan Losses

Net charge-offs

Net charge-offs to average loans

Net charge-offs

Net charge-offs to average loans

At December 31, 2023, our allowance for credit losses on loans represented 0.96% of total loans and we had only $1.0 million in non-performing loans.

The allowance for credit losses on loans increased to $16.5 million at December 31, 2023 from $14.1 million at December 31, 2022 as a direct result of adopting the CECL accounting standard and normal credit provisions in conjunction with loan growth throughout the year.

There were $446,000 in net loan charge-offs and $19,000 in net loan recoveries during the years ended December 31, 2023 and December 31, 2022, respectively.

Allocation of Allowance for Credit Losses on Loans .

The following table sets forth the allowance for credit losses on loans allocated by loan category and the percent of the allowance in each category to the total allocated allowance on credit losses for loans at the dates indicated.

The allowance for credit losses on loans allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

At December 31,

(Dollars in thousands)

Allowance for Credit Losses - Loans

Percent of Allowance in Each Category to Total Allocated Allowance

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Construction and Land Development

Commercial –

Non Real Estate:

Commercial – Non Real Estate:

Commercial and industrial

Consumer –

Non Real Estate:

Consumer – Non Real Estate:

Funding Activities

Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense.

The Company also utilizes brokered deposits as a funding source in addition to customer deposits.

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

Total deposits increased by $173.2 million from December 31, 2022 to December 31, 2023.

Brokered deposits, which are included in the table below, totaled $317.3 million and $245.5 million at December 31, 2022, and December 31, 2021, respectively.

The following table presents the Company’s average deposits segregated by major category for the year ended December 31, 2022:

Wholesale deposits, which are included in the table below, totaled $433.0 million and $355.6 million at December 31, 2023, and December 31, 2022, respectively.

The following table presents the Company’s average deposits segregated by major category for the year ended December 31, 2023:

At December 31,

11 unchanged sentences

Total deposits

The overall increase in total deposits were primarily driven by an increase in non-interest bearing demand deposits and time deposits largely due to our deposit gather strategies. These increases were partially offset by a decrease in money market deposits. Non-interest bearing deposits increased from December 31, 2022, compared to December 31, 2021 primarily as a result of increased efforts Company wide to replace higher cost of funds with sticky lower cost deposit accounts.

At December 31, 2022, the Company had $486.9 million in total deposits in excess of the FDIC insurance limit of $250,000.

Certificates of deposit in amounts in excess of the FDIC insurance limit of $250,000 totaled approximately $331.3 million.

The pronounced shift from non-interest bearing demand deposits into money market demand and time deposits was driven by market conditions emanating from the large-bank failures in the first half of 2023.

In order for us to maintain the customer relationships, we needed to shift the deposits into accounts where we could provide excess FDIC insurance coverage.

We also gained in money market demand and time deposits as customers brought additional funds into the Company.

The Company uses wholesale deposits as a funding source in addition to customer deposits.

Wholesale deposits provide a diversified and stable source of funding during times of market volatility.

As of December 31, 2023, the Company had $433.0 million of total wholesale deposit funding sources, an increase of $77.5 million compared to December 31, 2022, which totaled $355.6 million.

Given the interest rate environment and strategic initiatives, the Company replaced maturing lower yielding wholesale CDs with higher market rate CDs.

The replacement CDs include call options at our discretion if economic conditions changed.

The Company also utilized additional wholesale demand deposits to provide liquidity and more effectively balance our interest rate sensitivity.

During the year ended December 31, 2023 , total wholesale deposit funding accounted for approximately 33% of our in terest expense.

The following table presents the Company's total wholesale deposit composition, concentrations, current rate and remaining duration, if applicable as of December 31, 2023.

As of December 31,

(Dollars in thousands)

Wholesale Money Market Deposits Accounts (MMDA)

Weighted Average Rate

Weighted Remaining Maturity (in months)

Weighted Average Rate

Weighted Remaining Maturity (in months)

Wholesale MMDAs

Wholesale Time Deposits

CDARS one-way

Listing Service CDs (1)

Wholesale CDs:

Term with Call Option (2)

Total Wholesale CDs

Total wholesale deposits

Listing service CDs are excluded from being classified as wholesale deposits, per FDIC call report instructions

Average weighted call date is April 2024

Regulatory Defined Wholesale Deposits

Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits.

As of December 31, 2023, the Company had $398.5 million of wholesale deposits outstanding, as defined by FDIC, an increase of $81 million from December 31, 2022.

In addition, p ursuant to rule 12 CFR 337.6(e), well-capitalized and well-rated institutions are not required to treat reciprocal deposits as wholesale deposits up to the lesser of 20 percent of their total liabilities or $5 billion.

Reciprocal core deposits exceeding this threshold must be reported additionally as wholesale deposits for call report purposes only.

As of December 31, 2023, the Company additionally reported $176.3 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $574.8 million as of December 31, 2023.

As of December 31, 2023, all of the Company's reciprocal deposits were core deposits from customers who placed their deposits in the reciprocal network for additional FDIC insurance coverage.

At December 31, 2023, the Company had $387.8 million in total deposits in excess of the FDIC insurance limit of $250,000.

Certificates of deposit in amounts in excess of the FDIC insurance limit of $250,000 totaled approximately $99.9 million.

The following table sets forth the maturity of these certificates as of December 31, 2023.

11 unchanged sentences

Interest Rate Range:

0.01 –

1.00 –

2.00 –

5.00 and greater

8 unchanged sentences

Interest Rate Range:

0.01 –

1.00 –

2.00 –

5.00 and greater

Borrowed Funds

We may obtain advances from the Federal Home Loan Bank of Richmond upon the security of the common stock we own in that bank and certain of our residential and commercial mortgage loans, provided certain standards related to creditworthiness have been met.

We may obtain advances from the Federal Home Loan Bank of Richmond upon the security of the common stock we own in that bank and certain of our residential and commercial mortgage loans, provided certain standards related to creditworthiness have been met.

These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities.

Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.

At December 31, 2022 and 2021, we were permitted to borrow up to an aggregate total of $465.0 million and $414.0 million, respectively, from the Federal Home Loan Bank of Richmond.

There were Federal Home Loan Bank borrowings outstanding of $100.0 million and $0 at December 31, 2022, and December 31, 2021, respectively.

At December 31, 2023 and 2022, we were permitted to borrow up to an aggregate total of $504.8 million and $465.0 million, respectively, from the Federal Home Loan Bank of Richmond.

There were Federal Home Loan Bank borrowings outstanding of $0 and $100.0 million at December 31, 2023, and December 31, 2022, respectively.

Additionally, we had credit availability of $114.0 million with correspondent banks for short-term liquidity needs, if necessary.

No borrowings were outstanding at December 31, 2022 and 2021, under this facility.

Borrowings were $15.0 million and $0 outstanding at December 31, 2023 and 2022, respectively, under this facility.

Liquidity and Capital Resources

Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.

Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.

Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves.

5 unchanged sentences

Other short-term investments such as federal funds sold and maturing interest-bearing deposits with other banks, are additional sources of liquidity.

The liability portion of the balance sheet provides liquidity through various customers’

interest-bearing and noninterest-bearing deposit accounts and through FHLB and other borrowings.

Brokered deposits, federal funds purchased, and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity.

The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and noninterest-bearing deposit accounts and through FHLB and other borrowings.

Wholesale deposits, federal funds purchased, and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity.

These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs.

In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a bank holding company that is a separate legal entity from the Bank.

The Company requires cash for various operating needs that could include payment of dividends to its stockholder, the servicing of debt, and the payment of general corporate expenses.

In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a bank holding company that is a separate legal entity from the Bank.

The Company requires cash for various operating needs that could include payment of dividends to its stockholders, the servicing of debt, and the payment of general corporate expenses.

The primary source of liquidity for the Company is dividends paid by the Bank.

Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank.

In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits and other such items.

Any future dividends must be set forth in the Company's capital plans before any dividends can be paid.

The Company’s ability to raise funding at competitive prices is affected by the rating agencies’

views of the Company’s credit quality, liquidity, capital and earnings.

Management meets with the rating agencies on a routine basis to discuss the current outlook for the Company.

The Company’s ability to raise funding at competitive prices is affected by the rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings.

Management is rated by an independent rating agency annually and is provided with independent current outlook for the Company.

The Board of Director's and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies.

We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of December 31, 2022.

We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of December 31, 2023.

We monitor and adjust our investments in liquid assets based upon our assessment of:

(1) expected loan demand;

(2) expected deposit flows;

(3) yields available on interest-earning deposits and securities;

and (4) the objectives of our asset/liability management program.

(1) expected loan demand;

(2) expected deposit flows;

(3) yields available on interest-earning deposits and securities;

and (4) the objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

At December 31, 2022, cash and cash equivalents totaled $130.6 million.

Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $62.6 million at December 31, 2022.

Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks.

The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

At December 31, 2023, cash and cash equivalents totaled $114.5 million.

Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $59.9 million at December 31, 2023.

Our cash flows are comprised of three primary classifications:

cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $33.5 million and $29.1 million for the twelve months ended December 31, 2022, and December 31, 2021, respectively.

Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $228.7 million and $60.5 million for the twelve months ended December 31, 2022, and December 31, 2021, respectively.

There were no sales of available-for-sale debt securities in 2022 or 2021. Net cash provided by financing activities was $232.6 million and used in financing activities was $14.2 million for the twelve months ended December 31, 2022 and 2021, respectively, which consisted primarily of increases in interest bearing deposits and FHLB advances for the twelve months ended December 31, 2022.

There were no net repayments from the Federal Home Loan Bank for year ended 2022.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of December 31, 2022, totaled $516.9 million of total deposits.

cash flows from operating activities, investing activities, and financing activities.

Net cash provided by operating activities was $31.6 million and $33.5 million for the twelve months ended December 31, 2023, and December 31, 2022, respectively.

Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $130.7 million and $228.7 million for the twelve months ended December 31, 2023, and December 31, 2022, respectively.

There were no sales of available-for-sale debt securities in 2023 or 2022.

Net cash provided by financing activities was $83.0 million and $232.6 million for the twelve months ended December 31, 2023 and 2022, respectively, which consisted primarily of increases in interest bearing deposits and federal funds purchased for the twelve months ended December 31, 2023.

There were repayments of $100.0 million to the Federal Home Loan Bank for year ended 2023.

We are committed to maintaining a strong liquidity position.

We monitor our liquidity position on a daily basis.

We anticipate that we will have sufficient funds to meet our current funding commitments.

Certificates of deposit due within one year of December 31, 2023, totaled $463.7 million of total deposits.

If these deposits do not remain with us, we will be required to seek other sources of funds in the normal course of business, including other deposits and Federal Home Loan Bank advances.

Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us.

Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay.

We believe, however, based on past experience that a significant portion of such deposits will remain with us.

We have the ability to attract and retain deposits by adjusting the interest rates offered.

Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

6 unchanged sentences

The Federal Reserve may apply the regulatory capital standards at its discretion to any bank holding company, regardless of asset size, if such action is warranted for supervisory purposes.

Because the Company has total consolidated assets of less than $3 billion and does not engage in activities that would trigger application of the federal regulatory capital rules, it is not at present subject to consolidated capital requirements under the such rules.

The Basel III Capital Rules, a comprehensive capital framework for U.S.

banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).

Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios.

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 was phased in from 0.0% for 2015 to 2.50% by 2019.

The capital conservation buffer for 2023 and 2022 is 2.50%.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

Management believes, as of December 31, 2022, the Company and the Bank meets all capital adequacy requirements to which it is subject.

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 December 31, 2023, the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2023 and 2022, the most recent notification from the Federal Reserve Bank of Richmond categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity Tier 1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual regulatory capital amounts and ratios as of December 31, 2022 and 2021 are presented in the table below.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual regulatory capital amounts and ratios as of December 31, 2023 and 2022 are presented in the table below.

Capital Adequacy Purposes

13 unchanged sentences

In reporting the results of December 31, 2023, the Company has provided supplemental performance measures on an operating basis.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP.

In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.

In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.

Net interest margin on a fully tax equivalent (FTE) basis, provides valuable additional insight into the net interest margin and the impact that investments in tax-exempt securities have on our financial metrics.

The entire FTE adjustment is attributable to the interest tax effect on tax-exempt securities, using the statutory federal income tax rate of 21%.

The entire FTE adjustment is attributable to the interest tax effect on tax-exempt securities, using the statutory federal income tax rate of 21%.

The Company believes that tangible common stockholders' equity, excluding intangible assets, is a meaningful supplement to GAAP financial measures and useful to investors because it provides an additional measure to calculate the book value of our common shares by removing the value of a subjective portion of our balance sheet.

The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31,

The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31,

For the year ended December 31,

15 unchanged sentences

Tangible book value per common share (non-GAAP)

Yield on earning assets (FTE)

Total interest income

FTE adjustment on tax-exempt securities

Total interest income (FTE) (non-GAAP)

Average interest earning assets

Yield on earning assets (GAAP)

Yield on earning assets (FTE) (non-GAAP)

Net interest spread (FTE)

Yield on earning assets (GAAP)

Yield on earning assets (FTE) (non-GAAP)

Yield on interest-bearing liabilities

Net interest spread (GAAP)

Net interest spread (FTE) (non-GAAP)

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity