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Item 8. Financial Statements and Supplementary Data

2024-03-20 compared with 2023-03-23 · 837 added, 1112 removed, 708 unchanged (73% of the section changed)

Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

MainStreet Bancshares, Inc.

Fairfax, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of MainStreet Bancshares, Inc.

and Subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ YOUNT, HYDE & BARBOUR, P.C. 

We have served as the Company's auditor since 2008.

Winchester, Virginia

March 23, 2023

Financial Statements and Supplementary Data

Item 8 – Financial Statements and Supplementary Data

Consolidated Financial Statements

3 unchanged sentences

Cash and due from banks

$ 48,931  

$ 61,827  

$ 53,581 $ 48,931

Federal funds sold

81,669  

31,372  

60,932 81,669

Cash and cash equivalents

130,600  

93,199  

114,513 130,600

Investment securities available-for-sale, at fair value

62,631  

99,913  

Investment securities held-to-maturity, at amortized cost

17,642  

20,349  

59,928 62,631

Investment securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 0 and $ 0 , respectively.

17,275 17,642

Restricted securities, at amortized cost

24,325  

15,609  

Loans, net of allowance for loan losses of $ 14,114 and $ 11,697 , respectively

1,579,950  

1,341,760  

24,356 24,325

Loans, net of allowance for credit losses of $ 16,506 and $ 14,114 , respectively

1,705,137 1,579,950

Premises and equipment, net

14,709  

14,863  

Other real estate owned, net

13,944 14,709

Accrued interest and other receivables

1 unchanged sentence

Bank owned life insurance

37,249  

36,241  

39,915  

14,499  

$ 1,925,751  

$ 1,647,402  

Liabilities and Stockholders’

38,318 37,249

34,914 39,915

$ 2,035,432 $ 1,925,751

Liabilities and Stockholders’ Equity

Non-interest bearing deposits

$ 550,690  

$ 530,678  

$ 364,606 $ 550,690

Interest bearing demand deposits

80,099  

69,232  

137,128 80,099

Savings and NOW deposits

51,419  

85,175  

45,878 51,419

Money market deposits

222,540  

267,730  

442,179 222,540

Time deposits

608,141  

459,148  

696,336 608,141

Total deposits

1,512,889  

1,411,963  

1,686,127 1,512,889

Federal funds purchased

Federal Home Loan Bank advances

100,000  

Subordinated debt, net

72,245  

29,294  

72,642 72,245

Allowance for credit losses on off-balance sheet credit exposure

Other liabilities

42,335  

17,357  

39,137 42,335

Total Liabilities

1,727,469  

1,458,614  

1,813,915 1,727,469

Commitments and contingencies (Note 13)

Stockholders’

Stockholders’ Equity

Preferred stock, $ 1.00 par value, 2,000,000 shares authorized non-cumulative perpetual;

28,750 issued and outstanding as of December 31, 2023 and December 31, 2022

27,263  

27,263 27,263

Common stock, $ 4.00 par value, 10,000,000 shares authorized;

issued and outstanding 7,527,415 shares (including 228,300 nonvested shares) for December 31, 2023 and 7,442,743 shares (including 259,036 nonvested shares) for December 31, 2022

28,736  

29,466  

29,198 28,736

Capital surplus

63,999  

67,668  

65,985 63,999

Retained earnings

86,830  

64,194  

106,549 86,830

Accumulated other comprehensive income (loss)

( 8,546 )  

Total Stockholders’

198,282  

188,788  

Total Liabilities and Stockholders’

$ 1,925,751  

$ 1,647,402  

( 7,478 ) ( 8,546 )

Total Stockholders’ Equity

221,517 198,282

Total Liabilities and Stockholders’ Equity

$ 2,035,432 $ 1,925,751

See Notes to the Consolidated Financial Statements

15 unchanged sentences

Interest on time deposits

Interest on federal fund purchases

Interest on Federal Home Loan Bank advances

2 unchanged sentences

Net Interest Income

Provision for (recovery of) loan losses

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

Provision For Credit Losses - Loans

Recovery of Credit Losses - Off-Balance Sheet Credit Exposure

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

Non-Interest Income

3 unchanged sentences

Net gain on held-to-maturity securities

Net gain (loss) on sale of loans

Net loss on sale of loans

Other fee income

17 unchanged sentences

Net Income available to common shareholders

Net Income per common share:

Earnings per common share:

See Notes to the Consolidated Financial Statements

2 unchanged sentences

Comprehensive Income, net of taxes

$ 26,674  

$ 22,171  

Other comprehensive loss, net of tax benefit:

Unrealized losses on available for sale securities arising during the period (net of tax benefit, $ 2.6 million and $ 223 , respectively)

( 8,759 )  

$ 26,585 $ 26,674

Other comprehensive gain (loss), net of tax expense (benefit):

Unrealized gains (losses) on available for sale securities arising during the period (net of tax expense (benefit), $ 309 and ($ 2.6 million), respectively)

1,062 ( 8,759 )

reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $ 2 and $ 4 , respectively)

Other comprehensive loss

( 8,743 )  

Other comprehensive gain (loss)

1,068 ( 8,743 )

Comprehensive Income

$ 17,931  

$ 21,391  

$ 27,653 $ 17,931

See Notes to the Consolidated Financial Statements

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2022 and 2021 (Dollars in thousands).

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 (Dollars in thousands).

Accumulated Other

2 unchanged sentences

Balance, December 31, 2022

$ 27,263  

$ 29,466  

$ 67,668  

$ 64,194  

$ 188,788  

$ 27,263 $ 28,736 $ 63,999 $ 86,830 $ ( 8,546 ) $ 198,282

Cumulative change in accounting principle (Note 3)

— — — ( 1,699 ) — ( 1,699 )

Vesting of restricted stock

( 407 )  

— 470 ( 470 ) — — —

Stock based compensation expense

— — 2,491 — — 2,491

Common stock repurchased

( 1,137 )  

( 5,781 )  

— ( 8 ) ( 35 ) — — ( 43 )

Dividends on preferred stock - ($ 0.47 per depositary share)

( 2,156 )  

— — — ( 2,156 ) — ( 2,156 )

Dividends on common stock - ($ 0.40 per share)

( 1,882 )  

26,674  

Other comprehensive loss

( 8,743 )  

— — — ( 3,011 ) — ( 3,011 )

— — — 26,585 — 26,585

Other comprehensive gain

— — — — 1,068 1,068

Balance, December 31, 2023

$ 27,263  

$ 28,736  

$ 63,999  

$ 86,830  

$ ( 8,546 )  

$ 198,282  

$ 27,263 $ 29,198 $ 65,985 $ 106,549 $ ( 7,478 ) $ 221,517

Accumulated Other

Comprehensive

Income (Loss)

Balance, December 31, 2021

$ 27,263  

$ 29,130  

$ 66,116  

$ 44,179  

$ 167,665  

$ 27,263 $ 29,466 $ 67,668 $ 64,194 $ 197 $ 188,788

Vesting of restricted stock

( 336 )  

— 407 ( 407 ) — — —

Stock based compensation expense

— — 2,519 — — 2,519

Common stock repurchased

— ( 1,137 ) ( 5,781 ) — — ( 6,918 )

Dividends on preferred stock - ($ 0.47 per depositary share)

( 2,156 )  

22,171  

— — — ( 2,156 ) — ( 2,156 )

Dividends on common stock - ($ 0.25 per share)

— — — ( 1,882 ) — ( 1,882 )

— — — 26,674 — 26,674

Other comprehensive loss

( 780 )  

— — — — ( 8,743 ) ( 8,743 )

Balance, December 31, 2022

$ 27,263  

$ 29,466  

$ 67,668  

$ 64,194  

$ 188,788  

$ 27,263 $ 28,736 $ 63,999 $ 86,830 $ ( 8,546 ) $ 198,282

See Notes to the Consolidated Financial Statements

8 unchanged sentences

Loss on valuation of other real estate owned

Provision for (recovery of) loan losses

Loss on loans held for sale

Loss on New Market Tax Credit investment operations

Gain on disposal of premises and equipment

Gain on called held-to-maturity securities

Provision for credit losses, net

Stock based compensation expense

1 unchanged sentence

Subordinated debt amortization expense

Gain on disposal of premises and equipment

Loss (gain) on loans held for sale

Gain on called held-to-maturity securities

Accrued interest receivable and other receivables

11 unchanged sentences

Proceeds from sale of other real estate owned

Proceeds from sale of loans

Purchases of bank owned life insurance

Proceeds from sale of premises and equipment

3 unchanged sentences

Cash Flows from Financing Activities

Net increase in non-interest deposits

Net increase (decrease) in interest bearing demand, savings, and time deposits

Net increase in Federal Home Loan Bank advances and other borrowings

Net increase (decrease) in non-interest deposits

Net increase in interest bearing demand, savings, and time deposits

Net increase (decrease) in Federal Home Loan Bank advances

Net increase in federal funds purchased

Net increase in subordinated debt

2 unchanged sentences

Cash dividends paid on common stock

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Increase (decrease) in Cash and Cash Equivalents

4 unchanged sentences

Cash paid during the period for income taxes

Right of use assets obtained in exchange for new operating lease liabilities

Transfers from loans receivable to loans held for sale, at carrying value

Net unrealized loss on securities available-for-sale

Net unrealized gain (loss) on securities available-for-sale

See Notes to the Consolidated Financial Statements

MAINSTREET BANCSHARES,  

MAINSTREET BANCSHARES, INC.

AND SUBSIDIARY

2 unchanged sentences

MainStreet Bancshares Inc.

(the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet Bank.

18, 2016, the stockholders of MainStreet Bank (the “Bank”) approved a Reorganization Agreement and Plan of Share Exchange (“Reorganization”) whereby the Bank would reorganize into a holding company structure.

The Plan of Share Exchange called for each outstanding share of Bank common stock to be automatically converted into and exchanged for one share of the Company’s common stock, and the common stockholders of the Bank would become the common stockholders of the Company on the effective date of the Reorganization.

(the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet Bank.

On May 18, 2016, the stockholders of MainStreet Bank (the “Bank”) approved a Reorganization Agreement and Plan of Share Exchange (“Reorganization”) whereby the Bank would reorganize into a holding company structure.

On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally.

2 unchanged sentences

There are currently 28,750 shares of preferred stock outstanding.

On July 

15, 2016, the Reorganization became effective, and the Bank became a wholly-owned subsidiary of the Company.

On July 15, 2016, the Reorganization became effective, and the Bank became a wholly-owned subsidiary of the Company.

The holding company is regulated under the Bank Holding Company Act of 1956, as amended, and is subject to inspection, examination, and supervision by the Federal Reserve Board.

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”

), pursuant to Section 12 (b) of the Securities Exchange Act of 1934.

The Company is considered an “emerging growth company”

under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,”

and as defined in Section 

2 (a) of the Securities Act of 1933, as amended, or the “Securities Act.”

We are also a “smaller reporting company”

as defined in Exchange Act Rule 12b - 2.

As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”

We were approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB”

as of April 

We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market on the symbol “MNSBP”

as of September 16, 2020.

The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2 (a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b - 2.

As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”

We were approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019.

We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market on the symbol “MNSBP” as of September 16, 2020.

Each depositary share represents a 1/40 th interest in a share of 7.50 % Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock.

In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company to promote development in economically distressed areas.

This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”).

In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.

This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”).

In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.

MainStreet Bank is headquartered in Fairfax, Virginia where it also operates a branch.

The Bank was incorporated on March 

28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 

The Bank commenced regular operations on May 

26, 2004, and is supervised by the Bureau and the Federal Reserve Bank of Richmond.

The Bank was incorporated on March 28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004.

The Bank commenced regular operations on May 26, 2004, and is supervised by the Bureau and the Federal Reserve Bank of Richmond.

The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation.

2 unchanged sentences

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) as applicable to a smaller reporting company.

Principles of Consolidation –

The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries, the Bank and MainStreet Community Capital, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and cash equivalents –

For the purpose of presentation in the Statements of Cash Flows, the Bank has defined cash and cash equivalents as those amounts included in the statement of financial condition captions “Cash and due from banks”

and “Federal funds sold.”

Investment securities –

The Bank’s investment debt securities are classified as either held to maturity, available for sale or trading.

At December 31, 2022 and December 31, 2021 , the Bank held approximately $ 17.6  million and $ 20.3  million, respectively, in securities classified as held to maturity.

Principles of Consolidation – The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries, the Bank and MainStreet Community Capital, LLC.

All significant intercompany transactions and balances have been eliminated in consolidation.

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

Investment securities – The Bank’s investment debt securities are classified as either held to maturity, available for sale or trading.

At December 31, 2023 and December 31, 2022 , the Bank held approximately $ 17.3 million and $ 17.6 million, respectively, in securities classified as held to maturity.

The Bank held no securities classified as trading.

Debt securities which are not classified as held to maturity or trading are classified as securities available for sale.

Debt securities which are not classified as held to maturity or trading are classified as securities available for sale (AFS).

Debt securities available for sale are reported at fair value.

Any unrealized gain or loss, net of applicable income taxes, is reported as a separate addition to or reduction from stockholders’

Any unrealized gain or loss, net of applicable income taxes, is reported as a separate addition to or reduction from stockholders’ equity.

Gains and losses arising from the sale of debt securities available for sale are recognized based on the specific identification method on a trade-date basis and included in results of operations.

Debt securities held to maturity includes securities purchased with the ability and positive intent to hold to maturity.

Debt securities are stated at historical cost adjusted for amortization of premiums and accretion of discount.

Any investment security, for which there has been a value impairment deemed by management to be other than temporary, is written down to its estimated fair value with a charge to current operations.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Declines in the fair value of held to maturity and available for sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

In determining whether other-than-temporary impairment exists, management considers many factors, including ( 1 ) the length of time and the extent to which the fair value has been less than cost, ( 2 ) the financial condition and near-term prospects of the issuer, and ( 3 ) whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Restricted equity securities consist of the Federal Reserve Bank and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of $ 4.8  million and $ 5.1 million respectively, as of December 31, 2022 , compared to $ 4.1  million and $ 826,000 , respectively, as of December 31, 2021 .

Debt securities are stated at historical cost adjusted for amortization of premiums and accretion of discount, and net of any allowance for credit losses.

The Company measures expected credit losses on held-to-maturity (HTM) securities on a collective basis by major security type and credit ratings.

Accrued interest receivable on these securities are excluded from the estimate of credit losses.

For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis.

The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings.

The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others.

The adoption of CECL had an insignificant impact on the Company's held-to-maturity securities portfolio.

Purchase premiums and discounts are amortized using the interest method over the term or first call date of each security.

A HTM or an AFS debt security that management does not intend to sell, for which there has been a value impairment deemed by management, an allowance for credit losses is established and written down.

An AFS security that management does intend to sell or more likely than not will be required to sell, that is in an unrealized loss position shall be written down to its fair value with a charge to current operations.

Restricted equity securities consist of the Federal Reserve Bank and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of $ 5.2 million and $ 1.3 million respectively, as of December 31, 2023 , compared to $ 4.8 million and $ 5.1 million, respectively, as of December 31, 2022 .

Restricted equity securities also consisted of $ 126,800 in Community Bankers Bank stock at December 31, 2023 and December 31, 2022 .

3 unchanged sentences

When evaluating restricted stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.

The Bank does not consider these investments to be impaired at December 31, 2022 or December 31, 2021 and no previous impairment has been recognized.

Restricted equities include $ 6.7 million in Low-Income Housing Tax Credits (“LIHTC”) that are carried at amortized cost through the proportional amortization method.

The Bank does not consider these investments to be impaired at December 31, 2023 or December 31, 2022 and no previous impairment has been recognized as of December 31, 2023 .

Restricted equities include $ 8.2 million in Low-Income Housing Tax Credits (“LIHTC”) that are carried at amortized cost through the proportional amortization method.

Restricted equities also include $ 6.4 million of nonmarketable securities as of December 31, 2023 that do not qualify for equity method accounting.

As of December 31, 2021  restricted equities include $ 4.9 million in LIHTC and $ 5.7 million of nonmarketable securities that do not qualify for equity method accounting.

These investments are recorded at cost because the ownership is restricted and lacks a market for resale. 

Loans held for sale - Loans intended for sale are recorded at the lower aggregate cost or fair value as of the statement of financial condition date.

Gains and losses on loan sales are determined by the specific-identification method.

As of December 31, 2022 restricted equities include $ 6.7 million in LIHTC and $ 6.1 million of nonmarketable securities that do not qualify for equity method accounting.

These investments are recorded at cost because the ownership is restricted and lacks a market for resale.

Loans - The Bank makes commercial and consumer loans to customers.

Our recorded investment in loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their unpaid principal balances adjusted for charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for loan losses.

Interest on loans is credited to operations based on the principal amount outstanding.

Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the effective interest method.

The Bank is amortizing these amounts over the contractual life of the related loans.

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

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

5 unchanged sentences

It is Bank policy to charge-off loans whose collectability is sufficiently questionable and can no longer be justified as an asset on the statement of financial condition.

To determine if a loan should be charged-off, all possible sources of repayment are analysed, including:

( 1 ) the potential for future cash flow, ( 2 ) the value of the Bank’s collateral, and ( 3 ) the strength of co-makers or guarantors.

All principal and previously accrued interest is charged to the allowance for loan losses.

All future payments received on the loan are credited to the allowance for loan losses as a recovery.

To determine if a loan should be charged-off, all possible sources of repayment are analyzed, including:

( 1 ) the potential for future cash flow, ( 2 ) the value of the Bank’s collateral, and ( 3 ) the strength of co-makers or guarantors.

All principal and previously accrued interest is charged to the allowance for credit losses.

All future payments received on the loan are credited to the allowance for credit losses as a recovery.

These policies are applied consistently across our loan portfolio.

Impairment of a loan - The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all interest and principal payments as scheduled in the loan agreement when due.

A loan is not considered impaired during a period of an insignificant delay in payment if the ultimate collectability of all amounts due is expected.

Impairment is measured on a loan by loan basis for all commercial, construction and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Consistent with the Bank’s method for nonaccrual loans, payments on impaired loans are first applied to principal outstanding.

Smaller balance consumer loans are not individually evaluated for impairment.

Troubled Debt Restructuring (TDR) occurs when the Bank agrees to modify the original terms of a loan due to the deterioration in the financial condition of the borrower.

TDRs are considered impaired loans.

Upon designation as a TDR, the Bank evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan.

If a loan was accruing prior to being modified as a TDR and if the Bank concludes that the borrower is able to continue making such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status.

If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above.

Restructured loans for which there was no rate concession, and therefore made at a market rate of interest, may be eligible to be removed from TDR status in periods subsequent to the restructuring depending on the performance of the loan.

As of December 31, 2022 , and December 31, 2021 , the Bank had zero loans classified as TDR.

Allowance for Loan Losses - The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses.

Loan losses are charged against the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:

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

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

The loan is a non-consumer loan, unless the loan is well secured and recovery is probable.

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

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

The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable and estimable losses inherent in the loan portfolio.

Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses.

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

The evaluation also considers the following risk characteristics of each loan portfolio segment:

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

Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan.

Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate.

Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate.

Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards.

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Consumer secured loans (indirect lending) carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles).

These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

The allowance consists of specific and general components.

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

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

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

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

The general component 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.

The characteristics of the loan ratings are as follows:

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio.

The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue.

When necessary, acceptable personal guarantors support the loan.

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

Watch rated loans are still performing as agreed.

Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis.

The borrower’s recent payment history is characterized by late payments.

The Bank’s risk exposure is mitigated by collateral supporting the loan.

The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension.

The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan.

The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank.

There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term.

A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due.

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

The possibility of loss is extremely high.

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

Loss rated loans are fully charged off.

Other Real Estate Owned ( “

OREO ”

) - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis.

The Company designates individually evaluated loans on nonaccrual status as collateral-dependent loans, as well as other loans that management of the Company designates as having higher risk.

Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty.

These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral.

The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost.

If the fair value of the collateral exceeds the amortized cost, no allowance is required.

Allowance for Credit Losses - see discussion of allowance for credit loss presentation under Recently Adopted Accounting Policies.

Other Real Estate Owned ( “ OREO ” ) - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis.

Any required initial write-downs are charged to allowance for credit losses.

Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, and recent sales of like properties, length of time the properties have been held and our ability and intention with regard to continued ownership of the properties.

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Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets and improvements are capitalized.

Interest income on loans –

Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding.

Interest income on loans – Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding.

The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due.

Upon such discontinuance, all unpaid accrued interest is reversed.

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

Upon returning to accrual status, interest payments applied to the principal balance of a loan while in nonaccrual status are recognized as a yield adjustment over the remaining life.

Loan origination and commitment fees and certain related direct costs - Loan origination and commitment fees charged by the Bank and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment.

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Net fees related to standby letters of credit are recognized over the commitment period.

Premises and equipment –

Land is carried at cost.

Premises and equipment – Land is carried at cost.

Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line basis over the estimated useful life of each asset, which ranges from 3 to 39 years.

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All of this amortization expense is included within components of operating income.

Income taxes –

The Bank uses an asset and liability approach in financial accounting and reporting for income taxes.

Income taxes – The Bank uses an asset and liability approach in financial accounting and reporting for income taxes.

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future.

The principal items relate primarily to differences between the allowance for loan losses, deferred loan fees, and accumulated depreciation and amortization.

The principal items relate primarily to differences between the allowance for credit losses, deferred loan fees, and accumulated depreciation and amortization.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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

Comprehensive income –

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.

Although, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Stock compensation plans –

Stock compensation accounting guidance (FASB ASC 718, “Compensation –

Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements.

Stock compensation plans – Stock compensation accounting guidance (FASB ASC 718, “Compensation – Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements.

That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’

service period, generally defined as the vesting period.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period.

For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

A Black-Sholes model is used to estimate the fair value of stock options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards.

A Black-Sholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

No stock options were granted during 2023 and 2022 .

Earnings per common share –

Net income per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share”

and has been computed based on the weighted average common shares outstanding during the year ended December 

31, ( 7,529,382 for 2022 and 7,559,310 for 2021 ).

Earnings per common share – Earnings per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share” and has been computed based on the weighted average common shares outstanding during the year ended December 31, ( 7,522,913 for 2023 and 7,529,382 for 2022 ).

Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The only potential dilutive stock of the Bank as defined in FASB ASC 260 would be stock options granted to various directors, officers, and employees of the Bank.

There were no such options outstanding at December 31, 2022 or December 31, 2021 .

There were no such options outstanding during the years ended December 31, 2023 or December 31, 2022 .

Restricted stock is included in the computation of basic earnings per share as the holder is entitled to full benefits of a stockholder during the vesting period and is thus considered a participating security.

Off-balance sheet instruments –

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit.

Off-balance sheet instruments – In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit.

Such financial instruments are recorded in the financial statements when they are funded, or related fees are incurred or received.

Advertising and marketing expense –

Advertising and marketing costs are expensed as incurred.

Use of estimates –

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

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

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

Actual results could differ from the estimates.

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

In connection with the determination of the allowances for losses on loans, management obtains independent appraisals for significant properties.

Fair value of financial instruments –

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 20.

In connection with the determination of the allowances for credit losses on loans, management obtains independent appraisals for significant properties.

Fair value of financial instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 20.

Fair value estimates involve uncertainties and matters of significant judgment.

Changes in assumptions or in market conditions could significantly affect the estimates.

Derivative Financial Instruments –

The Bank recognizes derivative financial instruments at fair value as either an other asset or other liability 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.

Derivative Financial Instruments – The Bank recognizes derivative financial instruments at fair value as either an other asset or other liability 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 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.

Transfers of financial assets –

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from the Bank –

put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and ( 3 ) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Revenue Recognition

Most revenue associated with the Company’s financial instruments, including interest income and gains/losses on investment securities, derivatives and sales of financial instruments are outside the scope of ASC Topic 606.

The Company’s services that fall within the scope of ASC Topic 606 are presented within noninterest income and are recognized as revenue.

The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 19.

Transfers of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.

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

Revenue Recognition - Most revenue associated with the Company’s financial instruments, including interest income and gains/losses on investment securities, derivatives and sales of financial instruments are outside the scope of ASC Topic 606.

The Company’s services that fall within the scope of ASC Topic 606 are presented within noninterest income and are recognized as revenue.

A description of the primary revenue streams accounted for under ASC Topic 606 follows:

Service Charges on Deposit Accounts.

 The Company earns fees from its deposit customers for overdraft and account maintenance services.

Deposit Account Service Charges.

The Company earns fees from its deposit customers for overdraft and account maintenance services.

Overdraft fees are recognized when the overdraft occurs.

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Other Service Charges and Fees.

 The Company earns fees from its customers for transaction-based services.

Such services include safe deposit box, ATM, stop payment, wire transfer, mortgage origination and interest rate swap fees.

In each case, these service charges and fees are recognized in income at the time or within the same period that the Company’s performance obligation is satisfied.

Interchange Income.

 The Company earns interchange fees from debit and credit cardholder transactions conducted through various payment networks.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services.

Recently Adopted Accounting Policies

Adoption of New Accounting Standards:

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

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by the lessor in accordance with Topic 842 on leases.

In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

One such changes is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that is more likely than not they will be required to sell.

The Company adopted ASC 326 and all the subsequent amendments thereto effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior periods amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a net decrease to retained earnings of $ 1.7 million as of January 1, 2023 for the cumulative effect of adopting ASC 326.

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

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities.

Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.

The following table illustrates the impact of ASC 326.

January 1, 2023

(Dollars in thousands)

As Reported Under ASC 326

Pre-ASC 326 Adoption

Impact of ASC 326 Adoption

Allowance for Credit Losses

Residential Real Estate

$ 2,205 $ 2,146 $ 59

Commercial Real Estate

7,773 7,159 614

Construction and Land Development

3,366 3,347 19

Commercial & Industrial

1,590 1,418 172

Total Allowance for Credit Losses on Loans

$ 15,009 $ 14,114 $ 895

Allowance for Credit Losses Off-Balance Sheet Credit Exposure

1,310 — 1,310

Total Allowance for Credit Losses

$ 16,319 $ 14,114 $ 2,205

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful.

The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Allowance for Credit Losses (ACL) - Loans

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management's estimate of lifetime credit losses inherent in the loans as of the balance sheet date.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, concentrations or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or vacancy rates, consumer price index and projected federal funds target rate and future unemployment rates.

The allowance for credit losses on loans is measured on a collective (pool) basis when similar risk characteristics exist.

The Company has identified the following portfolio segments and measures the allowance for credit losses on loans using the following methods:

Portfolio segments are grouped in homogenous pools that mirror the loan pools described in Federal Financial Institutions Examination Council Call Report however we are able to group these pools into the following segments:

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate.

Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate.

Real estate security diminishes risks only to the extent that a market exists for the subject collateral.

These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards

Construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan.

Residential real estate mortgage loans, including equity lines of credit, carry risks associated with the continued creditworthiness of the borrower and the changes in the value of the collateral.

In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

Consumer secured loans (indirect lending) carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles).

These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

Consumer unsecured loans carry risks associated with the continued credit-worthiness of the borrower.

Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

For each homogenous loan pool, the Company elected to use the Weighted Average Remaining Life (“WARM”) methodology for calculating historical and future loss reserves.

The WARM methodology calculates the average annual historical charge-off rate of a homogenous loan pool and multiplies that rate by the pool's remaining life to estimate the allowance for credit losses.

Quantitative assumptions included are below:

Remaining life - For amortizing assets, the remaining life is calculated by taking the contractual life and adjusting it by any expected scheduled payments as well as prepayments.

An important assumption in the calculation of remaining life is an “exit event” which would be deemed as the end of life of a loan.

Examples of exit events included in our model are:

A change in maturity date of 90 days or more and 2 ).

A loan changing its loan pool classification.

Loss Rate - Loss rates are calculated quarterly and aggregated to determine an annual loss rate.

Our methodology uses actual Company data utilizing a straight average over the time periods included.

Recoveries are netted against charge-offs and loss rates are floored at 0% with no ability to have “negative” loss rates.

Loss Rate Lookback - By utilizing the WARM method, management is also evaluating future economic conditions.

Using historical loan portfolio performance data in certain economic conditions, gives us an idea of how to adjust for potential credit exposure in similar future environments.

While subject to change at each quarterly meeting, we have elected to make our base case scenario for future economic environments.

This evaluation will be subject to change given the circumstances evaluated at each quarter.

Historical Losses - Quantitative loss estimation models have been developed based largely on call report data from 2004 through the current period and the economic conditions during the same time period.

Within our historical losses calculation, the Company projects out the loss environment for the subsequent two quarters, based largely on the preceding four quarters.

After that period, the historical loss percentage reverts back to the lifetime historical mean over a four quarter progression.

Additionally, the allowance for credit losses on loans calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis.

When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.

Allowance for Credit Losses - Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The Company classified off-balance sheet exposure in similar pools as the funded loan portfolio and determined that qualitative and quantitative risk factors assessed to the funded loan pool are also evident for the unfunded loan pool of similar type, adjusted for likelihood of funding and any other relevant metrics.

The allowance for unfunded commitments is identified separately on the Company’s consolidated statement of financial condition.

Allowance for Credit Losses - Held-to-Maturity Securities

The Company measures expected credit losses on held-to-maturity (HTM) securities on a collective basis by major security type and credit ratings.

Accrued interest receivable on these securities are excluded from the estimate of credit losses.

For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis.

The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings.

The adoption of CECL had an insignificant impact on the Company's held-to-maturity securities portfolio.

The Company’s Allowance Committee, contains representatives from both the Company’s finance and credit teams, is responsible for approving the Company’s estimate of expected credit losses.

The Allowance Committee considers the quantitative model results and qualitative factors when approving the final ACL.

The Company’s ACL model is subject to the Company’s model risk management standards.

In December 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022 - 06, “Reference Rate Reform (Topic 848 ):

Deferral of the Sunset Date of Topic 848.” ASU 2022 - 06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848.

The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published.

In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

The Company's adopted ASU 2022 - 06 as of June 30, 2023 and it did not have a material impact on its consolidated financial statements.

Impact of Recently Issued Accounting Pronouncements

During June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13, “Financial Instruments –

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.” 

The ASU, as amended, requires an entity to measure 

expected credit losses for financial assets carried at amortized cost 

based on historical experience, current conditions, and reasonable and supportable forecasts.

Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.   The Company adopted ASU 2016 - 13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard.

The adjustment recorded at adoption was 

not significant to the overall allowance for credit losses or shareholders’

equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company’s reserve for unfunded loan commitments.

Subsequent to adoption, the Company will record adjustments to its allowances for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.

The Company is utilizing a third -party model to tabulate its estimate of current expected credit losses, using a weighted average remaining life methodology.

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included call report codes and other attributes that significant to the Company. The Company primarily utilizes average remaining portfolio life and Federal Reserve Economic Data for its reasonable and supportable forecasting of current expected credit losses.

To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: lending practices, national/local economics, portfolio composition, employee experience, credit quality indicators, underlying collateral, concentrations and other external factors. The Company’s CECL implementation process was overseen by the Allowance for Credit Losses Committee and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2020 - 04 “Reference Rate Reform (Topic 848 ):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”

These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2021 - 01 “Reference Rate Reform (Topic 848 ):

Scope.”

This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU No.

2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU No.

2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

The Company has inventoried its exposure to instruments that include a reference to LIBOR and have included amendments to transition to an appropriate comparable rate.

The Company has also discontinued using LIBOR as a primary rate reference.

The Company is assessing ASU 2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In August 2021, the FASB issued ASU 2021 - 06, “'Presentation of Financial Statements (Topic 205 ), Financial Services—Depository and Lending (Topic 942 ), and Financial Services—Investment Companies (Topic 946 ):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.

This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.

33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”.

The ASU is effective upon addition to the FASB Codification.

During June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts.

Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.

The Company adopted ASU 2016 - 13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard.

The adjustment recorded at adoption was not significant to the overall allowance for credit losses or shareholders’ equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company’s reserve for unfunded loan commitments.

Subsequent to adoption, the Company will record adjustments to its allowances for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.

The Company is utilizing a third -party model to tabulate its estimate of current expected credit losses, using a weighted average remaining life methodology.

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included call report codes and other attributes that significant to the Company.

The Company primarily utilizes average remaining portfolio life and Federal Reserve Economic Data for its reasonable and supportable forecasting of current expected credit losses.

lending practices, national/local economics, portfolio composition, employee experience, credit quality indicators, underlying collateral, concentrations and other external factors.

The Company’s CECL implementation process was overseen by the Allowance for Credit Losses Committee and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience.

In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023 - 02, “Investments—Equity Method and Joint Ventures (Topic 323 ):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted for all entities in any interim period.

The Company does not expect the adoption of ASU 2023 - 02 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

ASU 2016 - 13 - Financial Instruments - Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments:

In June 2016, FASB issued ASU 2016 - 13 - Financial Instruments - Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.

The new accounting guidance in this ASU replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model.

The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, and held-to-debt securities.

It also applies to off-balance sheet credit exposures not accounted for as loan recievables (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.

The CECL model requires an entity to estimate credit losses over the life of an asset or off-balance sheet exposure.

The new accounting guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2022. 

Adoption will be applied through a one -time cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

Management adopted the guidance on January 1, 2023 

and implemented changes to relevant systems as necessary. The Company currently intends to use a blend of multiple economic forecasts to estimate expected credit losses over a six month reasonable forecast period and then revert, over a one year period, to longer term historical loss experience to arrive at lifetime expected credit losses.

The estimated increase in the allowance is primarily due to required increases for commercial real estate, residential, and installment loans to include the requirement to estimate lifetime expected credit losses and the remaining length of time to maturity for these loans.

Additionally, management expects an increase in the allowance for credit losses for unfunded commitments.

While adoption of this ASU is expected to increase the allowance for credit losses, it does not change the overall credit risk in the Company's loan, lease and securities portfolios or the ultimate losses therein.

The transition adjustment to increase the allowance will result in a decrease to shareholders' equity on January 1, 2023, but will not have an impact on the Bank's regulatory capital.

The ultimate impact of the adoption of this ASU on January 1, 2023 was an increase of $ 2.2 million, comprised of increases of $ 895,000 in the allowance for credit losses and $ 1.3 million for the reserve for unfunded commitments.

This represents an increase of 2 and 8 basis points, respectively.

Calculated credit losses on held-to-maturity debt securities were not material and there was no impact to the available for sale portfolio or other financial instruments.

In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023 - 06, “Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S.

Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification.

The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations.

For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules.

For all other entities, the amendments will be effective two years later.

However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity.

The Company does not expect the adoption of ASU 2023 - 06 to have a material impact on its consolidated financial statements.

In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023 - 09, “Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis.

Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received).

Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign.

This ASU is effective for annual periods beginning after December 15, 2024.

Early adoption is permitted.

The amendments should be applied on a prospective basis;

however, retrospective application is permitted.

The Company does not expect the adoption of ASU 2023 - 06 to have a material impact on its consolidated financial statements.

Restrictions on Cash

To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances.

The daily average cash reserve requirements were $ 0 as of December 31, 2022 and December 31, 2021 .

On March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020.

13 unchanged sentences

Collateralized Mortgage Backed

$ 26,801  

$ ( 4,574 )  

$ 22,227  

$ 23,446 $ — $ ( 3,931 ) $ 19,515

Subordinated Debt

( 1,143 )  

9,970 — ( 1,503 ) 8,467

Municipal Securities

10,675  

( 2,709 )  

22,823  

( 2,658 )  

20,175  

10,649 — ( 2,342 ) 8,307

22,668 23 ( 1,949 ) 20,742

Governmental Agencies

( 36 )  

$ 73,739  

$ ( 11,120 )  

$ 62,631  

2,932 3 ( 38 ) 2,897

$ 69,665 $ 26 $ ( 9,763 ) $ 59,928

Investment securities held-to-maturity was comprised of the following:

5 unchanged sentences

Municipal Securities

$ 15,142  

$ ( 237 )  

$ 14,940  

$ 14,775 $ 19 $ ( 121 ) $ 14,673

Subordinated Debt

$ 17,642  

$ ( 237 )  

$ 17,440  

2,500 — ( 10 ) 2,490

$ 17,275 $ 19 $ ( 131 ) $ 17,163

Investment securities available-for-sale was comprised of the following:

4 unchanged sentences

Gross Unrealized Losses

Treasury Securities

$ 20,000  

Collateralized Mortgage Backed

31,521  

( 790 )  

30,882  

26,801 — ( 4,574 ) 22,227

Subordinated Debt

( 47 )  

9,970 — ( 1,143 ) 8,827

Municipal Securities

10,704  

( 160 )  

10,557  

22,978  

( 17 )  

24,143  

10,675 — ( 2,709 ) 7,966

22,823 10 ( 2,658 ) 20,175

Governmental Agencies

( 98 )  

$ 99,648  

$ 1,377  

$ ( 1,112 )  

$ 99,913  

3,470 2 ( 36 ) 3,436

$ 73,739 $ 12 $ ( 11,120 ) $ 62,631

Investment securities held-to-maturity was comprised of the following:

5 unchanged sentences

Municipal Securities

$ 17,849  

$ 18,644  

$ 15,142 $ 35 $ ( 237 ) $ 14,940

Subordinated Debt

$ 20,349  

$ 21,144  

The scheduled maturities of securities available-for-sale and held-to-maturity at December 

31, 2021 were as follows:

2,500 — — 2,500

$ 17,642 $ 35 $ ( 237 ) $ 17,440

Credit Quality Indicators and Allowance for Credit Losses - Held-to-Maturity (HTM)

For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis.

The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings.

The Company’s HTM securities ACL was immaterial at December 31, 2023 .

The majority of the Company’s HTM securities with credit risk are obligations of states and political subdivisions.

The following table presents the amortized cost of HTM securities as of December 31, 2023 and December 31, 2022 by security type and credit rating according to Moody's and Standard and Poor's:

(Dollars in thousands)

Municipal Securities

Subordinated Debt

Total HTM securities

December 31, 2023

Credit Rating:

$ 14,775 $ — $ 14,775

Not Rated - Non Agency

— 2,500 $ 2,500

$ 14,775 $ 2,500 $ 17,275

December 31, 2022

Credit Rating:

$ 15,142 $ — $ 15,142

Not Rated - Non Agency

— 2,500 2,500

$ 15,142 $ 2,500 $ 17,642

At December 31, 2023 , the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments.

The Company had no securities held-to-maturity classified as nonaccrual for the year ended December 31, 2023 .

The scheduled maturities of securities available-for-sale and held-to-maturity at December 31, 2023 were as follows:

December 31, 2023

Available-for-Sale

4 unchanged sentences

Due in one year or less

$ — $ — $ 318 $ 315

Due from one to five years

1,000 976 3,325 3,314

Due from after five to ten years

13,056  

11,583  

14,054 12,222 7,218 7,188

Due after ten years

59,683  

50,085  

$ 73,739  

$ 62,631  

$ 17,642  

$ 17,440  

Securities with a fair value of $ 3.6 million and $ 410,492  at December 31, 2022 and December 31, 2021 , respectively, were pledged as collateral to secure public funds and loans swaps.

54,611 46,730 6,414 6,346

$ 69,665 $ 59,928 $ 17,275 $ 17,163

Securities with a fair value of $ 16.1 million and $ 3.6 million at December 31, 2023 and December 31, 2022 , respectively, were pledged as collateral to secure public funds, loans swaps, and funding through the bank term funding program.

The Company has not drawn upon or utilized the bank term funding program.

As of December 31, 2023 and December 31, 2022 , there were no holdings of securities of any one issuer, other than U.S.

Government and its agencies, in an amount greater than 10% of shareholders' equity

There were no securities sold from the available-for-sale portfolio during the years ended December 31, 2023 and 2022 .

4 unchanged sentences

(Dollars in thousands)

Estimated Fair Value

Unrealized Loss

Estimated Fair Value

Unrealized Loss

Estimated Fair Value

Unrealized Loss

1 unchanged sentence

Collateralized Mortgage Backed

$ 2,021  

$ ( 151 )  

$ 20,206  

$ ( 4,423 )  

$ 22,227  

$ — $ — $ 19,440 $ ( 3,931 ) $ 19,440 $ ( 3,931 )

Subordinated Debt

( 393 )  

( 750 )  

— — 7,717 ( 1,503 ) 7,717 ( 1,503 )

Municipal Securities

( 198 )  

( 2,511 )  

11,028  

( 838 )  

( 1,820 )  

18,691  

— — 8,307 ( 2,342 ) 8,307 ( 2,342 )

1,986 ( 34 ) 16,510 ( 1,915 ) 18,496 ( 1,949 )

U.S Governmental Agencies

( 34 )  

$ 19,551  

$ ( 1,582 )  

$ 40,196  

$ ( 9,538 )  

$ 59,747  

Held-to-maturity:

Municipal securities

$ 10,599  

$ ( 237 )  

$ 10,599  

$ ( 237 )  

$ 10,599  

1,515 ( 1 ) 845 ( 37 ) 2,360 ( 38 )

$ 3,501 $ ( 35 ) $ 52,819 $ ( 9,728 ) $ 56,320 $ ( 9,763 )

December 31, 2022

7 unchanged sentences

Collateralized Mortgage Backed

$ 11,922  

$ ( 215 )  

$ 12,043  

$ ( 575 )  

$ 23,965  

$ 2,021 $ ( 151 ) $ 20,206 $ ( 4,423 ) $ 22,227 $ ( 4,574 )

Subordinated Debt

( 47 )  

3,357 ( 393 ) 4,720 ( 750 ) 8,077 ( 1,143 )

Municipal Securities

( 63 )  

( 97 )  

( 17 )  

1,377 ( 198 ) 6,589 ( 2,511 ) 7,966 ( 2,709 )

11,028 ( 838 ) 7,663 ( 1,820 ) 18,691 ( 2,658 )

U.S Government Agencies

( 98 )  

$ 24,673  

$ ( 342 )  

$ 20,970  

$ ( 770 )  

$ 45,643  

The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis.

1,768 ( 2 ) 1,018 ( 34 ) 2,786 ( 36 )

$ 19,551 $ ( 1,582 ) $ 40,196 $ ( 9,538 ) $ 59,747 $ ( 11,120 )

These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.

At December 31, 2022 , there were twelve collateralized mortgage backed securities with fair values totaling $ 2.0 million, twenty-two  municipal securities with a fair value of $ 12.4 million, eight  subordinated debt securities with fair values of $ 3.4 million, and one U.S.

government agency securitiy with a fair value of $ 1.8 million considered temporarily impaired and in an unrealized loss position of less than 12 months.

At December 31, 2023 , there were five municipal securities with a fair value of $ 2.0 million and one U.S.

government agency security with a fair value of $ 1.5 million in an unrealized loss position of less than 12 months.

At December 31, 2023 , there were seven U.S.

government agencies with fair values totaling approximately $ 1.0  million, thirteen  collateralized mortgage backed securities with a fair value totaling $ 20.2 million, thirteen subordinated debt securities with fair values of $ 4.7 million and twenty municipal securities with a fair value of $ 14.3 million that were in an unrealized loss position of more than 12 months.

The Bank does not consider any of the securities in the available for sale portfolio to be other-than-temporarily impaired at December 31, 2022 and December 31, 2021 .

government agencies with fair values totaling approximately $ 845,000 , twenty-four collateralized mortgage backed securities with a fair value totaling $ 19.4 million, twenty-one subordinated debt securities with fair values of $ 7.7 million, eleven taxable municipal securities with a fair value of $ 8.3 million and thirty-seven tax-exempt municipal securities with a fair value of $ 16.5 million that were in an unrealized loss position of more than 12 months.

There were no securities sold during 2023 or 2022 .

1 unchanged sentence

The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities.

The unamortized, unrealized loss, before tax, at December 31, 2022 and December 31, 2021 was $ 8,228  and $ 29,016 , respectively.

The unamortized, unrealized loss, before tax, at December 31, 2023 and December 31, 2022 was $ 0 and $ 8,228 , respectively.

For held-to-maturity securities, an allowance for credit losses is required to absorb estimated lifetime credit losses.

The Company has assessed the risk of credit loss and has determined that no allowance for credit losses for held-to-maturity securities was necessary as of December 31, 2023 and 2022 .

The evaluation of credit risk includes consideration of the credit ratings of the issuers, the effects of interest rate changes since purchase and observable market information such as issuer-specific credit spreads.

Loans Receivable

5 unchanged sentences

Single family

$ 178,615  

$ 161,362  

215,624  

137,705  

$ 203,417 $ 178,615

271,040 215,624

Commercial Real Estate:

Owner-occupied

228,374  

173,086  

282,052 228,374

Non-owner occupied

472,354  

361,101  

461,775 472,354

Construction and Land Development

393,783  

337,173  

Commercial –

Non Real-Estate:

429,637 393,783

Commercial – Non Real-Estate:

Commercial & industrial

97,351  

164,014  

Consumer –

Non Real Estate:

11,352  

22,986  

75,415 97,351

Consumer – Non Real Estate:

Total Gross Loans

1,599,592  

1,358,935  

1,727,091 1,599,592

unearned fees

( 5,528 )  

( 5,448 ) ( 5,528 )

allowance for loan losses

( 14,114 )  

$ 1,579,950  

$ 1,341,760  

The unsecured consumer loans above include $ 2.0 million and $ 185,135 of overdrafts reclassified as loans for the years ended December 31, 2022 and December 31, 2021 , respectively.

There were no nonaccrual loans as of December 31, 2022 and December 31, 2021 .

( 16,506 ) ( 14,114 )

$ 1,705,137 $ 1,579,950

The unsecured consumer loans above include $ 271,000 and $ 2.0 million of overdrafts reclassified as loans for the years ended December 31, 2023 and December 31, 2022 , respectively.

There were nonaccrual loans of $ 1.0 million and $ 0 as of December 31, 2023 and December 31, 2022 , respectively

The following tables present the segments of the loan portfolio summarized by aging categories as of December 31, 2023 and December 31, 2022 :

1 unchanged sentence

(Dollars in thousands)

30-59 Days Past Due  

60-89 Days Past Due  

Greater than 90 Days  

Total Past Due  

Total Loans Receivable  

30-59 Days Past Due

60-89 Days Past Due

Greater than 90 Days Past Due and Still Accruing

Current Loans

Total Loans Receivable

Residential Real Estate:

Single Family

$ 178,615  

215,624  

$ — $ — $ — $ 149 $ 203,268 $ 203,417

— — — — 271,040 271,040

— — — — 145 145

Commercial Real Estate:

Owner occupied

228,374  

— — — — 282,052 282,052

Non-owner occupied

472,354  

— — — — 461,775 461,775

Construction & Land Development

393,783  

Commercial –

Non Real Estate:

— — — — 429,637 429,637

Commercial – Non Real Estate:

Commercial & industrial

97,336  

97,351  

Consumer –

Non Real Estate:

11,323  

11,352  

$ 1,599,548  

$ 1,599,592  

— — — 851 74,564 75,415

Consumer – Non Real Estate:

— — — — 271 271

25 — 4 — 3,310 3,339

$ 25 $ — $ 4 $ 1,000 $ 1,726,062 $ 1,727,091

December 31, 2022

(Dollars in thousands)

30-59 Days Past Due  

60-89 Days Past Due  

Greater than 90 Days  

Total Past Due  

Total Loans Receivable  

30-59 Days Past Due

60-89 Days Past Due

Greater than 90 Days Past Due and Still Accruing

Current Loans

Total Loans Receivable

Residential Real Estate:

Single Family

$ 161,362  

137,705  

$ — $ — $ — $ — $ 178,615 $ 178,615

— — — — 215,624 215,624

— — — — 155 155

Commercial Real Estate:

Owner occupied

173,086  

— — — — 228,374 228,374

Non-owner occupied

361,101  

— — — — 472,354 472,354

Construction & Land Development

337,173  

Commercial –

Non Real Estate:

— — — — 393,783 393,783

Commercial – Non Real Estate:

Commercial & industrial

164,014  

Consumer –

Non Real Estate:

22,915  

22,986  

$ 1,358,864  

$ 1,358,935  

No loans were modified under the terms of a TDR during the years ended December 31, 2022 and 2021 , and there were no loans modified as TDR’s that subsequently defaulted during the years ended December 31, 2022 and 2021 that were modified as TDR’s within the twelve months prior to default.

Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses by loan class for the twelve months ended December 31, 2022 and 2021 :

Allowance  

Credit  

Losses  

Portfolio  

For the 

twelve months ended December 31, 2022

Beginning Balance

$ 1,672  

$ 5,689  

$ 2,697  

$ 1,540  

$ 11,697  

— — 15 — 97,336 97,351

Consumer – Non Real Estate:

— — — — 1,984 1,984

11 12 6 — 11,323 11,352

$ 11 $ 12 $ 21 $ — $ 1,599,548 $ 1,599,592

Allowance for Credit Losses

The following tables summarize the activity in the allowance for credit losses by loan class for the twelve months ended December 31, 2023 and 2022 :

Allowance for Credit Losses By Portfolio Segment

For the twelve months ended December 31, 2023

Beginning Balance, prior to adoption of ASC 326

$ 2,146 $ 7,159 $ 3,347 $ 1,418 $ 44 $ 14,114

Impact of adopting ASC 326

59 614 19 172 31 895

— — — ( 462 ) ( 6 ) ( 468 )

7 — — — 15 22

Provision (recovery)

( 74 )  

( 122 )  

Ending Balance

$ 2,146  

$ 7,159  

$ 3,347  

$ 1,418  

$ 14,114  

382 1,115 209 307 ( 70 ) 1,943

Ending Balance

Individually evaluated for Impairment

Collectively evaluated for Impairment

$ 2,146  

$ 7,159  

$ 3,347  

$ 1,418  

$ 14,114  

Allowance for Credit Losses By Portfolio Segment

$ 2,594 $ 8,888 $ 3,575 $ 1,435 $ 14 $ 16,506

Allowance for Loan Losses By Portfolio Segment

For the twelve months ended December 31, 2022

Beginning Balance

$ 1,223  

$ 6,552  

$ 3,326  

$ 1,405  

$ 12,877  

( 32 )  

$ 1,672 $ 5,689 $ 2,697 $ 1,540 $ 99 $ 11,697

— — — - 19 19

Provision (recovery)

( 863 )  

( 629 )  

( 256 )  

474 1,470 650 ( 122 ) ( 74 ) 2,398

Ending Balance

$ 1,672  

$ 5,689  

$ 2,697  

$ 1,540  

$ 11,697  

$ 2,146 $ 7,159 $ 3,347 $ 1,418 $ 44 $ 14,114

Ending Balance:

Individually evaluated for Impairment

$ — $ — $ — $ — $ — $ —

Collectively evaluated for Impairment

$ 1,672  

$ 5,689  

$ 2,697  

$ 1,540  

$ 11,697  

The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio.

$ 2,146 $ 7,159 $ 3,347 $ 1,418 $ 44 $ 14,114

The Company maintains a general allowance for credit losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio.

These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions.

The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of December 31, 2022 and December 31, 2021 :

The following table summarizes information in regard to impaired loans by loan portfolio class as of December 31, 2022 :

December 31, 2022

Loans Receivable

(Dollars in thousands)

Ending Balance

Ending Balance:

Individually Evaluated for Impairment

Ending Balance:

Collectively Evaluated for Impairment

With no related allowance recorded

Residential Real Estate:

$ 394,394  

$ 394,245  

Commercial Real Estate

700,728  

Construction and Land Development

393,783  

Commercial & Industrial

97,351  

13,336  

$ 1,599,592  

$ 1,599,443  

Single family

$ 149 $ 149 $ —

The following table presents additional information regarding the impaired loans for the year ended December 31, 2022 .

December 31, 2022

Loans Receivable

(Dollars in thousands)

Ending Balance

Ending Balance:

Individually Evaluated for Impairment

Ending Balance:

Collectively Evaluated for Impairment

With no related allowance recorded

Residential Real Estate:

$ 300,390  

$ 300,243  

Commercial Real Estate

534,187  

533,111  

Construction and Land Development

337,173  

Commercial & Industrial

164,014  

164,006  

23,171  

$ 1,358,935  

$ 1,231  

$ 1,357,704  

The following table summarizes information in regard to impaired loans by loan portfolio class as of December 31, 2022 and December 31, 2021 :

Single family

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated.

Incurred Loss

December 31, 2023

1 unchanged sentence

(Dollars in thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

Recorded Investment

Unpaid Principal Balance

Related Allowance

With no related allowance recorded

Nonaccrual Loans with No Allowance

Nonaccrual Loans with an Allowance

Total Nonaccrual Loans

Nonaccrual Loans

Residential Real Estate:

Single Family

Commercial Real Estate:

Non-Owner Occupied

$ 149 $ — $ 149 $ —

Commercial & industrial

$ 1,231  

The following table presents additional information regarding the impaired loans for the years ended December 31, 2022 and 2021 .

December 31, 2022

December 31, 2021

$ 1,000 $ — $ 1,000 $ —

The Company recognized $ 57,792 of interest income on nonaccrual loans during the year ended December 31, 2023 .

The following table represents the accrued interest receivables written off by reversing interest income during the year ended December 31, 2023 :

(Dollars in thousands)

Average Record Investment

Interest Income Recognized

Average Record Investment

Interest Income Recognized

With no related allowance recorded

For the Year Ended December 31, 2023

Residential Real Estate:

Single Family

Commercial & industrial

The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty.

The underlying collateral can vary based upon the type of loan.

The following provides more detail about the types of collateral that secure collateral-dependent loans:

Commercial real estate loans can be secured by either owner-occupied commercial real estate or non-owner-occupied investment commercial real estate.

Typically, owner-occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies.

Non-owner-occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

Residential real estate mortgage loans, including equity lines of credit, are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

Home equity lines of credit are generally secured by second mortgages on residential real estate property.

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property.

Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans:

(Dollars in thousands)

As of December 31, 2023

Residential Real Estate:

Single Family

Commercial Real Estate:

Owner occupied

Commercial & industrial

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.

The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.

The Company uses a weighted average remaining life model to determine the allowance for credit losses.

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

Occasionally, the Company modifies loans by providing principal forgiveness on certain 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 following table shows the amortized cost basis as of December 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

Term Extension

December 31, 2023

(Dollars in thousands)

Amortized Cost Basis

% of Total Loan Type

Financial Effect

Commercial Real Estate:

Non-owner occupied

Extended term on interest only payments for six months.

Commercial & industrial

$ 1,321  

No additional funds are committed to be advanced in connection with impaired loans.

There were no nonaccrual loans at December 31, 2022 and December 31, 2021 excluded from the impaired loan disclosure.

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established.

Extended term for three months.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:

current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss.

Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established.

Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer.

Loans classified as Special Mention have potential weaknesses that deserve management’s close attention.

If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment.

4 unchanged sentences

Loans not classified are rated pass.

The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of December 31, 2022 and December 31, 2021 :

The following table presents the risk category of loans by credit quality indicators by year of origination as of December 31, 2023 :

Term Loans Amortized Cost Basis by Origination Year

December 31, 2023

(Dollars in thousands)

Revolving Loans

Residential Real Estate - Single Family

$ 49,803 $ 17,502 $ 26,434 $ 33,134 $ 20,610 $ 20,542 $ 33,217 $ 201,242

298 — — 1,319 — — — 1,617

Special Mention

Residential Real Estate:

Single Family

$ 178,172  

$ 178,615  

215,624  

Commercial Real Estate:

Owner occupied

227,231  

228,374  

Non-owner occupied

439,537  

24,897  

472,354  

— — — — — — — —

— — — — 409 — 149 558

Total Residential Real Estate - Single Family

$ 50,101 $ 17,502 $ 26,434 $ 34,453 $ 21,019 $ 20,542 $ 33,366 $ 203,417

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Residential Real Estate - Multifamily

$ 28,346 $ 81,180 $ 60,156 $ 39,286 $ 27,270 $ 10,797 $ 24,005 $ 271,040

— — — — — — — —

Special Mention

— — — — — — — —

Total Residential Real Estate - Multifamily

$ 28,346 $ 81,180 $ 60,156 $ 39,286 $ 27,270 $ 10,797 $ 24,005 $ 271,040

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Residential Real Estate - Farmland

$ — $ — $ — $ — $ — $ 145 $ — $ 145

— — — — — — — —

Special Mention

— — — — — — — —

Total Residential Real Estate - Farmland

$ — $ — $ — $ — $ — $ 145 $ — $ 145

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Commercial Real Estate - Owner Occupied

$ 70,476 $ 55,222 $ 43,576 $ 39,621 $ 32,044 $ 37,360 $ 1,391 $ 279,690

— — — — — — 1,242 1,242

Special Mention

— — — — — — — —

— — — — 1,120 — — 1,120

Total Commercial Real Estate - Owner Occupied

$ 70,476 $ 55,222 $ 43,576 $ 39,621 $ 33,164 $ 37,360 $ 2,633 $ 282,052

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Commercial Real Estate - Non-Owner Occupied

$ 23,091 $ 101,617 $ 51,291 $ 47,732 $ 17,827 $ 131,347 $ 32,122 $ 405,027

— — — 960 12,768 19,282 — 33,010

Special Mention

— — — 16,000 — — — 16,000

— — — — 7,738 — — 7,738

Total Commercial Real Estate - Non-Owner Occupied

$ 23,091 $ 101,617 $ 51,291 $ 64,692 $ 38,333 $ 150,629 $ 32,122 $ 461,775

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Construction & Land Development

393,783  

Commercial –

Non Real Estate:

$ 6,158 $ 32,544 $ 13,612 $ 2,455 $ — $ 8,118 $ 333,417 $ 396,304

258 — — — — — 22,272 22,530

Special Mention

— — — — — — — —

— 1,454 — — — — 9,349 10,803

Total Construction & Land Development

$ 6,416 $ 33,998 $ 13,612 $ 2,455 $ — $ 8,118 $ 365,038 $ 429,637

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Commercial & Industrial

97,246  

97,351  

Consumer –

Non Real Estate:

11,352  

$ 1,565,084  

$ 24,994  

$ 9,514  

$ 1,599,592  

$ 10,150 $ 5,271 $ 13,530 $ 3,495 $ 1,230 $ 10,132 $ 27,299 $ 71,107

— — — — — 334 — 334

Special Mention

— — — — — — 2,997 2,997

— — — — 536 353 88 977

Total Commercial & Industrial

$ 10,150 $ 5,271 $ 13,530 $ 3,495 $ 1,766 $ 10,819 $ 30,384 $ 75,415

Current period gross write-offs

$ — $ — $ — $ — $ 261 $ 201 $ — $ 462

Consumer - Unsecured

$ — $ — $ — $ — $ — $ — $ 271 $ 271

— — — — — — — —

Special Mention

— — — — — — — —

Total Consumer - Unsecured

$ — $ — $ — $ — $ — $ — $ 271 $ 271

Current period gross write-offs

$ — $ — $ — $ — $ — $ — $ — $ —

Consumer - Secured

$ 55 $ 252 $ 3 $ 51 $ 1,400 $ 1,497 $ 81 $ 3,339

— — — — — — — —

Special Mention

— — — — — — — —

Total Consumer - Secured

$ 55 $ 252 $ 3 $ 51 $ 1,400 $ 1,497 $ 81 $ 3,339

Current period gross write-offs

$ — $ — $ — $ — $ — $ 6 $ — $ 6

$ 188,079 $ 293,588 $ 208,602 $ 165,774 $ 100,381 $ 219,938 $ 451,803 $ 1,628,165

556 — — 2,279 12,768 19,616 23,514 58,733

Special Mention

— — — 16,000 — — 2,997 18,997

— 1,454 — — 9,803 353 9,586 21,196

$ 188,635 $ 293,588 $ 208,602 $ 168,053 $ 113,149 $ 239,560 $ 475,317 $ 1,727,091

Current period gross write-offs

$ — $ — $ — $ — $ 261 $ 207 $ — $ 468

The following table presents the risk category of loans by credit quality indicators as of December 31, 2022 :

December 31, 2022

3 unchanged sentences

Single Family

$ 160,234  

$ 161,362  

137,705  

$ 178,172 $ — $ — $ 443 $ — $ 178,615

215,624 — — — — 215,624

155 — — — — 155

Commercial Real Estate:

Owner occupied

168,352  

173,086  

227,231 — — 1,143 — 228,374

Non-owner occupied

297,873  

46,379  

15,275  

361,101  

439,537 24,897 — 7,920 — 472,354

Construction & Land Development

317,846  

19,327  

337,173  

Commercial –

Non Real Estate:

393,783 — — — — 393,783

Commercial – Non Real Estate:

Commercial & industrial

159,634  

164,014  

Consumer –

Non Real Estate:

22,986  

$ 1,266,138  

$ 70,585  

$ 16,866  

$ 5,346  

$ 1,358,935  

97,246 97 — 8 — 97,351

Consumer – Non Real Estate:

1,984 — — — — 1,984

11,352 — — — — 11,352

$ 1,565,084 $ 24,994 $ — $ 9,514 $ — $ 1,599,592

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., the commitment cannot be canceled at any time).

The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense.

The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in Note 1.

The allowance for credit losses for unfunded loan commitments of $ 1.0 million at December 31, 2023 , is separately classified on the balance sheet within Other Liabilities.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the year ended December 31, 2023 .

(Dollars in thousands)

Total Allowance for Credit Losses on Off-Balance Sheet Credit Exposure

Balance, December 31, 2022

Adjustment to allowance for off-balance sheet credit losses upon adoption of ASU 2016-13

Recovery of off-balance sheet credit losses, net

Balance, December 31, 2023

Related Party Transactions

1 unchanged sentence

Such loans are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or present other unfavorable features.

The aggregate amount of such loans outstanding at December 31, 2022 was approximately $ 556,240 compared to $ 642,640  at December 31, 2021 .

During 2022 , new loans and line of credit advances to such related parties was approximately $ 4,900 compared to $ 50,971 during 

Repayments on loans to directors and officers were $ 91,300  and $ 57,137 during 2022 and 2021 , respectively.

The aggregate amount of such loans outstanding at December 31, 2023 was approximately $ 280,957 compared to $ 556,240 at December 31, 2022 .

During 2023 , new loans and line of credit advances to such related parties was approximately $ 74,589 compared to $ 4,900 during 2022 .

Repayments on loans to directors and officers were $ 349,872 and $ 91,300 during 2023 and 2022 , respectively.

The Bank maintains deposit accounts with some of its executive officers, directors and their affiliated entities.

Such deposit accounts at December 31, 2022 and December 31, 2021 amounted to approximatel y $ 2.1  million and $ 2.3  million, resp ectively.

Such deposit accounts at December 31, 2023 and December 31, 2022 amounted to approximatel y $ 2.2 million and $ 2.1 million, resp ectively.

Premises and Equipment

1 unchanged sentence

(Dollars in thousands)

$ 13,005  

$ 12,765  

Leasehold improvements

1 unchanged sentence

Computer software and equipment

23,108  

21,842  

Less accumulated depreciation

( 8,399 )  

Construction in progress

Premises and equipment, net

$ 14,709  

$ 14,863  

Depreciation and amortization charged to operations were $ 1.3  million and $ 1.2  million during the years ended December 31, 2022 and December 31, 2021 , respectively.

Depreciation and amortization charged to operations were $ 1.3 million and $ 1.3 million during the years ended December 31, 2023 and December 31, 2022 , respectively.

Intangible Assets

The carrying amount of computer software developed was $ 9.1 million and $ 2.5  at December 31, 2022 and December 31, 2021 , respectively.

The following table presents the changes in the carrying amount of computer software developed during the years ended December 31, 2022  and 

The carrying amount of computer software developed was $ 14.7 million and $ 9.1 at December 31, 2023 and December 31, 2022 , respectively.

The following table presents the changes in the carrying amount of computer software developed during the years ended December 31, 2023 and 2022 .

December 31, 2023

2 unchanged sentences

Gross Carrying Amount

Accumulated Amortization  

Gross Carrying Amount

Accumulated Amortization  

Accumulated Amortization Gross Carrying Amount

Accumulated Amortization

Amortizable intangible assets:

Computer software

$ 9,149  

$ 2,493  

$ 9,149  

$ 2,493  

The Company is still in the development stage of the computer software where costs are capitalized.

$ 14,657 $ — $ 9,149 $ —

The Company is still in the stage of computer software where costs are capitalized.

Capitalization ceases when the software is substantially complete and ready for its intended use.

1 unchanged sentence

As of December 31, 2023 , the Company has not recorded any amortization on its intangible computer software.

Time deposits in denominations of $250,000 or more totaled approximately $ 374.8  million a nd $ 289.7 million at December 31, 2022 and 2021 , respectively.

The Company expects to put the software into service in the first quarter of 2024.

Time deposits in denominations of $250,000 or more totaled approximately $ 445.6 million a nd $ 374.8 million at December 31, 2023 and 2022 , respectively.

At December 31, 2023 , maturities of time deposits are as follows:

1 unchanged sentence

Year ended December 31,

$ 516,884  

82,839  

$ 608,141  

Brokered deposits, as defined by the FDIC, totaled approximately $ 317.3 million and $ 245.1  million at December 31, 2022 and December 31, 2021 , respectively.

Wholesale deposits, as defined by the FDIC and pursuant to rule 12 CFR 337.6 (e), totaled approximately $ 574.9 million and $ 324.2 million at December 31, 2023 and December 31, 2022 , respectively.

Borrowed Funds

3 unchanged sentences

The rate of interest charged is based on market conditions.

At December 31, 2022 , there were commercial real estate, residential 1 - 4 and multi-family loans totaling $ 1.3 billion were used to collateralize FHLB advances. 

The following summarizes the contractual maturities of long-term FHLB advances at December 31, 2022 . 

(Dollars in thousands)

$ 100,000  

The average balance on FHLB advances for the years ended December 31, 2022 and December 31, 2021 was approximately $ 24.0 million and $ 0 , respectively. The weighted average interest rate paid during the year ended 

December 31, 2022 and 2021 was 1.45 % and 0 %, respectively.

At December 31, 2023 , there were commercial real estate, residential 1 - 4 and multi-family loans totaling $ 1.5 billion used to collateralize FHLB advances.

The Company did not have any outstanding FHLB advances at December 31, 2023 .

The average balance on FHLB advances for the years ended December 31, 2023 and December 31, 2022 was approximately $ 25.0 million and $ 24.0 million, respectively.

The weighted average interest rate paid during the year ended December 31, 2023 and 2022 was 4.90 % and 1.45 %, respectively.

The weighted average interest rate paid at December 31, 2023 and 2022 was 0 % and 4.31 %, respectively

The Company had $ 15.0 million outstanding on its unsecured federal funds lines at December 31, 2023 .

The average balance on unsecured borrowing lines for the years ended December 31, 2023 and December 31, 2022 was approximately $ 5.6 million and $ 2,000 , respectively.

The weighted average interest rate paid during the year ended December 31, 2023 and 2022 was 5.36 % and 1.59 %, respectively.

The weighted average interest rate paid at December 31, 2023 and 2022 was 5.65 % and 0 %, respectively, as there were no outstanding borrowings at December 31, 2022.

The Company files tax returns in the U.S.

2 unchanged sentences

The Commonwealth of Virginia assesses a Bank Franchise Tax on banks instead of a state income tax.

The Bank Franchise Tax expense is reported in non-interest expense and the tax’s calculation is unrelated to taxable income.

The provision for income taxes consists of the following components:

1 unchanged sentence

Current expense

$ 7,608  

$ 5,449  

Deferred (benefit)

(894 )  

$ 6,714  

$ 5,785  

Income tax expense for the years ended December 31, 2023 and 2022 differed from the federal statutory rate applied to income before income taxes for the following reasons:

1 unchanged sentence

(Dollars in thousands)

Computed “expected”

income tax expense

$ 7,012  

$ 5,871  

Computed “expected” income tax expense

Increase (decrease)in income taxes resulting from:

Tax exempt Interest

( 200 )  

( 211 )  

Low Income Housing Investment

1 unchanged sentence

Restricted Stock Adjustment

( 119 )  

Federal tax credits

( 472 )  

Other Adjustments

( 63 )  

$ 6,714  

$ 5,785  

The tax effects of temporary differences result in deferred tax assets and liabilities as presented below:

1 unchanged sentence

Deferred tax assets:

Allowance for loan losses

$ 3,238  

$ 2,591  

Allowance for credit losses

Restricted stock

OREO adjustment

Net loan fees

Right-of-use liability

Accrued compenation

Accrued compensation

Unrealized losses on securities available-for-sale

1 unchanged sentence

Deferred tax liabilities:

Unrealized gain on securities available-for-sale

Prepaid expense

3 unchanged sentences

Net deferred tax asset

$ 7,551  

$ 4,046  

Earnings Per Common Share

2 unchanged sentences

There were no such potentially dilutive securities outstanding in 2023 or 2022 .

The weighted average number of shares used in the calculation of basic and diluted earnings per share includes unvested restricted shares of the Company’s common stock outstanding.

Applicable guidance requires that outstanding unvested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common stockholders.

1 unchanged sentence

(Dollars in thousands)

$ 26,674  

$ 22,171  

$ 26,585 $ 26,674

Preferred stock dividends

( 2,156 )  

( 2,156 ) ( 2,156 )

Net income available to common shareholders

$ 24,518  

$ 20,015  

$ 24,429 $ 24,518

Weighted average number of shares issued, basic and diluted

7,529,382  

7,559,310  

Net income per common share:

Basic and diluted income per common share

$ 3.26  

$ 2.65  

7,522,913 7,529,382

Earnings per common share:

Basic and diluted earnings per common share

$ 3.25 $ 3.26

Commitments and Contingencies

The Bank’s financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest risk and liquidity risk.

These commitments and contingent liabilities are commitments to extend credit and standby letters of credit.

2 unchanged sentences

Loan commitments

$ 435,751  

$ 304,335  

$ 359,373 $ 435,751

Standby letters of credit

Commitments to extend credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer.

The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the statements of financial condition.

Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank.

1 unchanged sentence

During 2020, the Bank made a commitment of $ 5.0 million to the Housing Equity Fund of Virginia XXIV, L.L.C.

This commitment will be funded through capital calls from the fund and we expect our investment to be fully funded by December 31, 2023.

During 2020,  the Bank made a commitment of $ 2.0 million to the Washington Housing Initiative Impact Pool, LLC.

This commitment will be funded through capital calls from the fund.

This commitment will be funded through capital calls from the fund and we expect our investment to be fully funded by December 31, 2025.

During 2020, the Bank made a commitment of $ 2.0 million to the Washington Housing Initiative Impact Pool, LLC.

This commitment will be funded through capital calls from the fund.

As of December 31, 2023 , approximately $ 1.4 million has been deployed, with a remaining unfunded balance of approximately $ 600,000 .

During 2022, the Bank made a commitment of $ 2.0 million to the VCDC Equity Fund 26, LLC. This commitment will be funded through capital calls from the fund and we expect our investment to be fully funded by December 31, 2028.

From time to time, we are a party to various litigation matters incidental to our ordinary conduct of our business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

During 2022, the Bank made a commitment of $ 2.0 million to the VCDC Equity Fund 26, LLC.

This commitment will be funded through capital calls from the fund and we expect our investment to be fully funded by December 31, 2028.

During 2023, the Bank made a commitment of $ 2.0 million to the VCDC Equity Fund 27, LLC.

This commitment will be funded through capital calls from the fund and we expect our investment to be fully funded by December 31, 2029.

From time to time, we are a party to various litigation matters incidental to our ordinary conduct of our business.

Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

The right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Statements of Financial Condition.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract.

Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases.

Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised.

The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

Cash paid for amounts included in the measurement of lease liabilities during the twelve months ended December 31, 2022 was $ 623,000 and $ 590,000 for the same period in 2021 .

During twelve months ended December 31, 2022 and 2021 , the Company recognized lease expense of $ 677,000 and $ 693,000 , respectively.

Information regarding the Company's leases as of and for the years ended December 31, 2023 and 2022 were as follows:

As of December 31,

1 unchanged sentence

Lease liabilities

$ 7,342  

$ 7,753  

$ 6,902 $ 7,342

Right-of-use assets

$ 6,688  

$ 7,154  

Weighted-average remaining lease term –

operating leases (in months).

Weighted-average discount rate –

operating leases

2.80 %  

$ 6,211 $ 6,688

Weighted-average remaining lease term – operating leases (in months).

Weighted-average discount rate – operating leases

2.80 % 2.80 %

For the year ended December 31,

7 unchanged sentences

Total rent income on these operating leases is approximately $ 7,500 per month.

As of December 31, 2022 , all of the Company’s lease obligations are classified as operating leases.

As of December 31, 2023 , all of the Company’s lease obligations are classified as operating leases.

The Company does not have any finance lease obligations.

3 unchanged sentences

Lease liabilities

$ 7,342  

Significant Concentrations of Credit Risk

Substantially all the Bank’s loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C.

Metropolitan Area.

1 unchanged sentence

The Bank maintains its cash and federal funds sold in correspondent bank deposit accounts.

The amount on deposit at December 31, 2022 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $ 89.1  million.

The amount on deposit at December 31, 2023 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $ 61.8 million.

The Bank has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks.

Regulatory Matters

Information presented for December 31, 2022 and December 31, 2021 , reflects the Basel III capital requirements that became effective January 

1, 2015 for the Bank.

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

The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

Information presented for December 31, 2023 and December 31, 2022 , reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank.

The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

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

banking organizations, became effective for the Company and the Bank on January 

1, 2015 (subject to 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 for 2022 and 2023 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.

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

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.

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

Capital Adequacy Purposes

15 unchanged sentences

The Bank began making a matching contribution to the plan on January 1, 2010.

The Bank matches dollar for dollar up to 3 % of the employee’s contribution and then fifty cents on the dollar on the next two percentage points up to the employee contribution of 5 %.

The total amount the Bank matched during 2022 and 2021 was $ 616,721  and $ 492,578 , respectively.

The Bank matches dollar for dollar up to 5 % up to the employee contribution of 5 %.

The total amount the Bank matched during 2023 and 2022 was $ 901,513 and $ 616,721 , respectively.

Stock Based Compensation Plan

ASC Topic 718, Compensation –

Stock Compensation, requires the Company to recognize expense related to the fair value of share-based compensation awards in net income.

Total compensation expense for restricted stock recorded for the years ended December 31, 2022 and December 31, 2021 were $ 2.5  million and $ 1.9  million, respectively. 

On July 17, 2019, the Board of Directors of the Company adopted, and the Company’s shareholders subsequently approved, the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other selected employees and directors of the Company with additional incentives to promote the growth and performance of the Company.

ASC Topic 718, Compensation – Stock Compensation, requires the Company to recognize expense related to the fair value of share-based compensation awards in net income.

Total compensation expense for restricted stock recorded for the years ended December 31, 2023 and December 31, 2022 were $ 2.5 million and $ 2.5 million, respectively.

On July 17, 2019, the Board of Directors of the Company adopted, and the Company’s shareholders subsequently approved, the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other selected employees and directors of the Company with additional incentives to promote the growth and performance of the Company.

During the year ended December 31, 2023 , there were 90,686 restricted shares awarded, 4,014 restricted shares were forfeited, and no stock options were awarded under the 2019 Plan.

The restricted shares awarded during 2023 vest equally on an annual basis over a three, five, or ten year period.

As a result of the stockholders’

approval of the 2019 Plan, no additional awards have been or will be made under the Company’s 2016 Plan, although all awards that were outstanding under the 2016 Plan as of July 17, 2019 remained outstanding in accordance with their terms. 

A summary of the status of the Bank’s nonvested restricted stock shares as of December 31, 2022 and changes during the year ended December 31, 2022 is presented below:

As a result of the stockholders’ approval of the 2019 Plan, no additional awards have been or will be made under the Company’s 2016 Plan, although all awards that were outstanding under the 2016 Plan as of July 17, 2019 remained outstanding in accordance with their terms.

A summary of the status of the Bank’s nonvested restricted stock shares as of December 31, 2023 and changes during the year ended December 31, 2023 is presented below:

Nonvested Restricted Stock Shares

1 unchanged sentence

Nonvested at January 1, 2023

229,257  

$ 19.33  

138,644  

( 101,876 )  

( 6,989 )  

259,036 $ 22.05

( 117,408 ) 21.28

( 4,014 ) 24.35

Nonvested at December 31, 2023

259,036  

$ 22.05  

228,300 $ 24.15

As of December 31, 2023 , there was $ 3.9 million of total unrecognized compensation cost related to nonvested restricted stock awards.

The cost is expected to be recognized over approximately ten years.

The total fair value of shares vested during the years ended December 31, 2022 and 2021 w as $ 2.0  million and $ 1.5  million, respectively.

The cost is expected to be recognized over approximately five years.

The total fair value of shares vested during the years ended December 31, 2023 and 2022 w as $ 2.9 million and $ 2.0 million, respectively.

Derivatives and Risk Management Activities

The Bank uses derivative financial instruments (or “derivatives”) primarily to assist customers with their risk management objectives.

The Bank classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (or “interest rate loan swaps”). The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs.

The Bank uses derivative financial instruments (or “derivatives”) primarily to assist customers with their risk management objectives.

The Bank classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (or “interest rate loan swaps”).

The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs.

The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms.

The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Bank receives a floating rate.

These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets”

and “Other liabilities”

in the consolidated financial statements.

These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements.

Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.

The following tables summarize key elements of the Banks’s derivative instruments as of December 31, 2022 and December 31, 2021 .

The following tables summarize key elements of the Banks’s derivative instruments as of December 31, 2023 and December 31, 2022 .

December 31, 2023

2 unchanged sentences

Notional Amount

Collateral Pledges  

Matched interest rate swap with borrower

$ 245,717  

$ 23,896  

$ 3,034  

$ 224,008 42 — $ 18,569 $ —

Matched interest rate swap with counterparty

$ 245,717  

$ 23,896  

$ 3,034  

$ 224,008 42 $ 18,569 — $ —

December 31, 2022

2 unchanged sentences

Notional Amount

Collateral Pledges  

Matched interest rate swap with borrower

$ 210,793  

$ 2,097  

$ 15,120  

$ 245,717 44 — $ 23,896 $ 3,034

Matched interest rate swap with counterparty

$ 210,793  

$ 2,097  

$ 15,120  

$ 245,717 44 $ 23,896 — $ 3,034

The Company is able to recognize fee income upon execution of the interest rate swap contract.

Interest rate swap fee income for the twelve months ended December 31, 2022 and 2021 was $ 619,000 and $ 83,000 , respectively.

Interest rate swap fee income for the twelve months ended December 31, 2023 and 2022 were $ 0 and $ 619,000 , respectively.

Fair Value Presentation

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

Fair value is best determined based upon quoted market prices.

However, in many instances, there are no quoted market prices for the Bank’s various financial instruments.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

6 unchanged sentences

In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions.

The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:

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

2  –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

3  –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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

Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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

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Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ).

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 

3 of the valuation hierarchy.

As of December 31, 2022  and December 31, 2021 , the Bank’s entire portfolio of available for sale securities are considered to be Level 

2 securities, with the exception of one subordintated debt security.

Derivative asset (liability)  –

interest rate swaps on loans

As discussed in “Note 19:

Derivatives and Risk Management Activities”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

As of December 31, 2023 and December 31, 2022 , the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities, with the exception of one subordinated debt security, which is considered to be a level 3 security.

Derivative asset (liability) – interest rate swaps on loans

As discussed in “Note 19:

Derivatives and Risk Management Activities”, the Bank recognizes interest rate swaps at fair value on a recurring basis.

The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.

The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 :

3 unchanged sentences

Collateralized Mortgage Backed

$ 22,227  

$ — $ 19,515 $ — $ 19,515

Subordinated Debt

— 8,217 250 8,467

Municipal Securities

20,175  

— 8,307 — 8,307

— 20,742 — 20,742

Government Agencies

Derivative asset –

interest rate swap on loans

23,896  

$ 86,277  

$ 86,527  

Derivative liability –

interest rate swap on loans

23,896  

$ 23,896  

— 2,897 — 2,897

Derivative asset – interest rate swap on loans

— 18,569 — 18,569

$ — $ 78,247 $ 250 $ 78,497

Derivative liability – interest rate swap on loans

— 18,569 — 18,569

$ — $ 18,569 $ — $ 18,569

December 31, 2022

1 unchanged sentence

Investment securities available-for-sale:

Treasury Securities

$ 20,000  

Collateralized Mortgage Backed

30,882  

$ — $ 22,227 $ — $ 22,227

Subordinated Debt

— 8,577 250 8,827

Municipal Securities

10,557  

24,143  

— 7,966 — 7,966

— 20,175 — 20,175

Government Agencies

Derivative asset –

interest rate swap on loans

$ 102,010  

Derivative liability –

interest rate swap on loans

$ 2,097  

— 3,436 — 3,436

Derivative asset – interest rate swap on loans

— 23,896 — 23,896

$ — $ 86,277 $ 250 $ 86,527

Derivative liability – interest rate swap on loans

— 23,896 — 23,896

$ — $ 23,896 $ — $ 23,896

Reconciliation of Level 3 Inputs

6 unchanged sentences

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

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due.

The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral.

Individually evaluated

Loans are individually evaluated when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due.

The measurement of loss associated with individually evaluated loans can be based on either the observable market price of the loan or the fair value of the collateral.

Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.

1 unchanged sentence

The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2 ).

However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’

financial statements if not considered significant.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant.

Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis.

Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

Individually evaluated loans allocated to the Allowance for Credit Losses are measured at fair value on a nonrecurring basis.

Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income.

Other real estate owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank.

If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank.

If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3.

OREO is measured at fair value on a nonrecurring basis.

Any initial fair value adjustment is charged against the Allowance for Loan Losses.

Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Statements of Income.

The following table summarizes the value of the Bank’s assets as of 

December 31, 2021 that were measured at fair value on a nonrecurring basis during the period.

The Bank did not have any other real estate owned assets as of December 31, 2022 or impaired loans measured at fair value as of December 31, 2022 or 2021.

December 31, 2021

(Dollars in thousands)

Other Real Estate Owned

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonreoccuring basis as of December 31, 2021.

Fair Value Measurements at December 31, 2021

(Dollars in thousands)

Valuation Technique(s)

Unobservable Inputs

Other Real Estate Owned, net

Discount to reflect current market conditions and estimated selling costs

6 % - 10 %  

Any initial fair value adjustment is charged against the Allowance for Credit Losses.

Subsequent fair value adjustments are recorded in the period incurred and included in other non-interest expense on the Consolidated Statements of Income.

The Bank did not have any other real estate owned assets or individually evaluated loans measured at fair value as of December 31, 2023 and December 31, 2022 .

Fair Value of Financial Instruments

2 unchanged sentences

Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Additionally, in accordance with ASU 2016 - 01, which the Company adopted on January 

1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculation the fair values of financial instruments not measured at fair value on a recurring basis.

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

Additionally, in accordance with ASU 2016 - 01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

December 31, 2023

4 unchanged sentences

Cash and cash equivalents

$ 130,600  

$ 114,513 $ 114,513 $ 114,513 $ — $ —

Restricted equity securities

24,325  

24,356 24,356 — 24,356 —

Available for sale

62,631  

59,928 59,928 — 59,928 —

Held to maturity

17,642  

17,440  

1,579,950  

1,584,533  

Derivative asset –

interest rate swap on loans

23,896  

17,275 17,163 — 17,163 —

1,705,137 1,701,418 — — 1,701,418

Derivative asset – interest rate swap on loans

18,569 18,569 — 18,569 —

Bank owned life insurance

37,249  

38,318 38,318 — 38,318 —

Accrued interest receivable

$ 1,512,889  

$ 1,503,869  

$ 904,748  

$ 599,121  

10,725 10,725 — 10,725 —

$ 1,686,127 $ 1,685,487 $ — $ 989,791 $ 695,696

Subordinated debt, net

72,245  

64,235  

Advances from the FHLB

100,000  

99,983  

Derivative liability –

interest rate swaps on loans

23,896  

72,642 56,513 — 56,513 —

Federal funds purchased

15,000 14,968 — — 14,968

Derivative liability – interest rate swaps on loans

18,569 18,569 — 18,569 —

Accrued interest payable

2,845 2,845 — 2,845 —

December 31, 2022

4 unchanged sentences

Cash and cash equivalents

$ 93,199  

$ 130,600 $ 130,600 $ 130,600 $ — $ —

Restricted equity securities

15,609  

24,325 24,325 — 24,325 —

Available for sale

99,913  

62,631 62,631 — 62,631 —

Held to maturity

20,349  

21,144  

1,341,760  

1,346,048  

Derivative asset –

interest rate swap on loans

17,642 17,440 — 17,440 —

1,579,950 1,584,533 — — 1,584,533

Derivative asset – interest rate swap on loans

23,896 23,896 — 23,896 —

Bank owned life insurance

36,241  

37,249 37,249 — 37,249 —

Accrued interest receivable

$ 1,411,963  

$ 1,415,551  

$ 952,815  

$ 462,736  

8,779 8,779 — 8,779 —

$ 1,512,889 $ 1,503,869 $ — $ 904,748 $ 599,121

Subordinated debt, net

29,294  

29,570  

Derivative liability –

interest rate swaps on loans

72,245 64,235 — 64,235 —

Advances from the FHLB

100,000 99,983 99,983

Derivative liability – interest rate swaps on loans

23,896 23,896 — 23,896 —

Accrued interest payable

896 896 — 896 —

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument.

Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision.

3 unchanged sentences

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.

Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

There were no changes in methodologies or transfers between levels at December 31, 2023 from December 31, 2022 .

Other Real Estate Owned

At December 31, 2022 and 2021 , Other Real Estate Owned was $ 0 and $ 775,000 , respectively.

OREO is comprised of non-residential property associated with a commercial relationship and located in Virginia.

Changes in the balance for OREO are as follows:

(Dollars in thousands)

Balance, beginning of year

$ 1,180  

Loss on sale of other real estate owned

Loss on valuation, net

( 70 )  

Sale of other real estate owned

( 701 )  

Balance, end of year

Expenses applicable to other real estate owned include the following:

At December 31, 2023 and 2022 , did not have other real estate owned.

Expenses applicable to other real estate owned during the years ended December 31, 2023 and 2022 include the following:

(Dollars in thousands)

2 unchanged sentences

Operating expenses (income), net of rental income

( 36 )  

Balance, end of year

As of December 31, 2023 , there were no real estate loans in the process of foreclosure.

Accumulated Other Comprehensive Income

The following table presents the cumulative balances of the components of accumulated other comprehensive income net of deferred taxes, as of December 31, 2022 and December 31, 2021 :

Accumulated Other Comprehensive Loss

The following table presents the cumulative balances of the components of accumulated other comprehensive loss net of deferred taxes, as of December 31, 2023 and December 31, 2022 :

(Dollars in thousands)

Unrealized gain on securities

$ ( 11,108 )  

Unrealized loss on securities transferred to HTM

Total accumulated other comprehensive income

$ ( 8,546 )  

On September 15, 2020, the Company issued 1,000,000 depositary shares, each representing a 1/40th interest in a share of the Company’s Fixed Rate Series A Noncumulative Perpetual Preferred Stock, par value $ 1.00 per share, with a liquidation preference of $ 1,000 per share (equivalent to $ 25 per depositary share).

Total accumulated other comprehensive loss

Dividends will accrue on the depositary shares at a fixed rate equal to 7.50 % per annum.

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.

On October 22, 2020, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $ 17.0 million of the Company’s common stock at the discretion of management.

The new common stock repurchase program replaced the Company’s previous repurchase plan which was authorized on September 18, 2019.

The Company repurchased approximately $ 12.8 million of common stock during the year ended December 31, 2020 and $ 4.0  million of common stock during the year ended December 31, 2022, under this plan.

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.

The new common stock repurchase program replaced the Company’s previous repurchase plan which was authorized on September 18, 2019.

The Company repurchased approximately $ 12.8 million of common stock during the year ended December 31, 2020 and $ 4.0 million of common stock during the year ended December 31, 2022, under this plan.

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

On May 18, 2022, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $ 7.5 million of the Company’s common stock at the discretion of management.

The new common stock repurchase program replaced the Company’s previous repurchase plan which was authorized on October 22, 2020.

The Company repurchased approximately $ 3.0 million of common stock during the year ended December 31, 2022.

On May 18, 2022, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $ 7.5 million of the Company’s common stock at the discretion of management.

The new common stock repurchase program replaced the Company’s previous repurchase plan which was authorized on October 22, 2020.

The Company repurchased approximately $ 43,000 and $ 3.0 million of common stock during the years ended December 31, 2023 and December 31, 2022, respectively.

Subordinated Notes

1 unchanged sentence

The net proceeds of the offering are intended to retire the subordinated debt issued in 2016, to support growth and be used for other general business purposes.

The notes have a maturity date of 

April 15, 2031 

and have an annual fixed interest rate of 3.75 % until 

April 15, 2026.

The notes have a maturity date of April 15, 2031 and have an annual fixed interest rate of 3.75 % until April 15, 2026.

Thereafter, the notes will have a floating interest rate based on three -month SOFR rate plus 302 basis points ( 3.02 %) (computed on the basis of a 360 -day year of twelve 30 -day months) from and including April 15, 2026 to the maturity date or any early redemption date.

Interest will be paid semi-annually, in arrears, on April 15 and October 15 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date.

Interest will be paid quarterly, in arrears, on 

April 15, 

July 15, October 15 and January 15 throughout the floating interest rate period or earlier redemption date.

Interest will be paid quarterly, in arrears, on April 15, July 15, October 15 and January 15 throughout the floating interest rate period or earlier redemption date.

On March 1, 2022, the Company completed the issuance of $ 43.8 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various accredited investors.

The net proceeds of the offering will be used to support growth and for other general business purposes.

The notes have a maturity date of 

March 15, 2032 

and have an annual fixed interest rate of 4.00 % until 

March 15, 2027.

The notes have a maturity date of March 15, 2032 and have an annual fixed interest rate of 4.00 % until March 15, 2027.

Thereafter, the notes will have a floating interest rate based on three -month SOFR rate plus 233 basis points ( 2.33 %) (computed on the basis of a 360 -day year of twelve 30 -day months) from and including March 15, 2027 to the maturity date or any early redemption date.

Interest will be paid semi-annually, in arrears, on March 15 and September 15 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date.

Interest will be paid quarterly, in arrears, on 

March 15, June 15, September 15 and December 15 throughout the floating interest rate period or earlier redemption date.

Interest will be paid quarterly, in arrears, on March 15, June 15, September 15 and December 15 throughout the floating interest rate period or earlier redemption date.

Condensed Parent Company Financial Statements

7 unchanged sentences

Cash on deposit with subsidiary

$ 5,077  

Restricted securities, at cost

Investment in subsidiary

263,912  

215,858  

$ 270,543  

$ 218,372  

Other liabilities

Subordinated debt, net of debt issuance costs

72,245  

29,294  

Stockholders’

198,282  

188,788  

Total Liabilities and Stockholders’

$ 270,543  

$ 218,372  

Stockholders’ equity

Total Liabilities and Stockholders’ Equity

Condensed Statement of Income

2 unchanged sentences

Dividends from subsidiary

$ 4,038  

$ 2,156  

Subordinated debt interest expense

2 unchanged sentences

Undistributed earnings of subsidiary

24,797  

21,504  

Net income before income taxes

$ 25,873  

$ 21,776  

Income tax benefit

( 801 )  

$ 26,674  

$ 22,171  

preferred stock dividends

( 2,156 )  

Net income available to common shareholders

$ 24,518  

$ 20,015  

Condensed Statement of Cash Flows

2 unchanged sentences

CASH FLOWS FROM OPERATING ACTIVITIES:

$ 26,674  

$ 22,171  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Equity in undistributed earnings of subsidiary

( 24,797 )  

Stock based compensation

2 unchanged sentences

Increase (decrease) in other liabilities

( 274 )  

Net cash provided by operating activities

1 unchanged sentence

Purchase of restricted equities

( 1,430 )  

Investment in bank subsidiary

( 32,000 )  

Net cash used in investing activities

( 33,430 )  

CASH FLOWS FROM FINANCING ACTIVITIES:

Repurchase of common stock

( 6,918 )  

Cash dividends paid on preferred stock

( 2,156 )  

Cash dividend paid on common stock

( 1,882 )  

Net increase in subordinated debt

42,623  

14,237  

Net cash provided by financing activities

31,667  

12,081  

Net cash provided by (used in) financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

1 unchanged sentence

CASH AND CASH EQUIVALENTS, END OF YEAR

$ 5,077  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data