MainStreet Bancshares, Inc. 10-K

Item 8 – Financial Statements and Supplementary Data Consolidated Financial Statements Consolidated Statements of Financial Condition as of December 31, 2023 and December 31, 2022 (Dollars in thousands, except per share data) At December 31, 2023 At December 31, 2022 Assets Cash and due from banks $ 53,581 $ 48,931 Federal funds sold 60,932 81,669 Cash and cash equivalents 114,513 130,600 Investment securities available-for-sale, at fair value 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 24,356 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 13,944 14,709 Accrued interest and other receivables 12,390 9,581 Computer software, net of amortization 14,657 9,149 Bank owned life insurance 38,318 37,249 Other assets 34,914 39,915 Total Assets $ 2,035,432 $ 1,925,751 Liabilities and Stockholders’ Equity Liabilities Non-interest bearing deposits $ 364,606 $ 550,690 Interest bearing demand deposits 137,128 80,099 Savings and NOW deposits 45,878 51,419 Money market deposits 442,179 222,540 Time deposits 696,336 608,141 Total deposits 1,686,127 1,512,889 Federal funds purchased 15,000 — Federal Home Loan Bank advances — 100,000 Subordinated debt, net 72,642 72,245 Allowance for credit losses on off-balance sheet credit exposure 1,009 — Other liabilities 39,137 42,335 Total Liabilities 1,813,915 1,727,469 Commitments and contingencies (Note 13) 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 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 29,198 28,736 Capital surplus 65,985 63,999 Retained earnings 106,549 86,830 Accumulated other comprehensive income (loss) ( 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 62 Consolidated Statements of Income for the Years Ended December 31, 2023 and 2022 (Dollars in thousands, except per share data). For the Year Ended December 31, 2023 2022 Interest Income Interest and fees on loans $ 116,184 $ 78,872 Interest and dividends on investments securities U.S. government agencies and corporations — 37 Mortgage-backed securities 395 438 Tax-exempt obligations of states and political subdivisions 1,065 1,058 Taxable obligations of states and political subdivisions 256 254 Other 1,185 874 Interest on federal funds sold 5,038 2,312 Total Interest Income 124,123 83,845 Interest Expense Interest on interest bearing DDA deposits 1,892 601 Interest on savings and NOW deposits 546 203 Interest on money market deposits 13,924 1,547 Interest on time deposits 27,003 8,202 Interest on federal fund purchases 299 — Interest on Federal Home Loan Bank advances 1,224 347 Interest on subordinated debt 3,288 2,936 Total Interest Expense 48,176 13,836 Net Interest Income 75,947 70,009 Provision For Credit Losses - Loans 1,943 2,398 Recovery of Credit Losses - Off-Balance Sheet Credit Exposure ( 301 ) — Net interest income after provision for (recovery of) credit losses 74,305 67,611 Non-Interest Income Deposit account service charges 2,149 2,420 Bank owned life insurance income 1,069 1,008 Loan swap fee income — 619 Net gain on held-to-maturity securities — 4 Net loss on sale of loans — ( 168 ) Other fee income 420 951 Total Non-Interest Income 3,638 4,834 Non-Interest Expense Salaries and employee benefits 28,267 23,801 Furniture and equipment expenses 2,787 2,786 Advertising and marketing 2,343 2,304 Occupancy expenses 1,684 1,471 Outside services 2,044 2,075 Franchise tax 1,835 1,430 FDIC insurance 1,131 637 Data processing 1,328 1,303 Administrative expenses 922 872 Other real estate expenses, net — 38 Other operating expenses 2,778 2,340 Total Non-Interest Expense 45,119 39,057 Income before income taxes 32,824 33,388 Income Tax Expense 6,239 6,714 Net Income $ 26,585 $ 26,674 Preferred Stock Dividends 2,156 2,156 Net Income available to common shareholders $ 24,429 $ 24,518 Earnings per common share: Basic $ 3.25 $ 3.26 Diluted $ 3.25 $ 3.26 See Notes to the Consolidated Financial Statements 63 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023 and 2022 (Dollars in thousands) For the Year Ended December 31, 2023 2022 Comprehensive Income, net of taxes Net Income $ 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 ) Add: 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) 6 16 Other comprehensive gain (loss) 1,068 ( 8,743 ) Comprehensive Income $ 27,653 $ 17,931 See Notes to the Consolidated Financial Statements Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 (Dollars in thousands). Accumulated Other Preferred Common Capital Retained Comprehensive Stock Stock Surplus Earnings Income (Loss) Total Balance, December 31, 2022 $ 27,263 $ 28,736 $ 63,999 $ 86,830 $ ( 8,546 ) $ 198,282 Cumulative change in accounting principle (Note 3) — — — ( 1,699 ) — ( 1,699 ) Vesting of restricted stock — 470 ( 470 ) — — — Stock based compensation expense — — 2,491 — — 2,491 Common stock repurchased — ( 8 ) ( 35 ) — — ( 43 ) Dividends on preferred stock - ($ 0.47 per depositary share) — — — ( 2,156 ) — ( 2,156 ) Dividends on common stock - ($ 0.40 per share) — — — ( 3,011 ) — ( 3,011 ) Net income — — — 26,585 — 26,585 Other comprehensive gain — — — — 1,068 1,068 Balance, December 31, 2023 $ 27,263 $ 29,198 $ 65,985 $ 106,549 $ ( 7,478 ) $ 221,517 Accumulated Other Preferred Common Capital Retained Comprehensive Stock Stock Surplus Earnings Income (Loss) Total Balance, December 31, 2021 $ 27,263 $ 29,466 $ 67,668 $ 64,194 $ 197 $ 188,788 Vesting of restricted stock — 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 ) — ( 2,156 ) Dividends on common stock - ($ 0.25 per share) — — — ( 1,882 ) — ( 1,882 ) Net income — — — 26,674 — 26,674 Other comprehensive loss — — — — ( 8,743 ) ( 8,743 ) Balance, December 31, 2022 $ 27,263 $ 28,736 $ 63,999 $ 86,830 $ ( 8,546 ) $ 198,282 See Notes to the Consolidated Financial Statements 64 Consolidated Statements of Cash Flows (Dollars in thousands) Year Ended December 31, 2023 2022 Cash Flows from Operating Activities Net income $ 26,585 $ 26,674 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion, net 2,268 2,083 Amortization of right-of-use assets 477 496 Deferred income tax benefit ( 191 ) ( 894 ) Loss on sale of other real estate owned — 4 Loss on valuation of other real estate owned — 70 Loss on loans held for sale — 168 Loss on New Market Tax Credit investment operations 251 — Gain on disposal of premises and equipment ( 129 ) — Gain on called held-to-maturity securities — ( 4 ) Provision for credit losses, net 1,642 2,398 Stock based compensation expense 2,491 2,519 Income from bank owned life insurance ( 1,069 ) ( 1,008 ) Subordinated debt amortization expense 397 328 Change in: Accrued interest receivable and other receivables ( 2,803 ) ( 1,861 ) Other assets 4,912 ( 22,407 ) Other liabilities ( 3,198 ) 24,978 Net cash provided by operating activities 31,633 33,544 Cash Flows from Investing Activities Activity in available-for-sale securities: Payments 3,696 6,634 Maturities, sales, called, refunded — 245,000 Purchases — ( 226,215 ) Activity in held-to-maturity securities: Maturities, called, refunded 265 2,595 Purchases of equity securities ( 4,174 ) ( 3,916 ) Purchases of restricted investment in bank stock ( 7,059 ) ( 9,123 ) Redemption of restricted investment in bank stock 10,425 4,125 Net increase in loan portfolio ( 128,025 ) ( 240,756 ) Proceeds from sale of other real estate owned — 701 Proceeds from sale of premises and equipment 129 — Purchases of premises and equipment ( 497 ) ( 1,125 ) Computer software developed ( 5,508 ) ( 6,656 ) Net cash used in investing activities ( 130,748 ) ( 228,736 ) Cash Flows from Financing Activities Net increase (decrease) in non-interest deposits ( 186,084 ) 20,012 Net increase in interest bearing demand, savings, and time deposits 359,322 80,914 Net increase (decrease) in Federal Home Loan Bank advances ( 100,000 ) 100,000 Net increase in federal funds purchased 15,000 — Net increase in subordinated debt — 42,623 Repurchase of common stock ( 43 ) ( 6,918 ) Cash dividends paid on preferred stock ( 2,156 ) ( 2,156 ) Cash dividends paid on common stock ( 3,011 ) ( 1,882 ) Net cash provided by financing activities 83,028 232,593 Increase (decrease) in Cash and Cash Equivalents ( 16,087 ) 37,401 Cash and Cash Equivalents, beginning of period 130,600 93,199 Cash and Cash Equivalents, end of period $ 114,513 $ 130,600 Supplementary Disclosure of Cash Flow Information Cash paid during the period for interest $ 45,534 $ 12,639 Cash paid during the period for income taxes $ 7,280 $ 6,381 Transfers from loans receivable to loans held for sale, at carrying value $ — $ 715 Net unrealized gain (loss) on securities available-for-sale $ 1,371 $ ( 11,373 ) See Notes to the Consolidated Financial Statements 65 MAINSTREET BANCSHARES, INC. AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements Organization MainStreet Bancshares Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose 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. 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. On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $ 4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $ 1.00 per share. There are currently 28,750 shares of preferred stock outstanding. 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 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. 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 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. The Bank places special emphasis on serving the needs of individuals, and small and medium-sized businesses and professionals in the Washington, D.C. metropolitan area. 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 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 (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’ 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. 66 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, 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 . This restricted stock is recorded at cost because its ownership is restricted and it lacks a market for resale. The Bank is required to maintain Federal Reserve Bank stock at a level of 6 % of capital and surplus. The FHLB requires the Bank to maintain stock, at a minimum, in an amount equal to 4.5 % of outstanding borrowings and 0.20 % of total assets. 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, 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, 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 credit losses on loans. 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. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. 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 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. 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. 67 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. The Bank may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market values. 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. 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. 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. The Bank amortizes these net amounts over the life of the related loans or, in the case of demand loans, over the estimated life. 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 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. Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Construction in progress includes assets which will be reclassified and depreciated once placed into service. Computer software development - The Company capitalizes new product development costs incurred for software to be sold from the point at which technological feasibility has been established through the point at which the product is ready for general availability. Software development costs that are capitalized are evaluated annually for impairment and are assigned an estimated economic life based on the type of product, market characteristics, and maturity of the market for that particular product. These costs are amortized on a straight-line basis. All of this amortization expense is included within components of operating income. 68 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 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. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than- not recognition threshold are measured as the largest amount of tax benefit that is more than 50 % likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2023 , and December 31, 2022 , there were no such liabilities recorded. 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. 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. 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. 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 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 – 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 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. 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. Actual results could differ from the estimates. 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. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for credit losses on loans, management obtains independent appraisals for significant properties. 69 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. 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. A description of the primary revenue streams accounted for under ASC Topic 606 follows: 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. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the company satisfies the performance obligation. 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. 70 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 Assets: 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 Consumer 75 44 31 Total Allowance for Credit Losses on Loans $ 15,009 $ 14,114 $ 895 Liabilities: 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. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. • Residential real estate mortgage loans, including equity lines of credit, carry risks associated with the continued creditworthiness of the borrower and the changes in the value of the collateral. • Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision. • Consumer secured loans (indirect lending) carry risks associated with the continued creditworthiness of the borrower and the value of the collateral (e.g., rapidly depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio. • Consumer unsecured loans carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy. For each homogenous loan pool, the Company elected to use the Weighted Average Remaining Life (“WARM”) methodology for calculating historical and future loss reserves. The WARM methodology calculates the average annual historical charge-off rate of a homogenous loan pool and multiplies that rate by the pool's remaining life to estimate the allowance for credit losses. Quantitative assumptions included are below: Remaining life - For amortizing assets, the remaining life is calculated by taking the contractual life and adjusting it by any expected scheduled payments as well as prepayments. An important assumption in the calculation of remaining life is an “exit event” which would be deemed as the end of life of a loan. Examples of exit events included in our model are: 1 ). A change in maturity date of 90 days or more and 2 ). A loan changing 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 primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The adoption of CECL had an insignificant impact on the Company's held-to-maturity securities portfolio. Governance The Company’s Allowance Committee, contains representatives from both the Company’s finance and credit teams, is responsible for approving the Company’s estimate of expected credit losses. The Allowance Committee considers the quantitative model results and qualitative factors when approving the final ACL. The Company’s ACL model is subject to the Company’s model risk management standards. 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 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. 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. 71 Note 2. Restrictions on Cash On March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Prior to the change, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act Note 3. Investment Securities Investment securities available-for-sale was comprised of the following: December 31, 2023 (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Collateralized Mortgage Backed $ 23,446 $ — $ ( 3,931 ) $ 19,515 Subordinated Debt 9,970 — ( 1,503 ) 8,467 Municipal Securities Taxable 10,649 — ( 2,342 ) 8,307 Tax-exempt 22,668 23 ( 1,949 ) 20,742 U.S. Governmental Agencies 2,932 3 ( 38 ) 2,897 Total $ 69,665 $ 26 $ ( 9,763 ) $ 59,928 Investment securities held-to-maturity was comprised of the following: December 31, 2023 (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Municipal Securities Tax-exempt $ 14,775 $ 19 $ ( 121 ) $ 14,673 Subordinated Debt 2,500 — ( 10 ) 2,490 Total $ 17,275 $ 19 $ ( 131 ) $ 17,163 72 Investment securities available-for-sale was comprised of the following: December 31, 2022 (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Collateralized Mortgage Backed 26,801 — ( 4,574 ) 22,227 Subordinated Debt 9,970 — ( 1,143 ) 8,827 Municipal Securities Taxable 10,675 — ( 2,709 ) 7,966 Tax-exempt 22,823 10 ( 2,658 ) 20,175 U.S. Governmental Agencies 3,470 2 ( 36 ) 3,436 Total $ 73,739 $ 12 $ ( 11,120 ) $ 62,631 Investment securities held-to-maturity was comprised of the following: December 31, 2022 (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Municipal Securities Tax-exempt $ 15,142 $ 35 $ ( 237 ) $ 14,940 Subordinated Debt 2,500 — — 2,500 Total $ 17,642 $ 35 $ ( 237 ) $ 17,440 Credit Quality Indicators and Allowance for Credit Losses - 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 primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The majority of the Company’s HTM securities with credit risk are obligations of states and political subdivisions. The following table presents the amortized cost of HTM securities as of 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: AAA/AA/A $ 14,775 $ — $ 14,775 Not Rated - Non Agency — 2,500 $ 2,500 Total $ 14,775 $ 2,500 $ 17,275 December 31, 2022 Credit Rating: AAA/AA/A $ 15,142 $ — $ 15,142 Not Rated - Non Agency — 2,500 2,500 Total $ 15,142 $ 2,500 $ 17,642 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 Held-to-Maturity (Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value 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 14,054 12,222 7,218 7,188 Due after ten years 54,611 46,730 6,414 6,346 Total $ 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 . 73 The following tables summarize the fair value and unrealized losses at December 31, 2023 and December 31, 2022 , aggregated by investment category and length of time that individual securities have been in a continuous loss position: December 31, 2023 Less than 12 Months 12 Months or Longer Total (Dollars in thousands) Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Available-for-sale: Collateralized Mortgage Backed $ — $ — $ 19,440 $ ( 3,931 ) $ 19,440 $ ( 3,931 ) Subordinated Debt — — 7,717 ( 1,503 ) 7,717 ( 1,503 ) Municipal Securities Taxable — — 8,307 ( 2,342 ) 8,307 ( 2,342 ) Tax-exempt 1,986 ( 34 ) 16,510 ( 1,915 ) 18,496 ( 1,949 ) U.S Governmental Agencies 1,515 ( 1 ) 845 ( 37 ) 2,360 ( 38 ) Total $ 3,501 $ ( 35 ) $ 52,819 $ ( 9,728 ) $ 56,320 $ ( 9,763 ) December 31, 2022 Less than 12 Months 12 Months or Longer Total (Dollars in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Available-for-sale: Collateralized Mortgage Backed $ 2,021 $ ( 151 ) $ 20,206 $ ( 4,423 ) $ 22,227 $ ( 4,574 ) Subordinated Debt 3,357 ( 393 ) 4,720 ( 750 ) 8,077 ( 1,143 ) Municipal Securities Taxable 1,377 ( 198 ) 6,589 ( 2,511 ) 7,966 ( 2,709 ) Tax-exempt 11,028 ( 838 ) 7,663 ( 1,820 ) 18,691 ( 2,658 ) U.S Government Agencies 1,768 ( 2 ) 1,018 ( 34 ) 2,786 ( 36 ) Total $ 19,551 $ ( 1,582 ) $ 40,196 $ ( 9,538 ) $ 59,747 $ ( 11,120 ) 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. 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, 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 $ 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 . All municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at 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. 74 Note 4. Loans Receivable Loans receivable were comprised of the following: (Dollars in thousands) December 31, 2023 December 31, 2022 Residential Real Estate: Single family $ 203,417 $ 178,615 Multifamily 271,040 215,624 Farmland 145 155 Commercial Real Estate: Owner-occupied 282,052 228,374 Non-owner occupied 461,775 472,354 Construction and Land Development 429,637 393,783 Commercial – Non Real-Estate: Commercial & industrial 75,415 97,351 Consumer – Non Real Estate: Unsecured 271 1,984 Secured 3,339 11,352 Total Gross Loans 1,727,091 1,599,592 Less: unearned fees ( 5,448 ) ( 5,528 ) Less: allowance for loan losses ( 16,506 ) ( 14,114 ) Net Loans $ 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 75 The following tables present the segments of the loan portfolio summarized by aging categories as of December 31, 2023 and December 31, 2022 : December 31, 2023 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due and Still Accruing Nonaccrual Current Loans Total Loans Receivable Residential Real Estate: Single Family $ — $ — $ — $ 149 $ 203,268 $ 203,417 Multifamily — — — — 271,040 271,040 Farmland — — — — 145 145 Commercial Real Estate: Owner occupied — — — — 282,052 282,052 Non-owner occupied — — — — 461,775 461,775 Construction & Land Development — — — — 429,637 429,637 Commercial – Non Real Estate: Commercial & industrial — — — 851 74,564 75,415 Consumer – Non Real Estate: Unsecured — — — — 271 271 Secured 25 — 4 — 3,310 3,339 Total $ 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 Past Due and Still Accruing Nonaccrual Current Loans Total Loans Receivable Residential Real Estate: Single Family $ — $ — $ — $ — $ 178,615 $ 178,615 Multifamily — — — — 215,624 215,624 Farmland — — — — 155 155 Commercial Real Estate: Owner occupied — — — — 228,374 228,374 Non-owner occupied — — — — 472,354 472,354 Construction & Land Development — — — — 393,783 393,783 Commercial – Non Real Estate: Commercial & industrial — — 15 — 97,336 97,351 Consumer – Non Real Estate: Unsecured — — — — 1,984 1,984 Secured 11 12 6 — 11,323 11,352 Total $ 11 $ 12 $ 21 $ — $ 1,599,548 $ 1,599,592 76 Note 5. 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 Real Estate Residential Commercial Construction Commercial Consumer Total 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 Charge-offs — — — ( 462 ) ( 6 ) ( 468 ) Recoveries 7 — — — 15 22 Provision (recovery) 382 1,115 209 307 ( 70 ) 1,943 Ending Balance $ 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 Real Estate Residential Commercial Construction Commercial Consumer Total Beginning Balance $ 1,672 $ 5,689 $ 2,697 $ 1,540 $ 99 $ 11,697 Charge-offs — — — - 19 19 Provision (recovery) 474 1,470 650 ( 122 ) ( 74 ) 2,398 Ending Balance $ 2,146 $ 7,159 $ 3,347 $ 1,418 $ 44 $ 14,114 Ending Balance: Individually evaluated for Impairment $ — $ — $ — $ — $ — $ — Collectively evaluated for Impairment $ 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. 77 The following table summarizes information in regard to impaired loans by loan portfolio class as of December 31, 2022 : December 31, 2022 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded Residential Real Estate: Single family $ 149 $ 149 $ — Total $ 149 $ 149 $ — The following table presents additional information regarding the impaired loans for the year ended December 31, 2022 . December 31, 2022 (Dollars in thousands) Average Record Investment Interest Income Recognized With no related allowance recorded Residential Real Estate: Single family $ 149 $ 15 Total $ 149 $ 15 The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated. CECL Incurred Loss December 31, 2023 December 31, 2022 (Dollars in thousands) Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Nonaccrual Loans Residential Real Estate: Single Family $ 149 $ — $ 149 $ — Commercial & industrial 851 — 851 — Total $ 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) For the Year Ended December 31, 2023 Residential Real Estate: Single Family $ 5 Commercial & industrial 128 Total $ 133 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 $ 346 Commercial Real Estate: Owner occupied 1,120 Commercial & industrial 851 Total $ 2,317 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 $ 16,000 3.5 % Extended term on interest only payments for six months. Commercial & industrial 315 0.4 % Extended term for three months. Total $ 16,315 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. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. 78 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) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Residential Real Estate - Single Family Pass $ 49,803 $ 17,502 $ 26,434 $ 33,134 $ 20,610 $ 20,542 $ 33,217 $ 201,242 Watch 298 — — 1,319 — — — 1,617 Special Mention — — — — — — — — Substandard — — — — 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 Pass $ 28,346 $ 81,180 $ 60,156 $ 39,286 $ 27,270 $ 10,797 $ 24,005 $ 271,040 Watch — — — — — — — — Special Mention — — — — — — — — Substandard — — — — — — — — 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 Pass $ — $ — $ — $ — $ — $ 145 $ — $ 145 Watch — — — — — — — — Special Mention — — — — — — — — Substandard — — — — — — — — Total Residential Real Estate - Farmland $ — $ — $ — $ — $ — $ 145 $ — $ 145 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial Real Estate - Owner Occupied Pass $ 70,476 $ 55,222 $ 43,576 $ 39,621 $ 32,044 $ 37,360 $ 1,391 $ 279,690 Watch — — — — — — 1,242 1,242 Special Mention — — — — — — — — Substandard — — — — 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 Pass $ 23,091 $ 101,617 $ 51,291 $ 47,732 $ 17,827 $ 131,347 $ 32,122 $ 405,027 Watch — — — 960 12,768 19,282 — 33,010 Special Mention — — — 16,000 — — — 16,000 Substandard — — — — 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 Pass $ 6,158 $ 32,544 $ 13,612 $ 2,455 $ — $ 8,118 $ 333,417 $ 396,304 Watch 258 — — — — — 22,272 22,530 Special Mention — — — — — — — — Substandard — 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 Pass $ 10,150 $ 5,271 $ 13,530 $ 3,495 $ 1,230 $ 10,132 $ 27,299 $ 71,107 Watch — — — — — 334 — 334 Special Mention — — — — — — 2,997 2,997 Substandard — — — — 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 Pass $ — $ — $ — $ — $ — $ — $ 271 $ 271 Watch — — — — — — — — Special Mention — — — — — — — — Substandard — — — — — — — — Total Consumer - Unsecured $ — $ — $ — $ — $ — $ — $ 271 $ 271 Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer - Secured Pass $ 55 $ 252 $ 3 $ 51 $ 1,400 $ 1,497 $ 81 $ 3,339 Watch — — — — — — — — Special Mention — — — — — — — — Substandard — — — — — — — — Total Consumer - Secured $ 55 $ 252 $ 3 $ 51 $ 1,400 $ 1,497 $ 81 $ 3,339 Current period gross write-offs $ — $ — $ — $ — $ — $ 6 $ — $ 6 Total Pass $ 188,079 $ 293,588 $ 208,602 $ 165,774 $ 100,381 $ 219,938 $ 451,803 $ 1,628,165 Watch 556 — — 2,279 12,768 19,616 23,514 58,733 Special Mention — — — 16,000 — — 2,997 18,997 Substandard — 1,454 — — 9,803 353 9,586 21,196 Total loans $ 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 (Dollars in thousands) Pass Watch Special Mention Substandard Doubtful Total Residential Real Estate: Single Family $ 178,172 $ — $ — $ 443 $ — $ 178,615 Multifamily 215,624 — — — — 215,624 Farmland 155 — — — — 155 Commercial Real Estate: — Owner occupied 227,231 — — 1,143 — 228,374 Non-owner occupied 439,537 24,897 — 7,920 — 472,354 Construction & Land Development 393,783 — — — — 393,783 Commercial – Non Real Estate: — Commercial & industrial 97,246 97 — 8 — 97,351 Consumer – Non Real Estate: — Unsecured 1,984 — — — — 1,984 Secured 11,352 — — — — 11,352 Total $ 1,565,084 $ 24,994 $ — $ 9,514 $ — $ 1,599,592 The 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 1,310 Recovery of off-balance sheet credit losses, net (301 ) Balance, December 31, 2023 $ 1,009 Note 6. Related Party Transactions The Bank grants loans and letters of credit to its executive officers, directors and their affiliated entities. 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, 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, 2023 and December 31, 2022 amounted to approximatel y $ 2.2 million and $ 2.1 million, resp ectively. 79 Note 7. Premises and Equipment Premises and equipment are summarized as follows at December 31: (Dollars in thousands) 2023 2022 Cost Building $ 13,005 $ 13,005 Land 2,856 2,856 Leasehold improvements 1,091 1,091 Furniture, fixtures and equipment 4,500 4,300 Computer software and equipment 1,931 1,856 23,383 23,108 Less accumulated depreciation ( 9,439 ) ( 8,399 ) Premises and equipment, net $ 13,944 $ 14,709 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. Note 8. Intangible Assets 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 . Years Ended December 31, 2023 December 31, 2022 (Dollars in thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizable intangible assets: Computer software $ 14,657 $ — $ 9,149 $ — Total $ 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. At that time the intangible asset will be amortized on a straight-line bases over the estimated useful life of the asset. As of December 31, 2023 , the Company has not recorded any amortization on its intangible computer software. The Company expects to put the software into service in the first quarter of 2024. Note 9. Deposits 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: (Dollars in thousands) Year ended December 31, 2024 $ 463,702 2025 113,313 2026 44,490 2027 74,831 Thereafter — Total $ 696,336 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. 80 Note 10. Borrowed Funds The Bank also has a credit availability agreement with the FHLB based on a percentage of total assets. As of December 31, 2023 , the credit availability with FHLB is approximately $ 504.6 million. This credit availability agreement provides the Bank with access to a myriad of advance products offered by the FHLB. The rate of interest charged is based on market conditions. 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. Note 11. Income Taxes The Company files tax returns in the U.S. federal jurisdiction and required states. With few exceptions, the Bank is no longer subject to tax examination by tax authorities for years prior to 2019. 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: (Dollars in thousands) 2023 2022 Current expense $ 6,430 $ 7,608 Deferred (benefit) (191 ) (894 ) Total $ 6,239 $ 6,714 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: Year ended December 31, (Dollars in thousands) 2023 2022 Computed “expected” income tax expense $ 6,893 $ 7,012 Increase (decrease)in income taxes resulting from: Tax exempt Interest ( 136 ) ( 200 ) BOLI Income ( 225 ) ( 211 ) Low Income Housing Investment 386 130 State Income Taxes 649 637 Restricted Stock Adjustment ( 100 ) ( 119 ) Federal tax credits ( 1,317 ) ( 472 ) Other Adjustments 89 ( 63 ) Total $ 6,239 $ 6,714 81 The tax effects of temporary differences result in deferred tax assets and liabilities as presented below: December 31, (Dollars in thousands) 2023 2022 Deferred tax assets: Allowance for credit losses $ 3,798 $ 3,238 Restricted stock 533 511 Net loan fees 1,253 1,268 Right-of-use liability 1,588 1,705 Accrued compensation 638 403 Unrealized losses on securities available-for-sale 2,240 2,555 Other 320 42 Gross deferred tax assets 10,370 9,722 Deferred tax liabilities: Depreciation 253 378 Prepaid expense 12 11 Right-of-use Asset 1,429 1,534 Internally developed software costs 527 153 Other 215 95 Gross deferred tax liabilities 2,436 2,171 Net deferred tax asset $ 7,934 $ 7,551 N ote 12. Earnings Per Common Share Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were no such potentially dilutive securities outstanding in 2023 or 2022 . The weighted average number of shares used in the calculation of basic and diluted earnings per 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. For the Year Ended December 31, (Dollars in thousands) 2023 2022 Net income $ 26,585 $ 26,674 Preferred stock dividends ( 2,156 ) ( 2,156 ) Net income available to common shareholders $ 24,429 $ 24,518 Weighted average number of shares issued, basic and diluted 7,522,913 7,529,382 Earnings per common share: Basic and diluted earnings per common share $ 3.25 $ 3.26 82 Note 13. 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. The amounts of loan commitments and standby letters of credit are set forth in the following table as of December 31, 2023 and 2022 : December 31, (Dollars in thousands) 2023 2022 Loan commitments $ 359,373 $ 435,751 Standby letters of credit $ 471 $ — 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. The Bank has not incurred any losses on commitments in 2023 or 2022 . 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, 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. 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. Note 14. Leases 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. 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. 83 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, (Dollars in thousands) 2023 2022 Lease liabilities $ 6,902 $ 7,342 Right-of-use assets $ 6,211 $ 6,688 Weighted-average remaining lease term – operating leases (in months). 155.9 162.9 Weighted-average discount rate – operating leases 2.80 % 2.80 % For the year ended December 31, (Dollars in thousands) 2023 2022 Lease Cost Operating lease cost $ 677 $ 677 Total lease costs $ 677 $ 677 Cash paid for amounts included in measurement of lease liabilities $ 639 $ 623 The Company is the lessor for three operating leases. One lease is extended on a month-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Total rent income on these operating leases is approximately $ 7,500 per month. 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. A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of December 31, 2023 is as follows: (Dollars in thousands) 2024 $ 654 2025 671 2026 689 2027 587 2028 594 Thereafter 4,967 Total undiscounted cash flows 8,162 Discount ( 1,260 ) Lease liabilities $ 6,902 84 Note 15. 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. The concentrations of credit by type of loan are set forth in Note 4. The Bank maintains its cash and federal funds sold in correspondent bank deposit accounts. 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. Note 16. Regulatory Matters 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. 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. The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 and 2023 is 2.50 %. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of 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): Actual Capital Adequacy Purposes To Be Well Capitalized Under the Prompt Corrective Action Provision (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2023 Total capital (to risk-weighted assets) $ 312,069 17.18% $ 145,300 ≥ 8.0% $ 181,625 ≥ 10.0% Common equity tier 1 capital (to risk-weighted assets) $ 294,553 16.22% $ 81,731 ≥ 4.5% $ 118,056 ≥ 6.5% Tier 1 capital (to risk-weighted assets) $ 294,553 16.22% $ 108,975 ≥ 6.0% $ 145,300 ≥ 8.0% Tier 1 capital (to average assets) $ 294,553 14.66% $ 80,375 ≥ 4.0% $ 100,469 ≥ 5.0% As of December 31, 2022 Total capital (to risk-weighted assets) $ 286,572 16.27% $ 140,929 ≥ 8.0% $ 176,161 ≥ 10.0% Common equity tier 1 capital (to risk-weighted assets) $ 272,458 15.47% $ 79,272 ≥ 4.5% $ 114,504 ≥ 6.5% Tier 1 capital (to risk-weighted assets) $ 272,458 15.47% $ 105,696 ≥ 6.0% $ 140,929 ≥ 8.0% Tier 1 capital (to average assets) $ 272,458 15.05% $ 72,435 ≥ 4.0% $ 90,544 ≥ 5.0% Note 17. Defined Contribution Benefit Plan The Bank adopted a 401 (k) defined contribution plan on October 1, 2004, which is administered by Principal Investments. Participants have the right to contribute up to a maximum of 15 % of pretax annual compensation or the maximum allowed by the Internal Revenue Code, whichever is less. The Bank began making a matching contribution to the plan on January 1, 2010. 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. 85 Note 18. 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, 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, 2023 and changes during the year ended December 31, 2023 is presented below: Nonvested Restricted Stock Shares Shares Weighted Average Grant Date Fair Value Nonvested at January 1, 2023 259,036 $ 22.05 Granted 90,686 26.44 Vested ( 117,408 ) 21.28 Forfeited ( 4,014 ) 24.35 Nonvested at December 31, 2023 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 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. Note 19. 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 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. 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, 2023 and December 31, 2022 . December 31, 2023 Customer-related interest rate contracts (Dollars in thousands) Notional Amount Positions Assets Liabilities Collateral Pledges Matched interest rate swap with borrower $ 224,008 42 — $ 18,569 $ — Matched interest rate swap with counterparty $ 224,008 42 $ 18,569 — $ — December 31, 2022 Customer-related interest rate contracts (Dollars in thousands) Notional Amount Positions Assets Liabilities Collateral Pledges Matched interest rate swap with borrower $ 245,717 44 — $ 23,896 $ 3,034 Matched interest rate swap with counterparty $ 245,717 44 $ 23,896 — $ 3,034 The Company is able to recognize fee income upon execution of the interest rate swap contract. Interest rate swap fee income for the twelve months ended December 31, 2023 and 2022 were $ 0 and $ 619,000 , respectively. 86 Note 20. Fair Value Presentation In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is the most representative of fair value under current market conditions. In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows: Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: Securities available for sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. As of 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. 87 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 : December 31, 2023 (Dollars in thousands) Level 1 Level 2 Level 3 Total Assets: Investment securities available-for-sale: Collateralized Mortgage Backed $ — $ 19,515 $ — $ 19,515 Subordinated Debt — 8,217 250 8,467 Municipal Securities Taxable — 8,307 — 8,307 Tax-exempt — 20,742 — 20,742 U.S. Government Agencies — 2,897 — 2,897 Derivative asset – interest rate swap on loans — 18,569 — 18,569 Total $ — $ 78,247 $ 250 $ 78,497 Liabilities: Derivative liability – interest rate swap on loans — 18,569 — 18,569 Total $ — $ 18,569 $ — $ 18,569 December 31, 2022 (Dollars in thousands) Level 1 Level 2 Level 3 Total Assets: Investment securities available-for-sale: Collateralized Mortgage Backed $ — $ 22,227 $ — $ 22,227 Subordinated Debt — 8,577 250 8,827 Municipal Securities Taxable — 7,966 — 7,966 Tax-exempt — 20,175 — 20,175 U.S. Government Agencies — 3,436 — 3,436 Derivative asset – interest rate swap on loans — 23,896 — 23,896 Total $ — $ 86,277 $ 250 $ 86,527 Liabilities: Derivative liability – interest rate swap on loans — 23,896 — 23,896 Total $ — $ 23,896 $ — $ 23,896 Reconciliation of Level 3 Inputs Dollars in thousands Subordinated Debt December 31, 2022 fair value $ 250 December 31, 2023 fair value $ 250 Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The 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: 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. The vast majority of the collateral is real estate. 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 3. 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 ). 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. 88 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 3. OREO is measured at fair value on a nonrecurring basis. 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 FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. 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. 89 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. December 31, 2023 Carrying Estimated Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Dollars in thousands) Amount Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 114,513 $ 114,513 $ 114,513 $ — $ — Restricted equity securities 24,356 24,356 — 24,356 — Securities: Available for sale 59,928 59,928 — 59,928 — Held to maturity 17,275 17,163 — 17,163 — Loans, net 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 38,318 38,318 — 38,318 — Accrued interest receivable 10,725 10,725 — 10,725 — Liabilities: Deposits $ 1,686,127 $ 1,685,487 $ — $ 989,791 $ 695,696 Subordinated debt, net 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 Carrying Estimated Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Dollars in thousands) Amount Fair Value Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 130,600 $ 130,600 $ 130,600 $ — $ — Restricted equity securities 24,325 24,325 — 24,325 — Securities: Available for sale 62,631 62,631 — 62,631 — Held to maturity 17,642 17,440 — 17,440 — Loans, net 1,579,950 1,584,533 — — 1,584,533 Derivative asset – interest rate swap on loans 23,896 23,896 — 23,896 — Bank owned life insurance 37,249 37,249 — 37,249 — Accrued interest receivable 8,779 8,779 — 8,779 — Liabilities: Deposits $ 1,512,889 $ 1,503,869 $ — $ 904,748 $ 599,121 Subordinated debt, net 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 are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-balance sheet and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment. 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. 90 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 . Note 21. Other Real Estate Owned 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) 2023 2022 Net loss on sales of real estate $ — $ 4 Loss on valuation, net — 70 Operating expenses (income), net of rental income — ( 36 ) Balance, end of year $ — $ 38 As of December 31, 2023 , there were no real estate loans in the process of foreclosure. Note 22. 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) 2023 2022 Unrealized gain on securities $ ( 9,737 ) $ ( 11,108 ) Unrealized loss on securities transferred to HTM ( 6 ) ( 8 ) Tax effect 2,265 2,570 Total accumulated other comprehensive loss $ ( 7,478 ) $ ( 8,546 ) Note 23. Capital 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). 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. 91 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. 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 $ 43,000 and $ 3.0 million of common stock during the years ended December 31, 2023 and December 31, 2022, respectively. Note 24. Subordinated Notes On April 6, 2021, the Company completed the issuance of $ 30.0 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 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. 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. 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. 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. 92 Note 25. Condensed Parent Company Financial Statements Condensed financial statements pertaining only to the Company are presented below. The investment in subsidiary is accounted for using the equity method of accounting. The payment of dividends by the subsidiary is restricted by various regulatory limitations. Banking regulations also prohibit extensions of credit to the parent company unless appropriately secured by assets. Condensed Parent Company Only Condensed Balance Sheet (Dollars in thousands) December 31, 2023 2022 ASSETS Cash on deposit with subsidiary $ 3,616 $ 5,077 Restricted securities, at cost 3,123 1,430 Investment in subsidiary 287,075 263,912 Other assets 1,190 124 Total Assets $ 295,004 $ 270,543 Liabilities: Other liabilities $ 845 $ 16 Subordinated debt, net of debt issuance costs 72,642 72,245 Stockholders’ equity 221,517 198,282 Total Liabilities and Stockholders’ Equity $ 295,004 $ 270,543 93 Condensed Statement of Income (Dollars in thousands) For the Year Ended December 31, 2023 2022 Income Dividends from subsidiary $ 5,166 $ 4,038 Expenses Subordinated debt interest expense 3,288 2,936 Non-interest expense 42 26 Total expenses 3,330 2,962 Undistributed earnings of subsidiary 23,546 24,797 Net income before income taxes $ 25,382 $ 25,873 Income tax benefit ( 1,203 ) ( 801 ) Net income $ 26,585 $ 26,674 Less: preferred stock dividends ( 2,156 ) ( 2,156 ) Net income available to common shareholders $ 24,429 $ 24,518 94 Condensed Statement of Cash Flows (Dollars in thousands) Year Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,585 $ 26,674 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary ( 23,546 ) ( 24,797 ) Stock based compensation 2,491 2,519 Subordinated debt amortization expense 397 328 Decrease (increase) in other assets ( 1,063 ) 2,014 Increase (decrease) in other liabilities 829 ( 274 ) Net cash provided by operating activities 5,693 6,464 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of restricted equities ( 1,944 ) ( 1,430 ) Investment in bank subsidiary — ( 32,000 ) Net cash used in investing activities ( 1,944 ) ( 33,430 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock ( 43 ) ( 6,918 ) Cash dividends paid on preferred stock ( 2,156 ) ( 2,156 ) Cash dividend paid on common stock ( 3,011 ) ( 1,882 ) Net increase in subordinated debt — 42,623 Net cash provided by (used in) financing activities ( 5,210 ) 31,667 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1,461 ) 4,701 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,077 376 CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,616 $ 5,077 95 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.