UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
o | TRANSITION REPORT PURSUANT TO SECTION 13 | ||||
2022: $237,799,174. 17,674,224. presence of a diverse group of large and small businesses. According to the U.S. Census Bureau, the region is home to four of the top ten most highly educated counties in the nation and four to the top ten most affluent counties, as measured by household income. As of December 31, Our Products and Services terms of 12 - 24 months. Generally, we do not make commercial construction loans outside of our primary or secondary market areas. requir 2022. Deposit Products among institutions in the market area is strong. As a result, it is possible that we may pay above market rates to attract deposits. Investment Portfolio directly or indirectly in any activity other than banking or managing or controlling banks or furnishing services to or performing service for its authorized subsidiaries. A bank holding company may, however, engage in, or acquire an interest in a company that engages in, activities which the Federal Reserve The The GLB Act made substantial changes in the historic restrictions on non-bank activities of bank holding companies, and allows affiliations between types of companies that were previously prohibited. The GLB Act also allows banks to engage in a wider array of nonbanking activities through "financial subsidiaries."Virginia 47-5020283 (State or other jurisdiction
of
incorporation or organization)47-5020283
(I.R.S. Employer
Identification No.)22030 (Address of principal executive offices) 22030
(Zip Code)Title of Each Class: Trading Symbol(s) Name of Each Exchange on Which Registered: Common Stock, $0.01 par value FVCB The Nasdaq Stock Market, LLC o¨ No ýxo¨ No ýxýx No o¨ýx No o¨ýooxýxýxýxo¨ No ýx2019: $235,481,152.18, 2020,17, 2023, was 13,467,955.20202023 Annual Meeting of Shareholders are incorporated by reference into Part III of the Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K. PART IItem 1.Business1Risk Factors21Properties4242
36
[Reserved]Selected Financial Data45PART III114 Part137
115 FVCBankcorp, Inc. (the "Company")on the cusp of the most significant economic downturn since the Great Depression, it has grown largely organically, throughde novo branch expansion, and banker and customer acquisition, and two whole-bank acquisitions. In 2012, we completed the acquisition of 1st Commonwealth Bank of Virginia ("1st1st Commonwealth"), a $58.9 million asset savings and loan association in Arlington, Virginia.announced the completion ofcompleted our acquisition of Colombo Bank ("Colombo"), pursuant to a previously announced definitive merger agreement. Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018 addingand added five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuant to the terms of the merger agreement, based on the average closing price of the Company's common stock during the five trading day period ended on October 10, 2018, the second trading day prior to closing, of $19.614 (the Average Closing Price") holders of shares of Colombo common stock received 0.002217 shares of the Company's common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective date of the merger, plus cash in lieu of fractional shares at a rate equal to the Average Closing Price, and subject to the right of holders of Colombo common stock who owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, and who made a timely election, to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result of the merger, 763,051 shares of the Company's common stock were issued in exchange for outstanding shares of Colombo common stock.supportssupported our current business and allowedallowing us to expand our presence in adjacent markets where we lend, but in which we had no physical presence. Colombo's branch locations strengthenstrengthened our strategy as they enableenabled us to add lenders and banking services in areas where we currently lend. We expect that ourOur strong infrastructure and wide range of products and services will allowallowed us to develop deeper relationships with Colombo's current customers, as well as enhance our platform for generating new relationships.2019,2022, the Washington MSA had total deposits of $220.7$297.1 billion excluding deposits maintained by a national brokerage firm. Theand the Baltimore MSA had total deposits of $74.3$104.6 billion, as of June 30, 2019 based on FDICFederal Deposit Insurance Corporation ("FDIC") data.2018,2020, the Washington MSA had a median household income of $102,180,$106,415, which ranks as sixth highest among all metropolitan statistical areasMSAs nationally, and a population of 6.26.3 million. The Virginia and Maryland localities within the Washington MSA in which we primarily 2.6%2.8% as of December 2019.2022. The significant presence of national and international businesses make1516 Fortune 500 companies, including eight based in Fairfax County.2018,2020, the Baltimore MSA had a median household income of $80,469$83,811 which represented 4%3.3% growth over the previous year. The Baltimore MSA has an unemployment rate of 2.9%3.1% as of December 2019.2022. With a population of 2.8 million, the top industries of the Baltimore MSA include health care, education, and professional, scientific and technical services.such as our acquisition of Colombo,or other strategic transactions, while increasing profitability, maintaining strong asset quality and a high level of customer service.our shareholdersthe aforementioned are customers. We receive referrals from existing customers and all employees are encouraged to promote the Company. We believe having such a large group of individuals actively promote usthe Company has and will continue to augment our ability to generate both deposits and loans through staff and management led marketing and calling campaigns. As we have grown, we have increased our reliance on management originated customer relationships, but believe that our strong network of personal, customer and shareholder relationships and referrals will continue to be a significant factor in our business development strategy.SBASmall Business Administration ("SBA") lending; (iv) asset based lending and accounts receivable financing; (v) home equity loans, or HELOCs;home equity lines of credit; and (vi) consumer loans for constructive purposes. Through our partnership with ACM, we purchase residential mortgage loans primarily originated in our market area that meet our product criteria and pricing, to help with the diversification of our loan portfolio. Although we do not generally actively originate them, we have acquired pools of other types of loans, and we have purchased whole residential loans in our market area, student loans and other consumer loans, in order to diversify the loan portfolio, put capital to work before organic loan production requires it, and to increase margin. We may also purchase participations from other banks in our market. Any acquired loans must meet our standard underwriting requirements.2019,2022, owner occupied commercial real estate loans represented 16.2%11.3% of the loan portfolio.portfolio. At December 31, 2019,2022, non-owner occupied commercial real estate loans represented approximately 37.8%39.0% of the loan portfolio and multi-family residential real estate comprised 5.2%9.4% of the portfolio. We seek to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. We typically require a maximum loan to value of 80% and minimum cash flow and debt service coverages, of at least 1.20 to 1.0.1.00. Personal guarantees are generally required, but may be limited. We generally require that interest rates adjust not less frequently than five years. For purposes of geographic diversification, we will also make commercial real estate loans outside of our primary and secondary markets, in an area extending south to Richmond, Virginia, and north toof Baltimore, Maryland, and between Winchester, Virginia and the Eastern Shore of Maryland.2019,2022, such loans represented 17.0%8.0% of the loan portfolio. Our typicaltypical commercial construction loan involves property that will ultimately be leased to a non-owner occupant. We will finance construction projects of a speculative nature, which are well-conceived and structured with appropriate interest reserves and analyzed fully. In underwriting commercial construction loans, we consider the expected costs of the transaction, the loan to value ratio, the credit history, cash flows and liquidity of the borrower, the project and the guarantors, the debt service coverage ratios (which are stressed prior to approval), take out sources for the permanent loan or repayment of the construction loan, the reputation, experience and qualifications of the borrower, the general contractor and others involved with the project and other factors. Commercial construction loans are generally made on a variable rate basis, typically based on the Wall Street Journal Prime Rate and subject to rate floors, for9.0%13.2% of our loan portfolio at December 31, 2019.2022. The warehouse facility provided to ACM is also included in this loan type. We make commercial loans on a secured or unsecured basis. We generally require thethe owners, managing members, general partners and principals of the borrowing entity or that control more than 20% of the borrower to guaranty the loan, unless a combination of low leverage, significant income and debt service coverage ratios, and substantial experience in operating the business, strong management and internal controls and/or other factors are demonstrated. Commercial loans are typically made with variable or adjustable"black""classified" projects. A government contractor borrower must have an acceptable level of eligible accounts receivable, provide appropriate security instruments perfecting our rights in the accounts receivable or other collateral, and are subject to periodic review and monitoring of their receivables, contract backlog and contract compliance. The contractor is typically required to have its primary deposit relationship with us. Advance rates will be up to 90% of prime eligible government receivables, and lower percentages depending on the nature of thethe receivables. At December 31, 2019,2022, outstanding loans to government contractors represented 28.8%40.3% of our commercial and industrial segment. Total commitments to government contractors totaled $131.6$305.1 million at December 31, 2019.2022. Government contract loans are typically made with variable or adjustable rates. Lines of credit typically have a one year term. As with other commercial loans, guarantees are typically required.asas a service to our customers and when we receive referrals from various mortgage brokers within our market area. As of December 31, 2019,2022, HELOCs comprise 5.2%1.9% of total loans. Loans originated for residential 1-4 family trust investment purposes comprise 4.9% of total loans as of December 31, 2022. While we do not typically originate residential first mortgages, we will occasionally originate a mortgage loan meeting our investment preferences presented by a mortgage broker. We have also purchased portfolios of 1-4 family residential first mortgage loans on properties primarily located in our market area for yield and diversification. At December 31, 2019, 1-4 family2022, consumer residential mortgage loans represented 3.3%18.5% of the loan portfolio. including as a result of events suchas the recent coronoavirus outbreak and related disruptions, business and individual borrowers may be less able to meet their obligations to us in full, in a timely manner, resulting in decreased earnings or losses. Economic conditions may also adversely affect the value and liquidity of property pledged as security for loans.2019,2022, the Bank had a legal lending limit of $28.9$38.5 million. At December 31, 2019,2022, our average funded loan size outstanding, excluding PPP loans, for commercial real estate (including commercial construction) and commercial loans was $1.4$2.2 million and $228 thousand,$1.1 million, respectively. In accordance with internal lending policies, we may sell participations of loans to other banks, which allows us to manage risk involved in these loans and to meet the lending needs of our clients.$1.04$1.25 billion and constituted 81.5%67.8% of total loans as of December 31, 2019,2022, and commercial loans, including loans to government contractors and the ACM warehouse lending facility, which totaled $115.1$243.2 million and constituted 9.0%13.2% of total loans as of December 31, 2019.2022. The geographic concentration of our loans subjects our business to the general economic conditions within our market area. The risks created by such concentrations have been considered by management in the determination of the adequacyadequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover probable incurred losses in our loan portfolio as of December 31, 2019.commercialcommercial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. As of December 31, 2019,2022, commercial real estate loans as defined for regulatory purposes represented 396.4%405% of our total risk-based capital. Of those loans, commercial construction, development and land loans represented 111.7%57% of our total risk based capital. Owner-occupied commercial real estate loans represented an additional 107.0%81% of our total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightenedheightened portfolio monitoring and reporting, and strong underwriting criteria with respect to our commercial real estate portfolio.provideprovide customers with a sophisticated escrow management product which facilitates and simplifies management of multiple escrow balances. We also provide secure credit card processing and merchant services, with reporting tailored to customer needs. We alsoAdditionally, we offer online and mobile banking products to our consumer depositors, to complement our branch network.2019,2022, there were approximately $220.7 $297.1 billion in total deposits shared between banking institutions located in the Washington MSA, according to the FDIC. As of thatthe aforementioned date, our deposit market share was approximately 0.57%, excluding deposits maintained0.64% in the Washington MSA by a national brokerage firm.MSA. Our strategic goal is to increase our market share through selective new branch additions, opportunistic acquisitions, and acquisitions of customers from larger competitors. PNC Bank, Capital One, Wells Fargo Bank, Truist Bank, and Bank of America Corporation hold the primary market shares. However, we believe these large banks generally cannot provide the same level of attention and customization of services to small The Audit Committee of our board of directors provides primary oversight of our enterprise risk management function.directors or its designated committee;directors; and acts as a second line of defense inbackbacked securities and collateralized mortgage obligations issued and fully backed by U.S. government agencies, securities of municipalities and to a lesser extent corporate bonds and other obligations, in each case meeting identified credit standards, and certificates of deposit.standards. The securities portfolio, along with certain loans, may also be used to collateralize public deposits, FHLBFederal Home Loan Bank of Atlanta ("FHLB") borrowings, and Federal Reserve Bank of Richmond ("FRB") borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk which is reflective in the yields obtained on those securities.2019,2022, we had 124131 full-time equivalentemployees and 4 part-time employees. NoneNone of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.Company.Company. The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended or ("the ActAct"), and is subject to regulation and supervision by the Board of Governors of the Federal Reserve Board.System (the "Federal Reserve"). The Act and other federal laws subject bank holding companies to restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and actions, including regulatory enforcement actions for violations of laws and regulations and unsafe and unsound banking practices. As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may also examine the Company and each of its subsidiaries. As a small bank holding company under the Federal Reserve Board'sReserve's Small Bank Holding Company Policy Statement, the Company is not subject to risk-based capital requirements adopted by the Federal Reserve, Board, which are substantially identical to those applicable to the Bank, and which are described below. Board for, among other things, a bank holding company's direct or indirect acquisition of control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or consolidation by a bank holding company with another bank holding company. The Act also generally permits the acquisition by a bank holding company of control, or substantially all of the assets of, any bank located in a state otherBoard may approve the acquisition.Board has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such a determination, the Federal Reserve Board is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public, such as convenience, increased competition or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking include making or servicing loans, performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare. The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.or ("GLB Act,Act"), allows a bank holding company or other company to certify its status as a financial holding company, which would allow such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve Board to determine by regulation what other activities are financial in nature, or incidental or complementary thereto. The Company has not elected financial holding company status.or FDIA,("FDIA"), require a bank holding company to serve as a source of financial and managerial strength to its bank subsidiaries. As a result of a bank holding company's source of strength obligation, a bank holding company may be required to provide funds to a bank subsidiary in the form of subordinated capital or other instruments which qualify as capital under bank regulatory rules. Any loans from the holding company to such subsidiary banks likely would be unsecured and subordinated to such bank's depositors and perhaps to other creditors of the Bank. In addition, where a bank holding company has more than one FDIC-insured bank or thrift subsidiary, each of the bank holding company's subsidiary FDIC-insured depository institutions is responsible for losses to the FDIC as a result of an affiliated depository institution's failure. The Federal Reserve has adopted an exception to this approval requirement for well-capitalized and well managed bank holding companies if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth.Bank.Bank. The Bank is a Virginia chartered commercial bank and a member of the Federal Reserve System, or a state member bank, whose accounts are insured by the Deposit Insurance Fund of the FDIC up to the maximum legal limits of the FDIC. The Bank is subject to regulation, supervision and regular examination by the Virginia Bureau of Financial Institutions (the "VBFI") and the Federal Reserve Board.Reserve. The regulations of these various agencies govern most aspects of the Bank's business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices.Board, which regulates the supply of money through various means including open market dealings in United States government securities. The nature and timing of changes in such policies and their impact on the Bank cannot be predicted.Banking.Banking. The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Riegle-Neal Act, by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act. Washington, D.C., Maryland and Virginia have each enacted laws, whichthat permit interstate acquisitions of banks and bank branches. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") authorizes national and state banks to establishde novo branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
Company has implemented appropriate internal practices, procedures, and controls.
withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Under the Basel III Rules, mortgage-servicing assets and deferred tax assets are subject to certain restrictions on their inclusion as capital. Certain deferred tax assets arising from temporary differences, mortgage-servicing assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock are each subject to an individual limit of 10% of CET1and an aggregate limit of 15% of CET1.
The Basel III Rules also include, as part of the definition of CET1, a requirement that banking institutions include the amount of additional other comprehensive income, or AOCI, which primarily
consists of unrealized gains and losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax,) in calculating regulatory capital, unless the institution makes a one-time opt-out election from this provision in connection with the filing of its first regulatory reports after applicability of the Basel III Rules to that institution. The Bank opted out of this requirement and, as such, does not include AOCI in its regulatory capital calculation.
The Basel III Rules provide for the manner of calculating risk-weighted assets, including the recognition of credit risk mitigation, such as the financial collateral and a range of eligible guarantors. They also include the risk weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan-to-value, or LTV, and equity components. In particular, loans categorized as "high-volatility commercial real estate," or HVCRE, loans are required to be assigned a 150% risk weighting and require additional capital support. HVCRE loans are defined to include any credit facility that finances or has financed the acquisition, development or construction of real property, unless it finances: 1-4 family residential properties; certain community development investments; agricultural land used or usable for, and whose value is based on, agricultural use; or commercial real estate projects in which: (i) the LTV is less than the applicable maximum supervisory LTV ratio established by the bank regulatory agencies; (ii) the borrower has contributed cash or unencumbered readily marketable assets, or has paid development expenses out of pocket, equal to at least 15% of the appraised "as completed" value; (iii) the borrower contributes its 15% before the bank advances any funds; and (iv) the capital contributed by the borrower, and any funds internally generated by the project, is contractually required to remain in the project until the facility is converted to permanent financing, sold or paid in full. The "EconomicEconomic Growth, Regulatory Relief and Consumer Protection Act" or the 2018 Act, expanded the exclusion from HVCRE loans to include credit facilities financing the acquisition or refinance of, or improvements to, existing income producing property, secured by the property, if the cash flow being generated by the property is sufficient to support the debt service and expenses of the property in accordance with the institution's loan criteria for permanent financing. The 2018 Act also provides that the value of contributed property will be its appraised value, rather than its cost. The 2018 Act permits an institution to reclassify an HVCRE loan as a non-HVCRE loan upon substantial completion of the project, where the cash flow from the property is sufficient to support debt service and expenses, in accordance with the institution's underwriting criteria for permanent financing.
The 2018 Act ("EGRRCPA") also directed the federal banking agencies to develop a "Community Bank Leverage Ratio,"Ratio" ("CBLR"), calculated by dividing tangible equity capital
December 31, 2022.
levels based upon our concentrations of loans, the risk of our lending or other activities, the performance of our loan and investment portfolios and other factors. Failure to maintain such higher capital expectations could result in a lower composite regulatory rating, which would impact our deposit insurance premiums and could affect our ability to borrow and costs of borrowing, and could result in additional or more severe enforcement actions. In respect of institutions with high concentrations of loans in areas deemed to be higher risk, or during periods of significant economic stress, regulators may require an institution to maintain a higher level of capital, and/or to maintain more stringent risk management measures, than those required by these regulations.
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 commitments.
| Capital Category | | Total Risk‑Based Capital Ratio | Tier 1 Risk‑Based Capital Ratio | Common Equity Tier 1 Capital Ratio | Leverage Ratio | Tangible Equity to Assets | Supplemental Leverage Ratio | ||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Well Capitalized | 10% or greater | 8% or greater | 6.5% or greater | 5% or greater | n/a | n/a | |||||||||||||||||||||||||||||||||||||||||||||
Adequately Capitalized | 8% or greater | 6% or greater | 4.5% or greater | 4% or greater | n/a | 3% or greater | |||||||||||||||||||||||||||||||||||||||||||||
Undercapitalized | Less than 8% | Less than 6% | Less than 4.5% | Less than 4% | n/a | Less than 3% | |||||||||||||||||||||||||||||||||||||||||||||
Significantly Undercapitalized | Less than 6% | Less than 4% | Less than3% | Less than 3% | n/a | n/a | |||||||||||||||||||||||||||||||||||||||||||||
Critically Undercapitalized | n/a | n/a | n/a | n/a | Less than 2% | n/a | |||||||||||||||||||||||||||||||||||||||||||||
An institution that is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equal to 5.0% of the institution's total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized. Such a guaranty shall expire after the appropriate federal
banking agency notifies the institution that it has remained adequately capitalized for four consecutive calendar quarters. An institution that fails to submit a written capital restoration plan within the requisite period, including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, shall be subject to the restrictions in Section 38 of the FDIA that are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is required to be placed in conservatorship or receivership within 90 days, unless the FDIC formally determines that forbearance from such action would better protect the Deposit Insurance Fund. Unless the FDIC or other appropriate federal banking agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized during the fourth calendar quarter after the date it became critically undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after an institution becomes critically undercapitalized unless good cause is shown and an extension is agreed to by the federal regulators. In general, good cause requires that adequate capital has been raised and is imminently available for infusion into the institution, except for certain technical requirements, which may delay the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become subject to the provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the Deposit Insurance Fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital; restricting transactions with affiliates; requiring divestiture of the institution or the sale of the institution to a willing purchaser; and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution where: (i) an institution's obligations exceed its assets; (ii) there is substantial dissipation of the institution's assets or earnings as a result of any violation of law or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv) there is a willful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete all or substantially all of an institution's capital, and there is no reasonable prospect of becoming "adequately capitalized" without assistance; (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution's condition, or otherwise seriously prejudice the interests of depositors or the insurance fund; (viii) an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospect that it will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital.
actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
•Expanded the authorityfinancial services industry as a result of theFederal Reserve Board to examine bank holding companiessignificant regulatory andtheir subsidiaries, including insured depository institutions.•Required a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition.•Provided mortgage reform provisions regarding a customer's ability to pay and making more loans subject to provisions for higher-cost loans and new disclosures.•Created the Consumer Financial Protection Bureau, or CFPB, which has rulemaking authority for a wide range of consumer protection laws that apply to all banks, and has broad powers to supervise and enforce consumer protection laws.•Created the Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.•Introduced additional corporate governance and executive compensation requirements on companies subject to the Securities Exchange Act of 1934, as amended, or Exchange Act.•Permitted FDIC-insured banks to pay interest on business demand deposits.•Adopted Section 13 of the Act, commonly referred to ask the Volcker Rule, which restricts the ability of institutions and their holding companies to and affiliates to make proprietary investments in securities and to invest in certain covered nonpublic investment vehicles, and to extend credit to such vehicles.•Codified the requirement that holding companies and other companies that directly or indirectly control an insured depository institution to serve as a source of financial strength.•Made permanent the $250 thousand limit for federal deposit insurance.•Permitted national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches.
The 2018 Act includes provisions revising Dodd-Frank Act provisions, including provisions that, among other things: (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans; (ii) exempt certain transactions valued at less than $400,000 in rural areas from appraisal requirements; (iii) exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the expanded data disclosurescompliance changes required under the Home Mortgage Disclosureact.
adds certain protections for consumers, including veteranshas had, and active duty military personnel, expands credit freezes and call for the creation of an identity theft protection database.
In addition, other new proposals for legislation continue to be introducedmay in the Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictionsfuture have, a material impact on the Company’s operations, particularly through increased compliance costs resulting from new and general ability of firms withinpossible future consumer and fair lending regulations. The future changes resulting from the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted,Dodd-Frank Act may impactaffect the profitability of our business activities, require more oversight or changechanges to certain of our business practices, includingimpose more stringent regulatory requirements, or otherwise adversely affect the ability to offer new products, obtain financing, attract deposits, make loansbusiness and achieve satisfactory interest spreadsfinancial condition of the Company and could exposethe Bank. These changes may also require the Company to additional costs, including increased compliance costs. These changes also may requireinvest significant management attention and resources to evaluate and make any necessary changes to operations to comply with new statutory and could have an adverse effect on our business, financial condition and results of operations.
regulatory requirements.
The rule implementing the Dodd-Frank Act requirement that lenders determine whether a consumer has the ability to repay a mortgage loan, established certain minimum requirements for creditors when making ability to pay determinations, and established certain protections from liability for mortgages meeting the definition of "qualified mortgages." Generally, the rule applies to all
consumer-purpose, closed-end loans secured by a dwelling including home-purchase loans, refinances and home equity loans—whether a first or subordinate lien. The rule does not cover, among other things, home equity lines of credit or other open-end credit; temporary or "bridge" loans with a term of 12 months or less, such as a loan to finance the initial construction of a dwelling; a construction phase of 12 months or less of a construction-to-permanent loan; and business-purpose loans, even if secured by a dwelling. The rule afforded greater legal protections for lenders making qualified mortgages that are not "higher priced." Qualified mortgages must generally satisfy detailed requirements related to product features, underwriting standards, and a points and fees requirement whereby the total points and fees on a mortgage loan cannot exceed specified amounts or percentages of the total loan amount. Mandatory features of a qualified mortgage include: (1) a loan term not exceeding 30 years; and (2) regular periodic payments that do not result in negative amortization, deferral of principal repayment, or a balloon payment. Further, the rule clarified that qualified mortgages do not include "no-doc" loans and loans with negative amortization, interest-only payments, or balloon payments. The rule created special categories of qualified mortgages originated by certain smaller creditors.its terms. To the extent that we seek to make qualified mortgages,mortgage loans, we are required to comply with these rules, subject to available exclusions. Our business strategy, product offerings, and profitability may change as the rule is interpreted by the regulators and courts.
exceptions.
product line, type of collateral, or short-term obligations of one financial institution or affiliated group; (iii) funding concentrations from a single source representing 10% or more of Total Assets; or (iv) potentially volatile funding sources that when combined represent 25% or more of Total Assets (these sources may include brokered, large, high-rate, uninsured, internet-listing-service deposits, Federal funds purchased or other potentially volatile deposits or borrowings). If a concentration is present, management must employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, third party review and increasing capital requirements.
Additionally, the federal bank regulatory agencies have issued guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that institutions that have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution's total risk-based capital; or (ii) total reported commercial real estate loans, excluding loans secured by owner-occupied commercial real estate, representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months, are identified as having potential commercial real estate concentration risk. Institutions whichthat are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and
We have determined that we have a concentration in
The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to $250 thousand per depositor. The Dodd-Frank Act also broadened the base for calculating FDIC insurance assessments. Assessments are now based on a
financial institution's average consolidated total assets less tangible equity capital. The Dodd-Frank Act requiredpremiums. In October 2022, the FDIC adopted a final rule to increase the reserve ratioassessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. The assessment base rate may increase further as a result of the Deposit Insurance Fund to 1.35% of insured deposits and eliminatedrecent activity transpired in the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
banking industry.
Cybersecurity.common stock is listed, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. In February 2023, The Nasdaq Stock Market, LLC posted its initial rule filing with the SEC to implement this directive. The final rule will require us to adopt a clawback policy that is compliant with the new listing standard within 60 days after such standard becomes effective.
Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 ("Appropriations Act") was signed into law on December 27, 2020. Among other things, the CARES Act and Appropriations Act include the following provisions impacting financial institutions:
Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse impact on our business, financial condition and results of operations. A substantial portion of our loans are and will continue to be real estate related loans in the Washington, D.C. metropolitan area. Adverse changes in the real estate market or economy in this area could lead to higher levels of problem loans and charge-offs, adversely affecting our earnings and financial condition. Related to Our Businessgradually increasing from near historically low levels,as a result of contractionary monetary policy which could impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Unfavorable market conditions, including as a result of events such as the recent coronavirus outbreakCOVID-19 pandemic and related disruptions, can result in a deterioration in the credit quality of our borrowers and the demand for our also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates are concerns for businesses, consumers and investors in the U.S. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial conditions and results of operations. Our interest sensitivity profile was slightly asset sensitive as of December 31, 2019. As a result, we would expect small increases in net interest income if interest rates rise, and small declines in the event rates fall. However, such expectations are based on our assumptions as to deposit customer behavior in an increasing rate scenario. events such as the recent coronavirus outbreakCOVID-19 pandemic and related disruptions, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and our level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for loan losses.Losses related to any single loan could have a significant impact on our financial condition and results of operations. While our average funded loan size is relatively small compared to our legal lending limit, averaging $1.4 million for commercial real estate loans (including construction) and approximately $228 thousand for commercial and industrial loans, at December 31, 2019, our legal lending limit has increased, and we have originated larger loans in recent years. As a result of our commercial real estate lending, the loan portfolio contains approximately 12 loans which have balances in excess of 5% of our shareholder's equity, and our largest single exposure is $25.5 million, while our largest exposure to one borrower is $26.2 million. Additionally, commercial and industrial loans not primarily secured by real estate are typically made based on the ability of the borrower to make payment on the loan from the cash flow of the business, and are collateralized primarily by business assets such as equipment, inventory and accounts receivable. These assets are often subject to depreciation over time, may be more difficult than real estate collateral to evaluate, and may be more difficult to realize the value of upon foreclosure. As a result, the availability of funds for repayment of such loans is often contingent on the success of the business itself. Although we seek to structure and monitor our loans and the financial condition of our borrowers in an effort to avoid or minimize losses, unexpected reversals in the business of an individual borrower can occur, and the resulting decline in the quality of loans to such borrowers, and related provisions for credit losses, could have a material adverse effect on our earnings, financial condition and shareholder returns.
TDRs and other problem assets requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities.
lending limits than us, and offer certain services, such as extensive and established branch networks and trust services, that we do not currently provide or currently expect to provide in the near future. Moreover, larger institutions operating in the Washington, D.C. metropolitan area may have access to borrowed funds at lower cost than will be available to us. Additionally, deposit competition among institutions in the market area is strong. Increased competition could require us to increase the rates we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have a material adverse effect on our business, financial condition and results of operations.
Our portfolio of loans to small and mid-sized community-based businesses may increase our credit risk.
Many of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market area in which we operate negatively impact this important customer sector, our results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. The deterioration of our borrowers' businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations.
Our government contractor customers, and businesses in the Washington, D.C. metropolitan area in general, may be adversely impacted by the federal government and a budget impasse.
At December 31, 2019, 9.0% of our total loans were outstanding to commercial and industrial customers. Of that, approximately 28.8% of outstanding commercial and industrial loans are to government contractors or their subcontractors specializing in the defense and homeland security and defense readiness sectors, and we have commitments of $131.6 million to such borrowers. We are actively seeking to expand our exposure to this business segment. While we believe that our loans to government contractor customers are unlikely to experience more than a delay in payment as a result of government shutdowns, the current emphasis on defense readiness presents an opportunity for many of our customers. In the event of a government shutdown, this could cause these customers to have their government contracts reduced or terminated for convenience, or have payments delayed, causing a loss of anticipated revenues or reduced cash flow, resulting in an increase in credit risk, and potentially defaults by such customers on their respective loans.
Our government contractor customers could also withdraw their deposit balances during a shutdown to fund current operations, resulting in additional liquidity risk. Additionally, temporary layoffs, salary reductions or furloughs of government employees or government contractors could have adverse impacts on other businesses in our market and the general economy of the Washington, D.C. metropolitan area, and may indirectly lead to a loss of revenues by our customers. As a result, a government shutdown could lead to an increase in the levels of past due loans, nonperforming loans, loan loss reserves and charge-offs, and a decline in liquidity.
We may not be able to retain or grow our core deposit base, which could adversely impact our funding costs.
Like many financial institutions, we rely on customer deposits as our primary source of funding for our lending activities, and we continue to seek customer deposits to maintain this funding base. Our future growth will largely depend on our ability to retain and grow our deposit base. As of December 31, 2019, we had $1.29 billion in deposits. Our deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes,
customer perceptions of our financial health and general reputation, adverse developments in general economic conditions of an individual's business, and a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. Any such loss of funds could result in lower loan originations, which could have a material adverse effect on our business, financial condition and results of operations.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due, and failure to maintain sufficient liquidity could materially adversely affect our growth, business, profitability and financial condition.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. We require sufficient liquidity to fund asset growth, meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Liquidity risk can increase due to a number of factors, including an over-reliance on a particular source of funding or market-wide phenomena such as market dislocation and major disasters. Factors that could detrimentally impact access to liquidity sources include, but are not limited to, a decrease in the level of our business activity as a result of a downturn in our market, adverse regulatory actions against us, or changes in the liquidity needs of our depositors. Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Our inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial negative effect on our business, and could result in the closure of the Bank. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair our ability to fund operations and meet our obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations.
We rely on customer deposits, including brokered deposits, and to a lesser extent on advances from the Federal Home Loan Bank of Atlanta, or FHLB, to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change. FHLB borrowings and other current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations.
Our reputation is critical to our business, and damage to it could have a material adverse effect on us.
We believe that a key differentiating factor for our business is the strong reputation we have built in our market. Maintaining a positive reputation is critical to attracting and retaining customers and employees. Adverse perceptions of us could make it more difficult for us to execute on our strategy. Harm to our reputation can arise from many sources, including actual or perceived employee misconduct, errors or misconduct by our third party vendors or other counterparties, litigation or regulatory actions, our failure to meet our high customer service and quality standards, compliance failures and weakened financial condition. Negative publicity about us, whether or not accurate, may damage our reputation, which could have a material adverse effect on our business, financial condition and results of operations.
Our allowance for loan losses may be inadequate to absorb losses inherent in the loan portfolio, which could have a material adverse effect on our business, financial condition and results of operations.
Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some may only be partially repaid or may never be repaid at all. We may experience losses for reasons beyond our control, such as the impact of general economic conditions on customers and their businesses. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio considering historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Although we endeavor to maintain our allowance for loan losses at a level adequate to absorb any inherent losses in the loan portfolio, the determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risk and future trends, and the accuracy of our judgments depends on the outcome of future events. Further, despite our underwriting criteria and historical experience, we may be particularly susceptible to losses due to: (i) the geographic concentration of our loans, (ii) the concentration of higher risk loans, such as commercial real estate, and commercial and industrial loans, and (iii) the relative lack of seasoning of certain of our loans.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in our experiencing higher levels of nonperforming assets and charge-offs, and incurring loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.
Our federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. If we need to make significant and unanticipated increases in the loss allowance in the future, or to take additional charge-offs for which we have not established adequate reserves, our results of operations and financial condition could be materially adversely affected at that time.
The success of our growth strategy depends, in part, on our ability to identify and retain individuals with experience and relationships in our market.
opportunities in the future, or our inability to successfully bid for such opportunities as are available, could result in a slower pace of growth.
which could limit our growth, require us to obtain additional capital, and have a material adverse effect on our business
, financial condition and results of operations.Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our organic growth over the past several years, as of December 31, 2019, approximately $1.02 billion, or 79.9%, of the loans in our loan portfolio were first originated during the past three years. The average age by loan type for loans originated in the past three years is: commercial real estate loans—1.55 years; commercial and industrial loans—1.35 years; commercial construction loans—0.91 years; consumer residential loans—1.38 years; and consumer nonresidential loans—1.64 years. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as "seasoning." As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Therefore, the recent and current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in the future. Our limited experience with these loans may not provide us with a significant history with which to judge future collectability or performance. However, we believe that our stringent credit underwriting process, our ongoing credit review processes, and our history of successful management of our loan portfolio, mitigate these risks. Nevertheless, if delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.
Limits on our ability to use brokered deposits as part of our funding strategy may adversely affect our ability to grow.
A "brokered deposit" is any deposit that is obtained from, or through the mediation or assistance of, a deposit broker. These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. Recently enacted legislation excludes reciprocal deposits of up to the lesser of $5 billion or 20% of an institution's deposits from the definition of brokered deposits, where the institution is well capitalized and has a composite supervisory rating of 1 or 2. We have used brokered deposits in the past, and we intend to continue to use brokered deposits as one of our funding sources to support future growth. We have established a brokered deposit to total deposit tolerance ratio of 15%. As of December 31, 2019, brokered deposits, excluding reciprocal deposits, represented approximately 7.8% of our total deposits. Reciprocal deposits represented an additional 5.6% of total deposits at December 31, 2019. Currently, our brokered deposits have a comparable deposit cost to our core deposits. There are risks associated with using brokered deposits. In order to continue to maintain our level of brokered deposits, we may be forced to pay higher interest rates than those contemplated by our asset-liability pricing strategy which could have an adverse effect on our net interest margin. In addition, banks that become less than "well capitalized" under applicable regulatory capital requirements may be restricted in their ability to accept or renew, or prohibited from accepting or renewing, brokered deposits. If this funding source becomes more difficult to access, we will have to seek alternative funding sources in order to continue to fund our growth. This may include increasing our reliance on FHLB borrowings, attempting to attract additional non-brokered deposits, and selling loans. There can be no assurance that brokered deposits will be available, or if available, sufficient to support our continued growth. The unavailability of a sufficient volume of brokered deposits could have a material adverse effect on our business, financial condition and results of operations.
We may face risks with respect to future expansion or acquisition activity.
may underestimate the appropriate level of resources or expertise necessary to make new lines of business or products successful or to realize their expected benefits. We may not achieve the We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches. Our risk management framework may not be effective in mitigating risks and/or losses to us. the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. We have no current plans to pay cash dividends. condition. to support the Bank if necessary. We may be required to commit additional resources to the Bank at times when we may not be in a financial position to provide such resources or when it may not be in our, or our shareholders' or creditors', best interests to do so. A requirement to provide such support is more likely during times of financial stress for us and the Bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise be. In addition, any capital loans we make to the Bank are subordinate in right of repayment to deposit liabilities of the Bank. We are subject to Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention. loss of revenue, and/or cause us to incur additional expenses. The 2023. Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Net income before income taxes Provision for income taxes Net income Balance Sheet Data: Total assets Loans receivable, net of fees Allowance for loan losses Total investment securities Total deposits Other borrowed funds Total shareholders' equity Common shares outstanding Per Common Share Data: Basic net income Fully diluted net income Book value Tangible book value(1) Performance Ratios: Return on average assets Return on average equity Net interest margin(2) Efficiency ratio(3) Non-interest income to average assets Non-interest expense to average assets Loans receivable, net of fees to total deposits Asset Quality Ratios: Net charge-offs (recoveries) to average loans receivable, net of fees Nonperforming loans to loans receivable, net of fees Nonperforming assets to total assets Allowance for loan losses to nonperforming loans Allowance for loan losses to loans receivable, net of fees Capital Ratios (Bank Only): Tier 1 risk-based capital Total risk-based capital Common Equity Tier 1 capital Leverage capital ratio Other: Average shareholders' equity to average total assets Average loans receivable, net of fees to average total deposits Average common shares outstanding: Basic Diluted Total shareholders' equity Less: goodwill and intangibles, net Tangible Common Equity Book value per common share Less: intangible book value per common share Tangible book value per common share comparative purposes. The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchase credit-impaired loans, and fair value measurements. any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan. Fair Value Measurements To mitigate the risks associated with the expected discontinuation of LIBOR, we have ceased originating LIBOR-linked loans, implemented fallback language for LIBOR-linked commercial loans, adhered to the International Swaps and Derivatives Association 2020 Fallbacks Protocol for interest rate swap agreements, and have updated our systems to accommodate loans linked to SOFR. In accordance with regulatory guidance, we ceased entering into new LIBOR transactions at the end of 2021 and have selected SOFR, as the rate that best represents an alternative to LIBOR. Uncertainty as to the adoption, market acceptance or availability of SOFR or other alternative reference rates may adversely affect the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. Net income (as reported) Add: merger and acquisition expense Less: provision for income taxes associated with merger and acquisition expense Net income, excluding above non-GAAP items Earnings per share—basic (net income, as adjusted) Earnings per share—diluted (net income, as adjusted) Return on average assets (non-GAAP net income) Return on average equity (non-GAAP net income) 2021 GAAP net income to operating earnings (non-GAAP). Company's membership interest purchase in ACM during 2021. a reconciliation of GAAP net income to operating earnings (non-GAAP). Assets Interest-earning assets: Loans(1): Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total loans(1) Investment securities(2) Restricted stock Deposits at other financial institutions and federal funds sold Total interest-earning assets and interest income Noninterest-earning assets: Cash and due from banks Premises and equipment, net Accrued interest and other assets Allowance for loan losses Total assets Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing deposits: Interest checking Savings and money markets Time deposits Wholesale deposits Total interest-bearing deposits Other borrowed funds Total interest-bearing liabilities and interest expense Noninterest-bearing liabilities: Demand deposits Other liabilities Common stockholders' equity Total liabilities and stockholders' equity Net interest income and net interest margin factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. Interest income: Loans(1): Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total loans(1) Investment securities(2) Restricted stock Deposits at other financial institutions and federal funds sold Total interest income Interest expense: Interest-bearing deposits: Interest checking Savings and money markets Time deposits Wholesale deposits Total interest-bearing deposits Other borrowed funds Total interest expense Net interest income GAAP Financial Measurements: Interest income: Loans Deposits at other financial institutions and federal funds sold Investment securities available-for-sale Investment securities held-to-maturity Restricted stock Total interest income Interest expense: Interest-bearing deposits Other borrowed funds Total interest expense Net interest income Non-GAAP Financial Measurements: Add: Tax benefit on tax-exempt interest income-securities Total tax benefit on interest income Tax equivalent net interest income the increase in liquidity at the Bank as a result of PPP loan forgiveness and payoffs, along with increases in deposit activity that was in excess of loan originations during 2021. This liquidity was invested in fixed income securities which increased interest income by $2.1 million on a tax equivalent basis for the year ended December 31, 2022. The yield on average investment securities decreased 16 basis points to 1.73% for the year ended December 31, 2022, primarily as a result of purchasing securities at lower interest rates relative to the average yield of the securities portfolio. 2021. decreased to 357% at December 31, 2022, compared to 394% for the year ended December 31, 2021. See "Asset Quality" section below for additional information on the credit quality of the loan portfolio. Service charges on deposit accounts Fees on loans Loss on sale of securities available-for-sale Gain on calls of securities held-to-maturity Loss on loans held for sale BOLI income Other fee income Total non-interest income Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM and other investments, income from our BOLI policies, and other fee income, and continues to supplement our operating results. Salaries and employee benefits Occupancy and equipment expense Data processing and network administration State franchise taxes Audit, legal and consulting fees Merger and acquisition expense Loan related expenses FDIC insurance Marketing, business development and advertising Director fees Postage, courier and telephone Internet banking Dues, memberships & publications Bank insurance Printing and supplies Bank charges State assessments Core deposit intangible amortization Other operating expenses Total non-interest expense Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was and assist in the funding of higher yielding newly originated commercial loans. During late February, we sold $40.3 million in investment securities available-for-sale, or 12% of the portfolio, for an after-tax loss of $3.6 million, which will be recorded in our March 31, 2023 quarterly results. This transaction was neutral to shareholders’ equity and tangible book value, as the loss recorded was already reflected in our accumulated other comprehensive loss. Tangible common equity to total assets is expected to improve approximately 7 basis points as a result of the reduction in total assets. From an earnings perspective, the balance sheet re-positioning is expected to be accretive to net interest income, net interest margin and return on average assets in future periods. Our model results indicate that net interest margin is expected to improve 9 basis points as a result of this de-leverage strategy. December 31, 2022. concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices. Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Consumer construction Gross loans Less: Allowance for loan losses Unearned income and (unamortized premiums) Loans receivable, net Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Consumer construction Gross loans Less: Allowance for loan losses Unearned income and (unamortized premiums) Loans receivable, net The following table sets forth the repricing characteristics and sensitivity to interest rate changes of our loan portfolio at December 31, Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total loans receivable Fixed—rate loans Floating—rate loans We recorded annualized net charge-offs of Nonperforming assets: Nonaccrual loans Loans contractually past-due 90 days or more Total nonperforming loans (NPLs) Other real estate owned (OREO) Total nonperforming assets (NPAs) Performing troubled debt restructurings (TDRs) NPLs/Total Assets NPAs/Total Assets NPAs and TDRs/Total Assets Allowance for loan losses/NPLs Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Beginning balance Provision for loan losses Loans charged off: Commercial real estate Commercial and industrial Consumer residential Consumer nonresidential Total loans charged off Recoveries: Commercial real estate Commercial and industrial Consumer residential Consumer nonresidential Total recoveries Net (charge-offs) recoveries Ending balance Loans, net of deferred fees: Balance at period end Allowance for loan losses to loans receivable, net of fees Net charge-offs (recoveries) to average loans receivable Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Consumer construction Unallocated Total allowance for loan losses Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Consumer construction Unallocated Total allowance for loan losses margin. securities that were pledged to secure public deposits totaled 2021. Held-to-maturity Securities of state and local municipalities tax exempt Securities of U.S. government and federal agencies Total held-to-maturity securities Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities Corporate bonds and securities Mortgage-backed securities Certificates of deposit Total available-for-sale securities Total investment securities Held-to-maturity Securities of state and local municipalities tax exempt Total held-to-maturity securities Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities Corporate bonds Mortgaged-backed securities Total available-for-sale securities Total investment securities Noninterest bearing demand Interest bearing—checking, savings and money market Time deposits $100,000 or more Other time deposits Three months or less Over three months through six months Over six months through twelve months Over twelve months Wholesale deposits increased to Three months or less Over three months through six months Over six months through twelve months Over twelve months Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were Other short-term borrowed funds: Federal funds purchased FHLB advances—short term Total short-term borrowed funds and weighted average rate Other borrowed funds: Subordinated debt Total other borrowed funds and weighted average rate Total borrowed funds and weighted average rate Capital Resources 2022 totaling $25.0 million. At December 31, 2019 Total risk-based capital Tier I risk-based capital Common equity tier I capital Leverage capital ratio At December 31, 2018 Total risk-based capital Tier I risk-based capital Common equity tier I capital Leverage capital ratio Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing. liquidity remain strong. Liquid assets, which include cash and due from banks, Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which we have committed. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS 2021 Assets Cash and due from banks Interest-bearing deposits at other financial institutions Securities held-to-maturity (fair value of $0.3 million and $1.7 million at December 31, 2019 and 2018, respectively) Securities available-for-sale, at fair value Restricted stock, at cost Loans held for sale, at fair value Loans, net of allowance for loan losses of $10.2 million and $9.2 million at December 31, 2019 and 2018, respectively Premises and equipment, net Accrued interest receivable Prepaid expenses Deferred tax assets, net Goodwill and intangibles, net Bank owned life insurance (BOLI) Other real estate owned (OREO) Operating lease right-of-use assets Other assets Total assets Liabilities and Stockholders' Equity Liabilities Deposits: Noninterest-bearing Interest-bearing checking, savings and money market Time deposits Total deposits Federal funds purchased FHLB advances Subordinated notes, net of issuance costs Accrued interest payable Operating lease liabilities Accrued expenses and other liabilities Total liabilities Preferred stock, $0.01 par value Shares authorized Shares issued and outstanding Common stock, $0.01 par value Shares authorized Shares issued and outstanding Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss), net Total stockholders' equity Total liabilities and stockholders' equity See Notes to Consolidated Financial Statements. 2021 Interest and Dividend Income Interest and fees on loans Interest and dividends on securities held-to-maturity Interest and dividends on securities available-for-sale Dividends on restricted stock Interest on deposits at other financial institutions Total interest and dividend income Interest Expense Interest on deposits Interest on federal funds purchased Interest on short-term debt Interest on long-term debt Interest on subordinated notes Total interest expense Net Interest Income Provision for loan losses Net interest income after provision for loan losses Noninterest Income Service charges on deposit accounts Loss on sale of securities available-for-sale Gain on calls of securities held-to-maturity Loss on loans held for sale BOLI income Other income Total noninterest income Noninterest Expenses Salaries and employee benefits Occupancy and equipment expense Data processing and network administration State franchise taxes Audit, legal and consulting fees Merger and acquisition expense Loan related expenses FDIC insurance Marketing, business development and advertising Director fees Postage, courier and telephone Internet banking Core deposit intangible amortization Other operating expenses Total noninterest expenses Net income before income tax expense Income tax expense Net income Earnings per share, basic Earnings per share, diluted See Notes to Consolidated Financial Statements. (Loss) 2021 Net income Other comprehensive income gain (loss): Unrealized gain (loss) on securities available for sale, net of tax expense of $932 in 2019 and net of tax benefit of $389 in 2018. Unrealized loss on interest rate swaps, net of tax benefit of $17 in 2019. Reclassification adjustment for losses realized in income, net of tax benefit of $0 and $108 for 2019 and 2018, respectively. Total other comprehensive income (loss) Total comprehensive income See Notes to Consolidated Financial Statements. 2021 Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for loan losses Net amortization of premium of securities Net amortization of deferred loan costs and purchase premiums Net accretion of acquisition accounting adjustments Gain on calls of held-to-maturity securities Loss on loans held for sale Amortization of subordinated debt issuance costs Core deposits intangible amortization Equity-based compensation expense BOLI income Realized losses on securities sales Deferred income tax (benefit) Changes in assets and liabilities: Increase in accrued interest receivable, prepaid expenses and other assets Increase in accrued interest payable, accrued expenses and other liabilities Net cash provided by operating activities Cash Flows From Investing Activities Maturities of certificates of deposits purchased for investment Decrease (increase) in interest-bearing deposits at other financial institutions Purchases of securities available-for-sale Proceeds from sales of securities available-for-sale Proceeds from maturities and calls of securities held-to-maturity Proceeds from maturities and calls of securities available-for-sale Proceeds from maturities, calls and paydowns of securities available-for-sale Net purchase of restricted stock Net increase in loans Proceeds from sale of OREO Cash acquired in acquisition Purchases of BOLI Purchases of premises and equipment, net Net cash used in investing activities Cash Flows From Financing Activities Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits Net increase (decrease) in time deposits Increase in federal funds purchased Net increase (decrease) in FHLB advances Common stock issuance Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2021 Balance at December 31, 2017 Net income Other comprehensive loss Common stock issuance at $20 per share Common stock issuance for options exercised, net Common stock issuance for acquisition of Colombo Bank Vesting of restricted stock grants Stock-based compensation expense Balance at December 31, 2018 Net income Adoption of lease accounting standard Other comprehensive income Common stock issuance for options exercised Vesting of restricted stock grants Stock-based compensation expense Balance at December 31, 2019 See Notes to Consolidated Financial Statements. amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to accounting for Interest income and dividends on securities are recognized in interest income on an accrual basis. Premiums and discounts are recognized in interest income using the effective interest method. Prepayments of the mortgages securing mortgage-backed securities may affect the yield to maturity. The Company uses actual principal prepayment experience and estimates of future principal prepayments in calculating the yield necessary to apply the effective interest method. flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to the Company's interest income on loans. owned ("OREO"). Commercial and Industrial the Company requires its lending officers to review the borrower's collateral and stability of income, past credit history, amount of debt currently outstanding and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. Loans considered to be troubled debt restructuring ("TDRs") are loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief to a borrower experiencing financial difficulty. All restructured loans are considered impaired loans and may either be in accruing status or nonaccruing status. Nonaccruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category in the year subsequent to the restructuring if their revised loan terms are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk and if they meet certain performance criteria. Leases Contracts 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. Right-of-use assets represent the Company's right to use the underlying asset assets less selling costs. Revenue and expenses from operations and valuation changes are charged to operating income in the year of the transaction. historical loss experience. instruments. Assets acquired: Cash and cash equivalents Interest-bearing deposits Securities available-for-sale Restricted stock, at cost Loans Premises and equipment Deferred tax assets, net Goodwill Core deposit intangible, net Accrued interest receivable Prepaid expense Other real estate owned (OREO) Other assets Total assets acquired Liabilities assumed: Deposits: Non-interest bearing Interest-bearing checking, savings and money market Time deposits Total deposits FHLB advances Accrued interest payable Accrued expenses and other liabilities Total liabilities assumed: Total consideration paid Held-to-maturity Securities of state and local municipalities tax exempt Total Held-to-maturity Securities Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities tax exempt Securities of state and local municipalities taxable Corporate bonds SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Available-for-sale Securities Held-to-maturity Securities of state and local municipalities tax exempt Securities of U.S. government and federal agencies Total Held-to-maturity Securities Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities tax exempt Securities of state and local municipalities taxable Corporate bonds Certificates of deposit SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Available-for-sale Securities The Company had securities with a market value of 2022 and 2021, respectively. Securities of U.S. government and federal agencies Securities of state and local municipalities taxable Corporate bonds SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Securities of U.S. government and federal agencies Securities of state and local municipalities tax exempt Securities of state and local municipalities taxable Corporate bonds Certificates of deposit SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Securities of U.S. government and federal agencies:The unrealized losses on Securities of state and local municipalities AAA. thousands, except per share data) 2022. The amortized cost and fair value of securities held-to-maturity and available-for-sale as of December 31, After 1 year through 5 years After 5 years through 10 years After 10 years Total For the years ended December 31, 2021, respectively. Federal Reserve stock FHLB stock Community Bankers' Bank stock Atlantic Bankers' Bank stock As Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Less: Allowance for loan losses Unearned income and (unamortized premiums), net Loans, net During 2018, as a result of the Company's acquisition of Colombo, the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as "originated" loans) and loans acquired (referred to as "acquired" loans). Purchased credit impaired acquired loans evaluated individually for future credit losses Outstanding principal balance Carrying amount Other acquired loans Outstanding principal balance Carrying amount Total acquired loans Outstanding principal balance Carrying amount Purchased credit impaired acquired loans evaluated individually for future credit losses Outstanding principal balance Carrying amount Other acquired loans Outstanding principal balance Carrying amount Total acquired loans Outstanding principal balance Carrying amount The following table presents changes for the year ended December 31, Balance at January 1, 2019 Accretion Reclassification of nonaccretable difference due to improvement in expected cash flows Other changes, net Balance at December 31, 2019 Balance at January 1, 2018 Accretable yield at acquisition date Accretion Balance at December 31, 2018 An analysis of the allowance for loan losses for the years ended December 31, 2019 Allowance for loan losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance 2018 Allowance for loan losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance The following table presents the recorded investment in loans and impairment method as of December 31, 2019 Allowance for loan losses: Ending Balance: Individually evaluated for impairment Purchased credit impaired Collectively evaluated for impairment 2019 Financing receivables: Ending Balance Individually evaluated for impairment Purchased credit impaired loans Collectively evaluated for impairment 2018 Allowance for loan losses: Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment 2018 Financing receivables: Ending Balance Individually evaluated for impairment Purchased credit impaired loans Collectively evaluated for impairment Impaired loans by class excluding purchased credit impaired, as of December 31, 2019 With an allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2019 With no related allowance: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2019 With an allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2019 With no related allowance: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2018 With an allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2018 With no related allowance: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2018 With an allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential 2018 With no related allowance: Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential No additional funds are committed to be advanced in connection with the impaired loans. There were no nonaccrual loans excluded from the impaired loan disclosure. 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, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings: Grade: Pass Special mention Substandard Doubtful Loss Total Grade: Pass Special mention Substandard Doubtful Loss Total Grade: Pass Special mention Substandard Doubtful Loss Total Grade: Pass Special mention Substandard Doubtful Loss Total 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, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At December 31, 2022, the Company had Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total Commercial real estate Commercial and industrial Commercial construction Consumer residential Consumer nonresidential Total There were overdrafts of 2022 and December 31, 2021. Commercial real estate Total Beginning Balance Sales of other real estate owned Ending Balance Beginning Balance Other real estate acquired in acquisition Ending Balance December 31, 2021. There was no OREO activity during 2022 and $3.9 million was sold during 2021 where the Company recognized a gain on sale of OREO of $236 thousand. There were no foreclosed residential real estate properties recorded in Balance at December 31, 2017 2018 activity: 1st Commonwealth amortization Acquisition of Colombo Bank Balance at December 31, 2018 2019 activity: 1st Commonwealth amortization Colombo Bank amortization Balance at December 31, 2019 The aggregate amortization expense was 2020 2021 2022 2023 2024 Thereafter The carrying amount of goodwill for the years ended December 31, Balance at December 31, 2017 Acquisition of Colombo Bank Balance at December 31, 2018 Colombo measurement period adjustment Balance at December 31, 2019 Leasehold improvements Furniture, fixtures and equipment Computer software Land Buildings Less: accumulated depreciation For the years ended December 31, The following tables present information about Right-of-Use-Asset Lease Liability Weighted Average Remaining Lease Term (Years) Weighted Average discount rate Operating Lease Expense Cash paid for amounts included in lease liabilities Right-of-use assets obtained in exchange for operating lease liabilities The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease 2020 2021 2022 2023 2024 Thereafter Total Less: discount Note 2020 2021 2022 2023 2024 Total time deposits At December 31, 2021. Federal funds purchased FHLB advances Subordinated debt Total borrowings The Company had and none in 2021. other liabilities. The remaining note holders redeemed their notes in February 2022. The notes stopped accruing interest effective as of September 30, 2021 redemption date. thousands, except per share data) Deferred Tax Assets: Allowance for loan losses Net operating loss carryforward—federal and state Bank premises and equipment and deferred rent Unrealized loss on securities available for sale Nonqualified stock options and restricted stock Organizational and start-up expenses Acquisition accounting adjustments Non-accrual loan interest Deferred loan (fees) costs Lease liability Unrealized loss on interest rate swap Deferred Tax Liabilities: Right-of-use assets Unrealized gain on securities available for sale Net Deferred Tax Assets The income tax expense charged to operations for the years ended December 31, Current tax expense Deferred tax expense (benefit) Income tax expense differed from amounts computed by applying the U.S. federal income tax rate to income, before income tax expense as a result of the following: Computed "expected" tax expense Increase (decrease) in income taxes resulting from: State income tax expense (benefit) Non-deductible expense Tax free income Tax benefits from exercise of stock options Other The Company files income tax returns in the U.S. federal jurisdiction. With few exceptions, the Company is no longer subject to U.S. federal examination by tax authorities for years prior to 2019. The notional amount and fair value of the Company's derivative financial instruments as of December 31, Interest Rate Swap Agreements Receive Fixed/Pay Variable Swaps Pay Fixed/Receive Variable Swaps Interest Rate Swap Agreements Receive Fixed/Pay Variable Swaps Pay Fixed/Receive Variable Swaps Interest Rate Risk Management—Cash Flow Hedging Instruments date. Notional amount Weighted average pay rate Weighted average receive rate Weighted average maturity in years Unrealized loss relating to interest rate swaps These agreements provided for the Company to receive payments determined by a specific index Commitments to grant loans Unused commitments to fund loans and lines of credit Commercial and standby letters of credit Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer. Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the As of December 31, 2019: Total Risk Based Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Tier 1 (CET1) (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) As of December 31, 2018: Total Risk Based Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Tier 1 (CET1) (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) For the year ended December 31, Outstanding at January 1, 2019 Granted Exercised Forfeited or expired Outstanding at December 31, 2019 Exercisable at December 31, 2019 Nonvested at January 1, 2019 Granted Vested Forfeited Balance at December 31, 2019 Fair Value Hierarchy Assets Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities tax exempt Securities of state and local municipalities taxable Corporate bonds SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Available-for-Sale Securities Assets Available-for-sale Securities of U.S. government and federal agencies Securities of state and local municipalities tax exempt Securities of state and local municipalities taxable Corporate bonds Certificates of deposit SBA pass-through securities Mortgage-backed securities Collateralized mortgage obligations Total Available-for-Sale Securities adjustments are recorded in the period incurred as provision for loan losses on the thousands, except per share data) Assets Impaired loans Loans held for sale Other real estate owned Assets Impaired loans Other real estate owned The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, Impaired loans Other real estate owned Impaired loans Other real estate owned The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company's financial instruments as of December 31, Financial assets: Cash and due from banks Interest-bearing deposits at other institutions Securities held-to-maturity Securities available-for-sale Restricted stock Loans held for sale Loans, net Bank owned life insurance Accrued interest receivable Financial liabilities: Checking, savings and money market accounts Time deposits Federal funds purchased FHLB advances and Subordinated notes Subordinated notes Accrued interest payable Financial assets: Cash and due from banks Interest-bearing deposits at other institutions Securities held-to-maturity Securities available-for-sale Restricted stock Loans, net Bank owned life insurance Accrued interest receivable Financial liabilities: Checking, savings and money market accounts Time deposits Subordinated notes Accrued interest payable 2021. Net income Weighted average shares—basic Effect of dilutive securities Weighted average shares—diluted Basic EPS Diluted EPS Supplemental Disclosure of Cash Flow Information: Cash paid for: Interest on deposits and borrowed funds Income taxes Noncash investing and financing activities: Transfer of loans to loans held for sale Unrealized gain (loss) on securities available-for-sale Initial right of use asset—operating leases Initial lease liability—operating leases Right-of-use assets obtained in the exchange for lease liabilities during the current period Noncash transactions related to acquisitions: Assets acquired: Interest bearing deposits Investment securities available-for-sale Restricted stock Loans Premises and equipment Deferred tax assets, net Goodwill Core deposit intangible, net Accrued interest receivable Prepaid expenses Other real estate owned (OREO) Other assets Liabilities assumed: Non-interest bearing Interest-bearing checking, savings, and money market Time deposits FHLB advances Accrued interest payable Other liabilities Consideration: Issuance of common stock Note are available-for-sale securities and Balance, beginning of period Net unrealized gains (losses) during the period Other comprehensive income (loss), net of tax Balance, end of period Balance, beginning of period Net unrealized gains (losses) during the period Net reclassification adjustment for losses (gains) realized in income Other comprehensive loss, net of tax Balance, end of period Losses on sale of available-for-sale securities Income tax benefit Total The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, Noninterest Income In-scope of Topic 606 Service Charges on Deposit Accounts Fees, Exchange, and Other Service Charges Other income Noninterest Income (in-scope of Topic 606) Noninterest Income (out-scope of Topic 606) Total Noninterest Income Contract Balances Assets Cash and cash equivalents Securities available-for-sale Investment in subsidiary Other assets Total assets Liabilities and Stockholders' Equity Subordinated notes Other liabilities Total liabilities Total stockholders' equity Total liabilities and stockholders' equity Income: Interest on securities available-for-sale Total income Expense: Interest on subordinated notes Salaries and employee benefits Occupancy and equipment Audit, legal and consulting fees Merger expenses Other operating expenses Total expense Net loss before income tax benefit and equity in undistributed earnings of subsidiary Income tax benefit Equity in undistributed earnings of subsidiary Net income Cash Flows From Operating Activities Net income Equity in undistributed earnings of subsidiary Deferred income tax (benefit) expense Amortization of subordinated debt issuance costs Stock-based compensation expense Change in other assets and liabilities Net cash used in operating activities Cash Flows From Investing Activities Cash acquired in acquision, net Cash contributed to banking subsidiary Net cash used in investing activities Cash Flows From Financing Activities Stock options exercised Common stock issuance Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Equity Compensation Plans Approved by Stockholders: Amended and Restated 2008 Stock Plan Equity Compensation Plans Not Approved by Stockholders(2) Total2019,2022, we had $7.1$7.2 million of goodwill related to our acquisition of Colombo. Goodwill and other intangible assets are tested for impairment on an annual basis or when facts and circumstances indicate that impairment may have occurred. Our financial condition and results of operationoperations may be adversely affected if that goodwillgoodwill is determined to be impaired, which would require us to take an impairment charge.We have extended off-balance sheet commitments to borrowers which expose us to credit and interest rate risk. We enter into off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and guarantees which would impact our liquidity and capital resources to the extent customers accept or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and guarantees written is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.unprofitability.profitability. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition and results of operations.the accuracyour ability to retain and completenessgrow our diverse deposit base. As of information providedDecember 31, 2022, we had $1.83 billion in deposits. Our deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, adverse developments in general economic conditions of an individual's business, and a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. Any such loss of funds could result in lower loan originations, which could have a material adverse effect on our business, financial condition and counterparties. In deciding whetherresults of operations.extend creditfund operations and meet our obligations as they become due, and failure to maintain sufficient liquidity could materially adversely affect our growth, business, profitability and financial condition.enter intoobtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. We require sufficient liquidity to fund asset growth, meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they become due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Liquidity risk can increase due to a number of factors, including an over-reliance on a particular source of funding or market-wide phenomena such as market dislocation and major disasters. Factors that could detrimentally impact access to liquidity sources include, but are not limited to, a decrease in the level of our business activity as a result of a slowdown in our market, adverse regulatory actions against us, or changes in the liquidity needs of our depositors. Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions with customersat a reasonable cost, in a timely manner, and counterparties,without adverse consequences. Our inability to raise funds through deposits, borrowings, the sale of loans, other sources, and our ability to maintain sufficient deposits, could have a substantial negative effect on our business, and could result in the closure of the Bank. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair our ability to fund operations and meet our obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations.rely on information furnished by or on behalf of customers and counterparties, including financial information. We may also rely on representations of customers and counterparties asnot be able to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon customers' representations that their financial statements conform to generally accepted accounting principlesreplace such funds in the United States of America, or GAAP, and present fairly, in all material respects,future if our financial condition, the financial condition results of operations and cash flows of the customer. We alsoFHLB or market conditions were to change. FHLB borrowings and other current sources of liquidity may rely on customer representations and certifications,not be available or, audit or accountants' reports, with respectif available, sufficient to the business and financial conditionprovide adequate funding for operations.Failure to keep up with the rapid technological changes in the financial services industry could have a material adverse effect on our competitive position and profitability. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete effectively and could have a material adverse effect on our business, financial condition or results of operations. As these technologies are improved in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have a material adverse effect on our business, financial condition and results of operations.GAAP.U.S. generally accepted accounting rinciples ("GAAP"). Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud.We are dependent on the use of data and modeling in both our management's decision-making generally and in meeting regulatory expectations in particular. The use of statistical and quantitative models and other quantitatively-based analyses is endemic to bank decision-makingcompliance processes,actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.employment of such analyses is becoming increasingly widespreadmatters are ultimately determined in our operations. Liquidity stress testing, interest rate sensitivity analysis, allowance for loan loss measurement, portfolio stress testingfavor, could also cause significant harm to our reputation and divert management attention from the identificationoperation of possible violations of anti-money laundering regulations are examples of areasour business. Further, any settlement, consent order, other enforcement agreement or adverse judgment in which we are dependent on modelsconnection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and the data that underlies them. We anticipate that model-derived insights will be used more widely in our decision-making in the future. While these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could yield adverse outcomes or regulatory scrutiny. Secondarily, becausegovernment agencies begin independent reviews of the complexity inherent in these approaches, misunderstanding or misusesame activities. As a result, the outcome of their outputs could similarly result in suboptimal decision making, whichlegal and regulatory actions could have a material adverse effect on our business, financial condition and results of operations.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance (“ESG”) practices may impose additional costs on us or expose us to new or additional risks.TableContentsWe could be subject to environmental risks and associated costs on our foreclosed real estate assets. A substantial portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. There is a risk that hazardous or toxic substances could be found on these properties and that we could be liable for remediation costs, as well as personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property's value or limit our ability to sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations.Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities. In the normal course of business, from time to time, we may be named as a defendant in various legal actions, arising in connection with our current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. Further, we may in the future be subject to consent orders or other formal or informal enforcement agreements with our regulators. We may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our current and/or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise, and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order, other enforcement agreement or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, financial condition and results of operations.The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property and other real estate owned may not accurately reflect the net value of the asset. In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in value in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately reflect the net value of the collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of OREO, that we acquire through foreclosure proceedings and to determine loan impairments. If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our OREO, if any, and our allowance for loan losses may not reflect accurate loan impairments. Inaccurate valuation of OREO or inaccurate provisioning for loan losses could have a material adverse effect on our business, financial condition and results of operations.We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability. The nature of our business makes us sensitive to the large body of accounting rules in the U.S. From time to time, the governing bodies that oversee changes to accounting rules and reporting requirements may release new guidance for the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Changes which have been approved for future implementation, or which are currently proposed or expected to be proposed or adopted include requirements that we: calculate the allowance for loan losses on the basis of the current expected credit losses over the lifetime of our loans, referred to as the CECL model, which is expected to be applicable to us beginning in 2023. These changes could adversely affect our capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics. Any such changes could have a material adverse effect on our business, financial condition and results of operations. Under the CECL model, banks will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses, and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of the allowance for loan losses. If we are required to materially increase the level of the allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations. We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.The fair value of our investment securities can fluctuate due to factors outside of our control. As of December 31, 2019, the fair value of our investment securities portfolio was approximately $141.6 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments, or OTTI, and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, financial condition or results of operations. The process for determining whether impairment of a security is OTTI usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security and our intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to correctly and timely assess any impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition or results of operations.Uncertainty relatingdiscontinuation, reformlaws and regulations that govern our operations, corporate governance, executive compensation and financial accounting or replacement of LIBORreporting, including changes in them or our failure to comply with them, may adversely affect our results of operations. In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or ARRC, has proposed that the Secured Overnight Financing Rate, or SOFR, as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks. The inability to obtain LIBOR rates, and the uncertainty as to the nature, comparability and utility of alternative reference rates which have been or may be established may adversely affect the value of LIBOR-based loans, investment securities and other financial instruments in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and the Bank is required to implement substitute indices for the calculation of interest rates under its loan agreements, it may incur additional expenses in effecting the transition, and may besubject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on its results of operations. At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, the establishment of alternative reference rates, or the impact of any such events on contractual mechanisms may have on the markets, us or our fixed-to-floating rate debt securities. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms may negatively impact market liquidity, our access to funding required to operate our business and the trading market for our fixed-to-floating rate debt securities. Furthermore, the use of alternative reference rates or other reforms could cause the interest payable on our outstanding fixed-to-floating rate debt securities to be materially different, and potentially higher, than expected.The effects of widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations. Widespread health emergencies, such as the recent coronavirus outbreak, can disrupt our operations through their impact on our employees, customers and their businesses, and the communities in which we operate. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.Risks Related to Our IndustryOur industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations. The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors. bythat govern almost all aspects of our operations. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our businessFederal Reserve,dividends or distributions that we can pay, restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our Bank is subject to regulation and supervision by the Federal Reserve and the VBFI.capital than GAAP. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations canoften impose additional compliance costs.which imposes significant regulatoryinstituted major changes to the banking and compliance changes on financial institutions is an example of this type of federal regulation. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept and the rates we may pay on such deposits, maintenance of adequate capital and liquidity, changes in control of us and our Bank, transactions between us and our Bank, handling of nonpublic information, restrictions on dividends and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all. These requirements may constrain our operations, and the adoption of new laws andregulatory regimes. Other changes to or repeal of existing laws may have a further impact on our business, financial condition and results of operations. Also, the burden imposed by those federal and state regulations may place banks in general, including our Bank in particular, at a competitive disadvantage compared to their non-bank competitors. Our failure to comply with any applicable laws orstatutes, regulations, or regulatory policies, and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations. Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significantsupervisory guidance, including changes in recent years,interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect us in substantial and unpredictable ways. Such additional regulation and supervision has increased, and may be subject to significant future changes. Future changes may have a material adverse effect on our business, financial condition and results of operations. Federal and state regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations to us. Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require uscontinue to increase, our regulatory capital,costs and limit our ability to pursue business opportunitiesopportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in an efficient manner by requiringinterpretation, could subject us to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations. In addition, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways, and could have a material adverse effectrestrictions on our business financial conditionactivities, fines and other penalties, any of which could adversely affect our results of operations. Furthermore,operations, capital base and the regulatory agencies have extremely broad discretion in their interpretationprice of our securities. Further, any new laws, rules and regulations and their assessment of the quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency's assessment of the quality of our assets, operations, lending practices, investment practices, capital structurecould make compliance more difficult or other aspects of our business differs from our assessment, we may be required to take additional chargesexpensive or undertake, or refrain from taking, actions that could have a material adverse effect on our business, financial condition and results of operations.Federal and state regulators periodically examineotherwise adversely affect our business and may require us to remediate adverse examination findings or may take enforcement action against us. The Federal Reserve and the VBFI periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, the Federal Reserve or the VBFI were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to require us to remediate any such adverse examination findings. In addition, these agencies have the power to take enforcement action against us to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation of law or regulation or unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our growth, to assess civil money penalties against us or our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is imminent risk of loss to depositors, to terminate our deposit insurance and place our Bank into receivership or conservatorship. Any regulatory enforcement action against us could have a material adverse effect on our business, financial condition and results of operations.ourthe Bank and to commit resourcesRegulatory initiatives regarding bank capitalrequire heightened capital. Regulatory capital rules, which implementrelease new guidance for the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, include a common equity Tier 1 capital requirementpreparation of our financial statements. These changes can materially impact how we record and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements were intended to both improve the qualityreport our financial condition and increase the quantityresults of capitaloperations. For example, we are required to be heldadopt the CECL model on January 1, 2023, which will require us to calculate the allowance for credit losses on the basis of the current expected credit losses over the lifetime of our loans. The Company adopted Accounting Standards Update ("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 banking organizations,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 better equip the U.S. banking systemallowance for credit losses on loans as well as an adjustment to deal with adverse economic conditions. The capital rules require banks to maintain a common equity Tier 1 capital ratio of 6.5% or greater, a Tier 1 capital ratio of 8% or greater, a total capital ratio of 10% or greater and a leverage ratio of 5% or greater tothe Company's reserve for unfunded commitments. In some instances, we could be deemed "well capitalized" for purposes of certain rules and prompt corrective action requirements. Bank holding companies and banks are also required to holdapply a capital conservation buffernew or revised standard retroactively, resulting in the restatement of common equity Tier 1prior period financial statements.These changes could adversely affect our capital, of 2.5% to avoid limitations on capital distributions and discretionary executive compensation payments. The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing significant internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Our regulatory capital ratios, currently are in excess of the levels established for "well capitalized" institutions. Future regulatory change could impose higher capital standards. The 2018 Act directed the federal banking agenciesability to develop a CBLR, calculated by dividing tangible equity capital by average consolidated total assets. In October 2019, the federal banking agencies adopted a CBLR of 9%. If a "qualified community bank," generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, has a leverage ratio which exceeds the CBLR of 9%, thenmake larger loans, earnings and performance metrics. Any such bank will be considered to have met all generally applicable leverage and risk based capital requirements; the capital ratio requirements for "well capitalized" status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject. As of December 31, 2019, we qualified for this simplified capital regime, however, there can be no assurance that satisfaction of the CBLR will provide adequate capital for our operations and growth, or an adequate cushion against increase levels of nonperforming assets or weakened economic conditions. Any new or revised standards adopted in the future may require us to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic liquidity requirements. We may not be able to raise additional capital at all, or on terms acceptable to us. Failure to maintain capital to meet current or future regulatory requirementschanges could have a significant material adverse effect on our business, financial condition and results of operations.We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The Bank Secrecy Act of 1970, the USA Patriot Act and other laws and regulationsfinancial institutions, among other duties, to institute and maintain an effective anti-money launderingheightened capital.program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network, or FinCEN, and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny of compliance with the regulations issued and enforced by the OFAC. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.numerous "faircapital adequacy guidelines and responsible banking" laws designedother regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to protect consumers,time, regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and/or other regulatory requirements, our financial condition would be materially and failureadversely affected. The Basel III rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with these lawsthe capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require us to limit our banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could lead to a wide variety of sanctions. The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Act and the Dodd-Frank Act prohibit unfair, deceptive, or abusive acts or practices by financial institutions. The U.S. Department of Justice, or DOJ, federal banking agencies, and other federal and state agencies are responsible for enforcing these fair and responsible banking laws and regulations. A challenge to an institution's compliance with fair and responsible banking laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect onnegatively affect our reputation, business, financial condition and results of operations.We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our business. Our business requires the collection and retention of large volumes of customer data, including personally identifiable information, or PII, in various information systems that we maintain and in those maintained by third party service providers. We also maintain important internal company data such as PII about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees and other third parties). For example, our business is subject to the GLB Act, which, among other things: (i) imposes certain limitations on our ability to share nonpublic PII about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that our collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchangewith us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations, financial condition and results of operations.Rulemaking changes implemented byConsumer Financial Protection Bureau willstability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in higher regulatory and compliance costs that may adversely affect our business.Dodd-Frank Act created a new, independent federal agency,occurrence of any such event in the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations issued by the CFPB have created a more intense and complex environment for consumer finance regulation. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination. These changesfuture could have a material adverse effect on our business, financial condition and results of operations.Potential limitations on incentive compensation containedwhich, in proposed federal agency rulemaking may adversely affect our ability to attract and retain our highest performing employees. The Federal Reserve, other federal banking agencies and the Securities and Exchange Commission, or SEC, have jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in consolidated assets. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to successfully compete with financial institutions andother companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees.The Bank's FDIC deposit insurance premiums and assessments may increase. The Bank's deposits are insured by the FDIC up to legal limits and, accordingly, the Bank is subject to insurance assessments based on the Bank's average consolidated total assets less its average tangible equity. The Bank's regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Numerous bank failures during the financial crisis and increases in the statutory deposit insurance limits increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and the reserve ratios of the Deposit Insurance Fund required by statute and FDIC estimates of projected requirements, the FDIC has the power to increase deposit insurance assessment rates and impose special assessments on all FDIC-insured financial institutions. Any future increases or special assessments could reduce our profitability andturn, could have a material adverse effect on our business, financial condition and results of operations.11nine additional branch offices in Arlington, Virginia; Ashburn, Loudoun County, Virginia; the independent city of Manassas, Virginia; Reston, Fairfax County, Virginia; and Springfield, Fairfax County, Virginia; Montgomery County and Baltimore, Maryland.Maryland; and Washington, D.C. We also maintain an operations center in Manassas. We lease all but one of our office properties. We ownlocation; our branch located in Baltimore, Maryland. We also lease a loan production office in Lutherville,Towson, Maryland.people and lendersprofessionals with substantial books of business and customer relationships. We believe that upon expiration of each of our leases we will be able to extend the leases on satisfactory terms or relocate to another acceptable location.quotedlisted on the Nasdaq Capital Market under the symbol "FVCB." As of March 18, 2020,15, 2023, there were 529455 holders of record of our common stock and approximately 9531,667 total beneficial shareholders.TableOn December 15, 2022, the Company announced that the Board of ContentsRepurchases No shares were repurchased duringDirectors approved a five-for-four split of the three months ended DecemberCompany's common stock in the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31, 2019.February 4, 2020,March 17, 2022, we publicly announced that the Board of Directors had adopted a program to repurchase up to 1,112,1651,351,075 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2019.2021, from April 1, 2022 to March 31, 2023. The timing and amount of repurchases, if any, will depend on market conditions, share price, trading volume, and other factors, and there is no assurance that we will purchase shares during any period. The repurchase program will expire on December 31, 2020, subject to earlier termination of the program by the board of directors. Shares may be repurchased in the open market or through privately negotiated transactions. SinceFor the inceptionyear ended$7.1 million.$730 thousand under the program. All of these shares have been cancelled and returned to the status of authorized but unissued.Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share ($) (c) Total Number of Shares Purchased as Part of Publicly Announced Program (d) Maximum Number of Shares that May Yet Be Purchased Under the Program October 1 - October 31, 2022 — — — — November 1 - November 30, 2022 — — — — December 1 - December 31, 2022 37,454 14 37,454 1,313,621 Total 37,454 14 37,454 1,313,621 Selected Financial Data Selected Financial Data(Dollars and shares in thousands, except per share data) Years Ended December 31, 2019 2018 2017 2016 2015 $ 66,734 $ 51,924 $ 40,302 $ 32,587 $ 26,557 18,671 12,110 8,195 5,387 3,665 48,063 39,814 32,107 27,200 22,892 1,720 1,920 1,200 1,471 1,073 46,343 37,894 30,907 25,729 21,819 2,546 1,661 2,975 1,220 1,161 28,877 26,448 19,346 16,446 14,701 20,012 13,107 14,536 10,503 8,279 4,184 2,238 6,846 3,571 2,860 $ 15,828 $ 10,869 $ 7,690 $ 6,932 $ 5,419 $ 1,537,295 $ 1,351,576 $ 1,053,224 $ 909,305 $ 736,807 1,270,526 1,136,743 888,677 768,102 623,559 (10,231 ) (9,159 ) (7,725 ) (6,452 ) (6,239 ) 141,589 125,298 117,712 113,988 67,795 1,285,722 1,162,440 928,163 775,991 626,640 49,487 24,407 24,327 51,247 35,650 179,078 158,336 98,283 79,811 72,752 13,902 13,713 10,869 10,179 10,141
$ 1.15 $ 0.93 $ 0.74 $ 0.68 $ 0.54 1.07 0.85 0.67 0.63 0.51 12.88 11.55 9.04 7.84 7.18 12.26 10.93 9.03 7.83 7.16
1.09 % 0.94 % 0.80 % 0.88 % 0.85 % 9.32 9.29 8.63 8.91 7.70 3.48 3.51 3.43 3.51 3.66 57.06 63.07 57.16 58.02 61.29 0.18 0.14 0.31 0.15 0.18 1.99 2.28 2.02 2.08 2.30 98.82 97.79 95.75 98.98 99.51
0.05 % 0.05 % (0.01 )% 0.19 % 0.07 % 0.84 0.34 0.09 0.03 0.41 0.95 0.57 0.44 0.03 0.35 95.39 285.24 979.09 2,591.16 243.81 0.81 0.81 0.87 0.84 1.00
12.72 % 13.27 % 12.05 % 12.37 % 11.25 % 13.43 14.02 12.83 13.16 12.20 12.72 13.27 12.05 12.37 11.25 12.15 12.41 11.79 11.89 10.82
11.71 % 10.09 % 9.32 % 9.85 % 11.03 % 98.56 % 96.56 % 97.74 % 96.05 % 97.83 % 13,817 11,715 10,435 10,170 10,138 14,825 12,822 11,545 10,922 10,591 (1)Tangible book value is calculated as total shareholders' equity, less goodwill and other intangible assets, divided by common shares outstanding.
Reserved(2)Net interest margin is calculated as net interest income divided by total average earning assets.(3)Efficiency ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income. Years Ended December 31,
(Dollars in thousands, except per share data) 2019 2018 2017 2016 2015 $ 179,078 $ 158,336 $ 98,283 $ 79,811 $ 72,752 (8,689 ) (8,443 ) (99 ) (119 ) (139 ) $ 170,389 $ 149,893 $ 98,184 $ 79,692 $ 72,613 $ 12.88 $ 11.55 $ 9.04 $ 7.84 $ 7.18 (0.62 ) (0.62 ) (0.01 ) (0.01 ) (0.02 ) $ 12.26 $ 10.93 $ 9.03 $ 7.83 $ 7.16 20192022 and 20182021 and the results of our operations for the years ended December 31, 20192022 and 2018.2021. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.Cautionary Note About Forward-Looking Statements We make certain forward-looking statements in this Form 10-K that are subject to risks and uncertainties. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as "may," "could," "should," "will," "would," "believe," "anticipate," "estimate," "expect," "aim," "intend," "plan," or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:•the strength of the United States economy in general and the strength of the local economies in which we conduct operations;•geopolitical conditions, including acts or threats of terrorism, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;•the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the recent coronavirus outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;•our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;•changes in consumer spending and savings habits;•technological and social media changes;•the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;•changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;•the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;•the impact of changes in laws, regulations and policies affecting the real estate industry;•the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, or PCAOB, the Financial Accounting Standards Board or other accounting standards setting bodies;•the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;•the willingness of users to substitute competitors' products and services for our products and services;•the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;•changes in the level of our nonperforming assets and charge-offs;•our involvement, from time to time, in legal proceedings and examination and remedial actions by regulators;•potential exposure to fraud, negligence, computer theft and cyber-crime. The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this Form 10-K, including those discussed in the section entitled "Risk Factors" in Item 1A above. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-K. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.
OverviewOverviewannounced the completion ofcompleted our acquisition of Colombo, pursuant to a previously announced definitive merger agreement.Colombo. Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018, adding five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuanttermsnext three years, and our investment had decreased to 27.7% as of December 31, 2022. In addition, the merger agreement, based onBank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held to investment loan portfolio.average closing priceCompany announced that the Board of Directors approved a five-for-four split of the Company's common stock duringin the five trading day period endedform of a 25% stock dividend for shareholders of record on October 10, 2018,January 9, 2023, payable on January 31, 2023. Earnings per share and all other per share information reflected herein have been adjusted for the second trading day prior to closing, of $19.614 (the "Average Closing Price") holders of shares of Colombo common stock received 0.002217 sharesfive-for-four split of the Company's common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective date of the merger, plus cash in lieu of fractional shares at a rate equal to the Average Closing Price, and subject to the right of holders of Colombo common stock who owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, and who made a timely election, to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result of the merger, 763,051 shares of the Company's common stock were issued in exchange for outstanding shares of Colombo common stock.noninterestnon-interest income. As discussed further in "Quantitative and Qualitative Disclosures About Market Risk" below, weWe manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limitnoninterestnon-interest income is a complementary source of revenue for us and includes, among other things, service charges on deposits and loans, income from minority membership interest in ACM, merchant services fee income, insurance commission income, income from bank owned life insurance or BOLI,("BOLI"), and gains and losses on sales of investment securities available-for-sale.measurements, and the valuation of other real estate owned.recent coronavirus outbreakCOVID-19 pandemic and associated efforts to restrict the spread of the disease, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions and concentrations of credit, competition, and loan review results to support estimates.2416 banks for our custom peer group which are within $1 billion to $3 billion in total assets, the majority of whom are geographically concentrated in the Washington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areas of the country. These baseline peer group loss rates are then adjusted based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updated on a quarterly basis.Allowance for Loan Losses—Acquired LoansAcquired loans accounted for under ASC 310-30 For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.Acquired loans accounted for under ASC 310-20 Subsequent to the acquisition date, we establish our allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.Purchased Credit-Impaired Loans Purchased credit-impaired ("PCI") loans, which are the loans acquired in our acquisition of Colombo, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans' expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the cash flows expected at acquisition and the investment in the loans, or the "accretable yield," is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received). At December 31, 2019, we had a specific reserve for impairment of one acquired loan within our allowance for loan losses totaling $29 thousand that had further deteriorated post acquisition. We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform betterthan originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.Other Real Estate Owned Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any writedowns are charged against current earnings. Accounting policy and treatment is consistent with accounting for impaired loans described above. Followingannouncement by the United Kingdom's Financial Conduct Authority in July 2017 that it will no longer require banksmost commonly used U.S. dollar LIBOR settings would cease to submit rates for the London InterBank Offered Rate (LIBOR)be published or cease to be representative after 2021, centralJune 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (IBOR)("IBOR") and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted inThere continues to be uncertainty regarding the use of alternative reference rates (ARRs) and could("ARRs"), which may cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.20192022 and 2018,2021, we continued to expandexpanded our market area through continued organic growth, and acquisition, and have continued to leverage our acquisition of Colombo while capitalizing on market disruption as a resultnew customer relationships we obtained through centers of recent merger activity within the Washington MSA.$1.54$2.34 billion compared to $1.35$2.20 billion as ofat December 31, 20192022 and 2018,2021, respectively, an increase of $185.7$141.4 million, or 13.7%6%. The increase in total assets is primarily attributable to our record loan growth during 2022.$133.8$336.6 million, or 11.8%22%, from December 31, 20182021 to December 31, 2019. The Company had2022. Excluding PPP loans, heldwhich decreased $26.2 million as a result of loan forgiveness, net loan growth was $362.8 million for sale totaling $11.2 million atthe year ended December 31, 2019 compared to none for December 31, 2018.2022. Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.70%0.19% at December 31, 2019,2022, compared to 0.24%0.16% at December 31, 2018.increased $123.3decreased $53.6 million, or 10.6%3%, from December 31, 20182021 to December 31, 2019.Tangible book value per share at December 31, 2019 was $12.26, an increase from $10.93 at December 31, 2018.•$15.8$25.0 million for the year ended December 31, 20192022 compared to $10.9$21.9 million for the same period of 2018.2021. Our 20192022 and 2021 results were impacted by merger-related expenses fromtotaling $125 thousand and $1.4 million, respectively, which were associated with our acquisitionpreviously announced proposed merger with Blue Ridge Bankshares, Inc. ("Blue Ridge"), which was mutually terminated by us and Blue Ridge on January 20, 2022. Our 2021 results were also impacted by one-time accelerated debt issuance costs of Colombo totaling $102$380 thousand netassociated with the redemption of tax, in 2019.our 2016 subordinated debt issuance during the third quarter of 2021 and a gain on the sale of OREO of $236 thousand during the fourth quarter of 2021. Excluding thesethe merger-related expenses, accelerated debt issuance costs and gain on OREO, we would have recorded net income of $15.9$25.1 million and $23.2 million for the yearyears ended December 31, 2019. Our 2018 results were impacted by additional expenses related to our acquisition of Colombo totaling $2.6 million, net of tax, in 2018. Excluding these merger-related expenses, we would have recorded income of $13.4 million for the year ended2022 and December 31, 2018 or $1.05 per diluted common share.2021, respectively. For a reconciliation of this non-GAAP information which excludes the effect of merger-related expenses, accelerated debt issuance costs, and the gain on sale of OREO, please refer to the table below.20192022 and 2018
20212022 2021 Net income (as reported) $ 24,984 $ 21,933 Add: merger and acquisition expense 125 1,445 Add: Accelerated debt issuance costs — 380 Subtract: Gains on sales of other real estate owned — (236) Subtract: provision for income taxes associated with impairment and merger and acquisition expense (28) (358) Non-GAAP Operating Earnings, excluding above items $ 25,081 $ 23,164 Earnings per share - basic (GAAP net income) $ 1.43 $ 1.29 Earnings per share - Non-GAAP expenses including provision for income taxes $ 0.01 $ 0.07 Earnings per share - basic (non-GAAP operating earnings) $ 1.44 $ 1.36 Earnings per share - diluted (GAAP net income) $ 1.35 $ 1.20 Earnings per share - Non-GAAP expenses including provision for income taxes $ 0.01 $ 0.07 Earnings per share - diluted (non-GAAP operating earnings) $ 1.36 $ 1.27 Return on average assets (GAAP net income) 1.18 % 1.11 % Non-GAAP expenses including provision for income taxes — % 0.06 % Return on average assets (non‑GAAP operating earnings) 1.18 % 1.17 % Return on average equity (GAAP net income) 12.34 % 10.92 % Non-GAAP expenses including provision for income taxes 0.05 % 0.61 % Return on average equity (non‑GAAP operating earnings) 12.39 % 11.53 % 2019 2018 $ 15,828 $ 10,869 133 3,339 (31 ) (788 ) $ 15,930 $ 13,420 $ 1.15 $ 1.15 $ 1.07 $ 1.05 1.10 % 1.16 % 9.38 % 11.47 % Years Ended December 31, Income Statement Data: 2022 2021 Interest income $ 80,682 $ 68,428 Interest expense 15,438 10,481 Net interest income 65,244 57,947 Provision for (reversal of) loan losses 2,629 (500) Net interest income after provision for (reversal of) loan losses 62,615 58,447 Non‑interest income 2,834 4,302 Non‑interest expense 34,460 34,540 Net income before income taxes 30,989 28,209 Provision for income taxes 6,005 6,276 Net income $ 24,984 $ 21,933 Balance Sheet Data: Total assets $ 2,344,322 $ 2,202,924 Loans receivable, net of fees 1,840,434 1,503,849 Allowance for loan losses (16,040) (13,829) Total investment securities 278,333 358,038 Total deposits 1,830,162 1,883,769 Other borrowed funds 284,565 44,510 Total shareholders' equity 202,382 209,796 Common shares outstanding 17,476 13,727 Basic net income $ 1.43 $ 1.29 Fully diluted net income 1.35 1.20 Book value 11.58 12.23 11.14 11.76 Performance Ratios: Return on average assets 1.18 % 1.11 % Return on average equity 12.34 10.92 3.19 3.09 50.62 55.49 Non‑interest income to average assets 0.13 0.22 Non‑interest expense to average assets 1.62 1.75 Loans receivable, net of fees to total deposits 100.56 79.83 Asset Quality Ratios: Net charge‑offs (recoveries) to average loans receivable, net of fees 0.03 % 0.04 % Nonperforming loans to loans receivable, net of fees 0.24 0.23 Nonperforming assets to total assets 0.19 0.16 Allowance for loan losses to nonperforming loans 357.00 394.21 Allowance for loan losses to loans receivable, net of fees 0.87 0.92 Capital Ratios (Bank Only): Tier 1 risk‑based capital 13.28 % 13.54 % Total risk‑based capital 12.45 12.72 Common Equity Tier 1 capital 12.45 12.72 Leverage capital ratio 10.75 10.55 Other: Average shareholders' equity to average total assets 9.53 % 10.15 % Average loans receivable, net of fees to average total deposits 86.77 86.80 Basic 17,431 17,062 Diluted 18,484 18,227 Years Ended December 31, Non‑GAAP Reconciliation (Dollars in thousands, except per share data) 2022 2021 Total stockholders' equity $ 202,382 $ 209,796 Less: goodwill and intangibles, net (7,790) (8,052) Tangible Common Equity $ 194,592 $ 201,744 Book value per common share $ 11.58 $ 12.23 Less: intangible book value per common share (0.44) (0.47) Tangible book value per common share $ 11.14 $ 11.76 20192022 and December 31, 2018$15.8$25.0 million, or $1.07$1.35 per diluted common share, for the year ended December 31, 2019,2022, compared to net income of $10.9$21.9 million, or $0.85$1.20 per diluted common share for the year ended December 31, 2018.2021. Our 20192022 results were impacted by additionalmerger-related expenses related to our acquisition of Colombo totaling $102 thousand, net of tax, in 2019. Excluding these$125 thousand. Our 2021 results were impacted by merger-related expenses totaling $1.4 million. We also recorded one-time accelerated debt issuance costs of $380 thousand associated with our redemption of our 2016 subordinated debt issuance during the third quarter of 2021 and a gain on the sale of OREO of $236 thousand. Excluding the merger-related expenses, accelerated debt issuance costs and gain on OREO and their related tax effects, we would have recorded net income of $15.9$25.1 million, or $1.07$1.36 per diluted common share, for the year ended December 31, 2019. Our 2018 results were impacted by additional expenses related to our acquisition of Colombo totaling $2.6 million, net of tax, in 2018. Excluding these merger-related expenses, we would have recorded income of $13.42022, and $23.2 million, or $1.05$1.27 per diluted common share, for the year ended December 31, 2018.Table2021. See above table for a reconciliation of Contents$8.2$7.3 million to $48.1$65.2 million for the year ended December 31, 2019,2022, compared to $39.8$57.9 million for the year ended December 31, 2018, primarily as2021. For the year ended December 31, 2022, we recorded a result of an increase in interest-earning assets. Provisionprovision for loan losses of $2.6 million due to continued loan growth compared to a reversal of $500 thousand during 2021 which was $1.7primarily driven by the improvement of economic conditions subsequent to the COVID-19 pandemic. Noninterest income for the year ended December 31, 2022 was $2.8 million, compared to $4.3 million for 2021, a decrease of $1.5 million, which was primarily driven by the loss recorded from our membership interest in ACM of $659 thousand for the year ended December 31, 2022, compared to income from our membership interest in ACM of $1.5 million for the year ended December 31, 2019, compared to $1.92021.same period of 2018. Noninterest income increased $885 thousand to $2.5 million for the yearyears ended December 31, 2019 as compared to $1.72022 and 2021. For the years ended December 31, 2022 and 2021, noninterest expense included merger-related expenses totaling $125 thousand and $1.4 million, respectively, associated with the Company's proposed merger with Blue Ridge. When excluding merger-related expenses, noninterest expense for 2018,the years ended December 31, 2022 and 2021 was $34.3 million and $33.1 million, respectively, an increase of $1.2 million, or 4%, which was primarily as a result of an increase in service charges on deposit accounts, income related to bank-owned life insurance, and other fee income. In addition, during 2018, we recorded a loss on sales of securities available-for-sale of $462 thousand that impacted 2018 noninterest income. Noninterest expense was $28.9 million for the year ended December 31, 2019 compared to $26.4 million for the same period of 2018. Noninterest expense increased during 2019 as a direct result of the addition of Colombo to the Company's expense structure and an increases in salaries and benefits expense for strategic additionsexpenses, offset by a year-over-year decrease in professional fees of $279 thousand, which were attributable to business development and back office staffing over the past year to support our growth plans.yearyears ended December 31, 20192022 and 20182021 was 1.09%1.18% and 0.94%1.11%, respectively. The return on average equity for the yearyears ended December 31, 20192022 and 20182021 was 9.32%12.34% and 9.29%10.92%, respectively. Excluding merger-related expenses and associated taxes recorded during 2019,The return on average assets for the years ended December 31, 2022 and 2021 based on operating earnings (a non-GAAP metric) was 1.18% and 1.17%, respectively. The return on average equity for the yearyears ended December 31, 2019 would have been 1.10%2022 and 9.38%2021Excluding merger-related expenses and associated taxes recorded during 2018, return on average assets and return on average equitySee the above table for the year ended December 31, 2018 would have been 1.16% and 11.47%, respectively.2019, 2018,2022 and 2017.2021.
Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities2019, 20182022 and 2017
2021 2019 2018 2017 Average
Balance Interest
Income/
Expense Average
Yield/
Rate Average
Balance Interest
Income/
Expense Average
Yield/
Rate Average
Balance Interest
Income/
Expense Average
Yield/
Rate $ 733,465 $ 35,174 4.80 % $ 587,060 $ 27,714 4.72 % $ 499,776 $ 23,250 4.65 % 127,706 7,844 6.14 % 109,475 6,174 5.64 % 91,361 4,516 4.94 % 192,528 10,819 5.62 % 133,691 7,170 5.36 % 89,156 4,399 4.93 % 125,573 6,362 5.07 % 113,643 5,316 4.68 % 105,715 4,510 4.27 % 26,446 1,983 7.50 % 28,014 1,842 6.58 % 19,178 830 4.33 % 1,205,718 62,182 5.16 % 971,883 48,216 4.96 % 805,186 37,505 4.66 % 137,263 3,550 2.59 % 124,510 2,843 2.28 % 113,799 2,530 2.22 % 5,488 321 5.86 % 4,211 291 6.92 % 3,971 223 5.61 % 34,104 705 2.07 % 34,193 599 1.75 % 13,400 90 0.68 % 1,382,573 66,758 4.83 % 1,134,797 51,949 4.58 % 936,356 40,348 4.31 % 8,606 2,683 1,924 2,134 1,555 1,367 66,157 28,480 23,232 (9,701 ) (8,266 ) (6,987 ) $ 1,449,769 $ 1,159,249 $ 955,892 $ 309,938 $ 4,287 1.38 % $ 182,532 $ 2,150 1.18 % $ 204,422 $ 1,664 0.81 % 252,028 3,644 1.45 % 258,462 2,680 1.04 % 162,127 1,175 0.72 % 316,201 7,080 2.24 % 265,038 4,258 1.61 % 210,093 2,773 1.32 % 74,715 1,819 2.43 % 77,466 1,266 1.63 % 75,534 805 1.07 % 952,882 16,830 1.77 % 783,498 10,354 1.32 % 652,176 6,417 0.98 % 36,680 1,841 5.02 % 32,730 1,756 5.37 % 40,849 1,778 4.35 % 989,562 18,671 1.89 % 816,228 12,110 1.48 % 693,025 8,195 1.18 % 270,397 222,972 171,649 19,996 3,057 2,162 169,814 116,992 89,056 $ 1,449,769 $ 1,159,249 $ 955,892 $ 48,087 3.48 % $ 39,839 3.51 % $ 32,153 3.43 % 2022 2021 Average
BalanceInterest
Income/
ExpenseAverage
Yield/
RateAverage
BalanceInterest
Income/
ExpenseAverage
Yield/
RateAssets Interest‑earning assets: Loans(1): Commercial real estate $ 978,983 $ 42,646 4.36 % $ 832,138 $ 35,104 4.22 % Commercial and industrial 199,957 10,317 5.16 % 135,017 6,127 4.54 % Paycheck protection program 9,112 592 6.50 % 105,980 5,410 5.11 % Commercial construction 165,088 8,762 5.31 % 209,957 9,790 4.66 % Consumer residential 255,794 10,602 4.14 % 169,168 6,685 3.95 % Consumer nonresidential 9,143 705 7.71 % 11,569 858 7.41 % Total loans(1) 1,618,077 73,624 4.55 % 1,463,829 63,974 4.37 % Investment securities(2) 344,725 5,974 1.73 % 204,952 3,878 1.89 % Restricted stock 7,339 408 5.56 % 6,269 328 5.24 % Deposits at other financial institutions 74,477 685 0.92 % 197,987 260 0.13 % Total interest‑earning assets and interest income 2,044,618 80,691 3.95 % 1,873,037 68,440 3.65 % Noninterest‑earning assets: Cash and due from banks 873 18,556 Premises and equipment, net 1,410 1,578 Accrued interest and other assets 92,761 99,562 Allowance for loan losses (14,596) (14,513) Total assets $ 2,125,066 $ 1,978,220 Liabilities and Stockholders' Equity Interest ‑ bearing liabilities: Interest ‑ bearing deposits: Interest checking $ 724,881 $ 5,966 0.82 % $ 587,151 $ 3,224 0.55 % Savings and money markets 315,653 2,662 0.84 % 303,317 1,421 0.47 % Time deposits 203,719 2,908 1.43 % 230,668 2,783 1.21 % Wholesale deposits 61,478 932 1.52 % 37,657 173 0.46 % Total interest ‑ bearing deposits 1,305,731 12,468 0.95 % 1,158,793 7,601 0.66 % Other borrowed funds 89,834 2,970 3.31 % 62,878 2,880 4.58 % Total interest‑bearing liabilities and interest expense 1,395,565 15,438 1.11 % 1,221,671 10,481 0.86 % Noninterest‑bearing liabilities: Demand deposits 501,962 527,675 Other liabilities 25,059 27,988 Common stockholders' equity 202,480 200,886 Total liabilities and stockholders' equity $ 2,125,066 $ 1,978,220 Net interest income and net interest margin $ 65,253 3.19 % $ 57,959 3.09 % 22.5% for 2019, 21% for 2018,2022 and 34.5% for 2017.2021.See "Quantitative and Qualitative Disclosures About Market Risk" below for further information. The following table shows the effect that these2019, 20182022 and 2017
2021 2019 Compared to 2018 2018 Compared to 2017 Average
Volume(3) Average
Rate Increase
(Decrease) Average
Volume(3) Average
Rate Increase
(Decrease) $ 6,912 $ 548 $ 7,460 $ 4,061 $ 403 $ 4,464 1,028 642 1,670 895 763 1,658 3,155 494 3,649 2,197 574 2,771 558 488 1,046 338 468 806 (103 ) 244 141 382 630 1,012 11,550 2,416 13,966 7,873 2,838 10,711 287 420 707 238 75 313 88 (58 ) 30 13 55 68 (2 ) 108 106 143 366 509 11,923 2,886 14,809 8,267 3,334 11,601 1,501 636 2,137 (178 ) 664 486 (67 ) 1,031 964 698 807 1,505 822 2,000 2,822 725 760 1,485 (45 ) 598 553 21 440 461 2,211 4,265 6,476 1,266 2,671 3,937 212 (127 ) 85 (353 ) 331 (22 ) 2,423 4,138 6,561 913 3,002 3,915 $ 9,500 $ (1,252 ) $ 8,248 $ 7,354 $ 332 $ 7,686 2022 Compared to 2021 Average
RateIncrease
(Decrease)Interest income: Loans(1): Commercial real estate $ 6,195 $ 1,347 $ 7,542 Commercial and industrial 2,947 1,243 4,190 Paycheck protection program (4,944) 126 (4,818) Commercial construction (2,092) 1,064 (1,028) Consumer residential 3,423 494 3,917 Consumer nonresidential (180) 27 (153) Total loans(1) 5,349 4,301 9,650 Investment securities(2) 2,645 (549) 2,096 Restricted stock 56 24 80 Deposits at other financial institutions (162) 587 425 Total interest income 7,888 4,363 12,251 Interest expense: Interest - bearing deposits: Interest checking 756 1,986 2,742 Savings and money markets 58 1,183 1,241 Time deposits (325) 450 125 Wholesale deposits 109 650 759 Total interest - bearing deposits 598 4,269 4,867 Other borrowed funds 1,235 (1,145) 90 Total interest expense 1,833 3,124 4,957 Net interest income $ 6,055 $ 1,239 $ 7,294 22.5% for 2019, 21% for 20182022 and 34.5% for 2017.(3)Changes attributable to rate/volume have been allocated to volume. Net interest income for the year ended December 31, 2019 was $48.1 million on a fully taxable-equivalent basis, compared to $39.8 million for the year ended December 31, 2018, an increase of $8.2 million, or 20.7%. The increase in net interest income was primarily a result of an increase in the volume of interest-earning assets related to organic growth during 2019 compared to 2018, in addition to the earning assets acquired from Colombo. The yield on interest-earning assets increased 25 basis points to 4.83% for the year ended December 31, 2019, compared to 4.58% for the same period of 2018, a result of the increased rate environment during the first six months of 2019. Offsetting thisincrease in yields on earning assets was a 41 basis point increase in the cost of interest-bearing liabilities, reflecting the increased rates on interest-bearing deposits prior to three rate cuts during the last half of 2019. Our net interest margin, on a tax equivalent basis, for the years ended December 31, 2019 and 2018 was 3.48% and 3.51%, respectively. The decrease in our net interest margin was primarily a result of an increase in rates on our interest-bearing liabilities during 2019 as compared to 2018. 2019, 20182022 and 2017
20212022 2021 GAAP Financial Measurements: Interest income: Loans $ 73,624 $ 63,974 Deposits at other financial institutions 685 260 Investment securities available‑for‑sale 5,959 3,860 Investment securities held‑to‑maturity 6 6 Restricted stock 408 328 Total interest income 80,682 68,428 Interest expense: Interest‑bearing deposits 12,468 7,601 Other borrowed funds 2,970 2,880 Total interest expense 15,438 10,481 Net interest income $ 65,244 $ 57,947 Non‑GAAP Financial Measurements: Add: Tax benefit on tax‑exempt interest income - securities 9 12 Total tax benefit on interest income $ 9 $ 12 Tax equivalent net interest income $ 65,253 $ 57,959 Net interest margin on a tax-equivalent basis 3.19 % 3.09 % 2019 2018 2017 $ 62,182 $ 48,216 $ 37,505 705 599 90 3,496 2,767 2,433 30 51 51 321 291 223 66,734 51,924 40,302 16,830 10,354 6,417 1,841 1,756 1,778 18,671 12,110 8,195 $ 48,063 $ 39,814 $ 32,107 24 25 46 $ 24 $ 25 $ 46 $ 48,087 $ 39,839 $ 32,153 21.8%9% to $1.38$2.04 billion at December 31, 20192022 compared to $1.13$1.87 billion at December 31, 2018,2021, which resulted in an increase in total interest income on a tax equivalent basis of $14.8$12.3 million, to $66.8$80.7 million for the year ended December 31, 20192022 compared to $51.9$68.4 million for the year ended December 31, 2018.2021. Both average volume and rate significantly impacted interest income during 2022, with volume contributing an additionalincrease in our earning assets was primarily driven by anyield on average loans increased 18 basis points to 4.55% for the year ended December 31, 2022. The increase in average volume of loans receivable contributed $5.3 million to interest income while the increase in average rate of $233.8loans receivable contributed $4.3 million which contributed to an additional $11.6 million in interest income. This increase in interest income was enhanced by an increase in yields earned on the loan portfolio which increased interest income $2.4 million. AverageAverage balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 20192022 and 2018.2021.$169.4$146.9 million to $952.9$1.31 billion at December 31, 2022 compared to $1.16 billion at December 31, 2021. Average noninterest-bearing deposits decreased $25.7 million, or 5%, to $502.0 million at December 31, 20192022, compared to $783.5$527.7 million at December 31, 2018. Average noninterest-bearing deposits increased $47.4 million to $270.4 million at December 31, 2019 compared to $223.0 million at December 31, 2018.2021. The largest increase in average interest-bearing deposit balances was in our interest checking accounts, which increased $127.4$137.7 million compared to 2018.2021. Average time deposits increased $51.2decreased $26.9 million to $316.2$203.7 million as of December 31, 20192022 compared to $265.0$230.7 million at December 31, 2018.2021, as customers continue to prefer short-term deposit options for liquidity purposes. Average wholesale deposits decreased $2.8increased $23.8 million to $74.7$61.5 million as of December 31, 20192022 compared to $77.5$37.7 million as of December 31, 2018. This change2021, to assist in the mix offunding our interest-bearing liabilities, in addition to the three increases in the targeted fed funds raterecord loan growth during 2019, have contributed to the increase in our cost of interest-bearing deposits to 1.77% in 2019 from 1.32% in 2018. 2022.used to help fund our balance sheet growth, decreased 35127 basis points to 5.02%3.31% for the year ended December 31, 2022, from 4.58% for the same period in 2019 from 5.37% in 2018. The decrease in the cost of other borrowed funds was2021, a result of a FHLB advancereduction in subordinated debt outstanding during 2022 and the recognition of accelerated debt issuance costs of $380 thousand recorded during the third quarter of 2019 with a rate of 1.88%.$1.7$2.6 million for the year ended December 31, 20192022 compared to a release of provision for loan losses of $1.9 million$500 thousand for the same period of 2018.year ended December 31, 2021. The allowance for loan losses at December 31, 20192022 was $10.2$16.0 million compared to $9.2$13.8 million at December 31, 2018.2021. Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs, for each of December 31, 20192022 and 20182021 was 0.81%. During 2019, we updated certain qualitative factors0.87% and 0.92%, respectively. The increase incommercial constructionloan portfolio as this portion of the portfolio entails additional credit risk during the construction phaseyear.funding. In addition, qualitative factors of our commercial real estate portfolio were adjustedtotaling $86 thousand. Net charge-offs for the limited loss rates and attributes of this portfolio. Lastly, while impaired loans increased during 2019 asyear ended December 31, 2022 were $418 thousand compared to 2018, specific reserves totaling $393$629 thousand were recorded during 2019, as these impairedfor the year ended December 31, 2021, consistent with our track record of low historical charge-offs. The allowance coverage to nonperforming loans are well secured.information.20192022 and 2018.2019, 20182022 and 2017
2021Change from Prior Year 2022 2021 Amount Percent Service charges on deposit accounts $ 954 $ 1,028 $ (74) (7.2) % Fees on loans 232 110 122 110.9 % BOLI income 1,200 994 206 20.7 % (Loss) income from minority membership interest (33) 1,464 (1,497) (102.3) % Other fee income 481 706 (225) (31.9) % Total non‑interest income $ 2,834 $ 4,302 $ (1,468) (34.1) % 2019 2018 $ 890 $ 635 582 722 — (462 ) 3 — (145 ) — 662 438 554 328 $ 2,546 $ 1,661 20192022 and 20182021 was $2.5$2.8 million and $1.7$4.3 million,Table respectively, a decrease of Contentsrespectively. $1.5 million, which was primarily driven by the loss recorded from our membership interest in ACM of $659 thousand for the year ended December 31, 2022, compared to income from ACM of $1.5 million for the year ended December 31, 2021. fees on loans (which includes loan swap fees), service charges on deposits and other fee income was $2.0$1.4 million for the year ended December 31, 2019, an increase of 20.2%,2022 as compared $1.7 million for the same period of 2018, primarily2021. The decrease in other fee income is a result of an increasedecreases in customer relationships over the past year. Loanboth insurance commission income of $88 thousand and rental income on OREO of $120 thousand, during 2022 when compared to 2021. There were no loan swap fees for the years ended December 31, 20192022 and 2018 were $449 thousand and $660 thousand, respectively. December 31, 2021. Income from BOLI increased 51.1%21% to $662$1.2 million for the year ended December 31, 2022 as compared to $994 thousand for the year ended December 31, 20192021 as compared towe purchased $15 million in BOLI during the year ended December 31, 2018, primarily as a resultsecond quarter of purchases2022.20192022 and 2018.2019, 20182022 and 2017
2021Change from Prior Year 2022 2021 Amount Percent Salaries and employee benefits $ 20,316 $ 18,980 $ 1,336 7.0 % Occupancy and equipment expense 3,252 3,290 (38) (1.2) % Data processing and network administration 2,303 2,203 100 4.5 % State franchise taxes 2,036 1,983 53 2.7 % Audit, legal and consulting fees 1,210 1,489 (279) (18.7) % Merger and acquisition expense 125 1,445 (1,320) (91.3) % Loan related expenses 555 1,247 (692) (55.5) % FDIC insurance 620 770 (150) (19.5) % Marketing, business development and advertising 483 220 263 119.5 % Director fees 668 651 17 2.6 % Postage, courier and telephone 181 190 (9) (4.7) % Internet banking 645 542 103 19.0 % Dues, memberships & publications 194 174 20 11.5 % Bank insurance 453 411 42 10.2 % Printing and supplies 147 104 43 41.3 % Bank charges 90 118 (28) (23.7) % State assessments 161 167 (6) (3.6) % Core deposit intangible amortization 262 305 (43) (14.1) % Gain on sale of other real estate owned — (236) 236 (100.0) % Tax credit amortization 126 — 126 100.0 % Other operating expenses 633 487 146 30.0 % Total non‑interest expense $ 34,460 $ 34,540 $ (80) (0.2) % 2019 2018 $ 17,047 $ 14,008 3,400 2,524 1,638 1,233 1,696 1,184 826 649 133 3,339 476 364 244 469 396 339 532 457 195 212 439 308 165 166 356 197 145 153 143 141 164 119 385 118 497 468 $ 28,877 $ 26,448 $28.9$34.5 million for each of the years ended December 31, 2022 and $26.4December 31, 2021.20192022 and 2018,December 31, 2021, respectively. Salaries Audit, legal and benefits expense increased $3.0 millionconsulting fees decreased $279 thousand to $17.0$1.2 million for the year ended December 31, 20192022 as compared to $14.0 millionthe same period of 2021, primarily as a result of expenses incurred in 2021 for 2018. The increaseour membership interest purchase of ACM in salaries and benefits expense is primarily2021. Loan related expenses decreased $692 thousand to increases in our business development and back office personnel to support our growth plans and staffing we retained from our acquisition of Colombo. Other increases in noninterestexpense were primarily related to supporting the larger organization following the Colombo acquisition and continued organic bank growth. Merger and acquisition expense decreased $3.2 million to $133$555 thousand for the year ended December 31, 20192022 compared to $3.3 millionthe prior year, as loan workout expense decreased during 2022.2018. During the third and fourth quartersa gain of 2019, as a result$236 thousand. No such gain or loss was recorded during 2022.$4.2$6.0 million for the year ended December 31, 2019,2022, a decrease of $276 thousand compared to $2.2$6.3 million for the year ended December 31, 2018.2021. Our effective tax rate for December 31, 20192022 was 20.9%19.4%, compared to 17.1%22.2% for 2018.2021. Our effective tax raterates for 20192022 and 2018 is2021 are less than theour combined federal and state statutory rate of 21%22.5% because of discrete tax benefits recorded as a result of nonqualified option exercises of nonqualified stock options during 2019 and 2018.Discussionthe aforementioned periods.2019,2022, total assets were $1.54$2.34 billion, an increase of 13.7%6%, or $185.7$141.4 million, from $1.35$2.20 billion at December 31, 2018.2021. Total loans receivable, net of deferred fees and costs, increased 11.8%22%, or $133.8$336.6 million, to $1.27$1.84 billion at December 31, 2019,2022, from $1.14$1.50 billion at December 31, 2018.2021. Total investment securities increaseddecreased by $16.3$79.7 million, or 13.0%22%, to $141.6$278.3 million at December 31, 2019,2022, from $125.3$358.0 million at December 31, 2018.2021. Total deposits increased 10.6%decreased 3%, or $123.3$53.6 million, to $1.29$1.83 billion at December 31, 2019,2022, from $1.16$1.88 billion at December 31, 2018.2021. From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. The BankFor December 31, 2022 and 2021, we had $30.0 million and $0 federal funds purchased, andrespectively. The Bank had FHLB advances outstanding of $10.0$235.0 million and $15.0$25.0 million respectively,for the years ended December 31, 2022 and 2021. Subordinated debt, net of unamortized issuance costs, totaled $19.6 million and $19.5 million at December 31, 2019. At December 31, 2018,2022 and 2021, respectively.had no federalmodeled various scenarios to improve balance sheet efficiency, reduce our cost of funds, purchased orimprove margin and our capital ratios. As a result, we executed a de-lever strategy through the sale of a portion of U.S. government agency low-yielding mortgage-backed investment securities available-for-sale at a one-time loss. The proceeds of this strategy were used to paydown high cost short-term FHLB advances outstanding.$1.27$1.84 billion at December 31, 2019,2022, an increase of $133.8$336.6 million, or 11.8%22%, compared to $1.14$1.50 billion at December 31, 2018. The increase in the2021. Excluding PPP loans, receivable portfolio was a result of organic loan growth primarily in our commercial real estate and commercial construction portfolios. At December 31, 2019, we had loans held for sale totaling $11.2which decreased $26.2 million compared to none for 2018. During 2019, we reclassified our unsecured consumer loan portfolio that we had purchased over the last two years. The earnings stream from this segment of our loan portfolio was not as expected as a result of loan forgiveness, net charge-offs totaling $647loan growth was $362.8 million for the year ended December 31, 2022. Loans outstanding under our warehouse facility with ACM totaled $42.7 million at December 31, 2022, a decrease of $29.3 million, or 41%, from $72 million at December 31, 2021, which is consistent with the slowdown of residential mortgage loan demand in our market.recorded during 2019. These loans are carried at estimated fair value.$821.7$1.10 billion at December 31, 2021, or 60% of total loan receivable, compared to $906.1 million at December 31, 2019, compared to $683.6 million at December 31, 2018,2021, an increase of $138.1$194.1 million, or 20.2%21%. Owner-occupied commercial real estate loans were $205.9$206.8 million at December 31, 20192022 compared to $160.6$191.8 million at December 31, 2018.2021. Nonowner-occupied$547.8$893.2 million at December 31, 20192022 compared to $452.2$714.3 million at December 31, 2018. Construction2021. Commercial construction loans totaled $216.0$147.9 million at December 31, 2019,2022, or 17.0%8% of total loans receivable. Of the $216.0$147.9 million in construction loans, $51.8$43.8 million are collateralized by land, and only $510 thousand are lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio). totaled $6.4 million at December 31, 2022. Our commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We plan to manage this portion of our portfolio in a disciplined manner. We have comprehensive policies to monitor, measure, and mitigate our loan The following table presents the composition of ourreceivable portfolioexcluding PPP loans, increased $69.2 million to $243.2 million at each of the five years ended December 31, 2019.Loans ReceivableAt2022, from $174.1 million at December 31, 2019, 2018, 2017, 20162021. Consumer residential loans increased $139.0 million to $339.6 million at December 31, 2022, from $200.6 million at December 31, 2021. The increase in residential loans was primarily a result of purchasing ACM originated mortgages, which were portfolio product offered by the Bank and 2015(Dollars in thousands) 2019 2018 2017 $ 821,692 64.55 % $ 683,602 60.07 % $ 526,657 59.21 % 115,103 9.04 % 137,328 12.07 % 98,150 11.04 % 215,983 16.97 % 153,339 13.47 % 123,444 13.88 % 108,795 8.55 % 131,431 11.55 % 108,926 12.25 % 11,290 0.89 % 32,308 2.84 % 32,232 3.62 % — — % — — % — — % 1,272,863 100.00 % 1,138,008 100.00 % 889,409 100.00 %
10,231 9,159 7,725 2,337 1,265 732 $ 1,260,295 $ 1,127,584 $ 880,952 2016 2015 $ 476,851 62.08 % $ 376,426 60.40 % 112,061 14.59 % 89,502 14.36 % 53,167 6.92 % 49,834 8.00 % 106,549 13.87 % 84,464 13.55 % 19,548 2.54 % 19,127 3.07 % — — % 3,856 0.62 % 768,176 100.00 % 623,209 100.00 %
6,452 6,239 75 (350 ) $ 761,649 $ 617,320 2019.2019
2022 One Year
or Less Between One
and Five Years After
Five Years Total $ 50,626 $ 308,892 $ 462,174 $ 821,692 59,062 47,313 8,728 115,103 51,612 91,873 72,498 215,983 4,748 25,455 78,592 108,795 4,478 3,699 3,113 11,290 $ 170,526 $ 477,232 $ 625,105 $ 1,272,863 $ 44,384 $ 298,369 $ 287,323 $ 630,076 126,142 178,863 337,782 642,787 $ 170,526 $ 477,232 $ 625,105 $ 1,272,863 One Year
or LessBetween One
and Five YearsBetween Five and Fifteen Years After Fifteen Years Total Commercial real estate $ 55,428 $ 522,217 $ 519,116 $ 3,500 $ 1,100,261 Commercial and industrial 41,670 120,783 26,815 53,964 243,232 Paycheck protection program — 1,988 — — 1,988 Commercial construction 68,003 64,615 15,321 — 147,939 Consumer residential 25,920 56,536 71,659 185,476 339,591 Consumer nonresidential 3,581 2,162 858 1,084 7,685 Total loans receivable $ 194,602 $ 768,301 $ 633,769 $ 244,024 $ 1,840,696 Fixed—rate loans $ 99,530 $ 517,069 $ 379,594 $ 150,321 $ 1,146,514 Floating—rate loans 95,072 251,232 254,175 93,703 694,182 Total loans receivable $ 194,602 $ 768,301 $ 633,769 $ 244,024 $ 1,840,696 20192022 were $14.6$4.5 million compared to $7.4$3.5 million at December 31, 2018.2021. Our ratio of nonperforming assets to total assets was 0.95%0.19% at December 31, 20192022 compared to 0.57%0.16% at December 31, 2018. Troubled debt restructurings, or2021. TDRs, as of December 31, 20192022 and 20182021, totaled $3.9$830 thousand and $92 thousand, respectively.$203not a result of economic, industry, or environmental causes that we might see as a pattern for possible future losses within our loan portfolio. For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we had specific reserves totaling $86 thousand respectively. The TDR recorded during 2019 is included in our total of nonaccrual loans and nonperforming assets as of$186 thousand at December 31, 2019. However, this TDR did pay off in full, including past due interest2022 and late fees, during the first quarter2021, respectively. Because these loans are individually evaluated for impairment, no general reserve was assessed for valuation purposes.2019,2022, we had $17.0$10.4 million in loans identified as special mention within the originated loan portfolio, an increase of $8.4from $3.0 million fromas of December 31, 2018.2021. Special mention rated loans are loans that have a potential weakness that deserves management's close attention; however, the borrower continues to pay in accordance with their contract. The increase from December 31, 2018 is concentrated in two loans that were added to this risk category during the second quarter of 2019. These loans do not have a specific reserve and are considered well-secured. These two loans, totaling $11.1 million at December 31, 2019, have paid off in full including interest during the first quarter of 2020. 2019,2022, we had $9.8$4.1 million in loans identified as substandard within the originated loan portfolio, an increasea decrease from $19.0 million as of $8.6 million from December 31, 2018.2021 due to a combination of loan payoffs and risk rating improvements during the current year. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At December 31, 2019,2022, specific reserves on originated and acquired loans totaling $393$86 thousand, hashave been allocated within the allowance for loan losses to supplement any shortfall of collateral. In addition, the above mentioned TDR was classified as substandard, and paid off in full, including past due interest and late fees, during the first quarter of 2020.0.05%0.03% and 0.04% for each of the years ended December 31, 20192022 and 2018.2021, respectively. The following tables provide additional information on our asset quality for the periods presented.2019, 2018, 2017, 20162022 and 2015
20212022 2021 Nonperforming assets: Nonaccrual loans $ 3,150 $ 3,485 Loans contractually past‑due 90 days or more 1,343 23 Total nonperforming loans (NPLs) $ 4,493 $ 3,508 Other real estate owned (OREO) — — Total nonperforming assets (NPAs) $ 4,493 $ 3,508 Performing troubled debt restructurings (TDRs) $ 830 $ 92 NPLs/Total Assets 0.19 % 0.16 % NPAs/Total Assets 0.19 % 0.16 % NPAs and TDRs/Total Assets 0.23 % 0.16 % Allowance for loan losses/NPLs 357.00 % 394.21 % 2019 2018 2017 2016 2015 $ 9,693 $ 2,180 $ 741 $ 94 $ 2,559
1,032
1,031
48
155
— $ 10,725 $ 3,211 $ 789 $ 249 $ 2,559 3,866 4,224 3,866 — — $ 14,591 $ 7,435 $ 4,655 $ 249 $ 2,559 $ — $ 203 $ 1,671 $ 11,523 $ 5,074 0.70 % 0.24 % 0.07 % 0.03 % 0.35 % 0.95 % 0.57 % 0.44 % 0.03 % 0.35 % 0.95 % 0.57 % 0.60 % 1.29 % 1.04 % 95.39 % 285.24 % 979.09 % 2591.16 % 243.81 % Nonperforming Loans by Type
At December 31, 2019, 2018, 2017, 20162022 and 2015(Dollars in thousands) 2019 2018 2017 2016 2015 $ 4,912 $ 56 $ 154 $ 155 $ 1,145 4,142 2,800 48 94 1,304 820 — — — — 839 355 587 — 110 12 — — — — $ 10,725 $ 3,211 $ 789 $ 249 $ 2,559 At December 31, 2019,2021, there were no performing loans considered a potential problem loan. Potential problem loans are defined as loans that are not included in the 90 day past due, nonaccrual or adversely classified or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. At December 31, 2018, there was one performing loan totaling $123 thousand considered a potential problem loan. We take a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loansthat are adversely rated but not impaired as compared to the general portfolio. At2019, we had one OREO property with a fair value of $3.9 million. We are in2022, there were no remaining loans on payment deferral related to the process of selling this property and do not expect a material gain or loss from the current fair value of the property as we recorded a $1.1 million gain on the foreclosure of the property during the year ended December 31, 2017.pandemic.creditloan losses for us. Also, in the ordinary course of business, we may also be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. At December 31, 2019,2022, our commercial real estate portfolio, net of fees (including construction lending) portfolio was 81.5%68% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.2019, 2018, 2017, 2016,2022 and 2015
20212022 2021 Net (charge-offs) recoveries Percentage of net charge-offs (annualized) to average loans outstanding during the year Net (charge-offs) recoveries Percentage of net charge-offs (annualized) to average loans outstanding during the year Commercial real estate $ — — % $ (453) (0.03) % Commercial and industrial (396) (0.02) % (117) (0.01) % Consumer residential 1 — % 35 — % Consumer nonresidential (23) — % (94) (0.01) % Total $ (418) (0.03) % $ (629) (0.04) % Average loans outstanding during the period $ 1,618,077 $ 1,463,829 Allowance for loan losses to loans receivable, net of fees 0.87 % 0.92 % Allowance for loan losses to loans receivable, net of fees, excluding PPP 0.87 % 0.94 % 2019 2018 2017 2016 2015 $ 9,159 $ 7,725 $ 6,452 $ 6,239 $ 5,565 1,720 1,920 1,200 1,471 1,073 (20 ) — — (513 ) (98 ) — (86 ) (44 ) (669 ) (312 ) — (187 ) — (76 ) — (692 ) (292 ) (33 ) — — (712 ) (565 ) (77 ) (1,258 ) (410 ) 4 — — — 11 35 26 117 — — 2 1 — — — 23 52 33 — — 64 79 150 — 11 (648 ) (486 ) 73 (1,258 ) (399 ) $ 10,231 $ 9,159 $ 7,725 $ 6,452 $ 6,239 2019 2018 2017 2016 2015 $ 1,270,526 $ 1,136,743 $ 888,677 $ 768,102 $ 623,559 0.81 % 0.81 % 0.87 % 0.84 % 1.00 % 0.05 % 0.05 % (0.01 )% 0.19 % 0.07 % 2019, 2018, 2017, 20162022 and 2015
20212022 2021 Allocation Allocation Commercial real estate $ 10,777 59.77 % $ 8,995 60.11 % Commercial and industrial 2,623 13.21 % 1,827 11.55 % Paycheck protection program — 0.11 % — 1.90 % Commercial construction 1,499 8.04 % 2,009 12.45 % Consumer residential 1,044 18.45 % 781 13.31 % Consumer nonresidential 97 0.42 % 217 0.68 % Total allowance for loan losses $ 16,040 100.00 % $ 13,829 100.00 % 2019 2018 2017 Allocation % of Total* Allocation % of Total* Allocation % of Total* $ 6,399 64.55 % $ 5,548 60.07 % $ 4,832 59.21 % 1,275 9.04 % 1,474 12.07 % 768 11.04 % 2,067 16.97 % 1,285 13.47 % 1,191 13.88 % 417 8.55 % 518 11.55 % 626 12.25 % 73 0.89 % 334 2.84 % 268 3.62 % — 0.00 % — 0.00 % — 0.00 % — 0.00 % — 0.00 % 40 0.00 % $ 10,231 100.00 % $ 9,159 100.00 % $ 7,725 100.00 % 2016 2015 Allocation % of Total* Allocation % of Total* $ 4,266 62.08 % $ 4,002 60.40 % 1,032 14.59 % 1,442 14.36 % 375 6.92 % 302 8.00 % 500 13.87 % 282 13.55 % 121 2.54 % 98 3.07 % — 0.00 % 23 0.62 % 158 0.00 % 89 0.00 % $ 6,452 100.00 % $ 6,238 100.00 %
___________________held-to-maturity and certificates of deposit.held-to-maturity. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity were $264 thousand at each of December 31, 2019 compared to $1.8 million at December 31, 2018,2022 and 2021, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of ourOur investment securities available-for-saleportfolio was $141.3$278.3 million at December 31, 2019, an increase of $17.8 million or 14.4%, from $123.52022 compared to $358.0 million at December 31, 2018. We purchased $36.62021. Investment securities decreased $79.7 million during the year ended December 31, 2022, primarily as a result of principal paydowns of $37.1 million and a $49.0 million decrease in the market value of the available-for-sale investment securitiesportfolio during 20192022. The decrease in market value is due to help enhancethe current increasing rate environment and not a result of any credit deterioration of the portfolio. These purchases were primarily funded through our increase in deposits and PPP loan forgiveness to deploy excess liquidity and optimize net interest margin by investing in higher yielding earning assets including the reinvestment of $21.1 million in cash flows provided by mortgage-backed security redemptions.20192022 and 2018,2021, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities whichthat carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. All of our mortgage-backed securities are guaranteed by either the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Investment$11.3$108.7 million and $8.1$85.6 million at December 31, 20192022 and December 31, 2018,2021, respectively. At December 31, 2019 and December 31, 2018, only investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of pricing changes due to recent and negativerising rate conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.2019,2022 and December 31, 2018.Federal Reserve Bank of Richmond, or FRB and FHLB. At December 31, 2019,2022, we owned $1.9$11.1 million in FHLB stock and $4.0$4.4 million in FRB stock. At December 31, 2018,2021, we owned $1.1$1.8 million in FHLB stock and $4.0$4.4 million in FRB stock. The following table reflects the composition of our investment portfolio, at amortized cost, at December 31, 2019, 2018, and 2017.Investment SecuritiesAt December 31, 2019, 2018 and 2017(Dollars in thousands) 2019 2018 2017 Balance Percent of
Total Balance Percent of
Total Balance Percent of
Total $ 264 0.19 % $ 264 0.21 % $ 263 0.22 % — 0.00 % 1,497 1.16 % 1,497 1.25 % $ 264 0.19 % $ 1,761 1.37 % $ 1,760 1.47 %
$ 4,000 2.84 % $ 1,000 0.78 % $ 1,000 0.83 % 4,631 3.29 % 6,056 4.72 % 6,285 5.24 % 6,984 4.97 % 5,000 3.89 % 5,000 4.17 % 124,757 88.71 % 114,379 89.05 % 105,321 87.88 % — 0.00 % 245 0.19 % 490 0.41 % $ 140,372 99.81 % $ 126,680 98.63 % $ 118,096 98.53 % $ 140,636 100.00 % $ 128,441 100.00 % $ 119,856 100.00 % amortized costweighted average yields of our investment portfolio by their stated maturities, as well as the weighted average yields for each of the maturity ranges at December 31, 2019.2019
2022 and 2021 2019 Within One Year One to Five Years Five to Ten Years Over Ten Years Total Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield Amortized
Cost Weighted
Average
Yield $ — — $ — — $ 264 2.32 % $ — — $ 264 2.32 % $ — — $ — — $ 264 2.32 % $ — — $ 264 2.32 % $ — — $ 1,000 2.12 % $ 3,000 2.32 % $ — — $ 4,000 2.27 % — — 1,028 2.25 % 1,380 2.30 % 2,223 2.81 % 4,631 2.54 % — — — — 6,984 4.83 % — — 6,984 4.83 % — — — — 14,163 2.26 % 110,594 2.51 % 124,757 2.48 % $ — — $ 2,028 2.19 % $ 25,527 2.97 % $ 112,817 2.52 % $ 140,372 2.59 % $ — — $ 2,028 2.19 % $ 25,791 2.97 % $ 112,817 2.52 % $ 140,636 2.59 % 2022 Within One Year One to Five Years Five to Ten Years Over Ten Years Total Weighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldHeld‑to‑maturity Securities of state and local municipalities tax exempt — 2.32 % — — 2.32 % Total held‑to‑maturity securities — 2.32 % — — 2.32 % Available‑for‑sale Securities of U.S. government and federal agencies — — 1.49 % — 1.49 % Securities of state and local municipalities — 2.25 % — 2.92 % 2.43 % Corporate bonds — 6.02 % 4.09 % — 4.27 % Mortgaged‑backed securities — 2.09 % 2.48 % 1.57 % 1.62 % Total available‑for‑sale securities — 3.73 % 2.84 % 1.57 % 1.79 % Total investment securities — 3.65 % 2.51 % 1.57 % 1.79 % 2021 Within One Year One to Five Years Five to Ten Years Over Ten Years Total Weighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldWeighted
Average
YieldHeld‑to‑maturity Securities of state and local municipalities tax exempt — — 2.32 % — 2.32 % Total held‑to‑maturity securities — — 2.32 % — 2.32 % Available‑for‑sale Securities of U.S. government and federal agencies — — 1.49 % — 1.49 % Securities of state and local municipalities — 2.25 % — 2.92 % 2.45 % Corporate bonds — 3.98 % 4.15 % — 4.12 % Mortgaged‑backed securities — — 2.21 % 1.53 % 1.57 % Total available‑for‑sale securities — 3.27 % 2.51 % 1.53 % 1.68 % Total investment securities — 3.27 % 2.51 % 1.53 % 1.68 % Average Balance (Dollars in thousands) 2022 2021 Noninterest-bearing demand $ 501,962 27.77 % $ 527,675 31.29 % Interest-bearing deposits Interest checking 724,881 40.10 % 587,151 34.82 % Savings and money markets 315,653 17.46 % 303,317 17.99 % Certificate of deposits, $100,000 to $249,999 51,490 2.85 % 58,453 3.47 % Certificate of deposits, $250,000 or more 152,229 8.42 % 172,215 10.21 % Other time deposits 61,478 3.39 % 37,657 2.22 % Total $ 1,807,693 100.00 % $ 1,686,468 100.00 % $1.29$1.83 billion at December 31, 2019, an increase2022, a decrease of $123.3$53.6 million, or 10.6%3%, from $1.16$1.88 billion at December 31, 2018.2021. Noninterest-bearing deposits totaled $306.2$438.3 million at December 31, 2019,2022, comprising 23.8%24% of total deposits and increased $72.9 million, or 31.3%, compared to December 31, 2018. The increase in total deposits during 2019 was primarily due to our core deposit gathering efforts as we strategically decreased our reliance on brokered deposit funding, which is used as a short-term funding source for the Bank. At December 31, 2019, deposits from municipalities, which are secured by a letter of credit issued by the FHLB and a portion of our investment securities, represented 8.4% of our total deposits. Deposits of any individual municipality are generally limited to 5% of total assets and in the aggregate, municipalities are limited to 18% of total assets. Some of these customers utilize our treasury management services, and all maintain deposits of varying types and maturities. As such, we believe that these customers are unlikely to abruptly terminate their relationship with us. However, in the event that we were to lose all or a significant portion of the deposits of one or more of these customers, we believe that we have adequate alternative sources of liquidity to enable us to replace these funds, although the cost of such replacement sources of liquidity could be higher. The following table provides information on our deposit composition at December 31, 2019.Deposit CompositionAt December 31, 2019(Dollars in thousands) 2019 Balance Average
Rate $ 306,235 — 557,148 1.18 % 270,508 2.37 % 151,831 2.19 % $ 1,285,722 The remaining maturity of time deposits at December 31, 2019 are as follows: 2019 $ 114,991 94,550 114,281 98,517 $ 422,339 $100.0$248.0 million at December 31, 2019, or $15.6 million,2022 from $84.4$35.0 million at December 31, 2018. In addition, we2021, which offset the year-over-year declines in all other deposit categories, which was a result of customers using their excess liquidity to fund their business activity, and decreases in escrow funds from title and real estate companies due to the slowdown in real estate activity in the market.Promontory InterfinancialIntraFi Network or Promontory,("IntraFi"), which gives us the ability to offer Certificates of Deposit Account Registry Service or CDARS,("CDARS"), and Insured Cash Sweep or ICS,("ICS"), products to our customers who seek to maximize FDIC insurance protection. When a customer places a large deposit with us for Promontory,IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At December 31, 20192022 and December 31, 2018,2021, we had $71.4$117.6 million and $88.7$186.0 million, respectively, in either CDARS reciprocal or ICS reciprocal products. The decrease from December 31, 2021 is a result of certain customers utilizing excess liquidity for their day-to-day operations.thosematurities of the estimated amount of uninsured certificates of deposit that exceed $100,000 by maturity for the year endedat December 31, 2019.Over $100,000 and Greater
than $250,0002019
20222022 Three months or less $ 38,589 Over three months through six months 45,366 Over six months through twelve months 51,820 Over twelve months 23,747 $ 159,522 2019 $ 45,309 59,303 93,456 72,440 $ 270,508 $49.5$284.6 million at December 31, 2019,2022, and $24.4$44.5 million at December 31, 2018. At2021. For December 31, 2019,2022 and 2021, we had $10.0$235.0 million and $25.0 million, respectively, in FHLB advances. The increase in FHLB advances was a result of the aforementioned decrease in customer deposits and to assist in funding loan origination activity. Subordinated debt, net of unamortized issuance costs, totaled $19.6 million and $19.5 million at December 31, 2022 and 2021, respectively. For December 31, 2022 and 2021, we had $30.0 million and $0 federal funds purchased, and $15.0 million in FHLB advances. We had no federal funds purchased or FHLB advances at December 31, 2018.
respectively. The following table reflects the short-term borrowings and other borrowed funds outstanding at December 31, 2019, 2018, and 2017.Short-Term Borrowings and Other Borrowed FundsAt December 31, 2019, 2018 and 2017(Dollars in thousands) 2019 2018 2017 Amount
Outstanding Weighted
Average
Rate Amount
Outstanding Weighted
Average
Rate Amount
Outstanding Weighted
Average
Rate $ 10,000 1.60 % $ — — $ — — 15,000 1.73 % — — — — $ 25,000 1.68 % $ — — $ — — 24,487 6.00 % 24,407 6.00 % 24,327 6.00 % $ 24,487 6.00 % $ 24,407 6.00 % $ 24,327 6.00 % $ 49,487 3.82 % $ 24,407 6.00 % $ 24,327 6.00 % a common equity Tier 1, or CET1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to our CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we currently consider our minimum capital ratios to be as follows: 7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total capital. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the minimum plus the conservation buffer will face constraints on dividends, equity repurchases, and compensation. Thehave adopted a CBLR, which is calculated by dividing tangible equity capital by average consolidated total assets of 9%.assets. If a "qualified community bank," generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, opts into the CBLR framework and has a leverage ratio whichthat exceeds the CBLR threshold, which was initially set at 9%, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements under Basel III, the capital ratio requirements for "well capitalized" status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject. A bank or holding company may be excluded from qualifying community bank status base on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures and such other facts as the appropriate federal banking agencies determine to be appropriate. AsAt January 1, 2020, we qualified for and adopted this simplified capital structure. Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2019, we qualified for this simplified capital regime, however, there can be no assurance that satisfaction of the CBLR will provide adequate capital for our operations2022 and growth, or an adequate cushion against increase levels of nonperforming assets or weakened economic conditions.December 31, 2021. Shareholders'Stockholders' equity at December 31, 20192022 was $179.1$202.4 million, an increasea decrease of $20.7$7.4 million, compared to $158.3$209.8 million at December 31, 2018.2021. The increasedecrease in shareholders' equity was primarily attributable to a decrease in accumulated other comprehensive income of $34.5 million, which was primarily related to the recognitiondecrease in the market value of the Company's available-for-sale investment securities portfolio, offset by net income of $15.8 millionrecorded for the year ended December 31, 2019. Common stock issued as a result of option exercises increased shareholders' equity by $1.2 million for the year ended December 31, 2019. Accumulated other comprehensive income increased $3.1 million during 2019, primarily as a result of an increase in market value of our available-for-sale investment securities portfolio.shareholders'stockholders' equity to total assets for each of December 31, 20192022 was 8.6% and for December 31, 20182021 was 11.7%9.5%. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) at December 31, 20192022 and December 31, 20182021 was $12.26$11.14 and $10.93,$11.76, respectively. Total risk-based capital to risk-weighted assets for the Bank was 13.43% at December 31, 2019 compared to 14.02% at December 31, 2018. Accordingly, we were considered "well capitalized" for regulatory purposes at December 31, 2019 and December 31, 2018.above,below, regulatory capital levels for the bank meets those established for "well capitalized" institutions. While we are currently considered "well capitalized," we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.which are substantially identical to those applicablepursuant to the Bank, and which are described below.small bank holding company policy statement. The Company understands that the Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that the Federal Reserve will continue this practice.20192022 and December 31, 20182021 for the Bank.
Capital Components20192022 and 2018
2021Actual Minimum Capital Requirement Minimum to be Well Capitalized Under Prompt Corrective Action Amount Ratio Amount Amount Ratio At December 31, 2022 Total risk-based capital $ 256,898 13.28 % $ 203,113 > 10.50 % $ 193,441 > 10.00 % Tier 1 risk-based capital 240,858 12.45 % 164,425 > 8.50 % 154,753 > 8.00 % Common equity tier 1 capital 240,858 12.45 % 135,409 > 7.00 % 125,737 > 6.50 % Leverage capital ratio 240,858 10.75 % 87,894 > 4.00 % 109,867 > 5.00 % At December 31, 2021 Total risk-based capital $ 222,871 13.54 % $ 177,069 > 10.50 % $ 168,638 > 10.00 % Tier 1 risk-based capital 214,442 12.72 % 143,342 > 8.50 % 134,910 > 8.00 % Common equity tier 1 capital 214,442 12.72 % 118,046 > 7.00 % 109,614 > 6.50 % Leverage capital ratio 214,442 10.55 % 81,712 > 4.00 % 102,140 > 5.00 % 2022 2021 Total stockholders' equity (GAAP) $ 202,382 $ 209,796 Less: goodwill and intangibles, net (7,790) (8,052) Tangible Common Equity (non-GAAP) $ 194,592 $ 201,744 Book value per common share (GAAP) $ 11.58 $ 12.23 Less: intangible book value per common share (0.44) (0.47) Tangible book value per common share (non-GAAP) $ 11.14 $ 11.76 Actual For Capital Adequacy
Purposes(1) To Be Well Capitalized
Under Prompt
Corrective Action
Provisions Amount Ratio Amount Ratio Amount Ratio $ 192,364 13.43 % $ 150,369 ³ 10.500 % $ 143,208 ³ 10.00 % 182,121 12.72 % 121,727 ³ 8.500 % 114,567 ³ 8.00 % 182,121 12.72 % 100,246 ³ 7.000 % 93,085 ³ 6.50 % 182,121 12.15 % 98,214 ³ 6.500 % 75,550 ³ 5.00 %
$ 172,975 14.02 % $ 121,861 ³ 9.875 % $ 123,404 ³ 10.00 % 163,804 13.27 % 97,180 ³ 7.875 % 98,723 ³ 8.00 % 163,804 13.27 % 78,670 ³ 6.375 % 80,213 ³ 6.50 % 163,804 12.41 % 52,777 ³ 4.000 % 65,971 ³ 5.00 %
Liquidity(1)Except with regard to the Bank's Tier 1 to average assets ratio, the minimum capital requirement for capital adequacy purposes includes the phased-in portion of the BASEL III Capital Rules conservation buffer.LiquidityPromontory InterfinancialIntraFi Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. We also have one-way authority with PromontoryIntraFi for both their CDARs and ICS products which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.TableOur primary and secondary sources of Contentsinterest-bearing deposits at other financial institutionsfederal funds sold and investment securities available for sale, totaled $174.5 $359.6 million at December 31, 2019,2022, or 11.4% 15% of total assets. We held investments that are classified as held-to-maturity in the amount of $264 thousandassets, a decrease from $598.7 million, or 27%, at December 31, 2019.2021. To maintain ready access to the Bank's secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at December 31, 20192022 was approximately $113.3approximately $138.5 million. Borrowing capacity with the FRB was approximately $51.9 approximately $94.2 million at December 31, 2019.2022. These facilities are subject to the FHLB and the Federal ReserveFRB approving disbursement to us. In addition, we have investment securities of $130.0 million which are available to pledge at FHLB to provide additional borrowing capacity if needed. We also have unsecured federal funds purchased lines of $189.0approximately $265.0 million available to us.us of which $30.0 million was advanced as of December 31, 2022. We anticipate maintaining liquidity at a level sufficient to protect depositors as we endure through this pandemic, provide for reasonable growth, and fully comply with all regulatory requirements.As discussed under the caption "Deposits and Other Borrowed Funds" above, we have a deposit concentration related to municipalities at December 31, 2019. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.20192022 and December 31, 2018,2021, unused commitments to fund loans and lines of credit totaled $244.4$235.6 million and $216.0$183.1 million, respectively. Commercial and standby letters of credit totaled $9.0$6.5 million and $9.4$8.9 million at December 31, 20192022 and December 31, 2018,2021, respectively. As a financial institution, we are exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers' ability to prepay loans and depositors' ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee, or ALCO. ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management. We employ an independent consulting firm to model our interest rate sensitivity. We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case. Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in
Not required.the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Bank's interest rate risk position over a historical time frame for comparison purposes. At December 31, 2019, our asset/liability position was slightly asset sensitive based on our interest rate sensitivity model. Our net interest income would increase by 0.1% in an up 100 basis point scenario and would decrease by 0.7% in an up 400 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would increase by 2.9% in an up 100 basis point scenario and would increase by 7.2% in an up 400 basis point scenario. At December 31, 2019 and December 31, 2018, all interest rate risk stress tests measures were within our board policy established limits in each of the increased rate scenarios. Additional information on our interest rate sensitivity for a static balance sheet over a one-year time horizon as of December 31, 2019 and December 31, 2018 can be found below.Interest Rate Risk to Earnings (Net Interest Income) December 31, 2019 December 31, 2018
rates (basis points) Percentage change in
net interest income Change in interest
rates (basis points) Percentage change in
net interest income +400 –0.69 % +400 2.74 % +300 –0.20 % +300 2.25 % +200 0.11 % +200 1.77 % +100 0.11 % +100 1.03 % 0 — 0 — –100 0.56 % –100 –1.13 % –200 –0.80 % –200 –4.80 % Economic value of equity, or EVE, measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows. The interest rate risk to capital at December 31, 2019 and December 31, 2018 is shown below and reflects that our market value of capital is in a liability position in which an increase in short-term interest rates is expected to generate lower market values of capital. At December 31, 2019 and December 31, 2018, all EVE stress tests measures were within our board policy established limits.Interest Rate Risk to Capital December 31, 2019 December 31, 2018
rates (basis points) Percentage change in
economic value of equity Change in interest
rates (basis points) Percentage change in
economic value of equity +400 –13.72 % +400 –16.16 % +300 –9.36 % +300 –11.98 % +200 –5.21 % +200 –7.37 % +100 –1.99 % +100 –3.33 % 0 — 0 — –100 1.68 % –100 2.39 % –200 1.55 % –200 2.75 % 2019PagePage 
and StockholdersSubsidiarysubsidiary (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of income, comprehensive income (loss), cash flows and changes in stockholders'stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.Yount, HydeYOUNT, HYDE & Barbour,BARBOUR, P.C.27, 202024, 202320192022 and 20182022 2021 Assets Cash and due from banks $ 7,253 $ 24,613 Interest-bearing deposits at other financial institutions 74,300 216,345 Securities held-to-maturity (fair value of $0.3 million for both December 31, 2022 and 2021, respectively), at amortized cost 264 264 Securities available-for-sale, at fair value 278,069 357,612 Restricted stock, at cost 15,612 6,372 Loans, net of allowance for loan losses of $16.0 million and $13.8 million at December 31, 2022 and 2021, respectively 1,824,394 1,490,020 Premises and equipment, net 1,220 1,584 Accrued interest receivable 9,435 8,074 Prepaid expenses 3,273 1,393 Deferred tax assets, net 18,533 8,629 Goodwill and intangibles, net 7,790 8,052 Bank owned life insurance (BOLI) 55,371 39,171 Operating lease right-of-use assets 9,680 10,167 Other assets 39,128 30,628 Total assets $ 2,344,322 $ 2,202,924 Liabilities and Stockholders' Equity Liabilities Deposits: Noninterest-bearing $ 438,269 $ 581,293 Interest-bearing checking, savings and money market 883,480 1,071,059 Time deposits 508,413 231,417 Total deposits $ 1,830,162 $ 1,883,769 Federal funds purchased $ 30,000 $ — FHLB advances 235,000 25,000 Subordinated notes, net of issuance costs 19,565 19,510 Accrued interest payable 1,269 1,034 Operating lease liabilities 10,394 11,111 Accrued expenses and other liabilities 15,550 52,704 Total liabilities $ 2,141,940 $ 1,993,128 Commitments and Contingent Liabilities Stockholders' Equity 2022 2021 Preferred stock, $0.01 par value Shares authorized 1,000,000 1,000,000 Shares issued and outstanding — — Common stock, $0.01 par value Shares authorized 20,000,000 20,000,000 Shares issued and outstanding 17,475,109 13,727,045 $ 175 $ 137 Additional paid-in capital 123,886 121,798 Retained earnings 114,888 89,904 Accumulated other comprehensive (loss) income, net (36,567) (2,043) Total stockholders' equity $ 202,382 $ 209,796 Total liabilities and stockholders' equity $ 2,344,322 $ 2,202,924 2019 2018 $ 14,916 $ 9,435 18,226 34,060 264 1,761 141,325 123,537 6,017 5,299 11,198 — 1,260,295 1,127,584 2,084 2,271 4,094 4,050 546 892 7,683 8,591 8,689 8,443 37,069 16,406 3,866 4,224 13,279 — 7,744 5,023 $ 1,537,295 $ 1,351,576
$ 306,235 $ 233,318 557,148 583,736 422,339 345,386 $ 1,285,722 $ 1,162,440 $ 10,000 $ — 15,000 — 24,487 24,407 605 811 13,686 — 8,717 5,582 $ 1,358,217 $ 1,193,240 Commitments and Contingent LiabilitiesStockholders' Equity 2019 2018 1,000,000 1,000,000 — — — —
20,000,000 20,000,000 13,902,067 13,712,615 139 137 $ 125,779 $ 123,882 52,470 36,728 690 (2,411 ) $ 179,078 $ 158,336 $ 1,537,295 $ 1,351,576 20192022 and 20182022 2021 Interest and Dividend Income Interest and fees on loans $ 73,624 $ 63,974 Interest and dividends on securities held-to-maturity 6 6 Interest and dividends on securities available-for-sale 5,959 3,860 Dividends on restricted stock 408 328 Interest on deposits at other financial institutions 685 260 Total interest and dividend income $ 80,682 $ 68,428 Interest Expense Interest on deposits $ 12,468 $ 7,601 Interest on federal funds purchased 688 — Interest on short-term debt 1,251 346 Interest on subordinated notes 1,031 2,534 Total interest expense $ 15,438 $ 10,481 Net Interest Income $ 65,244 $ 57,947 Provision for (reversal of) loan losses 2,629 (500) Net interest income after provision for (reversal of) loan losses $ 62,615 $ 58,447 Noninterest Income Service charges on deposit accounts $ 954 $ 1,028 BOLI income 1,200 994 (Loss) income from minority membership interest (33) 1,464 Other income 713 816 Total noninterest income $ 2,834 $ 4,302 Noninterest Expenses Salaries and employee benefits $ 20,316 $ 18,980 Occupancy and equipment expense 3,252 3,290 Data processing and network administration 2,303 2,203 State franchise taxes 2,036 1,983 Audit, legal and consulting fees 1,210 1,489 Merger and acquisition expense 125 1,445 Loan related expenses 555 1,247 FDIC insurance 620 770 Director fees 668 651 Core deposit intangible amortization 262 305 Gain on sale of other real estate owned — (236) Tax credit amortization 126 — Other operating expenses 2,987 2,413 Total noninterest expenses $ 34,460 $ 34,540 Net income before income tax expense $ 30,989 $ 28,209 Income tax expense 6,005 6,276 Net income $ 24,984 $ 21,933 Earnings per share, basic $ 1.43 $ 1.29 Earnings per share, diluted $ 1.35 $ 1.20 2019 2018 $ 62,182 $ 48,216 30 51 3,496 2,767 321 291 705 599 $ 66,734 $ 51,924 $ 16,830 $ 10,354 145 28 116 74 — 74 1,580 1,580 $ 18,671 $ 12,110 $ 48,063 $ 39,814 1,720 1,920 $ 46,343 $ 37,894 $ 890 $ 635 — (462 ) 3 — (145 ) — 662 438 1,136 1,050 $ 2,546 $ 1,661 $ 17,047 $ 14,008 3,400 2,524 1,638 1,233 1,696 1,184 826 649 133 3,339 476 364 244 469 396 339 532 457 195 212 439 308 385 118 1,470 1,244 $ 28,877 $ 26,448 $ 20,012 $ 13,107 4,184 2,238 $ 15,828 $ 10,869 $ 1.15 $ 0.93 $ 1.07 $ 0.85 20192022 and 20182022 2021 Net income $ 24,984 $ 21,933 Other comprehensive (loss) income: Unrealized loss on securities available for sale, net of tax benefit of $11,015 and $1,226 in 2022 and 2021, respectively. (37,943) (4,404) Unrealized gain on interest rate swaps, net of tax expense of $909 and $142 in 2022 and 2021, respectively. 3,419 535 Total other comprehensive loss $ (34,524) $ (3,869) Total comprehensive (loss) income $ (9,540) $ 18,064 2019 2018 $ 15,828 $ 10,869 3,164 (1,072 ) (63 ) — — 354 $ 3,101 $ (718 ) $ 18,929 $ 10,151 20192022 and 20182022 2021 Cash Flows From Operating Activities Net income $ 24,984 $ 21,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 424 555 Provision for (reversal of) loan losses 2,629 (500) Net amortization of premium of securities 607 528 Net accretion of deferred loan fees, costs, and purchase premiums (2,255) (5,830) Net accretion of acquisition accounting adjustments (315) (442) Gain on sale of other real estate owned — (236) Amortization of subordinated debt issuance costs 55 488 Core deposits intangible amortization 262 305 Amortization of tax credits 126 — Equity-based compensation expense 1,183 1,011 BOLI income (1,200) (994) Loss (income) from minority membership interest 33 (1,464) Deferred income tax expense 395 1,007 Changes in assets and liabilities: (Increase) decrease in accrued interest receivable, prepaid expenses and other assets (9,094) 9,480 Increase (decrease) in accrued interest payable, accrued expenses and other liabilities 4,558 (6,396) Net cash provided by operating activities $ 22,392 $ 19,445 Cash Flows From Investing Activities Decrease (increase) in interest-bearing deposits at other financial institutions $ 142,045 $ (96,117) Purchases of securities available-for-sale (47,160) (245,731) Proceeds from maturities and calls of securities available-for-sale — 6,996 Proceeds from paydowns of securities available-for-sale 37,076 41,016 (Increase) decrease in restricted stock (9,240) 191 Net increase in loans (334,426) (32,110) Purchase of bank-owned life insurance (15,000) — Distribution received from minority owned investment 1,040 — Proceeds from sale of OREO — 4,102 Purchase of minority membership interest — (22,200) Purchases of premises and equipment, net (166) (485) Net cash used in investing activities $ (225,831) $ (344,338) Cash Flows From Financing Activities Net (decrease) increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits $ (330,603) $ 432,912 Net increase (decrease) in time deposits 276,989 (81,649) Redemption of subordinated debt, net (1,250) (23,813) Increase in federal funds purchased 30,000 — Net increase in FHLB advances 210,000 — Repurchase of shares of common stock (730) — Common stock issuance 1,673 1,221 Net cash provided by financing activities $ 186,079 $ 328,671 Net (decrease) increase in cash and cash equivalents $ (17,360) $ 3,778 Cash and cash equivalents, beginning of year 24,613 20,835 Cash and cash equivalents, end of year $ 7,253 $ 24,613 2019 2018 $ 15,828 $ 10,869 643 497 1,720 1,920 377 534 755 534 487 (64 ) (3 ) — 145 — 80 80 385 118 679 707 (662 ) (438 ) — 462 185 (866 ) (2,044 ) (4,532 ) 1,826 3,520 $ 20,401 $ 13,341 $ 245 $ 245 15,834 (15,047 ) (36,619 ) (37,044 ) — 23,012 1,500 — 1,250 — 21,055 16,938 (718 ) (470 ) (147,195 ) (106,324 ) 358 — — 5,172 (20,000 ) — (311 ) (743 ) $ (164,601 ) $ (114,261 ) $ 46,329 $ 195,001 77,132 (99,113 ) 10,000 — 15,000 (27,577 ) 1,220 34,616 $ 149,681 $ 102,927 $ 5,481 $ 2,007 9,435 7,428 $ 14,916 $ 9,435 20192022 and 2018Shares Common
StockAdditional
Paid-in
CapitalRetained
EarningsAccumulated
Other
Comprehensive
Income (Loss)Total Balance at December 31, 2020 13,511 $ 135 $ 119,568 $ 67,971 $ 1,826 $ 189,500 Net income — — — 21,933 — 21,933 Other comprehensive income — — — — (3,869) (3,869) Common stock issuance for options exercised 182 2 1,219 — — 1,221 Vesting of restricted stock grants 34 — — — — — Stock-based compensation expense — — 1,011 — — 1,011 Balance at December 31, 2021 13,727 $ 137 $ 121,798 $ 89,904 $ (2,043) $ 209,796 Net income — — — 24,984 — 24,984 Other comprehensive loss — — — — (34,524) (34,524) Repurchase of common stock (37) — (730) — — (730) Common stock issuance for options exercised 242 3 1,670 — — 1,673 Vesting of restricted stock grants 48 — — — — — 5-for-4 stock split 3,495 35 (35) — — — Stock-based compensation expense — — 1,183 — — 1,183 Balance at December 31, 2022 17,475 $ 175 $ 123,886 $ 114,888 $ (36,567) $ 202,382 Shares Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total 10,869 $ 109 $ 74,008 $ 25,859 $ (1,693 ) $ 98,283 — — — 10,869 — 10,869 — — — — (718 ) (718 ) 1,844 18 33,457 — — 33,475 221 2 1,139 — — 1,141 763 8 14,571 — — 14,579 16 — — — — — — — 707 — — 707 13,713 $ 137 $ 123,882 $ 36,728 $ (2,411 ) $ 158,336 — — — 15,828 — 15,828 — — — (86 ) — (86 ) — — — — 3,101 3,101 174 2 1,218 — — 1,220 15 — — — — — — — 679 — — 679 13,902 139 125,779 52,470 690 $ 179,078 share and per share data)System and the Federal Deposit Insurance Corporation.System. It is subject to the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.October 12, 2018,August 31, 2021, the Bank made an investment in Atlantic Coast Mortgage, LLC ("ACM") for $20.4 million to obtain a 28.7% ownership interest in ACM. This ownership interest is subject to an earnback option of up to 3.7% over the next three years. As of December 31, 2022, our percentage ownership had decreased to 27.7%. In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify the Bank's held to investment loan portfolio. The investment is accounted for using the equity method of accounting.completionBoard of its acquisition of Colombo Bank ("Colombo"), pursuant toDirectors approved a previously announced definitive merger agreement. Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018 adding five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuant to the terms of the merger agreement, based on the average closing pricefive-for-four split of the Company's common stock duringin the five trading day period endedform of a 25% stock dividend for shareholders of record on October 10, 2018,January 9, 2023, payable on January 31, 2023. Earnings per share and all other per share information reflected in the second trading day prior to closing, of $19.614 (the Average Closing Price") holders of shares of Colombo common stock received 0.002217 sharesCompany's consolidated financial statements have been adjusted for the five-for-four split of the Company's common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective datecomparative purposes.merger, plus cashCompany’s asset/liability management process, the Bank sold $40.3 million of investment securities available-for-sale at an after-tax loss of $3.6 million to de-leverage its balance sheet and invest funds in lieuhigher-yielding assets. Also during the first quarter of fractional shares at a rate equal to the Average Closing Price, and subject to the right of holders of Colombo common stock who owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, and who made a timely election, to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result2023 as part of the merger, 763,051 sharesBank’s asset/liability management process, the Bank fixed $150 million of wholesale funding through the Company's common stock were issued in exchange for outstanding sharesexecution of Colombo common stock.pay-fixed/receive-floating interest rate swaps with a weighted-average rate of 3.50% and maturity of five years. For a full discussion of these transactions, please see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Discussion of Analysis of Financial Condition, Overview," above.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)business combinations and impairment testing of goodwill, the allowance for loan losses, the valuation of deferred tax assets, and other-than-temporary impairment, and the valuationimpairment.purchaseacquisition method. The purchaseacquisition method requires that the assets acquired and liabilities assumed be recorded, based on their estimated fair values at the date of acquisition. The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed, including identifiable intangibles, is recorded as goodwill.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)2018,2020, as a result of the Company's acquisition of Colombo Bank ("Colombo"), the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as "originated" loans) and loans acquired (referred to as "acquired" loans). The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification ("ASC") Topic 310-30 or ASC Topic 310-20.(PCI)("PCI") loans, which are the non-performing loans acquired in the Company's acquisition of Colombo, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. The CompanyNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)owned.reversalor reversals of loan losses, increased by recoveries of previously charged-off loans, and decreased by loan charge-offs.knownprobable and inherent losses in the loan portfolio. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected creditloan losses, historical trends and specific conditions of the individual borrowers. Unusual and infrequently occurring events, such as weather-related disasters or disease epidemics or pandemics, may impact management's assessment of possible creditloan losses. As a part of the analysis, the Company uses comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions and concentrations of credit, competition, and loan review results to support estimates.Loans.Loans. Commercial real estate loans are secured by both owner occupied and investor owned commercial properties, including multi-family residential real estate. Collateral for this loan type includes various types of commercial real estate, including office, retail, warehouse, industrial and other non-residential types of properties.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)Loans.LoansLoans.Loans. The Company's commercial construction loan portfolio consists of acquisition, development, and construction of commercial real estate, including multi-family properties. Our typical commercial construction loan involves property that will ultimately be leased to a non-owner occupant. Construction lending entails significant additional risks as they often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks since funds are advanced while the property is under construction, which property has uncertain value prior to the completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan-to-value ratios. To reduce the risks associated with construction lending, the Company generally limits loan-to-value ratios to 80% of when-completed appraised values for owner-occupied residential or commercial properties and for investor-owned residential or commercial properties. Construction loan agreements may include provisions which allow for the payment of contractual interest from an interest reserve. Amounts drawn from an interest reserve increase the amount of the outstanding balance of the construction loan. This is an industry standard practice.Residential.Residential. This portfolio consists primarily of home equity lines of credit ("HELOC"HELOCs") that we originate in our market areas. Our HELOCs generally have a maximum loan to value of up to 85%, however, actual loan to values are typically lower than the maximum. We have also purchased portfolios of 1-4 family residential first mortgage loans on properties located in our market area for yield and diversification.Nonresidential.Nonresidential. The Company's consumer nonresidential loans consist primarily of installment loans made to individuals for personal, family and household purposes. In addition, we have purchased pools of unsecured consumer loans and student loans from a third party for yield and diversification.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)20192022 and 20182021 is a reasonable estimate of knownprobable and inherent losses in the loan portfolio at those dates.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued) Duringfourth quarterrequired implementation date and recorded the impact of 2019,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 commitments. Subsequent to adoption, the Company reclassified a portionwill record adjustments to its allowances for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of its consumer unsecured loan portfolio as held for sale,income.recorded a loss on the market value adjustment totaling $145 thousand. This portfolio was purchased by the Company within the last two years and is not performing as expected, with recorded net charge-offs totaling $647 thousand for the year ended December 31, 2019. The Company anticipates selling these loans during 2020.(g)Premises and Equipment On January 1, 2019, theadoptedfollows ASU No. 2016-02 "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. There was a cumulative effect adjustment of approximately $86 thousand at adoption. The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases. Prior to adoption, all of the Company's leases were classified as operating leases and remain operating leases at adoption. The implementation of the new standard resulted in recognition of a right-of-use asset of approximately $12.2 million and an offsetting lease liability of $12.7 million for leases existing at the date of adoption. that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. for the lease termshare and per share data)Note 2. Summary of Significant Accounting Policies (Continued)annual impairment test annually during the fourth quarter. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.20192022 and 2018.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued) The Company did not foreclose on any properties during the years ended December 31, 2019 and 2018. The Company, through its acquisition of Colombo, did acquire one residential real estate property, which was sold for its recorded value in 2019.counterparty.Company—Company – 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 the20192022 and 2018.2021. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)income.income (loss). Other comprehensive income (loss) includes unrealized gains (losses) on securities available-for-sale and interest rate swaps for 2019,2022 and 2021, which are also recognized as separate components of equity. Items reclassified out of accumulated other comprehensive income (loss) to net income relate solely to realized gains (losses) on sales of securities available-for-sale and appear under the caption "Gain (loss) on sale of securities available-for-sale" in the Company's consolidated statements of income.17.16. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.periodsyears presented, all of the Company's stock options are classified as equity awards.2017,2018, the Company began granting restricted stock units which are granted at the fair market value of the Company's common stock on the grant date. Most restricted stock units vest in one-quarter increments on the anniversary date of the grant. The Company did not grant stock options in the years ended December 31, 20192022 and 2018.$367$424 thousand and $280$377 thousand for the years ended December 31, 20192022 and 2018,2021, respectively.
(r) ReclassificationsNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)(r)ReclassificationsFASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2016-13, "Financial Instruments—Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments."Instruments" that introduced the current expected credit losses ("CECL") model. The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied todaypreviously will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. AtThe FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the FASB's October 16, 2019 meeting,codification as well as other transition matters. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the Board affirmed its decision to amend the effective date of this ASU for many companies. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date and recorded the impact of fiscal years,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 interim periods within those fiscal years, beginning after December 15, 2019. All other entitiesconsisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company's reserve for unfunded commitments. Subsequent to adoption, the Company will be requiredrecord adjustments to applyits allowances for credit losses and reserves for unfunded commitments through the guidanceprovision for fiscal years, and interim periods within those years, beginning after December 15, 2022. credit losses in the consolidated statements of income.has identifiedis utilizing a third party vendorthird-party model to assist in the measurementtabulate its estimate of current expected credit losses, under this standard.using a discounted cash flow ("DCF") methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included loan type. The Company primarily utilizes national unemployment for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already within the quantitative component of the calculation, the Company may consider qualitative factors as prescribed in ASC 326. The Company's CECL implementation committee has completedprocess was overseen by the Allowance for Credit Losses Committee and included an assessment of data availability and gap analysis, data collection, process, validated the data inputs,consideration and is in the initial phasesanalysis of evaluating various allowancemultiple loss estimation methodologies, for certain loan segments withinand assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company's loan portfolio. The Company is currently evaluating the implementation of ASU 2016-13 due to the change in implementation dates for smaller reporting companies included in the FASB's Exposure Draft.January 2017,March 2020, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and Other (Topic 350): Simplifyingexceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the TestLondon Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for Goodwill Impairment." The amendmentsall entities as of March 12, 2020 through December 31, 2022. Subsequently, in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements. In August 2018,2021, the FASB issued ASU 2018-13, "Fair Value Measurement2021-01 "Reference Rate Reform (Topic 820)848): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.Scope." The amendments modify the disclosure requirementsThis ASU clarifies that certain optional expedients and exceptions in Topic 820848 for contract modifications and hedge accounting apply to add disclosures regarding changesderivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in unrealized gainsTopic 848 to capture the incremental consequences of the scope clarification and losses,to tailor the range and weighted average of significant unobservable inputs usedexisting guidance to develop Level 3 fair value measurements andderivative instruments affected by the narrative description of measurement uncertainty. Certainshare and per share data)Note 2. SummarySignificant Accounting Policies (Continued)disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal yearsany date from the beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendmentsinterim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be applied prospectively while others areissued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.applied retrospectively. Early adoptionpublished or cease to be representative after June 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for IBOR and other benchmark rates and to implement financial benchmark reforms more generally. There continues to be uncertainty regarding the use of alternative reference rates ("ARRs"), which may cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.permitted. The Company does not expectto identify, assess and monitor risks associated with the adoptionexpected discontinuation or unavailability of ASU 2018-13benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to have a material impact on its consolidated financial statements. In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.ARRs. The Company is currently assessing ASU 2020-04 and its impact on the impact that ASU 2019-04 will have onCompany's transition away from LIBOR for its consolidatedloan and other financial statements.May 2019, the FASB issued ASU 2019-05, "Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief." The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses." This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. "Expected recoveries" describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes." The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 2. Summary of Significant Accounting Policies (Continued)(eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers' application of certain income tax-related guidance. This ASU is part of the FASB's simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements. In JanuaryAugust 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321), Investments—Equity Method2020-06 "Debt - Debt with Conversion and Joint Ventures (Topic 323),Other Options (Subtopic 470-20) and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323,- Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Topic 815.Contracts in an Entity's Own Equity." The ASU is based onsimplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a consensus ofsingle liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the Emerging Issues Task Force and is expectedderivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020,2021, and interim periods within those fiscal years. For all other entities, including the Company, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-012020-06 to have a material impact on its consolidated financial statements. Effective November 25, 2019,SEC adopted StaffFASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting Bulletin (SAB) 119. SAB 119 updated portionsfor Contract Assets and Contract Liabilities from Contracts with Customers." The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company does not expect the adoption of SEC interpretative guidanceASU 2021-08 to align withhave a material impact on its consolidated financial statements.ASC 326,issued ASU 2022-02, "Financial Instruments—Credit Losses.Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentationASU 2022-02 addresses areas identified by the FASB as part of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.Note 3. Business Combinations On October 12, 2018, the Company acquired Colombo, a commercial bank with approximately $199 million in assets, after purchase accounting adjustments. Based on an average closing priceits post-implementation review of the Company's common stock duringcredit losses standard (ASU 2016-13) that introduced the five trading day period ended on October 10, 2018 of $19.614 (the "Average Closing Price"),CECL model. The amendments eliminate the shareholders of Colombo common stock received 0.002217 shares ofaccounting guidance for TDRs by creditors that have adopted the Company's common stockCECL model and $0.053157 in cashenhance the disclosure requirements for each share of Colombo common stock held, plus cash in lieu of fractional shares atloan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a rate equalpublic business entity to the Average Closing Price,disclose current-period gross write-offs for financing receivables and subject to the right of holders of Colombo common stock who own fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, and who made a timely election, to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result of the merger, 763,051 shares of the Company's common stock and $18.3 million in cash were issued in exchange for outstanding shares of Colombo common stock. Total consideration for the acquisition was $32.9 million. Merger and acquisition expense for 2018 was $3.3 million which was mainly related to legal and accounting cost, system conversion and integration expenses, employee retention and severanceshare and per share data)Note 3. Business Combinations (Continued)payments. In 2019, $133 thousandprimarily legal and contract termination expenses associated with the Colombo acquisition was recorded. The following table sets forth the assets acquired and liabilities assumedorigination in the acquisition at their estimatedvintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13. the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.values asvalue hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization's risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the closingmajor provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one of more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASC 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.transactions: October 12, 2018 $ 23,469 3,874 12,732 1,391 142,593 789 4,289 6,512 1,950 406 161 358 638 $ 199,162 $ 19,080 48,426 70,778 138,284 27,577 127 294 $ 166,282 $ 32,880 The fair value estimates were subject to change for up to one year afterrelief in Topic 848 covers the closingperiod of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the transaction if additional information relative to closing dates fair values becomes available. Subsequent to the purchase, management made a measurement period adjustment of $663 thousandrelief in Topic 848. The ASU is effective for a purchase credit impaired loan inadvertently included in the purchase performing loan categoryall entities upon issuance. The Company is assessing ASU 2022-06 and for deferred tax assets basedits impact on the additional credit markCompany's transition away from LIBOR for its loan and final tax returnother financial instruments.Colombo.Freestanding Equity - Classified Written Call Options (a consensus of FASB Emerging Issues Task Force)." The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021-04 was effective for the Company on January 1, 2022 and resulted in no material impact.share and per share data)Note 3. Business Combinations (Continued)Fair Value Measurement of Assets Acquired and Liabilities Assumed Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition. Cash and cash equivalents. The carrying amount of cash and cash equivalents was used as a reasonable estimate of fair value. Interest-bearing deposits. The carrying amount of interest-bearing deposits was used as a reasonable estimate of fair value. Investment securities available-for-sale. The estimated fair value of investment securities available-for-sale was based on proceeds received from sale of securities immediately after consummation of acquisition. Restricted stocks. The carrying amount of restricted stocks was used as a reasonable estimate of fair value. These investments are carried at cost as no active trading market exists. Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: PCI and performing loans. PCI loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired. Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms. Performing loans were those loans that were currently performing in accordance with the loan contract and do not appear to have any significant credit issues. For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the "income approach"). Performing loans were segmented into pools based on loan type (commercial real estate, commercial and industrial, commercial construction, consumer residential and consumer nonresidential), and further segmented based on payment structure (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity. The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates. Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan. Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio. The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date. These assumptions were developed based on management discussions and third party professional experience. For loans that were identified as PCI, either the above income approach was used or the asset approach was used. The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract. Management used the asset approach for all nonaccrual loans to reflect market participant assumptions. Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 3. Business Combinations (Continued) The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." See Note 5 for further details. Premises and equipment. The land and building acquired were recorded at fair value as determined by the current tax assessment at acquisition date. Other real estate owned (OREO). OREO was recorded at fair value based on an existing purchase contract. Core deposit intangible. Core deposit intangibles ("CDI") are measures of the value of noninterest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent. The fair value of the CDI stemming from any business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source. The CDI is being amortized over an estimated useful life of 9.8 years to approximate the existing deposit relationships acquired. Deposits. The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand. The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities. Federal Home Loan Bank ("FHLB") advances. The fair value of FHLB advances was determined based on the repayment amount as all acquired advances were repaid immediately following the acquisition.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)4.3. Investment Securities and Other Investments20192022 and 2018,2021, are as follows:December 31, 2022 Held-to-maturity Securities of state and local municipalities tax exempt $ 264 $ — $ (12) $ 252 Total Held-to-maturity Securities $ 264 $ — $ (12) $ 252 Available-for-sale Securities of U.S. government and federal agencies $ 13,559 $ — $ (2,555) $ 11,004 Securities of state and local municipalities tax exempt 1,385 — (9) 1,376 Securities of state and local municipalities taxable 506 — (62) 444 Corporate bonds 21,212 — (2,154) 19,058 SBA pass-through securities 74 — (7) 67 Mortgage-backed securities 282,858 — (45,424) 237,434 Collateralized mortgage obligations 9,998 — (1,312) 8,686 Total Available-for-sale Securities $ 329,592 $ — $ (51,523) $ 278,069 December 31, 2019 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
(Losses) Fair
Value $ 264 $ 6 $ — $ 270 $ 264 $ 6 $ — $ 270 $ 4,000 $ — $ (4 ) $ 3,996 3,662 76 — 3,738 969 — (14 ) 955 6,984 78 (81 ) 6,981 163 — (4 ) 159 96,358 1,077 (246 ) 97,189 28,236 290 (219 ) 28,307 $ 140,372 $ 1,521 $ (568 ) $ 141,325 December 31, 2021 Held-to-maturity Securities of state and local municipalities tax exempt $ 264 $ 6 $ — $ 270 Total Held-to-maturity Securities $ 264 $ 6 $ — $ 270 Available-for-sale Securities of U.S. government and federal agencies $ 13,557 $ — $ (283) $ 13,274 Securities of state and local municipalities tax exempt 1,393 58 — 1,451 Securities of state and local municipalities taxable 607 — (11) 596 Corporate bonds 13,970 259 (78) 14,151 SBA pass-through securities 107 1 — 108 Mortgage-backed securities 316,313 1,352 (3,827) 313,838 Collateralized mortgage obligations 14,230 113 (149) 14,194 Total Available-for-sale Securities $ 360,177 $ 1,783 $ (4,348) $ 357,612 December 31, 2018 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
(Losses) Fair
Value $ 264 $ — $ (6 ) $ 258 1,497 — (20 ) 1,477 $ 1,761 $ — $ (26 ) $ 1,735 $ 1,000 $ — $ (44 ) $ 956 3,678 — (39 ) 3,639 2,378 — (70 ) 2,308 5,000 92 (79 ) 5,013 245 — (1 ) 244 200 — (5 ) 195 90,234 94 (2,291 ) 88,037 23,945 10 (810 ) 23,145 $ 126,680 $ 196 $ (3,339 ) $ 123,537 $11.3$4.1 million and $0$5.8 million pledged with the Federal Reserve Bank of Richmond (the "Federal Reserve Bank""FRB") for the years ended December 31, 20192022 and 2018,2021, respectively.TableThe Company had securities with a market value of ContentsNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share$104.6 million and per share data)Note 4. Investment Securities and Other Investments (Continued) There were no securities$79.7 million pledged with the Treasury Board of Virginia at the Community Bankers' Bank atfor the years ended December 31, 2019. There were securities with a market value of $8.1 million pledged as of December 31, 2018.20192022 and 2018,2021, respectively. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the prior twelve-month period. Securities that have been in a continuous unrealized loss position are as follows:Less Than 12 Months 12 Months or Longer Total At December 31, 2022 Securities of U.S. government and federal agencies $ — 0 $ — $ 11,004 $ (2,555) $ 11,004 $ (2,555) Securities of state and local municipalities tax exempt 1,628 (21) — — 1,628 (21) Securities of state and local municipalities taxable — — 444 (62) 444 (62) Corporate bonds 12,344 (1,119) 5,964 (1,035) 18,308 (2,154) SBA pass-through securities — — 67 (7) 67 (7) Mortgage-backed securities 26,486 (1,831) 210,948 (43,593) 237,434 (45,424) Collateralized mortgage obligations 2,601 (238) 6,085 (1,074) 8,686 (1,312) Total $ 43,059 $ (3,209) $ 234,512 $ (48,326) $ 277,571 $ (51,535) Less Than 12 Months 12 Months or Longer Total Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses $ 2,997 $ (3 ) $ 999 $ (1 ) $ 3,996 $ (4 ) — — 955 (14 ) 955 (14 ) 2,463 (22 ) 941 (59 ) 3,404 (81 ) — — 159 (4 ) 159 (4 ) 15,529 (73 ) 20,475 (173 ) 36,004 (246 ) 7,479 (94 ) 7,975 (125 ) 15,454 (219 ) $ 28,468 $ (192 ) $ 31,504 $ (376 ) $ 59,972 $ (568 ) Less Than 12 Months 12 Months or Longer Total At December 31, 2021 Fair
ValueUnrealized
LossesFair
ValueUnrealized
LossesFair
ValueUnrealized
LossesSecurities of U.S. government and federal agencies $ 13,275 $ (283) $ — $ — $ 13,275 $ (283) Securities of state and local municipalities taxable 595 (11) — — 595 (11) Corporate bonds 3,922 (78) — — 3,922 (78) Mortgage-backed securities 216,278�� (3,175) 19,225 (652) 235,503 (3,827) Collateralized mortgage obligations 3,362 (82) 1,814 (67) 5,176 (149) Total $ 237,432 $ (3,629) $ 21,039 $ (719) $ 258,471 $ (4,348) Less Than 12 Months 12 Months or Longer Total Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses $ — $ — $ 2,433 $ (64 ) $ 2,433 $ (64 ) 263 (1 ) 3,634 (44 ) 3,897 (45 ) 757 (1 ) 1,551 (69 ) 2,308 (70 ) 988 (12 ) 933 (67 ) 1,921 (79 ) — — 244 (1 ) 244 (1 ) — — 195 (5 ) 195 (5 ) 12,743 (59 ) 60,656 (2,232 ) 73,399 (2,291 ) — — 16,790 (810 ) 16,790 (810 ) $ 14,751 $ (73 ) $ 86,436 $ (3,292 ) $ 101,187 $ (3,365 ) twothree available-for-sale securitysecurities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 4. Investment Securities and Other Investments (Continued)tax exempt:tax-exempt: The unrealized losses on three of the investments in securities of state and local municipalities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Three of the sevenThese investments carry an S&P investment grade rating of AA+ or above,and AA.hasof the investment in securities of state and local municipalities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The investment carries an S&P investment grade rating of AA–, one has an AA rating, while the remaining two do not carry a rating.inon fifteen corporate bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. OneTwo of these investments carriescarry an S&P investment grade rating of A-.BBB and BBB+. The remaining sixthirteen investments doesdo not carry a rating.losslosses on the Company's single investment in SBA pass-through securitiesone available-for-sale security was caused by interest rate increases. RepaymentThe contractual terms of these investments do not permit the principal on this investment is guaranteed by an agency ofissuer to settle the U.S. Government. Accordingly, it is expected that the security would not be settledsecurities at a price less than the amortized cost basis of the Company's investment. Because the declineinvestments.market value is attributable to changes in interest rates and not credit quality, the Company does not consider the investment to be other-than-temporarily impaired at December 31, 2019.thirtyone hundred and six mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2019.(CMOs)("CMOs"): The unrealized loss associated with twenty-sixtwenty-nine CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2019.2022.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 4. Investment Securities and Other Investments (Continued)2019,2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.2022 Held-to-maturity Available-for-sale Amortized
CostFair
ValueAmortized
CostFair
ValueAfter 1 year through 5 years $ 264 $ 252 $ 4,935 $ 4,776 After 5 years through 10 years — — 48,978 43,396 After 10 years — — 275,679 229,897 Total $ 264 $ 252 $ 329,592 $ 278,069 2019 Held-to-maturity Available-for-sale Amortized
Cost Fair
Value Amortized
Cost Fair
Value $ — $ — $ 2,028 $ 2,061 264 270 25,527 25,658 — — 112,817 113,606 $ 264 $ 270 $ 140,372 $ 141,325 20192022 and 2018,2021, proceeds from maturities, calls, and principal repayments of securities were $24.1$37.1 million and $16.9$48.0 million, respectively. During 2019No securities were sold during 2022 and 2018, proceeds from sales of securities amounted to $3.0 million and $23.0 million, gross realized gains of $3 thousand in 2019 and gross realized losses of $462 thousand in 2018.2021. There were no realized gains or losses in 20192022 and no realized gains in 2018.$6.0$15.6 million and $5.3$6.4 million at December 31, 20192022 and 2018,2021, respectively. The following table discloses the types of investments included in other investments:2022 2021 Federal Reserve stock $ 4,378 $ 4,378 FHLB stock 11,087 1,847 Community Bankers' Bank stock 122 122 Atlantic Bankers' Bank stock 25 25 Total $ 15,612 $ 6,372 2019 2018 $ 4,018 $ 4,029 1,852 1,123 122 122 25 25 $ 6,017 $ 5,299 membersa member of the Federal Reserve BankFRB and the FHLB, the Company's banking subsidiaryBank is required to hold stock in these entities. Stock membership in Community Bankers' Bank allows the Company to secure overnight funding.funding and participate in other services offered by this institution. These investments are carried at cost since no active trading markets exist.share and per share data)5.4. Loans and Allowance for Loan Losses2022 2021 Originated Acquired Total Originated Acquired Total Commercial real estate $ 1,085,513 $ 14,748 $ 1,100,261 $ 887,310 $ 18,802 $ 906,112 Commercial and industrial 242,307 2,913 245,220 199,040 3,710 202,750 Commercial construction 147,436 503 147,939 186,572 1,043 187,615 Consumer real estate 322,579 17,012 339,591 176,682 23,922 200,604 Consumer nonresidential 7,661 24 7,685 10,277 27 10,304 $ 1,805,496 $ 35,200 $ 1,840,696 $ 1,459,881 $ 47,504 $ 1,507,385 Less: Allowance for loan losses 16,040 — 16,040 13,829 — 13,829 Unearned income and (unamortized premiums), net 262 — 262 3,536 — 3,536 Loans, net $ 1,789,194 $ 35,200 $ 1,824,394 $ 1,442,516 $ 47,504 $ 1,490,020 2019 2018 Originated Acquired Total Originated Acquired Total $ 771,320 $ 50,372 $ 821,692 $ 616,614 $ 66,988 $ 683,602 107,698 7,405 115,103 128,909 8,419 137,328 210,933 5,050 215,983 141,694 11,645 153,339 74,488 34,307 108,795 87,609 43,822 131,431 11,205 85 11,290 32,184 124 32,308 $ 1,175,644 $ 97,219 $ 1,272,863 $ 1,007,010 $ 130,998 $ 1,138,008
10,202 29 10,231 9,159 — 9,159 2,337 — 2,337 1,265 — 1,265 $ 1,163,105 $ 97,190 $ 1,260,295 $ 996,586 $ 130,998 $ 1,127,584 20192022 and 20182021 are as follows:2022 Purchased credit impaired acquired loans evaluated individually for future credit losses Outstanding principal balance $ 24 Carrying amount — Other acquired loans Outstanding principal balance 35,604 Carrying amount 35,200 Total acquired loans Outstanding principal balance 35,628 Carrying amount 35,200 2021 Purchased credit impaired acquired loans evaluated individually for future credit losses Outstanding principal balance $ 207 Carrying amount — Other acquired loans Outstanding principal balance 48,049 Carrying amount 47,504 Total acquired loans Outstanding principal balance 48,256 Carrying amount 47,504 2019 $ 5,605 4,810
93,587 92,409
99,192 97,219 share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued) 2018 $ 5,896 4,649
131,286 129,597
137,182 134,246 20192022 and 20182021 in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.Balance at January 1, 2022 $ 3 Accretion (197) Reclassification of nonaccretable difference due to improvement in expected cash flows 33 Other changes, net 161 Balance at December 31, 2022 $ — Balance at January 1, 2021 $ 216 Accretion (217) Reclassification of nonaccretable difference due to improvement in expected cash flows 54 Other changes, net (50) Balance at December 31, 2021 $ 3 $ 357 (136 ) 78 72 $ 371 $ — 379 (22 ) $ 357 20192022 and 20182021 follows:Commercial
Real EstateCommercial and
IndustrialCommercial
ConstructionConsumer Real
EstateConsumer
NonresidentialTotal 2022 Allowance for loan losses: Beginning Balance $ 8,995 $ 1,827 $ 2,009 $ 781 $ 217 $ 13,829 Charge-offs — (396) — — (101) (497) Recoveries — — — 1 78 79 Provision (reversal) 1,782 1,192 (510) 262 (97) 2,629 Ending Balance $ 10,777 $ 2,623 $ 1,499 $ 1,044 $ 97 $ 16,040 Commercial
Real EstateCommercial and
IndustrialCommercial
ConstructionConsumer Real
EstateConsumer
NonresidentialTotal 2021 Allowance for loan losses: Beginning Balance $ 9,291 $ 2,546 $ 1,960 $ 690 $ 471 $ 14,958 Charge-offs (477) (117) — — (255) (849) Recoveries 24 — — 35 161 220 Provision (reversal) 157 (602) 49 56 (160) (500) Ending Balance $ 8,995 $ 1,827 $ 2,009 $ 781 $ 217 $ 13,829 Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 5,548 $ 1,474 $ 1,285 $ 518 $ 334 $ 9,159 (20 ) — — — (692 ) (712 ) 4 35 — 2 23 64 867 (234 ) 782 (103 ) 408 1,720 $ 6,399 $ 1,275 $ 2,067 $ 417 $ 73 $ 10,231 share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued) Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Unallocated Total $ 4,832 $ 768 $ 1,191 $ 626 $ 268 $ 40 $ 7,725 — (86 ) — (187 ) (292 ) — (565 ) — 26 — 1 52 — 79 716 766 94 78 306 (40 ) 1,920 $ 5,548 $ 1,474 $ 1,285 $ 518 $ 334 $ — $ 9,159 20192022 and 2018,2021, by portfolio segment:Allowance for Loan Losses Commercial
Real EstateCommercial
and IndustrialCommercial
ConstructionConsumer
Real EstateConsumer
NonresidentialTotal 2022 Allowance for loan losses: Ending Balance: Individually evaluated for impairment $ — $ 86 $ — $ — $ — $ 86 Purchased credit impaired — — — — — — Collectively evaluated for impairment 10,777 2,537 1,499 1,044 97 15,954 $ 10,777 $ 2,623 $ 1,499 $ 1,044 $ 97 $ 16,040 Loans Receivable Commercial
Real EstateCommercial
and IndustrialCommercial
ConstructionConsumer
Real EstateConsumer
NonresidentialTotal 2022 Financing receivables: Ending Balance Individually evaluated for impairment $ 1,703 $ 1,319 $ — $ 1,041 $ — $ 4,063 Purchased credit impaired loans — — — — — — Collectively evaluated for impairment 1,098,558 243,901 147,939 338,550 7,685 1,836,633 $ 1,100,261 $ 245,220 $ 147,939 $ 339,591 $ 7,685 $ 1,840,696 Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ — $ 364 $ — $ 29 $ — $ 393 — — — — — — 6,399 911 2,067 388 73 9,838 $ 6,399 $ 1,275 $ 2,067 $ 417 $ 73 $ 10,231 Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 13,902 $ 5,208 $ 820 $ 320 $ — $ 20,250 4,043 400 — 367 — 4,810 803,747 109,495 215,163 108,108 11,290 1,247,803 $ 821,692 $ 115,103 $ 215,983 $ 108,795 $ 11,290 $ 1,272,863 share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued) Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ — $ 372 $ — $ 1 $ — $ 373 5,548 1,102 1,285 517 334 8,786 $ 5,548 $ 1,474 $ 1,285 $ 518 $ 334 $ 9,159 Allowance for Loan Losses Commercial
Real Estate Commercial
and Industrial Commercial
Construction Consumer
Real Estate Consumer
Nonresidential Total 2021 Allowance for loan losses: Ending Balance: Individually evaluated for impairment $ — $ 181 $ — $ 5 $ — $ 186 Purchased credit impaired loans — — — — — — Collectively evaluated for impairment 8,995 1,646 2,009 776 217 13,643 $ 8,995 $ 1,827 $ 2,009 $ 781 $ 217 $ 13,829 Loans Receivable Commercial
Real Estate Commercial
and Industrial Commercial
Construction Consumer
Real Estate Consumer
Nonresidential Total 2021 Financing receivables: Ending Balance Individually evaluated for impairment $ 11,915 $ 5,214 $ 1,557 $ 343 $ — $ 19,029 Purchased credit impaired loans — — — — — — Collectively evaluated for impairment 894,197 197,536 186,058 200,261 10,304 1,488,356 $ 906,112 $ 202,750 $ 187,615 $ 200,604 $ 10,304 $ 1,507,385 Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 1,306 $ 2,969 $ — $ 182 $ — $ 4,457 139 467 421 374 — 1,401 682,157 133,892 152,918 130,875 32,308 1,132,150 $ 683,602 $ 137,328 $ 153,339 $ 131,431 $ 32,308 $ 1,138,008 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued)20192022 and 20182021 are summarized as follows:Loans—Loans – Originated Loan PortfolioRecorded
InvestmentUnpaid
Principal
BalanceRelated
AllowanceAverage
Recorded
InvestmentInterest
Income
Recognized2022 With an allowance recorded: Commercial real estate $ — $ — $ — $ — $ — Commercial and industrial 1,319 1,329 86 1,604 107 Commercial construction — — — — — Consumer real estate — — — — — Consumer nonresidential — — — — — $ 1,319 $ 1,329 $ 86 $ 1,604 $ 107 2022 With no related allowance: Commercial real estate $ 1,703 $ 1,703 $ — $ 1,704 $ 135 Commercial and industrial — — — — — Commercial construction — — — — — Consumer real estate 1,041 1,044 — 1,048 34 Consumer nonresidential — — — — — $ 2,744 $ 2,747 $ — $ 2,752 $ 169 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized $ — $ — $ — $ — $ — 2,040 2,040 364 2,081 157 — — — — — — — — — — — — — — — $ 2,040 $ 2,040 364 $ 2,081 $ 157 $ 13,732 $ 13,736 $ — $ 14,557 $ 699 3,168 3,323 — 5,387 340 820 820 — 816 56 — — — — — — — — — — $ 17,720 $ 17,879 $ — $ 20,760 $ 1,095 Impaired Loans—Acquired Loan Portfolio Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized $ — $ — $ — $ — $ — — — — — — — — — — — 169 163 29 163 10 — — — — — $ 169 $ 163 29 $ 163 $ 10 $ 170 $ 165 $ — $ 165 $ 13 — — — — — — — — — — 151 152 — 155 8 — — — — — $ 321 $ 317 $ — $ 320 $ 21 share and per share data)Note 5.and Allowance for Loan Losses (Continued)Impaired Loans—– Originated Loan PortfolioRecorded
InvestmentUnpaid
Principal
BalanceRelated
AllowanceAverage
Recorded
InvestmentInterest
Income
Recognized2021 With an allowance recorded: Commercial real estate $ — $ — $ — $ — $ — Commercial and industrial 1,678 1,688 181 1,711 95 Commercial construction — — — — — Consumer real estate 93 93 5 95 7 Consumer nonresidential — — — — — $ 1,771 $ 1,781 $ 186 $ 1,806 $ 102 2021 With no related allowance: Commercial real estate $ 11,915 $ 11,915 $ — $ 11,947 $ 581 Commercial and industrial 3,536 3,536 — 3,660 238 Commercial construction 1,557 1,596 — 1,597 174 Consumer real estate 250 250 — 250 28 Consumer nonresidential — — — — — $ 17,258 $ 17,297 $ — $ 17,454 $ 1,021 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized $ — $ — $ — $ — $ — 1,793 1,793 372 1,801 100 — — — — — 182 182 1 184 12 — — — — — $ 1,975 $ 1,975 $ 373 $ 1,985 $ 112 $ 1,306 $ 1,319 $ — $ 1,321 $ 68 1,156 1,170 — 1,378 81 — — — — — — — — — — — — — — — $ 2,462 $ 2,489 $ — $ 2,699 $ 149 Impaired Loans—Acquired Loan Portfolio Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized $ — $ — $ — $ — $ — — — — — — — — — — — — — — — — — — — — — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — 20 20 — 58 3 — — — — — — — — — — — — — — — $ 20 $ 20 $ — $ 58 $ 3 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued)— – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.— – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.— – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the enhanced possibility that the institution will sustain some loss if the deficiencies are not corrected.— – Loans classified as doubtful include those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, improbable.— – Loans classified as loss include those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be achieved in the future, it is neither practical nor desirable to defer writing off these loans.20192022 and 2018:2019—2021:Commercial Real
EstateCommercial and
IndustrialTotal Grade: Pass $ 1,077,526 $ 237,638 $ 147,436 $ 320,735 $ 7,661 $ 1,790,996 Special mention 6,284 3,350 — 803 — 10,437 Substandard 1,703 1,319 — 1,041 — 4,063 Doubtful — — — — — — Loss — — — — — — Total $ 1,085,513 $ 242,307 $ 147,436 $ 322,579 $ 7,661 $ 1,805,496 Commercial Real
EstateCommercial and
IndustrialTotal Grade: Pass $ 14,748 $ 2,913 $ 503 $ 17,012 $ 24 $ 35,200 Special mention — — — — — — Substandard — — — — — — Doubtful — — — — — — Loss — — — — — — Total $ 14,748 $ 2,913 $ 503 $ 17,012 $ 24 $ 35,200 Commercial Real
EstateCommercial and
IndustrialTotal Grade: Pass $ 875,395 $ 193,426 $ 182,497 $ 176,271 $ 10,277 $ 1,437,866 Special mention — 400 2,518 68 — 2,986 Substandard 11,915 5,214 1,557 343 — 19,029 Doubtful — — — — — — Loss — — — — — — Total $ 887,310 $ 199,040 $ 186,572 $ 176,682 $ 10,277 $ 1,459,881 Commercial Real
EstateCommercial and
IndustrialTotal Grade: Pass $ 18,802 $ 3,710 $ 1,043 $ 23,922 $ 27 $ 47,504 Special mention — — — — — — Substandard — — — — — — Doubtful — — — — — — Loss — — — — — — Total $ 18,802 $ 3,710 $ 1,043 $ 23,922 $ 27 $ 47,504 Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 751,161 $ 102,491 $ 210,113 $ 73,834 $ 11,186 $ 1,148,785 15,967 476 — 553 19 17,015 4,192 4,731 820 101 — 9,844 — — — — — — — — — — — — $ 771,320 $ 107,698 $ 210,933 $ 74,488 $ 11,205 $ 1,175,644 share and per share data)Note 5. LoansAllowance for Loan Losses (Continued)2019—Acquired Loan Portfolio Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 47,027 $ 7,005 $ 5,050 $ 33,622 $ 85 $ 92,789 3,089 — — 139 — 3,228 256 400 — 546 — 1,202 — — — — — — — — — — — — $ 50,372 $ 7,405 $ 5,050 $ 34,307 $ 85 $ 97,219 2018—Originated Loan Portfolio Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 610,580 $ 124,349 $ 141,694 $ 86,848 $ 32,184 $ 995,655 6,034 1,783 — 761 — 8,578 — 2,777 — — — 2,777 — — — — — — — — — — — — $ 616,614 $ 128,909 $ 141,694 $ 87,609 $ 32,184 $ 1,007,010 2018—Acquired Loan Portfolio Commercial
Real Estate Commercial
and
Industrial Commercial
Construction Consumer
Residential Consumer
Nonresidential Total $ 66,849 $ 7,952 $ 11,224 $ 43,811 $ 124 $ 129,960 56 — 421 — — 477 83 467 — 11 — 561 — — — — — — — — — — — — $ 66,988 $ 8,419 $ 11,645 $ 43,822 $ 124 $ 130,998 2019,Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued)$17.0$10.4 million in loans identified as special mention within the originated loan portfolio, an increase of $8.4$7.5 million from December 31, 2018.2021. Special mention rated loans are loans that have a potential weakness that deservedeserves management's close attention. The increase from December 31, 2018 is concentratedattention; however, the borrower continues to pay in three loans that were added to this risk category during the second quarter of 2019 and one loan that was added to this risk category during the fourth quarter of 2019.accordance with their contract. These loans do not have a specific reserve and are considered well-secured.2019,2022, the Company had $9.8$4.1 million in loans identified as substandard within the originated loan portfolio, an increasea decrease of $7.1$15.0 million from December 31, 2018.2021. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. As of December 31, 2019,2022, specific reserves on originated and acquired loans totaling $393 thousand,$0.1 million, has been allocated within the allowance for loan losses to supplement any shortfall of collateral.20192022 and 2018:2019—2021:30-59 days past
dueTotal past due Current Total loans 90 days past due
and still accruingNonaccruals Commercial real estate $ 546 $ — $ 2,096 $ 2,642 $ 1,082,871 $ 1,085,513 $ 393 $ 1,703 Commercial and industrial 512 — 1,319 1,831 240,476 242,307 — 1,319 Commercial construction — — 125 125 147,311 147,436 125 — Consumer real estate 805 — 953 1,758 320,821 322,579 825 128 Consumer nonresidential — 63 — 63 7,598 7,661 — — Total $ 1,863 $ 63 $ 4,493 $ 6,419 $ 1,799,077 $ 1,805,496 $ 1,343 $ 3,150 30 - 59 days
past due 60 - 89 days
past due 90 days
or more
past due Total
past due Current Total loans 90 days
past due
and still
accruing Nonaccruals $ 8,550 $ — $ 753 $ 9,303 $ 762,017 $ 771,320 $ 753 $ 3,903 1,184 — 48 1,232 106,466 107,698 48 3,822 2,000 — — 2,000 208,933 210,933 — 820 289 153 101 543 73,945 74,488 101 — 77 56 12 145 11,060 11,205 12 — $ 12,100 $ 209 $ 914 $ 13,223 $ 1,162,421 $ 1,175,644 $ 914 $ 8,545 2019—2022 – Acquired Loan Portfolio30-59 days past
dueTotal past due Current Total loans 90 days past due
and still accruingNonaccruals Commercial real estate $ — $ — $ — $ — $ 14,748 $ 14,748 $ — $ — Commercial and industrial — — — — 2,913 2,913 — — Commercial construction — — — — 503 503 — — Consumer real estate — — — — 17,012 17,012 — — Consumer nonresidential — — — — 24 24 — — Total $ — $ — $ — $ — $ 35,200 $ 35,200 $ — $ — 30 - 59 days
past due 60 - 89 days
past due 90 days
or more
past due Total
past due Current Total loans 90 days
past due
and still
accruing Nonaccruals $ — $ — $ — $ — $ 50,372 $ 50,372 $ — $ 256 — — — — 7,405 7,405 — 272 — — — — 5,050 5,050 — — 1,138 241 118 1,497 32,810 34,307 118 620 — — — — 85 85 — — $ 1,138 $ 241 $ 118 $ 1,497 $ 95,722 $ 97,219 $ 118 $ 1,148 share and per share data)Note 5. Loans and Allowance for Loan Losses (Continued)2018—30-59 days past
dueTotal past due Current Total loans 90 days past due
and still accruingNonaccruals Commercial real estate $ — $ — $ — $ — $ 887,310 $ 887,310 $ — $ — Commercial and industrial — — 1,678 1,678 197,362 199,040 — 1,678 Commercial construction — — 1,557 1,557 185,015 186,572 — 1,557 Consumer real estate — — 250 250 176,432 176,682 — 250 Consumer nonresidential 14 21 18 53 10,224 10,277 18 — Total $ 14 $ 21 $ 3,503 $ 3,538 $ 1,456,343 $ 1,459,881 $ 18 $ 3,485 30 - 59 days
past due 60 - 89 days
past due 90 days
or more
past due Total
past due Current Total loans 90 days
past due
and still
accruing Nonaccruals $ 3,062 $ 2,148 $ — $ 5,210 $ 611,404 $ 616,614 $ — $ — 68 181 2,701 2,950 125,959 128,909 1,031 1,769 — — — — 141,694 141,694 — — 843 345 — 1,188 86,421 87,609 — 182 111 44 — 155 32,029 32,184 — — $ 4,084 $ 2,718 $ 2,701 $ 9,503 $ 997,507 $ 1,007,010 $ 1,031 $ 1,951 2018—2021 – Acquired Loan Portfolio30-59 days past
dueTotal past due Current Total loans 90 days past due
and still accruingNonaccruals Commercial real estate $ — $ — $ — $ — $ 18,802 $ 18,802 $ — $ — Commercial and industrial — — — — 3,710 3,710 — — Commercial construction — — — — 1,043 1,043 — — Consumer real estate 234 — 5 239 23,683 23,922 5 — Consumer nonresidential 2 — — 2 25 27 — — Total $ 236 $ — $ 5 $ 241 $ 47,263 $ 47,504 $ 5 $ — 30 - 59 days
past due 60 - 89 days
past due 90 days
or more
past due Total
past due Current Total loans 90 days
past due
and still
accruing Nonaccruals $ 1,001 $ 83 $ 56 $ 1,140 $ 65,848 $ 66,988 $ — $ 56 446 — — 446 7,973 8,419 — — 186 — — 186 11,459 11,645 — — 2,785 612 173 3,570 40,252 43,822 — 173 — — — — 124 124 — — $ 4,418 $ 695 $ 229 $ 5,342 $ 125,656 $ 130,998 $ — $ 229 $181 thousand$1.3 million and $28$58 thousand at December 31, 20192022 and 20182021, respectively, which have been reclassified from deposits to loans. At December 31, 20192022 and 2018,2021, loans with a carrying value of $154.0$458.7 million and $173.0$290.3 million were pledged to the Federal Home Loan Bank of Atlanta. There was a default of one troubled debt restructuring (TDR) during the twelve months of restructuring during the year ended December 31, 2019. FHLB.yearyears ended December 31, 2018.2019:At2022:Troubled Debt Restructurings Commercial real estate 1 $ 742 $ 742 Total 1 $ 742 $ 742 2019 Number of
Contracts Pre-Modification
Outstanding
Recorded
Investment Post-Modification
Outstanding
Recorded
Investment 1 $ 3,903 $ 3,903 1 $ 3,903 $ 3,903 There were no TDR's originated in 2018. AsFor each of December 31, 20192022 and 2018,2021, the Company hashad a recorded investment in troubled debt restructuringsTDRs of $3.9 million$830 thousand and $203$92 thousand, respectively.troubled debt restructuringsTDRs were extensions of the maturity dates or reductions in the stated interest rate for the remaining life of the debt.share and per share data)6.5. Other Real Estate Owned Other real estate owned activity was as follows for20192022 and 2018. 2019 $ 4,224 (358 ) $ 3,866 2018 $ 3,866 358 $ 4,224 other real estate ownedOREO as a result of obtaining physical possession of the property at December 31, 2019. At December 31, 2018, there was one foreclosed residential real estate property recorded in other real estate owned which was acquired by the Company upon its acquisition of Colombo. At December 31, 2019, there was $177 thousand of2022 and 2021. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. Atprocess as of December 31, 2018, there was no residential real estate properties for which formal foreclosure proceedings are in process.2022 and 2021. The Company recorded no impairment charges during 20192022 and 2018.7.6. Goodwill and Intangiblesacquisition of Colombo in October 2018,past acquisitions, the Company recognized goodwill and core deposit intangibles.Acquisition of 1st Commonwealth Acquisition of Colombo Bank Total Gross Carrying
AmountAccumulated
AmortizationGross Carrying
AmountAccumulated
AmortizationGross Carrying
AmountAccumulated
AmortizationBalance at December 31, 2020 $ 204 $ 165 $ 1,950 $ 789 $ 2,154 $ 954 2021 activity: 1st Commonwealth amortization — 20 — — — 20 Colombo Bank amortization — — — 285 — 285 Balance at December 31, 2021 $ 204 $ 185 $ 1,950 $ 1,074 $ 2,154 $ 1,259 2022 activity: 1st Commonwealth amortization — 19 — — — 19 Colombo Bank amortization — — — 243 — 243 Balance at December 31, 2022 $ 204 $ 204 $ 1,950 $ 1,317 $ 2,154 $ 1,521 Acquisition of
1st Commonwealth Acquisition of
Colombo Bank Total Gross
Carrying
Amount Accumulated
Amortization Gross
Carrying
Amount Accumulated
Amortization Gross
Carrying
Amount Accumulated
Amortization $ 204 $ 105 $ — $ — $ 204 $ 105 — 20 — — — 20 — — 1,950 98 1,950 98 $ 204 $ 125 $ 1,950 $ 98 $ 2,154 $ 223 — 20 — — — 20 — — — 365 — 365 $ 204 $ 145 $ 1,950 $ 463 $ 2,154 $ 608 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 7. Goodwill and Intangibles (Continued)$385$262 thousand for 20192022 and $118$305 thousand for 2018. The2021. As of December 31, 2022, the estimated amortization expense for the next five years and thereafter is as follows:2023 $ 205 2024 165 2025 125 2026 85 2027 45 Thereafter 8 $ 633 $ 345 305 262 205 165 264 20192022 and 2018 were2021 is as follows:Balance at December 31, 2022 and 2021 $ 7,157 $ — 6,512 $ 6,512 631 $ 7,143 8.7. Premises, Equipment, and Equipment A summary ofLeasesfollows:2022 2021 Leasehold improvements $ 3,068 $ 3,039 Furniture, fixtures and equipment 4,310 4,163 Computer software 1,169 1,275 Land 61 61 Buildings 196 196 Vehicles 47 47 Premises and equipment, gross $ 8,851 $ 8,781 Less: accumulated depreciation 7,631 7,197 Premises and equipment, net $ 1,220 $ 1,584 2019 2018 $ 2,899 $ 2,915 3,957 3,799 1,079 756 61 61 196 196 $ 8,192 $ 7,727 6,108 5,456 $ 2,084 $ 2,271 20192022 and 2018,2021, depreciation expense was $643$424 thousand and $497$555 thousand, respectively.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 8. Premises and Equipment (Continued)leases:2022 2021 Right-of-Use-Asset $ 9,680 $ 10,167 Lease Liability $ 10,394 $ 11,111 Weighted Average Remaining Lease Term (Years) 7.9 8.9 Weighted Average discount rate 3.21 % 3.20 % Years Ended December 31, 2022 2021 Operating Lease Expense $ 1,504 $ 1,626 Cash paid for amounts included in lease liabilities $ 1,541 $ 1,559 Modification of right-of-use assets and lease liability 283 — Right-of-use assets obtained in exchange for operating lease liabilities 522 207 December 31,
2019 $ 13,279 $ 13,686 11.1 3.32 % Years Ended
December 31, 2019 2018 $ 1,784 $ 1,331 $ 1,642 N/A $ 2,378 N/A liability:2023 $ 1,780 2024 1,734 2025 1,581 2026 1,486 2027 1,355 Thereafter 3,860 Total $ 11,796 Less: discount (1,402) $ 10,394 $ 1,582 1,559 1,599 1,596 1,566 8,553 $ 16,455 (2,769 ) $ 13,686 9.8. Depositsfollows:2023 $ 413,617 2024 18,107 2025 48,284 2026 11,086 2027 17,315 Thereafter 4 $ 508,413 $ 323,822 61,482 23,020 9,048 4,967 $ 422,339 ofgreater than $250,000 and greater were $147.5$159.5 million and $135.6$89.7 million at December 31, 20192022 and 2018,2021, respectively.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 9. Deposits (Continued)20192022 and 2018,2021, the Company had one and two customer relationships, respectively,relationship whose related balance on deposit exceeded 5% of outstanding deposits. TheseThis customer relationships comprise 7%relationship comprises 9% of outstanding deposits at December 31, 20192022 and 13%17% of outstanding deposits at December 31, 2018.$100.0$248.0 million and $84.4$35.0 million at December 31, 20192022 and 2018,2021, respectively.10.9. Other Borrowed Funds20192022 and 20182021 consist of the following:Federal Funds Purchased FHLB Advances Subordinated Debt, net 2022 2021 2022 2021 2022 2021 Balance Outstanding at December 31, $ 30,000 $ — $ 235,000 $ 25,000 $ 19,565 $ 19,510 Maximum balance at any month end during the year $ 115,000 $ — $ 235,000 $ 25,000 $ 19,565 $ 44,167 Average balance for the year $ 22,164 $ 22 $ 48,134 $ 25,000 $ 19,535 $ 37,856 Weighted average rate on borrowings for the year ended 3.11 % 0.20 % 2.60 % 1.39 % 5.28 % 6.69 % 2019 2018 Amount Weighted
Average Rate Amount Weighted
Average Rate $ 10,000 1.60 % $ — — 15,000 1.73 % — — 24,487 6.00 % 24,407 6.00 % $ 49,487 3.82 % $ 24,407 6.00 % $15$235.0 million and $25.0 million of FHLB advances at each of December 31, 20192022 and $0December 31, 2021 respectively. $200.0 million of FHLB advances outstanding at December, 31, 2018.2022 mature during the first quarter of 2023 while the remaining $35.0 million represents a daily rate borrowing that matures in December 2023. At December 31, 2019,2022, 1-4 family residential loans with a lendable value of $2.1$168.8 million, multi-family residential loans with a booklendable value of $5.9$43.0 million, home equity lines of credit with a booklendable value of $11.9$6.1 million and commercial real estate loans with a booklendable value of $93.5$155.7 million were pledged against an available line of credit with the Federal Home Loan BankFHLB totaling $113.3$584.7 million as of December 31, 2019.2022. The Bank has a letter of credit with the FHLB in the amount of $95.0 million for the purpose of providing collateral for Virginia public deposits. The remaining lendable collateral value excess at December 31, 20192022 totaled $295.5$138.5 million.$199.0$265.0 million at December 31, 20192022 and $169.0$265.0 million at December 31, 2018,2021, available for overnight borrowing. At December 31, 2019 and 2018, $10.02022, the Company had an advance of $30 million and $0, respectively,with one of these lines of credit withthe correspondent banks were drawn upon.iswas payable at 6.00% per annum, from and including June 20, 2016 to, but excluding June 30, 2021, payable semi-annually in arrears. From and including June 30, 2021 to the maturity date or early redemption date, the interest rate shallwas to reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.may, at itshad the option, beginning with the interest payment date of June 30, 2021 and on any scheduled interest payment date thereafteron or after June 30, 2021, to redeem the subordinated notes, in whole or in part, upon not fewer than 30 nor greater than 60 days' notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. Any partialIn August 2021, the Company provided a redemption will be made pro rata among allnotice to each holder of the holders.Notes to Consolidated Financial Statements (Continued)(Dollarsprincipal was redeemed and paid during the year ended December 31, 2021. The remaining principal balance of $1.2 million as of December 31, 2021 is included in thousands, except share and per share data)Note 10. Other Borrowed Funds (Continued)BASELBasel III capital rules. When contributed to the capital of the Bank, the proceeds of the subordinated notes may be included in Tier 1 capital for the Bank. At December 31, 2019 and 2018, $21 millionthe Bank's Tier 1 capital.11.10. Income Taxes20192022 and 20182021 are presented below:2022 2021 Deferred Tax Assets: Allowance for loan losses $ 3,698 $ 3,131 Net operating loss carryforward – federal and state 2,466 2,785 Bank premises and equipment 265 184 Nonqualified stock options and restricted stock 658 611 Organizational and start-up expenses 10 22 Acquisition accounting adjustments 257 258 Non-accrual loan interest 59 24 Deferred loan costs 60 801 Lease liability 2,396 2,516 Unrealized loss on securities available for sale 11,876 582 Unrealized loss on interest rate swap — 17 $ 21,745 $ 10,931 Deferred Tax Liabilities: Right-of-use assets $ (2,232) $ (2,302) Unrealized gain on interest rate swap (980) — $ (3,212) $ (2,302) Net Deferred Tax Assets $ 18,533 $ 8,629 2019 2018 $ 2,302 $ 2,132 3,666 4,270 168 213 — 732 554 496 47 61 454 372 58 20 526 295 3,079 — 18 — $ 10,872 $ 8,591 $ (2,987 ) $ — (214 ) — $ (3,201 ) $ — $ 7,671 $ 8,591 20192022 and 20182021 consists of the following:2022 2021 Current tax expense $ 5,610 $ 5,269 Deferred tax expense 395 1,007 $ 6,005 $ 6,276 2019 2018 $ 3,999 $ 3,104 185 (866 ) $ 4,184 $ 2,238 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 11. Income Taxes (Continued)2022 2021 Computed "expected" tax expense $ 6,313 $ 5,924 Increase (decrease) in income taxes resulting from: State income tax expense 503 472 Non-deductible expense 138 231 Tax free income (259) (217) Tax benefits from exercise of stock options (364) (163) Other (326) 29 $ 6,005 $ 6,276 2019 2018 $ 4,203 $ 2,753 490 (86 ) 38 141 (158 ) (112 ) (179 ) (308 ) (210 ) (150 ) $ 4,184 $ 2,238 2016.$14.9$10.1 million of net operating loss carryforwards acquired from Colombo which can be offset against future taxable income. The carryforwards expire through December 31, 2037. The full realization of tax benefits associated with carryforwards depends predominately upon the recognition of ordinary income during the carryforward period. Beginning in 2019, theThe federal portion of net operating loss carryforwards available to offset taxable income is limited to $762 thousand annually under Internal Revenue Code section 382. The Company believes it will generate sufficient future taxable income to fully utilize the remaining deferred tax assets.12.11. Derivative Financial Instruments2019.2022. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives' mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of December 31, 2019,2022, the Company entered into 1715 interest rate swap agreements which arewere collateralized by $6.1 million$30 thousand in cash. As of December 31, 2018,2021, the Company entered into eight19 interest rate swap agreements which arewere collateralized by $1.6$6.7 million in cash.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 12. Derivative Financial Instruments (Continued)20192022 and 20182021 were as follows:December 31, 2022 Notional Amount Fair Value Interest Rate Swap Agreements Receive Fixed/Pay Variable Swaps $ 74,178 $ 4,260 Pay Fixed/Receive Variable Swaps 74,178 (4,260) December 31, 2019 Notional
Amount Fair Value $ 94,755 $ (6,001 ) 94,755 6,001 December 31, 2021 Notional Amount Fair Value Interest Rate Swap Agreements Receive Fixed/Pay Variable Swaps $ 80,643 $ 6,052 Pay Fixed/Receive Variable Swaps 80,643 (6,052) December 31, 2018 Notional
Amount Fair Value $ 47,381 $ (1,705 ) 47,381 1,705 an interest rate swap agreementagreements whereby the Company reduces the interest rate risk associated with the Company's variable rate advances (or other wholesale funding) from the designation date of July 30, 2019 and going through July 30, 2022 (thethe maturity date).2019,2022 and 2021, the information pertaining to outstanding interest rate swap agreements used to hedge variability in cash flows (FHLB advance which is included in other borrowed funds on the consolidated balance sheet) is as follows:(Dollars in thousands) 2022 2021 Notional amount $ 145,000 $ 60,000 Weighted average pay rate 2.12 % 0.87 % Weighted average receive rate 4.74 % 0.21 % Weighted average maturity in years 3.49 1.1 Unrealized gain/(loss) relating to interest rate swaps $ 4,251 $ (77) (Dollars in thousands) $ 15,000 1.88 % 1.90 % 3 year $ (80 ) (three month LIBOR) in exchange for making payments at a fixed rate. At December 31, 2019,2022 and 2021, the unrealized loss or gain relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with FHLB advanceswholesale funds are reported in other comprehensive income.income (loss). These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the advance affects earnings. The Company measures cash flow hedging relationships for effectiveness on a monthly basis, and at December 31, 2019,2022 and 2021, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)13.12. Financial Instruments with Off-Balance Sheet Risk20192022 and 2018,2021, the following financial instruments were outstanding which contract amounts represent credit risk:2022 2021 Commitments to grant loans $ 135,441 $ 90,591 Unused commitments to fund loans and lines of credit 235,617 183,145 Commercial and standby letters of credit 6,503 8,930 2019 2018 $ 27,260 $ 22,349 244,367 216,043 9,002 9,383 Federal Reserve BankFRB and correspondent banks. The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $10.6$1.4 million and $5.1$32.8 million at December 31, 20192022 and 2018,2021, respectively.14.13. Minimum Regulatory Capital Requirements In August, 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement (the "Statement"), in compliance with the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 ("EGRRCPA"). The Statement, among other things, exempts bank holding companies that have below a specified asset threshold from the consolidated regulatory capitalNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 14. Minimum Regulatory Capital Requirements (Continued)requirements. The interim final rule expands the exemption to bank holding companies with consolidated total assets of less than $3 billion. Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, the Company qualifies as of August 2018 as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.Bank'sCompany’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheetoff-balance sheet items as calculated under regulatory accounting practices. A financial institution'sinstitution’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.Supervision'sSupervision’s capital guidelines for U.S. banks (the (“Basel III rules)III”) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. As a part of the new requirements, the Common Equity Tier 1 Capital ratio is calculated and utilized in the assessment of capital for all institutions. The Company has made an election to not have the net unrealized gain or loss on available-for-sale securities included in computing regulatory capital. Under the Basel III rules, the Bankinstitutions must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.625% for 2016 to 2.50% by 2019. The capital conservation buffer for 2019 is 2.50%. Management believes as of December 31, 2019 and 2018, the Bank meets all capital adequacy requirement to which they are subject. At year-end 2019 and 2018, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. Federal and state banking regulations place certain restrictions on dividends paid by the Company. The total amount of dividends which may be paid at any date is generally limited to retained earnings of the Company. regulatorsfederal banking agencies have provided for an optional, simplified measure of capital adequacy, the community bank leverage ratio (“CBLR”) framework, ("CBLR"), for qualifying community bank organizations. Banksorganizations with less than $10 billion in consolidated total assets. Organizations that qualify maycould opt in to the CBLR framework beginning January 1, 2020 or any time thereafter. The CBLR framework eliminates the four required capital ratios disclosed below and requires the disclosure ofAn institution that maintains a single leverage ratio with a minimum requirement of 9%. Thethat exceeds the CBLR is considered to have met all generally applicable leverage and risk based capital requirements (including the Basel III rules), the capital ratio requirements for “well capitalized” status under the prompt corrective action regulations, and any other leverage or capital requirements to which it is subject. On January 1, 2020, the Company is evaluating whether to optopted in to the CBLR framework.
Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria proscribed. As of December 31, 2022 and 2021, the Bank meets all capital adequacy requirements to which it is subject and is considered well capitalized under the prompt corrective action regulations.share and per share data)Note 14. Minimum Regulatory Capital Requirements (Continued) Bank continues to be subject to various capital requirements administered by banking agencies. Risk based capital ratios for the Bank as of December 31, 20192022 and 20182021 are shown in the following table. Actual Minimum Capital
Requirement(1) Well Capitalized
Under Prompt
Corrective Action
Provisions Amount Ratio Amount Ratio Amount Ratio $ 192,364 13.43 % $ 150,369 10.500 % $ 143,208 10.000 % $ 182,121 12.72 % $ 121,727 8.500 % $ 114,567 8.000 % $ 182,121 12.72 % $ 100,246 7.000 % $ 93,085 6.500 % $ 182,121 12.15 % $ 98,214 6.500 % $ 75,550 5.000 %
$ 172,975 14.02 % $ 121,861 9.875 % $ 123,404 10.000 % $ 163,804 13.27 % $ 97,180 7.875 % $ 98,723 8.000 % $ 163,804 13.27 % $ 78,670 6.375 % $ 80,213 6.500 % $ 163,804 12.41 % $ 52,777 4.000 % $ 65,971 5.000 % Actual Minimum Capital Requirement Minimum to be Well Capitalized Under Prompt Corrective Action Amount Ratio Amount Amount At December 31, 2022 Total risk-based capital $ 256,898 13.28 % $ 203,113 10.50 % $ 193,441 > 10.00 % Tier 1 risk-based capital 240,858 12.45 % 164,425 8.50 % 154,753 > 8.00 % Common equity tier 1 capital 240,858 12.45 % 135,409 7.00 % 125,737 > 6.50 % Leverage capital ratio 240,858 10.75 % 87,894 4.00 % 109,867 > 5.00 % At December 31, 2021 Total risk-based capital $ 222,871 13.54 % $ 177,069 10.50 % $ 168,638 > 10.00 % Tier 1 risk-based capital 214,442 12.72 % 143,342 8.50 % 134,910 > 8.00 % Common equity tier 1 capital 214,442 12.72 % 118,046 7.00 % 109,614 > 6.50 % Leverage capital ratio 214,442 10.55 % 81,712 4.00 % 102,140 > 5.00 % Except with regard to the Bank's Tier 1 to average assets ratio, the minimum capital requirement includes the phased-in portion of the Basel III Capital Rules Ratios include capital conservation buffer.Restrictions—Restrictions – The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amounts of dividends that may be paid without approval of regulatory agencies. As of December 31, 2019, $40.72022, $44.7 million of retained earnings is available to pay dividends.15.14. Related Party Transactions$14.5$37.9 million and $14.8$19.5 million at December 31, 20192022 and 20182021, respectively, with the Company. During the years ended December 31, 20192022 and 2018,2021, total principal additions were $292 thousand$19.9 million and $4.2$9.0 million, respectively, and total principal payments were $611 thousand$1.5 million and $898 thousand,$3.8 million, respectively.$46.2$38.4 million and $36.8$31.7 million at December 31, 20192022 and 2018,2021, respectively.16.15. Stock-Based Compensation PlanOptionStock Plan (the Plan)"Plan"), which is shareholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock. InNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 16. Stock-Based Compensation Plan (Continued)June 2018, May 2022, the shareholders approved an amendment to the Amended and Restated 2008 Plan to extend the term of the plan until 2028 and increase the number of shares authorized for issuance under the Plan by 200,000 shares.2,529,2962,929,296 shares of common stock, subject to adjustment for certain corporate events. Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant, generally vest annually over four years of continuous service and have ten yearyears contractual terms. At December 31, 2019, 164,1952022, 157,263 shares were available to grant under the Plan.20192022 and 2018.2021. For the year ended December 31, 2019, 17,4912022, 4,772 shares were withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant.2018, 7,6432021, there were no shares were withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant.2019,2022, and changes during the year then ended is presented below: Shares Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Term Aggregate
Intrinsic
Value(1) 1,976,247 $ 8.00 4.98 — — (173,987 ) 7.01 (4,744 ) 10.38 1,797,516 $ 8.09 4.10 $ 16,863,327 1,716,310 $ 7.93 3.99 $ 16,380,151 Options Shares Weighted
Average
Exercise
PriceWeighted
Average
Remaining
Contractual
TermOutstanding at January 1, 2022 1,931,059 $ 6.65 2.46 — Granted — — Exercised (309,018) 5.74 Forfeited or expired (121) 6.85 Outstanding and Exercisable at December 31, 2022 1,621,920 $ 6.82 1.81 $ 13,681,905 2019.2022. This amount changes based on changes in the market value of the Company's stock.Number of
SharesWeighted Average
Grant Date
Fair ValueNonvested at January 1, 2022 189,240 $ 14.34 Granted 155,399 14.95 Vested (58,401) 14.53 Forfeited (7,993) 14.59 Balance at December 31, 2022 278,245 $ 14.63 $679 thousand$1.2 million and $707 thousand$1.0 million for 20192022 and 2018,2021, respectively. As of December 31, 2019,2022, there was unamortized compensation expense of $63 thousand that will be amortized over 4 months. Tax benefits recognized for qualified and non-qualified stock options during 2019 and 2018 totaled $179 thousand and $308 thousand, respectively.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 16. Stock-Based Compensation Plan (Continued) A summary of the Company's restricted stock grant activity as of December 31, 2019 is shown below. Number of
Shares Weighted
Average
Grant Date
Fair Value 50,629 $ 17.57 79,960 19.17 (15,465 ) 17.50 (5,406 ) 18.49 109,718 $ 18.70 As of December 31, 2019, there was $1.8$3.2 million of total unrecognized compensation cost related to nonvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3736 months.17.16. Fair Value MeasurementsNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 17. Fair Value Measurements (Continued)Level 1—Valuation is based on quoted prices in active markets for identical assets and liabilities.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-basedLevel 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.available-for-sale: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).20192022 and 2018:2021:Quoted Prices
in Active
Markets for
Identical
AssetsSignificant
Other
Observable
InputsSignificant
Unobservable
InputsDescription (Level 1) (Level 2) (Level 3) Assets Available-for-sale Securities of U.S. government and federal agencies $ 11,004 $ — $ 11,004 $ — Securities of state and local municipalities tax exempt 1,376 — 1,376 — Securities of state and local municipalities taxable 444 — 444 — Corporate bonds 19,058 — 19,058 — SBA pass-through securities 67 — 67 — Mortgage-backed securities 237,434 — 237,434 — Collateralized mortgage obligations 8,686 — 8,686 — Total Available-for-Sale Securities $ 278,069 $ — $ 278,069 $ — Derivative assets - interest rate swaps $ 4,260 $ — $ 4,260 $ — Derivative assets - cash flow hedge 4,251 — 4,251 — Liabilities Derivative liabilties - interest rate swaps $ 4,260 $ — $ 4,260 $ — Fair Value Measurements at
December 31, 2019 Using Quoted Prices
in Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Balance as of
December 31,
2019 (Level 1) (Level 2) (Level 3) $ 3,996 $ — $ 3,996 $ — 3,738 — 3,738 — 955 — 955 — 6,981 — 6,981 — 159 — 159 — 97,189 — 97,189 — 28,307 — 28,307 — $ 141,325 $ — $ 141,325 $ — share and per share data)Note 17. Fair Value Measurements (Continued) Fair Value Measurements at
December 31, 2018 Using Quoted Prices
in Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Balance as of
December 31,
2018 Quoted Prices
in Active
Markets for
Identical
AssetsSignificant
Other
Observable
InputsSignificant
Unobservable
Inputs (Level 1) (Level 2) (Level 3) Description (Level 1) (Level 2) (Level 3) Assets Available-for-sale $ 956 $ — $ 956 $ — Securities of U.S. government and federal agencies $ 13,436 $ — $ 13,436 $ — 3,639 — 3,639 — Securities of state and local municipalities tax exempt 1,451 — 1,451 $ — 2,308 — 2,308 — Securities of state and local municipalities taxable 596 — 596 — 5,013 — 5,013 — Corporate bonds 14,151 — 14,151 — 244 — 244 — 195 — 195 — SBA pass-through securities 108 — 108 — 88,037 — 88,037 — Mortgage-backed securities 313,838 — 313,838 — 23,145 — 23,145 — Collateralized mortgage obligations 14,194 — 14,194 — $ 123,537 $ — $ 123,537 $ — Total Available-for-Sale Securities $ 357,774 $ — $ 357,774 $ — Derivative assets - interest rate swaps Derivative assets - interest rate swaps $ 6,052 $ — $ 6,052 $ — Liabilities Liabilities Derivative liabilties - interest rate swaps Derivative liabilties - interest rate swaps $ 6,052 $ — $ 6,052 $ — Derivative liabilties - cash flow hedge Derivative liabilties - cash flow hedge 77 — 77 — Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 17. Fair Value Measurements (Continued)Consolidated Statements of Income. Loans Held for Sale: During the fourth quarterthe period incurred as losses on loans held for sale on the Consolidated Statements of Income. Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, which results in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated regularly for impairment and adjusted accordingly.20192022 and December 31, 2018:Quoted Prices
in Active
Markets for
Identical
AssetsSignificant
Other
Observable
InputsSignificant
Unobservable
InputsDescription (Level 1) (Level 2) (Level 3) Assets Impaired loans Commercial and industrial $ 1,233 $ — $ — $ 1,233 Total Impaired loans $ 1,233 $ — $ — $ 1,233 Fair Value Measurements
Using Quoted Prices
in Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Balance as of
December 31,
2019 (Level 1) (Level 2) (Level 3) $ 1,816 $ — $ — $ 1,816 $ 11,198 $ — $ 11,198 $ — $ 3,866 $ — $ — $ 3,866 Quoted Prices
in Active
Markets for
Identical
AssetsSignificant
Other
Observable
InputsSignificant
Unobservable
InputsDescription (Level 1) (Level 2) (Level 3) Assets Impaired loans Commercial and industrial $ 1,497 $ — $ — $ 1,497 Consumer residential 88 — — 88 Total Impaired loans $ 1,585 $ — $ — $ 1,585 Fair Value Measurements
Using Quoted Prices
in Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Balance as of
December 31,
2018 (Level 1) (Level 2) (Level 3) $ 1,602 $ — $ — $ 1,602 $ 4,224 $ — $ 358 $ 3,866 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 17. Fair Value Measurements (Continued)20192022 and 2018:Quantitative information about Level 3 Fair Value Measurements for December 31, 2022 Assets Fair Value Valuation Technique(s) Unobservable input (Avg.) Impaired loans Commercial and industrial $ 1,233 Discounted appraised value Marketability/Selling costs 8% - 8% 8.00 % Quantitative information about Level 3 Fair Value Measurements for December 31, 2021 Assets Fair Value Valuation Technique(s) Unobservable input (Avg.) Impaired loans Commercial and industrial $ 1,497 Discounted appraised value Marketability/Selling costs 8% - 8 % 8.00 % Consumer residential $ 88 Discounted appraised value Marketability/Selling costs 8% - 8% 8.00 % Total Impaired loans $ 1,585 Discounted appraised value Marketability/Selling costs 8% - 8% 8.00 % Quantitative information about Level 3 Fair Value Measurements for December 31, 2019
Assets Fair Value Valuation Technique(s) Unobservable input Range (Avg.) $ 1,816 Discounted appraised value Marketability/Selling costs 5% - 8% (7.84%) $ 3,866 Discounted appraised value Selling costs 10.51% Quantitative information about Level 3 Fair Value Measurements for December 31, 2018
Assets Fair Value Valuation Technique(s) Unobservable input Range (Avg.) $ 1,602 Discounted appraised value Marketability/Selling costs 0.60% - 11% (10.89%) $ 3,866 Discounted appraised value Selling costs 10.51% 20192022 and 2018.2021. Fair values for December 31, 20192022 and 20182021 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities."Fair Value Measurements as of December 31, 2022 using Significant
Unobservable
InputsLevel 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 7,253 $ 7,253 $ — $ — Interest-bearing deposits at other institutions 74,300 74,300 — — Securities held-to-maturity 264 — 252 — Securities available-for-sale 278,069 — 278,069 — Restricted stock 15,612 — 15,612 — Loans, net 1,824,394 — — 1,756,984 Bank owned life insurance 55,371 — 55,371 — Accrued interest receivable 9,435 — 9,435 — Derivative assets - interest rate swaps 4,260 — 4,260 — Derivative assets - cash flow hedge 4,251 — 4,251 — Financial liabilities: Checking, savings and money market accounts $ 1,321,749 $ — $ 1,321,749 $ — Time deposits 508,413 — 510,754 — Fed Funds Purchased 30,000 — 30,000 — FHLB advances 235,000 — 235,000 — Subordinated notes 19,565 — 18,856 — Accrued interest payable 1,269 — 1,269 — Derivative liabilties - interest rate swaps 4,260 — 4,260 — Fair Value Measurements as of
December 31, 2019 using Quoted Prices in
Active Markets
for Identical
Assets Significant
Unobservable
Inputs Significant
Unobservable
Inputs Carrying
Amount Level 1 Level 2 Level 3 $ 14,916 $ 14,916 $ — $ — 18,226 18,226 — — 264 — 270 — 141,325 — 141,325 — 6,017 — 6,017 — 11,198 — 11,198 — 1,260,295 — — 1,254,685 37,069 — 37,069 — 4,094 — 4,094 —
$ 863,383 $ — $ 863,383 $ — 422,339 — 424,398 — 10,000 — 10,000 — 15,000 — 15,000 — 24,487 — 24,564 — 605 — 605 — share and per share data)Note 17. Fair Value Measurements (Continued) Fair Value Measurements as of
December 31, 2018 using Quoted Prices in
Active Markets
for Identical
Assets Significant
Unobservable
Inputs Significant
Unobservable
Inputs Fair Value Measurements as of December 31, 2021 using Carrying
Amount Significant
Unobservable
Inputs Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial assets: $ 9,435 $ 9,435 $ — $ — Cash and due from banks $ 24,613 $ 24,613 $ — $ — 34,060 34,060 — — Interest-bearing deposits at other institutions 216,345 216,345 — — 1,761 — 1,735 — Securities held-to-maturity 264 — 270 — 123,537 — 123,537 — Securities available-for-sale 357,774 — 357,774 — 5,299 — 5,299 — Restricted stock 6,372 — 6,372 — 1,127,584 — — 1,116,012 Loans, net 1,490,020 — — 1,493,185 16,406 — 16,406 — Bank owned life insurance 39,171 — 39,171 — 4,050 — 4,050 — Accrued interest receivable 8,074 — 8,074 — Derivative assets - interest rate swaps Derivative assets - interest rate swaps 6,052 — 6,052 — Financial liabilities: $ 817,054 $ — $ 817,054 $ — Checking, savings and money market accounts $ 1,652,352 $ — $ 1,652,352 $ — 345,386 — 344,877 — Time deposits 231,417 — 232,837 — FHLB advances FHLB advances 25,000 — 25,000 — 24,407 — 24,515 — Subordinated notes 19,510 — 18,133 — 811 — 811 — Accrued interest payable 1,034 — 1,034 — Derivative liabilties - interest rate swaps Derivative liabilties - interest rate swaps 6,052 — 6,052 — Derivative liabilties - cash flow hedge Derivative liabilties - cash flow hedge 77 — 77 — 18.17. Earnings Per Share(EPS)("EPS") 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 contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of stock which then shared in the earnings of the Company. Weighted average shares—shares – diluted includes only the potential dilution of stock options and unvested restricted stock units as of as of December 31, 20192022 and 2018,2021, respectively.yearyears ended December 31, 2019. There was an average of 313 anti-dilutive shares excluded from the calculation for the year ended December 31, 2018.Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share2022 and per share data)Note 18. Earnings Per Share (Continued)2022 2021 Net income $ 24,984 $ 21,933 Weighted average shares - basic 17,431 17,062 Effect of dilutive securities 1,053 1,165 Weighted average shares - diluted 18,484 18,227 Basic EPS $ 1.43 $ 1.29 Diluted EPS $ 1.35 $ 1.20 Years Ended
December 31, 2019 2018 $ 15,828 $ 10,869 13,817 11,715 1,008 1,107 14,825 12,822 $ 1.15 $ 0.93 $ 1.07 $ 0.85 share and per share data)19.18. Supplemental Cash Flow Information2022 2021 Supplemental Disclosure of Cash Flow Information: Cash paid for: Interest on deposits and borrowed funds $ 15,140 $ 9,361 Income taxes 6,070 4,735 Noncash investing and financing activities: Unrealized loss on securities available-for-sale (48,958) (5,630) Unrealized gain on interest rate swaps 4,328 677 Right-of-use assets obtained in the exchange for lease liabilities during the current period 522 207 Modification of right-of-use assets and lease liability 283 — For the Years Ended
December 31, (dollars in thousands) 2019 2018 $ 18,698 $ 11,611 2,268 5,892 11,343 — 4,096 (999 ) 12,249 — 12,656 — 2,378 —
— 3,829 — 12,732 — 1,391 — 142,593 — 789 — 4,289 — 6,512 — 1,950 — 406 — 161 — 358 — 638
— 19,080 — 48,426 — 70,078 — 27,577 — 294 — 127
— 14,579 20.19. Accumulated Other Comprehensive Income (Loss)(AOCI)(loss) ("AOCI") for the years ended December 31, 20192022 and 20182021 are shown in the following table. The Company has two components of AOCI, whichNotes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 20. Accumulated Other Comprehensive Income (Loss) (Continued)interest rate swap,cash flow hedges, for each of the yearyears ended December 31, 2019. For the year ended December 31, 2018, available-for-sale securities is the only component.2022 Available-for-
Sale SecuritiesCash Flow
HedgesTotal Balance, beginning of period $ (1,983) $ (60) $ (2,043) Net unrealized (losses) gains during the period (37,943) 3,419 (34,524) Other comprehensive (loss) income, net of tax (37,943) 3,419 (34,524) Balance, end of period $ (39,926) $ 3,359 $ (36,567) 2019 Available-for-
Sale Securities Cash Flow
Hedges Total $ (2,411 ) $ — $ (2,411 ) 3,164 (63 ) 3,101 3,164 (63 ) 3,101 $ 753 $ (63 ) $ 690 2021 Available-for-
Sale SecuritiesCash Flow
HedgesTotal Balance, beginning of period $ 2,421 $ (595) $ 1,826 Net unrealized gains (losses) during the period (4,404) 535 (3,869) Other comprehensive income (loss), net of tax (4,404) 535 (3,869) Balance, end of period $ (1,983) $ (60) $ (2,043) 2018 Available-for-
Sale Securities $ (1,693 ) (1,072 ) 354 (718 ) $ (2,411 ) The following table presents information related toThere were no reclassifications from accumulated other comprehensive income. Amount
Reclassified
from AOCI
into Income For the Years
Ended
December 31, Affected Line Item in the Consolidated
Statements of Income 2019 2018 $ — $ 462 Loss on sale of securities available-for-sale — (108 ) Income tax benefit $ — $ 354 Net of tax 21.20. Revenue Recognition On January 1, 2018, theadoptedrecognizes revenue in accordance with ASU No. 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. 606 in recognizing revenue.BOLIbank owned life insurance income, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. However, theshare and per share data)Note 21. Revenue Recognition (Continued)commissions. However, the Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 21. Revenue Recognition (Continued)20192022 and 2018:Years Ended December 31, 2022 2021 Noninterest Income In-scope of Topic 606 Service Charges on Deposit Accounts $ 954 $ 1,028 Fees, Exchange, and Other Service Charges 374 369 Other income 104 191 Noninterest Income (in-scope of Topic 606) 1,432 1,588 Noninterest Income (out-scope of Topic 606) 1,402 2,714 Total Noninterest Income $ 2,834 $ 4,302 Years Ended
December 31, 2019 2018 $ 890 $ 635 429 284 38 27 1,357 946 1,189 715 $ 2,546 $ 1,661 20192022 and 2018,2021, the Company did not have any significant contract balances. In connection with the adoption of20192022 or 2018.2021.Notesother real estate ownedConsolidated Financial Statements (Continued)(Dollarsthe buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of the property to a buyer, the Company assesses whether the buyer is committed to perform the obligations under the contract and whether collectability of the transaction price is probable. In determining the gain (loss) on the sale, the Company adjusts the transaction price and the related gain or loss on sale if a significant financing component is present. The Company recorded a gain on sale of other real estate owned of $0 in thousands, except share2022 and per share data)22.21. Parent Company Only Financial Statements20192022 and 2018
2021Assets 2022 2021 Cash and cash equivalents $ 531 $ 1,882 Securities available-for-sale 991 1,005 Investment in subsidiary 214,382 223,043 Other assets 6,404 3,903 Total assets $ 222,308 $ 229,833 Liabilities and Stockholders' Equity Subordinated notes $ 19,565 $ 19,510 Other liabilities 361 527 Total liabilities $ 19,926 $ 20,037 Total stockholders' equity $ 202,382 $ 209,796 Total liabilities and stockholders' equity $ 222,308 $ 229,833 2019 2018 $ 5,421 $ 6,252 1,040 988 194,914 173,873 2,246 1,682 $ 203,621 $ 182,795 $ 24,487 $ 24,407 56 52 $ 24,543 $ 24,459 $ 179,078 $ 158,336 $ 203,621 $ 182,795 20192022 and 20182022 2021 Income: Interest on securities available-for-sale $ 67 $ 65 Income from minority membership interest 626 — Dividend income 730 20,820 Total income $ 1,423 $ 20,885 Expense: Interest on subordinated notes $ 1,031 $ 2,534 Salaries and employee benefits 1,192 1,021 Occupancy and equipment 80 83 Audit, legal and consulting fees 375 320 Other operating expenses 194 249 Total expense $ 2,872 $ 4,207 Net income (loss) before income tax benefit and equity in undistributed earnings of subsidiary $ (1,449) $ 16,678 Income tax benefit (580) (879) Equity in undistributed earnings of subsidiary 25,853 4,376 Net income $ 24,984 $ 21,933 2019 2018 $ 65 $ 65 $ 65 $ 65 (1,580 ) (1,580 ) (687 ) (715 ) (80 ) (80 ) (322 ) (225 ) — (781 ) (194 ) (128 ) (2,863 ) (3,509 ) $ (2,798 ) $ (3,444 ) (560 ) (835 ) 18,066 13,478 $ 15,828 $ 10,869 Notes to Consolidated Financial Statements (Continued)(Dollars in thousands, except share and per share data)Note 22. Parent Company Only Financial Statements (Continued)20192022 and 2018
20212022 2021 Cash Flows From Operating Activities Net income $ 24,984 $ 21,933 Equity in undistributed earnings of subsidiary (25,853) (4,376) Amortization of subordinated debt issuance costs 55 488 Stock-based compensation expense 1,183 1,011 Change in other assets and liabilities (1,413) (2,598) Net cash (used in) provided by operating activities $ (1,044) $ 16,458 Cash Flows From Investing Activities Net cash used in investing activities $ — $ — Cash Flows From Financing Activities Repayment of subordinated notes, net $ (1,250) $ (23,813) Repurchase of shares of common stock (730) — Common stock issuance 1,673 1,221 Net cash used in financing activities $ (307) $ (22,592) Net decrease in cash and cash equivalents $ (1,351) $ (6,134) Cash and cash equivalents, beginning of year 1,882 8,016 Cash and cash equivalents, end of year $ 531 $ 1,882 2019 2018 $ 15,828 $ 10,869 (18,066 ) (13,478 ) (44 ) 111 80 80 679 707 (528 ) (806 ) $ (2,051 ) $ (2,517 ) $ — $ 5,172 — (33,473 ) $ — $ (28,301 ) $ 1,220 $ 1,141 — 33,475 $ 1,220 $ 34,616 $ (831 ) $ 3,798 6,252 2,454 $ 5,421 $ 6,252 �� 2019.2022. In making this assessment, management used the 2013 criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO") inInternal Control-Integrated Framework. Based on management's assessment, management believes that as of December 31, 2019,2021, the Company's internal control over financial reporting was effective based on criteria set forth by COSO in its 2013Internal Control-Integrated Framework.(YHB)("YHB", Auditor Firm ID: 613), regarding internal control over financial reporting.reporting under Public Company Accounting Oversight Board standards. Management's report was not subject to attestation by YHB pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in its annual report.20192022 consolidated financial statements have been audited by the independent registered public accounting firm of Yount, Hyde & Barbour, P.C. (YHB).YHB. Personnel from YHB were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and Committees thereof. Management believes that all representations made to the independent registered public accounting firm were valid and appropriate. The resulting report from YHB accompanies the consolidated financial statements.20192022 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.inunder the captions "Election of Directors" section and under the headingsDirectors," "Executive Officers," "The Committees"Ownership of theCompany Securities – Delinquent Section 16(a) Reports" and "Corporate Governance and The Board of Directors," "Code of Ethics," and "Delinquent Section 16(a) Reports"Directors" in the Company's Proxy Statement for the 20202023 Annual Meeting of StockholdersShareholders is incorporated by reference.in the "Executive Compensation" section and under the headings "Directorcaptions "Executive Compensation," "Corporate Governance and The Board of Directors – Director Compensation" and "Corporate Governance and The Board of Directors – "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for the 20202023 Annual Meeting of StockholdersShareholders is incorporated by reference.headings "Securitycaption "Ownership of Company Securities - Security Ownership of Directors, Executive Officers and Officers" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement for the 20202023 Annual Meeting of StockholdersShareholders is incorporated by reference.2019,2022, with respect to compensation plans under which shares of our Common Stock are authorized for issuance. Number of Securities to Be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans(1) 1,797,516 $ 8.09 164,195 — — — 1,797,516 $ 8.09 164,195 Plan Category Number of Securities to Be
Issued Upon Exercise of
Outstanding Options,
Warrants and RightsWeighted Average
Exercise Price of
Outstanding Options,
Warrants and RightsNumber of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans(1)Equity Compensation Plans Approved by Stockholders: Amended and Restated 2008 Stock Plan 1,621,920 $ 6.82 157,263 Equity Compensation Plans Not Approved by Stockholders (2) — — — Total 1,621,920 $ 6.82 157,263 heading "Certaincaptions "Executive Compensation – Certain Relationships and Related Transactions" and "Independence"Corporate Governance and The Board of the Directors"Directors – Director Independence" in the Company's Proxy Statement for the 20202023 Annual Meeting of StockholdersShareholders is incorporated by reference.AccountingAccountant Fees and Servicesheading "Feescaptions "Audit information – Fees of Independent Registered Public Accountants" and "Audit Information – Audit Committee Pre-Approval Policies and Procedures" in the Company's Proxy Statement for the 20202023 Annual Meeting of StockholdersShareholders is incorporated by reference.ExhibitsExhibit and Financial Statement Schedules(a)ExhibitsNumberDescriptionNumber 3.1Description 3.1
3.23.2
3.33.3
4.14.1
4.210.14.3 10.1
10.210.210.3 10.4
10.510.310.6 10.7
10.810.4Form of Subordinated Note due June 30, 2026(1)10.5
10.910.6
2121
23.123.1
31.131.1
31.231.2
32.132.1
32.232.2
101101
Interactive data files pursuant to Item 405 of Regulation S-T
(i)(i)
Consolidated Statements of Condition at December 31, 20192022 and 20182021
(ii)(ii)
Consolidated Statement of Income for the years ended December 31, 20192022 and 20182021
(iii)(iii)
Consolidated Statement of Comprehensive Income for the years ended December 31, 20192022 and 20182021
(iv)(iv)
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 20192022 and 20182021
(v)(v)
Consolidated Statement of Cash Flows for the years ended December 31, 20192022 and 20182021
(vi)(vi)
Notes to the Consolidated Financial Statements104 The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline Extensible Business Reporting Language (included with Exhibit 101).
10-K Summary(1)Incorporated by reference to the Exhibit of the same number to FVCB's Registration Statement onItem 16. Form S-1 filed on August 20, 2018 (Registration No. 333-226942).
None.FVCBankcorp, Inc.March 27, 2020By:/s/ DAVID W. PIJOR
FVCBankcorp, Inc.March 24, 2023 By: Name:/s/ David W. Pijor Name: David W. Pijor Title:Title: Chairman and Chief Executive Officer 27, 2020.SignaturesTitlesSignatures Titles /s/ DAVID W. PIJORName: David W. Pijor
Name: David W. Pijor/s/ JENNIFER L. DEACONName: Jennifer L. Deacon
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)/s/ PATRICIA A. FERRICK
Name: Patricia A. FerrickPresident and DirectorJennifer L. Deacon/s/ MORTON A. BENDERName: Morton A. BenderDirector/s/ L. BURWEL GUNNName: L. Burwell GunnDirector/s/ SCOTT LAUGHLINName: Scott LaughlinDirector/s/ THOMAS L. PATTERSONName: Thomas L. PattersonDirectorSignaturesTitles
/s/ Patricia A. Ferrick
President and DirectorName: Patricia A. Ferrick /s/ DEVIN SATZ
Marc N. DuberDirector Name: Marc N. Duber /s/ L. Burwell Gunn Director Name: L. Burwell Gunn /s/ Meena Krishnan Director Name: Meena Krishnan /s/ Scott Laughlin Director Name: Scott Laughlin /s/ Thomas L. Patterson Director Name: Thomas L. Patterson /s/ Devin Satz Director Name: Devin Satz Director/s/ LAWRENCELawrence W. SCHWARTZ
SchwartzDirector Name: Lawrence W. Schwartz Director/s/ SIDNEYSidney G. SIMMONDS
SimmondsDirector Name: Sidney G. Simmonds Director/s/ DANIELDaniel M. TESTA
TestaDirector Name: Daniel M. Testa Director/s/ PHILIPPhilip R. WILLS
Wills IIIDirector Name: Philip R. Wills III Director/s/ STEVENSteven M. WILTSE
WiltseDirector Name: Steven M. Wiltse Director
