SECURITIES AND EXCHANGE COMMISSION
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
December 31, 20202023
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______to
_______
Commission file number:
001-38647
(Exact name of registrant as specified in its charter)
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| Virginia |
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(State or other jurisdiction
of incorporation or organization) | | 47-5020283
Identification No.)
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11325 Random Hills Road, Suite 240 Fairfax, Virginia |
Fairfax, Virginia
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| (Address of principal executive offices) | | 22030
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(703) 436-3800
(Registrant’s telephone number, including area code: code)
Securities registered pursuant to Section 12(b) of the Act:
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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 |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻¨ No ⌧x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻¨ No ⌧x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧x No ◻¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧x No ◻¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ◻o | Accelerated filer ◻o | Non-accelerated filer ⌧x | Smaller reporting company ☒x |
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| Emerging growth company ☒o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Act☒. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐¨ No ☒x State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2020: $125,869,695.
2023: $171,653,908.
The number of shares outstanding of Common Stock, as of March
19, 2021,20, 2024, was
13,639,910.
17,877,051.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant's definitive Proxy Statement for the 20212024 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.
Cautionary Note About Forward-Looking Statements
This Annual Report on Form 10-K, as well as other periodic reports filed with the U.S. Securities and Exchange Commission
("SEC"), and written or oral communications made from time to time by or on behalf of FVCBankcorp, Inc. and its subsidiary
(the “Company”("Company"), may contain statements relating to future events or future results of the Company that are considered
“forward-looking statements”"forward-looking statements" under the Private Securities Litigation Reform Act of 1995. 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,”"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:
| ● | risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues; the imposition of any restrictions on business operations and/or travel; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates; and the timing of distribution, effectiveness, and acceptance of vaccines against COVID-19;•general business and economic conditions, including higher inflation and its impacts, nationally or in the markets that the Company serves could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, consumer and business confidence, and consumer or business spending, which could lead to decreases in demand for loans, deposits, and other financial services that the Company provides and increases in loan delinquencies and defaults; •the impact of the interest rate environment on our business, financial condition and results of operation, and its impact on the composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities; •changes in the Company's liquidity requirements could be adversely affected by changes in its assets and liabilities; •changes in the assumptions underlying the establishment of reserves for possible credit losses and the possibility that future credit losses may be higher than currently expected; •changes in market conditions, specifically declines in the commercial and residential real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions the Company does business with; •the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve"), inflation, interest rate, market and monetary fluctuations; •the Company's investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates used to value the securities in the portfolio; •declines in the Company's common stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to record a noncash impairment charge to earnings in future periods; •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; • |
| ● | general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, and consumer and business confidence, which could lead to decreases in demand for loans, deposits, and other financial services that the Company provides and increases in loan delinquencies and defaults; |
| ● | the risk of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities; |
| ● | changes in the assumptions underlying the establishment of reserves for possible loan losses; |
| ● | changes in market conditions, specifically declines in the commercial and residential real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions we do business with; |
| ● | risks inherent in making loans such as repayment risks and fluctuating collateral values; |
| ● | declines in the Company’s common stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to record a noncash impairment charge to earnings in future periods; |
| ● | 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 or emergencies, 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 Board of Governors of the Federal Reserve System, 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 U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, 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; and |
| ● | potential exposure to fraud, negligence, computer theft and cyber-crime. |
•the management of risks inherent in the Company's real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of loan collateral and the ability to sell collateral upon any foreclosure;•the impact of changes in bank regulatory conditions, including laws, regulations and policies concerning capital requirements, deposit insurance premiums, taxes, securities, and the application thereof by regulatory bodies;
•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, the Financial Accounting Standards Board ("FASB") or other accounting standards setting bodies;
•competitive pressures among financial services companies, including the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
•the effect of acquisitions and partnerships the Company may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
•the Company's involvement, from time to time, in legal proceedings and examination and remedial actions by regulators; and
•potential exposure to fraud, negligence, computer theft and cyber-crime, and the Company's ability to maintain the security of its data processing and information technology systems.
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”"Risk Factors" in Item 1A below. 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 cautionthe Company cautions 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.
the Company's operations, financial condition or results of operations.
Overview
FVCBankcorp, Inc. (the “Company”)
The Company is a registered bank holding company headquartered in Fairfax, Virginia. We operate primarily through our sole subsidiary, FVCbank, (the
“Bank”"Bank"), a community oriented, locally-owned and managed commercial bank organized under the laws of the Commonwealth of Virginia. We serve the banking needs of commercial businesses, nonprofit organizations, professional service entities, and their respective owners and employees located in the greater Washington, D.C. and Baltimore metropolitan areas. The Company was established as the holding company for the Bank in 2015.
Since the Bank began operations in November 2007, it has grown largely organically, through de novo branch expansion, banker and customer acquisition, and two whole-bank acquisitions. In 2012, we completed the acquisition of 1st Commonwealth Bank of Virginia (“("1st Commonwealth” Commonwealth"), a $58.9 million asset savings and loan association in Arlington, Virginia. On October 12, 2018, we completed our acquisition of Colombo Bank
(“Colombo”("Colombo"), which was headquartered in Rockville, Maryland, and
which added
five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland.
Our acquisition of Colombo supported our business allowing us to expand our presence in adjacent markets where we lend, but in which we had no physical presence.
Colombo’s branch locations strengthened our strategy as they enabled us to add lenders and banking services in areas where we lend. Our strong infrastructure and wide range of products and services allowed us to develop deeper relationships with
Colombo’sColombo's customers, as well as enhance our platform for generating new relationships.
On August 31, 2021, we announced that the Bank made an investment in Atlantic Coast Mortgage, LLC ("ACM") for $20.4 million to obtain a 28.7% ownership interest in ACM. 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 our held to investment loan portfolio.
We operate in one of the most economically dynamic and wealthy regions of the Washington and Baltimore Metropolitan Statistical Areas (“MSA”("MSA"), focusing primarily on the Virginia counties of Arlington, Fairfax, Loudoun and Prince William and the independent cities located within those counties, as well as Washington, D.C. and its Maryland suburbs and Baltimore, Maryland and its surrounding suburbs. As of June 30, 2020, the2023, the Washington MSA had total deposits of $269.4$298.3 billion excluding deposits maintained by a national brokerage firm, and the Baltimore MSA had total deposits of $94.4$96.5 billion, based on Federal Deposit Insurance Corporation (“FDIC”("FDIC") data. Our market area's unemployment rate has generally remained below the national average for the last several
years. Currently, whileyears, as the
area's unemployment rate has increased significantly, it is still below the national average. Our market arearegion has the benefit of a highly trained and educated workforce concentrated in government and professional service businesses. These factors,
along with the ability of the regional infrastructure to support remote working, have provided a greater amount of resiliency
during the pandemic on the overall employment metrics for our market.
In addition to the presence of the federal government, the Washington MSA is defined by attractive market demographics, including strong household incomes, dense populations and the 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, 2019,2023, the Washington MSA had a median household income of $105,659,$111,252, which ranks as sixth highest among all MSAs nationally, and a population of 6.36.4 million.The Virginia and Maryland localities within the Washington MSA in which we primarily operate have higher median household incomes than the Washington MSA as a whole and have an unemployment rate of 5.6%2.5% as of December 2020.31, 2023. The significant presence of national and international businesses make the Washington MSA one of the most economically vibrant and diverse markets in the country. The Washington MSA is currently home to 1530 Fortune 500 companies, including eight based in Fairfax County.
The Baltimore MSA also has strong economic factors which enhance our business profile. As of December 31, 2019,2023, the Baltimore MSA had a median household income of $83,160$90,505 which represented 3.3%4.0% growth over the previous year. The Baltimore MSA has an unemployment rate of 5.6%2.0% as of December 2020.31, 2023. With a population of 2.83.0 million, the top industries of the Baltimore MSA include health care,healthcare, education, and professional, scientific and technical services.
Our business, financial condition,The local economies in which we operate that began to strengthen and results of operations have been profoundly affected by theimprove during 2022 post pandemic, which will potentially have adverse effects on our future performance. Both globally and within the United States, the pandemic has resultedshowed continued improvement in negative impacts and a significant disruption to economic and commercial activity and financial markets. The local economyduring 2023. This economic improvement resulted in which we operate had continued to strengthen and expand into early 2020 with lowlower unemployment, highincreased consumer confidence, and increased housing development and stable housing prices. Now, as a result ofOur business opportunities in the pandemic, our business opportunitiesfuture may be tempered by concerns such as employment opportunities, the effectshigher interest rates, inflation, and contractionary monetary policy. Volatility in global economic markets, continued domestic political turmoil and various episodes of remote work environments, the impactgeopolitical unrest continue to provide a degree of continued government stimulus, and wage growth. Overall,uncertainty in financial markets. Aside from these challenges, we continue to be encouraged by the resiliency of the current economic environment and the prospects for continued growth of the Company.
Our approach features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals. We provide a full range of banking services that become integral to our
customers’customers' business operations, which helps to enhance our ability to retain our relationships. We offer a better value proposition to our customers by providing high-touch service with few added fees. Our capabilities and reputation enable us to be selective in loan and customer selection, which contributes to our strong asset quality, and our ability to provide multiple services to customers.
We intend to continue expanding our market position through organic growth, through expansion of our relationships with our existing customers, acquisition of new customers and acquisition of seasoned bankers with strong customer relationships, through selective branching, and potentially opportunistic acquisitions or other strategic transactions, while increasing profitability, maintaining strong asset quality and a high level of customer service.
Our success has been driven by our mission to help our clients, communities and employees prosper. We strive to exceed our
clients’clients' expectations by delivering superior, personalized client service supported with high quality bank products and services. We invest in the growth of our employees and we give back to the communities in which we do business to foster a brighter future for everyone who lives there. Much of our early growth was the result of the active promotion by our organizing shareholders, our board of directors, our advisory board and our shareholders as many of
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.
Our vision is to be known as the number one community bank in experience and service in our community. Our passion is to provide the utmost banking experience for each of our clients, to create a positive and empowering work environment for our employees, to fulfill our obligation of corporate citizenship in the communities in which we operate and to ensure that our Bank increases profitability and grows prudently, ensuring its strength and continuity, and increasing shareholder value.
Our Products and Services
We emphasize providing commercial banking services to small and medium-sized businesses, professionals, non-profit organizations and associations, and investors living and working in and near our service area. We offer retail banking services to accommodate the individual needs of both corporate customers as well as the communities we serve. We also offer online banking, mobile banking and a remote deposit service, which allows clients to facilitate and expedite deposit transactions through the use of electronic devices. A sophisticated suite of treasury management products is a key feature of our client focused, relationship driven marketing. We have partnered with experienced service providers in both insurance and merchant services to further augment the products available to our customers.
We provide a variety of lending products to small and medium-sized businesses, including (i) commercial real estate loans; (ii) commercial construction loans; (ii) commercial loans for a variety of business purposes such as for working capital, equipment purchases, lines of credit, and government contract financing; (iii) Small Business Administration (“SBA”("SBA") lending; (iv) asset based lending and accounts receivable financing; (v) home equity loans, or 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.During 2020, we participated in the SBA’s Paycheck Protection Program ("PPP"), which provided forgivable loans to small businesses to enable them to maintain payroll, rehire employees who had been laid off, and cover applicable overhead. These loans are fully guaranteed by the SBA and provide for the full forgiveness of the loans during a specified forgiveness period that meet specific guidelines provided by the SBA. Loans that do not meet forgiveness criteria will enter a repayment period of either 2 or 5 years. At December 31, 2020, PPP loans totaled $155.8 million, or 10.6% of total loans. We continue to originate PPP loans as part of the 2021 program for first and second draw loans.
Commercial Real Estate Loans. Commercial real estate loans, which comprise the largest portion of theour loan portfolio, are secured by both owner occupied and investor owned commercial properties, including multi-family residential real estate. Commercial real estate loans are structured using both variable and fixed rates and renegotiable rates which adjust in three to five years, with maturities of generally five to ten years. At December 31, 2020,2023, owner occupied commercial real estate loans represented 12.4%12.0% of the loan portfolio. At December 31, 2020,2023, non-owner occupied commercial real estate loans represented approximately 41.3%48.0% of the loan portfolio and multi-family residential real estate comprised 5.0%comprised 10% 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 of Baltimore, Maryland, and between Winchester, Virginia and the Eastern Shore of Maryland.
Construction Loans. Commercial construction loans for the acquisition, development and construction of commercialcommercial real estate also comprise a significant and growing portion of the portfolio. At December 31, 2020,2023, such loans represented 15.1%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, for terms of 12 - 24 months. Generally, we do not make commercial construction loans outside of our primary or secondary market areas.
Commercial Loans, Government Contracting. Commercial loans, excluding PPP loans, for a variety of business purposes, including working capital, equipment purchases, lines of credit, and government contract financing and asset based lending and accounts receivable financing, comprise approximately 8.1%12.0% of our loan portfolio at December 31, 2020.2023. 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 rates. The cash flow of the borrower/borrower’sborrower's operating business is often the principal source of debt service, with a secondary emphasis on other collateral.
We have developed a special expertise in government contract financing. We lend to government contractors or subcontractors headquartered in the Washington, D.C. metropolitan area. This area of lending encompasses lines of credit for working capital, financing of government leases, mergers and acquisition financing, and, less frequently term loans, to operating companies that recognize over 50% of their total revenues from services provided to federal government agencies or rated state and municipal governments. Our borrowers are typically engaged in technology or service businesses, but may also include construction and equipment providers, or entities working on “classified”"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, 2020,2023, outstanding loans to government contractors represented 31.4%47.0% of our commercial and industrial segment. Total commitments to government contractors totaled $178.0$311.4 million at December 31, 2020.2023. 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.requir
ed. Consumer Residential. We actively originate loans for residential 1-4 family trust investment purposes and HELOCs in the communities we serve in the Washington and Baltimore MSAs. In addition, we have portfolio mortgage products that we developed for use by ACM to help diversify our total loan portfolio. Our HELOCs generally have a maximum loan to value of up to 85%, however, due to the favorable economic conditions and strong residential real estate market in these markets, actual loan to values are typically lower than the maximum. We provide HELOCs asas a service to our customers and when we receive referrals from various mortgage brokers within our market area. As of December 31, 2020,2023, HELOCs comprise 4.2%1.7% of total loans. Loans originated for residential 1-4 family trust investment purposes comprise 5.0%4.3% of total loans as of December 31, 2020.2023. 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, 2020, 1-4 family2023, consumer residential mortgage loans represented 2.2%19.9% of the loan portfolio.
Other Loans. We occasionally originate consumer loans both on an unsecured basis and secured by non-real estate collateral. We have also purchased pools of unsecured consumer loans and student loans from a third party for yield and diversification. The lending activities in which we engage carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Federal Reserve and general economic conditions, nationally and in our market areas, could have a significant impact on our results of operations. To the extent that economic conditions deteriorate
including as a result of the COVID-19 pandemic 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.
Our goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each
borrower’sborrower's business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
Our lending activities are subject to a variety of lending limits imposed by state and federal law. These limits will increase or decrease in response to increases or decreases in our level of capital. At December 31, 2020,2023, the Bank had a legal lending limit of $33.6$39.2 million. At December 31, 2020,2023, our average funded loan size outstanding, excluding PPP loans, for commercial real estate (including commercial construction) and commercial loans was $1.9$2.1 million and $239$520 thousand, 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.
Concentrations of Credit Risk. Most of our lending is conducted with businesses and individuals in the suburbs of Washington, D.C. Our loan portfolio consists primarily of commercial real estate loans, including construction and land loans, which totaled $1.01$1.31 billion and constituted 68.8%67.8% of total loans as of December 31, 2020,2023, and commercial loans, including loans to government contractors and the ACM warehouse lending facility, which totaled $119.5$219.9 million and constituted 8.1%12.0% of total loans as of December 31, 2020.2023. 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 adequacy of the allowance for loancredit losses. Management believes the allowance for loancredit losses is adequate to cover probable incurred losses in our loan portfolio as of December 31, 2020.2023.
Comprehensive risk management practices and appropriate capital levels are essential elements of a sound commercial real estate lending program. A concentration in commercial real estate adds a dimension of risk that compounds the risk inherent in individual loans. The federal banking 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’sinstitution'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’sinstitution's total risk-based capital and the institution’sinstitution'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 which 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 may be required to hold higher levels of capital. We have a concentration in commercialcommercial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. As of December 31, 2020,2023, commercial real estate loans as defined for regulatory purposes represented 372%399% of our total risk-based capital. Of those loans, commercial construction, development and land loans represented 99%57% of our total risk based capital. Owner-occupied commercial real estate loans represented an additional 82%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.
We offer a wide array of deposit products for individuals, professionals, government contractors and other businesses, including interest and noninterest-bearing transaction accounts, certificates of deposit,
savings, and money market accounts. We are a relationship based bank, and maintenance of significant deposit relationships is a factor in our decision to make loans and the pricing of our products.
Our sophisticated treasury management and online banking platform allows a commercial customer to view balances, initiate payments, pay bills (including positive pay), issue stop payments, reconcile accounts and set up custom alerts. Online wires, ACH (including positive authorization), remote capture, cash disbursement and cash concentration are additional payment options available to businesses. We 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.
Through third party networks, we offer our customers access to a full range of business insurance products and business and consumer credit card products.
We are one of the few remaining locally owned and managed independent community banks headquartered in Northern Virginia. We believe that this is an advantageous position and valuable quality which positively differentiates us from our competitors and positions us for future growth from individuals and small and mid-sized business customers who value the attention and customized services which a locally owned and managed community bank can provide.
As of June 30, 2020,2023, there were approximately $269.4$298.3 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 0.55%, excluding deposits maintained0.60% 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 businesses that we seek to provide. Through correspondents, referrals to third parties with whom we have partnered, and our own capabilities, we are a full service financial provider, able to compete in substantially all areas of banking, except trust services. Additionally, we believe we provide competitively priced products, superior customer service, flexibility and responsiveness when compared to our larger competitors.
The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds, financial technology companies and other financial institutions operating in the Washington and Baltimore MSAs and elsewhere.
Our market area is a highly competitive, highly branched, banking market. Competition in our market area for loans to small and middle-market businesses and professionals, our target market, is intense and pricing is important. Several of our competitors have substantially greater resources and lending limits than we have, 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 market have access to borrowed funds at
a lower cost than may be available to us. Additionally, deposit competition among institutions in the market area is strong. As a result, it is possible that we may pay above market rates to attract deposits.
We believe that effective risk management is of primary importance. Risk management refers to the activities by which we identify, measure, monitor, evaluate and manage the risks we face in the course of our banking activities. These include liquidity, interest rate, credit, operational, compliance, regulatory, strategic, financial and reputational risk exposures. Our board of directors and management team have created a risk-conscious culture that is focused on quality growth, which starts with capable and experienced risk management teams and
an infrastructure capable of addressing the evolving risks we face, as well as the changing regulatory and compliance landscape. Our risk management approach employs comprehensive policies and processes to establish robust governance. We believe a disciplined and conservative underwriting approach has been the key to our strong asset quality.
Our board of directors sets the tone at the top of our organization, adopting and overseeing the implementation of our risk management, establishing our overall risk appetite and risk management strategy. The board of directors approves our various operating policies, which include risk policies, procedures, limits, targets and reporting structured to guide decisions regarding the appropriate balance between risk and return considerations in our business. Our board of directors receives periodic reporting on the risks and control environment effectiveness and monitors risk levels in relation to the approved risk appetite.
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms and the risk that credit assets will suffer significant deterioration in market value. We manage and control credit risk in our loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by management, and approved by the board of directors. Our written loan policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, product and geographic levels is actively managed to mitigate concentration risk. In addition, credit risk management includes an independent credit review process that assesses compliance with policies, risk rating standards and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We evaluate our
customers’customers' borrowing needs and capacity to repay, in conjunction with their character and history. Our management and board of directors place significant focus on maintaining a healthy risk profile and ensuring sustainable growth. Our risk appetite seeks to balance the risks necessary to achieve our strategic goals while ensuring that our risks are appropriately managed and remain within our defined limits.
Our management of interest rate and liquidity risk is overseen by our Asset and Liability Committee, based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this
infrastructure reviews financial performance, trends, and significant variances to budget; reviews and recommends for board approval risk limits and tolerances; reviews ongoing monitoring and reporting regarding our performance with respect to these areas of risk, including compliance with board-approved risk limits and stress-testing; ensures annual back-testing and independent validation of models at a frequency commensurate with risk level; reviews all hedging strategies and recommends changes as appropriate; reviews and recommends our contingency funding plan; establishes wholesale borrowing limits to be submitted to the board of directors; and acts as a second line of defense in reviewing information and reports submitted to the committee for the purpose of identifying, investigating, and assuring remediation, to its satisfaction, of errors or irregularities, if any.
Our investment securities portfolio is primarily maintained as an on-balance sheet contingent source of liquidity to fund loans and meet the demands of depositors. It provides additional interest income and we seek to have limited interest rate risk and credit risk. We currently classify substantially all of our investment securities as available-for-sale. Our investment policy authorizes investment primarily in securities of the U.S. government and its agencies; mortgage backbacked 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, Federal Home Loan Bank of Atlanta
(“FHLB”("FHLB") borrowings, and Federal Reserve Bank of Richmond
(“FRB”("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.
As of December 31,
2020,2023, we had
121116 full-time
equivalentemployees and 4 part-time employees. None 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.
As a result of the COVID-19 pandemic stay at home orders to reduce the spread of the disease, the majority of our workforce transitioned to remote access operations towards the end of March 2020. Our information technology infrastructure has afforded our employees the ability to work predominantly remotely with little interruption as we continue to service the needs of our clients in a customer secure environment. As government imposed stay at home orders have further relaxed, more than half of our employees have returned to our offices under social distancing guidelines requiring employees to maintain safe distances, and with more frequent cleaning of our facilities and other practices encouraging a safe work environment. Management remains connected to employees through monthly company-wide conference calls and regular notifications and updates through both email and the Company's intranet as warranted.
Branch hours and availability, which were modified in consideration of the safety of our employees and clients, were reinstated during the second quarter of 2020. All of our locations have been opened with advanced safety measures and are available during our normal business hours.
Our common stock is currently listed on the Nasdaq Capital Market under the symbol
“FVCB.”"FVCB." We maintain a website at
https://www.fvcbank.com.
We make available free of charge through our website all of our U.S. Securities and Exchange Commission (“SEC”)SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such material to the SEC at https://www.sec.gov. Information on our website does not constitute part of, and is not incorporated into, this report or any other filing we make with the SEC.
SUPERVISION AND REGULATION
Our business and operations are subject to extensive federal and state governmental regulation and supervision. The following is a brief summary of certain statutes and rules and regulations that affect or may affect us. This summary is not intended to be an exhaustive description of the statutes or regulations applicable to our business. Supervision, regulation, and examination of the Company by the regulatory agencies are intended primarily for the protection of depositors and the Deposit Insurance Fund, rather than our shareholders.
The Company. The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“the Act”(the "Act"), and is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).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 an annual report and such other additional information as the Federal Reserve may require pursuant to the Act. The Federal Reserve may also examine the Company and each of its subsidiaries. As a small bank holding company under the Federal Reserve’sReserve's Small Bank Holding Company Policy Statement, the Company is not subject to risk-based capital requirements adopted by the Federal Reserve, which are substantially identical to those applicable to the Bank, and which are described below. The Act requires approval of the Federal Reserve for, among other things, a bank holding
company’scompany'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 other than the home state of the bank holding company, except where the bank has not been in existence for the minimum period of time required by state law; but if the bank is at least
5five years old, the Federal Reserve may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any company which is not a bank or bank holding company and from engaging 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 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 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 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’scompany'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.
The Gramm Leach-Bliley Act of 1999 (“("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 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.
The Act and the Federal Deposit Insurance Act (“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’scompany'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’sbank'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’scompany's subsidiary FDIC-insured depository institutions is responsible for losses to the FDIC as a result of an affiliated depository institution’sinstitution's failure.
A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or redemption of its own then outstanding equity securities. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve.
As a Virginia corporation, the Company is subject to additional limitations and restrictions. For example, state law restrictions include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, minutes, borrowing and the observance of corporate formalities.
The Bank. The Bank is a Virginia chartered commercial bank and a member of the Federal Reserve System, 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”"VBFI") and the Federal Reserve. The regulations of these various agencies govern most aspects of the Bank’sBank's business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. The laws and regulations governing the Bank generally have been promulgated to protect depositors and the Deposit Insurance Fund, and not for the purpose of protecting shareholders.
Commercial banks, savings and loan associations and credit unions are generally able to engage in interstate banking or acquisition activities. As a result, banks in the Washington, D.C. metropolitan area can, subject to limited restrictions, acquire or merge with a bank in another jurisdiction, and can branch de novo in any jurisdiction. Banking is a business, which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings and the interest received by a bank on loans extended to its customers and on securities held in its investment portfolio constitutes the major portion of the Bank’sBank's earnings. Thus, the earnings and growth of the Bank are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve, 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.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and any subsidiary bank are prohibited from engaging in certain tying arrangements in connection with the extension of credit. A subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that: (i) the customer obtain or provide some additional credit, property or services from or to such bank other than a loan, discount, deposit or trust service; (ii) the customer obtain or provide some additional credit, property or service from or to the Company or any other subsidiary of the Company; or (iii) the customer not obtain some other credit, property or service from competitors, except for reasonable requirements to assure the soundness of credit extended.
Branching and Interstate 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,(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 establish de novo branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
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"financial subsidiaries.
”"
Brokered Deposits. A “brokered deposit”"brokered deposit" is any deposit that is obtained from or through the mediation or assistance of a deposit broker. Deposit brokers may attract deposits from individuals and companies throughout the United States and internationally whose deposit decisions are based primarily on obtaining the highest interest rates. Certain reciprocal deposits of up to the lesser of $5 billion or 20% of an institution’sinstitution's deposits are excluded from the definition of brokered deposits, where the institution is “well-capitalized”"well-capitalized" and has a composite 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. 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. In addition, banks that become less than “well-capitalized”"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.loans and securities. 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. The FDIC has proposed to adopt regulations that are intended to expand the ability of institutions to accept brokered deposits by, among other things, simplifying the process by which institutions and deposit brokers naymay obtain exemptions from the restriction or conditions on the acceptance of brokered deposits.
Anti-Money Laundering Laws and Regulations. The Company is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorismcounter-
terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.
Office of Foreign Assets Control. The United States has imposed economic sanctions that affect transactions with designated foreign countries, foreign nationals and others, which are administered by the U.S. Treasury Department’sDepartment's Office of Foreign Assets Control (“OFAC”("OFAC"). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on a “U.S. person”"U.S. person" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of a sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g. property and bank deposits) cannot be paid out, 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.
Capital Adequacy. The Federal Reserve and the FDIC have adopted risk-based and leverage capital adequacy requirements, pursuant to which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. The federal banking agencies have adopted rules
referred to as the Basel III Rules, to implement the framework for strengthening international capital and liquidity regulation adopted by the Basel Committee on Banking Supervision
(“("Basel
III”III"). The Basel III framework, among other things, (i) introduced the concept of common equity tier one capital
(“CET1”("CET1"), (ii) required that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, (iii) expanded the scope of the adjustments to capital that may be made as compared to existing regulations, and (iv) specified that Tier 1 capital consists of CET1 and
“Additional"Additional Tier 1
capital”capital" instruments meeting specified requirements.
The Basel III
Rulesrules require institutions to maintain: (i) a minimum ratio of CET1 to risk-weighted assets of 4.5%, plus a
“capital"capital conservation
buffer”buffer" of 2.5%, or 7.0%; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer, or 8.5%; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of 8.0%, plus the capital conservation buffer, or 10.5%; and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average of the month-end ratios each month during a calendar quarter).
Basel III also provides for a
“countercyclical"countercyclical capital buffer,
”" generally to be imposed when federal banking agencies determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. This buffer would be a CET1 add-on to the capital conservation buffer of 2.5%. The current policy of the Federal Reserve is to maintain the countercyclical capital buffer at 0% in a normal risk environment.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below
the minimum plus the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on their ability to pay dividends, effect equity repurchases, and pay discretionary bonuses to executive officers, which constraints vary based on the amount of the shortfall.
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 CET1 and an aggregate limit of 15% of CET1. The amount of these items in excess of the 10% and 15% thresholds are deducted from CET1. Amounts of mortgage servicing assets, deferred tax assets and significant investments in unconsolidated financial institutions that are not deducted due to the aforementioned 10% and 15% thresholds are assigned a 250% risk weight. Finally, the Basel III Rules increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.
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 (“RWAs”), 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 Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”("EGRRCPA"), 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 EGRRCPA also provides that the value of contributed property will be its appraised value, rather than its cost. The EGRRCPA 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 EGRRCPA also directed the federal banking agencies to develop a “Community"Community Bank Leverage Ratio,” (“CBLR”Ratio" ("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"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, then such institution is considered to have met all generally applicable leverage and risk based capital requirements;requirements, the capital ratio requirements for “well capitalized”"well capitalized" status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject. An institution or holding company may be excluded from qualifying community bank status based 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. These CBLR rules were modified in response to the COVID-19 pandemic. See “Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021" below. We adopted this simplified capital regime on January 1, 2020, but there can be no assurance that satisfaction2020. Effective September 30, 2022, we opted out of the CBLR will provide adequateframework. 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 for their operationsadequacy requirements to which it was subject as of December 31, 2023 and growth, or an adequate cushion against increased levels of nonperforming assets or weakened economic conditions.December 31, 2022.
As discussed below, the Basel III
Rulesrules also integrate the new capital requirements into the prompt corrective action provisions under Section 38 of the FDIA.
The capital ratios described above are the minimum levels that the federal banking agencies expect. Our state and federal regulators have the discretion to require us to maintain higher capital 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.
In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of RWAs, which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV supported the revisions. Although it is uncertain at this time, it is anticipated that some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to the Bank.
In 2016, the FASB issued the current expected credit losses (“CECL”("CECL") model, which will becomebecame applicable to us on January 1, 2023. CECL requires financial institutions to estimate and establish a provision for credit losses over the lifetime of the asset, at the origination or the date of acquisition of the asset, as opposed to reserving for incurred or probable losses through the balance sheet date. Upon implementation, an institution would recognize a one-time cumulative effect adjustment to the allowance for credit losses. The Federal Reserve and FDIC have adopted a rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard.
As a result of the adoption of CECL, reserves for credit losses increased $3.7 million and consisted of increases to the allowance for credit losses as well as an increase in reserves for unfunded commitments.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations for this purpose. The following capital requirements currently apply to the Bank for purposes of Section 38.
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Capital Category
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Total
Risk‑Based
Capital Ratio | | Total
| Tier 1
Risk‑Based
Capital Ratio | |
Common |
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| Tangible
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| Supplemental
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| Risk‑Based
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| Risk‑Based
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Equity Tier 1
Capital Ratio | | Leverage
Ratio | | Leverage
| Tangible
Equity to
Assets | | Supplemental
Leverage
Ratio | Leverage
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Capital Category
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| Capital Ratio
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| Capital Ratio
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| Capital Ratio
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| Ratio
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| Assets
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| Ratio
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Well Capitalized | | 10% or greater | | 8% or greater | | 6.5% or greater | | 5% or greater | | n/a | | n/a | | n/a
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Adequately Capitalized | | 8% or greater | | 6% or greater | | 4.5% or greater | | 4% or greater | | n/a | | n/a
| 3% or greater |
Undercapitalized | | Less than 8% | | | Less than 6% | | | Less than 4.5% | | | Less than 4% | | n/a | | n/a
| Less than 3% |
Significantly Undercapitalized | | Less than 6% | | | Less than 4% | | | Less than3% | | | Less than 3% | | n/a | | n/a | | n/a
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Critically Undercapitalized | | n/a | | n/a | | n/a | | n/a | | n/a
| | n/a
| | Less than 2% | | | n/a |
An institution generally must file a written capital restoration plan which meets specified requirements with the appropriate federal banking agency within 45 days of the date the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. The appropriate federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency.
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’sinstitution'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)
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to the federal banking agencies. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
The Dodd-Frank ActAct.. The Dodd-Frank Act made significant changes to the U.S. bank regulatory structure, affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.was signed into law on July 21, 2010. The Dodd-Frank Act required a number of federal agencies to adoptsignificantly restructured the financial regulatory regime in the United States and has had a broad rangeimpact on the financial services industry as a result of rulesthe significant regulatory and regulations. The following provisions are considered to be of greatest significance to the Company: | ·
| Expanded the authority of the Federal Reserve to examine bank holding companies and their subsidiaries, including insured depository institutions.
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| Required a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition.
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| 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.
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| Created the Consumer Financial Protection Bureau (“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.
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| Created the Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.
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| Introduced additional corporate governance and executive compensation requirements on companies subject to the Securities Exchange Act of 1934, as amended (“Exchange Act”).
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| Permitted FDIC-insured banks to pay interest on business demand deposits.
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| Adopted Section13 of the Act, commonly referred to ask the Volcker Rule, which restricts the ability of institutions and their holding companies and affiliates to make proprietary investments in securities and to invest in certain covered nonpublic investment vehicles, and to extend credit to such vehicles.
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| 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.
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| Made permanent the $250thousand limit for federal deposit insurance.
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| Permitted national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches.
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The EGRRCPA 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 Disclosure Act (“HMDA”); (iv) amend the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; (v) require the CFPB to clarify how TILA-RESPA Integrated Disclosure applies to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use; (vi) revise treatment of HVCRE exposures; and (vii) create the simplified CBLR. act.
The EGRRCPA, also exempts community banks fromwhich became effective May 24, 2018, amended the Volcker Rule, if they haveDodd-Frank Act to provide regulatory relief for certain smaller and regional financial institutions, such as the Company and the Bank. The EGRRCPA, among other things, provides financial institutions with less than $10 billion in total consolidated assets. assets with relief from certain capital requirements and exempts banks with less than $250 billion in total consolidated assets from the enhanced prudential standards and the company-run and supervisory stress tests required under the Dodd-Frank Act.
The
EGRRCPA also adds certain protections for consumers, including veteransDodd-Frank Act has had, and
active duty military personnel, expands credit freezes and call formay in the
creation of an identity theft protection database.In addition, other new proposals for legislation continue to be introduced in 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.
Consumer Financial Protection Bureau ("CFPB"). The Dodd-Frank Act created the CFPB, a new, independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of the GLB Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with over $10 billion in assets. Smaller institutions, including the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking agencies for compliance with federal consumer protection laws and regulations. The CFPB also has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. The changes resulting from the Dodd-Frank Act and CFPB rulemakings and enforcement policies may impact the profitability of our business activities, limit our ability to make, or the desirability of making, certain types of loans, including non-qualified mortgage loans, require us to change our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business or profitability. The changes may also require us to dedicate significant management attention and resources to evaluate and make necessary changes to comply with the new statutory and regulatory requirements.
. The CFPB has concentrated much of its rulemaking efforts on reformsBank is subject to rules and regulations related to residential mortgage transactions.loans that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The CFPBBank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has issued rules related to a borrower’sreasonable ability to repay and qualified mortgage standards, mortgage servicing standards,the loan originator compensation standards, requirements for high-cost mortgages, appraisal and escrow standards and requirements for higher-priced mortgages. The CFPB has also issued rules establishing integrated disclosure requirements for lenders and settlement agents in connection with most closed end, real estate secured consumer loans and rules which, among other things, expand the scope of information lenders must report in connection with mortgage and other housing-related loan applications under HMDA. These rules include significant regulatory and compliance changes and are expectedaccording to have a broad impact on the financial services industry.
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.
Fair and Responsible Banking. Banks and other financial institutions are subject to numerous laws and regulations intended to promote fair and responsible banking and prohibit unlawful discrimination and unfair, deceptive or abusive practices in banking. These laws include, among others, the Dodd-Frank Act, Section 5 of the Federal Trade Commission Act, the Equal Credit Opportunity Act, and the Fair Housing Act. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, and actions by the U.S. Department of Justice and state attorneys general.
Financial Privacy. Under the Federal Right to Privacy Act of 1978, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, financial institutions are required to disclose their policies for collecting and protecting confidential information. Consumers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’institutions' own products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers.
In October 2023, the CFPB proposed a new rule that would require a provider of payment accounts or products, such as the Bank, to make certain data available to consumers upon request regarding the products or services they obtain from the provider. The proposed rule is intended to give consumers control over their financial data, including with whom it is shared, and encourage competition in the provision of consumer financial products and services. For banks with over $850 million and less than $50 billion in total assets, such as the Bank, compliance would be required approximately two and one-half years after adoption of the final rule.
Community Reinvestment Act (“CRA”("CRA"). The CRA requires that, in connection with examinations of insured depository institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the needs of its local community, including low- and moderate-income neighborhoods. The Bank’sBank's record of performance under the CRA is publicly available. A bank’sbank's CRA performance is also considered in evaluating applications seeking approval for mergers, acquisitions, and new offices or facilities. Failure to adequately meet these criteria could result in additional requirements and limitations being imposed on the Bank. Additionally, we must publicly disclose the terms of certain CRA-related agreements.
On October 24, 2023, the federal bank regulatory agencies jointly issued a final rule intended to strengthen and modernize the CRA regulatory framework. The final rule updates the CRA regulations to, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions. The final rule adopts a new metrics-based approach to evaluating bank retail lending and community development financing, using benchmarks based on peer and demographic data. Most of the rule’s requirements will be applicable beginning January 1, 2026. The remaining requirements, including the data reporting requirements, will be applicable on January 1, 2027.
Concentration and Risk Guidance. The federal banking regulatory agencies promulgated joint interagency guidance regarding material direct and indirect asset and funding concentrations. The guidance defines a concentration as any of the following: (i) asset concentrations of 25% or more of Total Capital (loan related) or Tier 1 Capital (non-loan related) by individual borrower, small interrelated group of individuals, single repayment source or individual project; (ii) asset concentrations of 100% or more of Total Capital (loan related) or Tier 1 Capital (non-loan related) by industry, 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’sinstitution'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’sinstitution's total risk-based capital and the institution’sinstitution'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 may be required to hold higher levels of capital.
We have determined that we have a concentration in commercial real estate lending, and while we believe we have implemented policies and procedures with respect to our commercial real estate lending consistent with the regulatory guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
FDIC Insurance Premiums. The FDIC maintains a risk-based assessment system for determiningdeposits of the Bank are insured up to applicable limits by the FDIC’s Deposit Insurance Fund and are subject to deposit insurance premiums.assessments to maintain the Deposit Insurance Fund. The FDIC has established four risk categories, each subjectdeposit insurance assessment base is based on average total assets minus average tangible equity, pursuant to a different premium rate, ranging fromrule issued by the
FDIC as required by the Dodd-Frank Act. Deposit insurance pricing is a low of 2.5 basis points up“financial ratios method” based on “CAMELS” composite ratings to 45 basis points, based upon an institution’s status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating. In general, an institution’sdetermine assessment base for calculating its deposit insurance premium is determined by subtracting its tangible equity and certain allowable deductions from its consolidated average assets. There are three adjustments that can be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and,rates for small established institutions a portion of Tier 1 capital; (2) a potential increase for secured liabilities above a threshold amount; and (3) for institutions other than those with the lowest risk rating, a potential increase for brokered deposits above a threshold amount. Institutions with less than $10 billion in assetsassets. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity, and sensitivity to market risk (“CAMELS”). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions. For the years ended December 31, 2023 and 2022, the Bank recorded $1.4 million and $620 thousand, respectively, for FDIC insurance premiums. The increase in insurance premiums during 2023 as compared to 2022 was a result of the FDIC imposed final rule to increase the assessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. In addition, the Bank had a larger percentage of brokered deposits during 2023, which partially increased the assessment rate for that period.
Limitations on Incentive Compensation. The federal bank regulatory agencies have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have been FDIC-insured for at least five years, insteadthe ability to materially affect the risk profile of financial institutions, either individually or as part of a group, is based upon the four risk categories, a financial ratios method based on a statistical model estimating the bank’s probability of failure over three years, utilizing seven financial ratios (leverage ratio; net income before taxes/total assets; nonperforming loans and leases/gross assets; other real estate owned/gross assets; brokered deposit ratio; one year asset growth; and loan mix index) and a weighted average of supervisory ratings components. The financial ratios method also provideskey principles that community banks with brokered deposits in excess of 10% of total consolidated assets (inclusive of reciprocal deposits if a bank is not well-capitalized or has a composite supervisory rating other than a 1 or 2) may be subject to an increased assessment rate if it has experienced rapid growth; lowers the range of authorized assessment rates to 1.5 basis points for institutions posing the least risk, increases the range up to 40 basis points for institutions posing the most risk; and further lowers the range of assessment rates if the reserve ratio of the Deposit Insurance Fund increases to 2% or more. Institutions with over $10 billion in total consolidated assets are required to pay a surcharge of 4.5 basis points on their assessment base, subject to certain adjustments. The FDIC may also impose special assessments from time to time. Under the 2017 Tax Cuts and Jobs Act, FDIC insured institutions with assets in excess of $10 billion are also subject to a phase out of the deductibility of deposit insurance premiums.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 required the FDIC to increase the reserve ratio of the Deposit Insurance Fund to 1.35% of insured deposits and eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
Limitations on Incentive Compensation. In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements should (i) provide incentives that do not encourage inappropriaterisk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the institution (i) by providing an executive officer, employee, director, principal shareholder or individuals who are “significant risk takers” with excessive compensation, fees, or benefits, or (ii) that could lead to material financial loss to the institution. The proposal would also impose certain governance and recordkeeping requirements on institutionsinstitution’s board of our size. directors.
The Federal Reserve would reserve the authority to impose more stringent requirements on institutions of our size. We are evaluating the expected impactwill review, as part of the proposalregular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the institution’s safety and soundness, and the financial institution is not taking prompt and effective measures to correct the deficiencies. At December 31, 2023, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
The Nasdaq Stock Market, LLC, the exchange on which our business.common stock is listed, enacted a listing rule that became effective in 2023 requiring 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. The Company has adopted a clawback policy compliant with such rule, a copy of which is attached as Exhibit 97 to this Form 10-K.
CybersecurityCybersecurity. In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’sinstitution's management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’sinstitution's operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. In December 2020,On November 18, 2021, the federal bankingbank regulatory agencies issued a notice of proposed rulemaking that would require banking organizationsfinal rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. The rule requires financial institutions to notify their primary federal regulator withinas soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution’s: (i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of becoming awareits customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a "computer-security incident"material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a "notification incident."threat to the financial stability of the United States.
On July 26, 2023, the SEC issued a final rule requiring enhanced standardized disclosures regarding cybersecurity risk management, strategy, governance, and cybersecurity incident reporting by public companies, such as the Company, that are subject to the reporting requirements of the Securities Exchange Act of 1934. The
proposedfinal rule
also would require specificrequires current reporting about material cybersecurity incidents and
immediate notifications by bank service providers that become awareperiodic disclosures about policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of
similar incidents.directors’ cybersecurity expertise and its oversight of cybersecurity risk.
To date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
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:
| ● | Community Bank Leverage Ratio. The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. |
| ● | Temporary Troubled Debt Restructurings Relief. The CARES Act allowed banks to elect to suspend requirements under U.S. generally accepted accounting principles ("GAAP") for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring ("TDR"), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking agencies are required to defer to the determination of the banks making such suspension. The Appropriations Act extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022. |
| ● | Small Business Administration Paycheck Protection Program. The CARES Act created the SBA's PPP and it was extended by the Appropriations Act. Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans. |
Item 1A. RISK FACTORS
The material risks and uncertainties that management believes affect us are described below. Any of these risks, if they are realized, could materially adversely affect our business, financial condition and results of operations, and consequently, the market value of our common stock. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially and adversely affect us. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. If any of the matters included in the following information about risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially and adversely affected.
Risks Related to the
COVID-19 PandemicThe ongoing COVID-19 pandemicEconomy, Financial Markets, Interest Rates and measures intended to prevent its spread has adversely affected, and will likely continue to adversely affect, our business, financial condition and results of operations. Moreover, the longer the pandemic persists, the more material the ultimate effects are likely to be.
The COVID-19 pandemic continues to negatively impact economic and commercial activity and financial markets, both globally and within the United States. Early on during the initial stages of the pandemic, stay-at-home orders, travel restrictions, and closure of non-essential businesses resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and mass layoffs and furloughs. Though these early restrictions have generally been lifted or eased, continuing capacity restrictions, and health and safety recommendations that discourage travel and encourage continued physical distancing and teleworking, have limited the ability of businesses to return to pre-pandemic levels of activity and employment.
The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact our business. In particular, the adverse affects caused by the pandemic impacting us include but are not limited to:
● | some of our borrowers are unable to meet existing payment obligations, particularly those borrowers disproportionately affected by business shutdowns and travel restrictions, such as those operating in the travel, lodging, retail and entertainment industries; |
● | our decision to significantly increase our allowance for loan losses, which adversely impacted net income during 2020; and |
● | changes in consumer and business spending, borrowing and saving habits have affected the demand for loans and other products and services we offer, as well as the creditworthiness of potential and existing borrowers. |
Moreover, we face increased technology and operational risk as a result of a portion of non-branch personnel working remotely. Such risks include technology controls not working effectively and operational procedures and controls not being as effective or effectively adhered to in a remote work environment.
Certain actions taken by the federal government, including the Federal Reserve, that are intended to mitigate the macroeconomic effects of the COVID-19 pandemic may cause additional harm to our business. In March 2020, the Federal Open Market Committee of the Federal Reserve reduced the targeted federal funds rate to between 0% and 0.25%, compared to the previous target of 1.00% and 1.25%. Decreases in short-term interest rates have a negative impact on our results, as we have certain assets that are sensitive to changes in interest rates.
LiquidityThe extent to which the COVID-19 pandemic will ultimately affect our business, liquidity, financial condition and operations is unknown and will depend on, among other things, its duration and severity, the actions undertaken by national, state and local governments and health officials to contain the virus or mitigate its effects, the effectiveness of the vaccines that have been developed and the ability of pharmaceutical companies and governments to manufacture and distribute those vaccines, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume. As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and we cannot predict the full extent of the impacts on our business, our operations or the global economy as a whole. To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors discussed here our Annual Report, or otherwise materially and adversely affect our business, liquidity, financial condition and results of operations.
The continuation of the COVID-19 pandemic and the efforts to contain the virus, including business restrictions and continued social distancing, could:
● | cause the continuation of the effects described above; |
● | increases in loan delinquencies, problem assets, and foreclosures; |
● | cause the value of collateral for loans, especially real estate, to decline in value; |
● | reduce the availability and productivity of our employees; |
● | cause our vendors and counterparties to be unable to meet existing obligations to us; |
● | negatively impact the business and operations of third-party service providers that perform critical services for our business; |
● | cause the value of our investment securities portfolio to decline; and |
● | cause the net worth and liquidity of loan guarantors to decline, impairing their ability to honor commitments to us. |
Any one of the combination of events described above could have a material impact on our business, financial condition, and results of operations. Moreover, our success and profitability is substantially dependent upon the management skills of our executive officers, many of whom have held officer positions with us for many years. The unanticipated loss or unavailability of key employees due to COVID-19 could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
We have granted payment deferrals to borrowers that have experienced financial hardship due to COVID-19, and if those borrowers are unable to resume making payments, we will experience an increase in nonaccrual loans, which could adversely affect our earnings and financial condition.
Consistent with the public encouragement provided generally by federal and state financial institution regulators after the spread of COVID-19 in the United States, we have attempted to work constructively with borrowers who have experienced financial hardship as a result of the pandemic to negotiate accommodations or forbearance arrangements that temporarily reduce or defer the monthly payments due to the Bank. Generally, these accommodations are for three to six months and allow customers to temporarily cease making principal and/or interest payments. In some cases, customers have received second and third accommodations for as much as up to 12 months, ending December 31, 2021. Through December 31, 2020, the Bank had granted accommodations with respect to loans with a total value of approximately $360.2 million, and as of March 1, 2021, $10.1 million in loans remained subject to a payment accommodation. Upon the expiration of the deferral period, borrowers are required to resume making previously scheduled loan payments. We anticipate that some borrowers will be unable to make timely loan payments after their deferral period ends, in which case their loans could be classified as nonaccrual and we may begin collection activities. Nonperforming loans and related charge-offs may increase significantly in 2021 and thereafter, as payment deferrals expire and the impact of government stimulus programs wanes. An increase in nonperforming loans and charge-offs would cause us to increase our allowance for loan losses, which would adversely affect our financial condition and results of operations.
Customary means to collect nonperforming assets may be prohibited or impractical during the COVID-19 pandemic, and there is a risk that collateral securing a nonperforming asset may deteriorate if we choose not to, or are unable to, foreclose on collateral on a timely basis.
Governments have adopted or may adopt in the future regulations or promulgate executive orders that restrict or limit our ability to take certain actions with respect to delinquent borrowers that we would otherwise take in the ordinary course, such as customary collection and foreclosure procedures. The value of collateral securing a nonaccrual loan may deteriorate if we choose not to, or are unable to, foreclose on the collateral on a timely basis, which would adversely affect our financial condition and results of operations.
We may experience losses, additional expense and reputational harm arising out of our origination of PPP loans.
At December 31, 2020, we had originated $173 million of PPP loans to over 700 borrowers and, in January 2021, we continued participation in the restarted program for first and second draw PPP loans. The vast majority of our PPP loans were made to existing borrowers or deposit customers. We may incur losses on some of our PPP loans if the loans are not forgiven, the borrowers default and the SBA does not honor its guarantee due to an error made by us in making the loan, the ineligibility of the borrower or otherwise. In addition, we may experience reputational harm arising out of our origination of PPP loans as a result of reports of borrower fraud, concerns about whether small businesses sufficiently benefited from the program, and government administration of the loan forgiveness process. Further, there have been lawsuits against other banks alleging that various PPP lenders improperly prioritized existing customers when those lenders approved PPP loans and that various PPP lenders failed to pay required agency fees to third parties who allegedly assisted businesses with PPP loan applications. We may experience additional expense and reputational harm arising out of our origination of PPP loans if we become subject to a similar lawsuit, which would adversely affect our financial condition and results of operations.
Market Risks
Our business and operations may be materially adversely affected by weak economic conditions.
Our business and operations, which primarily consist of banking activities, including lending money to customers and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the U.S. generally, and in the Washington, D.C. metropolitan area in particular. The economic conditions in our local markets may be different from the economic conditions in the U.S. as a whole. If economic conditions in the U.S. or any of our markets weaken, our growth and profitability from our operations could be constrained. In addition, foreign economic and political conditions could affect the stability of global financial markets, which could hinder economic growth. The current economic environment is characterized by
rising interest rates
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 COVID-19 pandemic and related disruptions, can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for
loancredit losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.
Our business is
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.
We are subject to interest rate risk, which could adversely affect our profitability.
Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. 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.
Our interest sensitivity profile was slightly asset sensitive as of December 31, 2020. 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.
When short-term interest rates rise, the rate of interest we pay on our interest-bearing liabilities may rise more quickly than the rate of interest that we receive on our interest-earning assets, which may cause our net interest income to decrease. Additionally, a shrinking yield premium between short-term and long-term market interest rates, a pattern usually indicative of
investors’investors' waning expectations of future growth and inflation, commonly referred to as a flattening of the yield curve, typically reduces our profit margin as we borrow at shorter terms than the terms at which we lend and invest.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for
loancredit losses, which could have a material adverse effect on our business, financial condition and results of operations.
Inflation can have an adverse impact on our business and on our customers.
Changes
In 2022 and continuing into 2023, the United States experienced the highest rates of inflation since the 1980s. In an effort to reduce inflation, the Federal Reserve increased the federal funds target rate seven times in 2022 and replacementfour times in 2023 from 0 - 0.25% at the beginning of 2022 to 5.25 - 5.50% as of December 31, 2023. Market interest rates increased in response to the Federal Reserve's actions. Inflation generally increases the cost of products and services we use in our business operations, as well as labor costs. We may find that we need to give higher than normal raises to employees and start new employees at a higher wage. Furthermore, our clients are also affected by inflation and the rising costs of products and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. Further rate hikes would continue to increase the cost of business investment and consumer goods, which would place downward pressure on demand and cause declines in cash flow and profitability, further impacting the ability of borrowers to repay their loans. As market interest rates rise, the value of our investment securities generally decreases, although this effect can be less pronounced for floating rate instruments. Higher interest rates reduce the demand for loans and increase the attractiveness of alternative investment and savings products, like U.S. Treasury securities and money market funds, which can make it difficult to attract and retain deposits.
Insufficient liquidity could impair our ability to fund operations and meet our obligations as they become due, and 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 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 at a reasonable cost, in a timely manner, and 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 London Interbank Offered Rate (“LIBOR”) may adverselyBank. 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 FHLB and federal funds purchased to fund our operations. Although we have certain loans, interest rate swap agreements, investment securities,historically been able to replace customer deposit withdrawals, maturing deposits, and debt obligations whose interest rate is indexedadvances if desired, we may not be able to LIBOR. In 2017,replace such funds in the Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to stop compelling banks to submit rates forfuture if our financial condition, the calculation of LIBOR after 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publicationfinancial condition of the one-weekFHLB or market conditions were to change. FHLB borrowings and two-month U.S. dollar LIBOR afterother current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations.
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 diverse deposit base. As of December 31,
2021,2023, we had $1.85 billion in deposits and
(ii) cease the publicationapproximately 9% of
allour deposits are derived from one customer relationship. 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
tenorsinvestment classes, customer perceptions of
U.S. dollar LIBOR (one, three, sixour financial health and
12 month LIBOR) after June 30, 2023.The Alternative Reference Rates Committee (“ARRC”), has identified the Secured Overnight Financing Rate (“SOFR”), as the rate that represents best practice as the alternativegeneral reputation and adverse developments in general economic conditions of an individual's business, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. Uncertainty as to the adoption, market acceptancemaintain current customer deposits 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. The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor index to LIBOR would be selected. If a trigger is satisfied, contracts and financial instruments may giveattract additional deposits. Additionally, negative news about us or the calculation agent,banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as applicable, discretion overmany regional banking organizations experienced in 2023, the selectionfailure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed “too big to fail” or remove deposits from the substitute indexbanking system entirely. As of December 31, 2023, approximately 31.1% of our deposits were uninsured when excluding collateralized deposits, and we rely on these deposits for the calculationliquidity.Any such loss of interest rates. The implementation of a substitute index for the calculation of interest rates under our loan agreements mayfunds could result in our incurring significant expenseslower loan originations and decrease in effecting the transition and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index, any ofliquidity, which could have ana material adverse effect on our business, financial condition and results of operations.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.
The closures of Silicon Valley Bank and Signature Bank in March 2023, and First Republic Bank in May 2023, and concerns about similar future events, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. More recently, concerns about commercial real estate concentrations at regional and community banks have exacerbated this volatility. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. To mitigateWhile federal bank regulators took action to ensure that depositors of the risks associated withfailed banks had access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional and community banks and the expected discontinuationbanking system more broadly. Furthermore, there is no guarantee that regional bank failures or bank runs similar to the ones that occurred in 2023 will not occur in the future and, if they were to occur, they may have a material and adverse impact on customer and investor confidence in regional and community banks, negatively impacting the Company’s liquidity, capital, results of LIBOR,operations and stock price.
Unrealized losses in our securities portfolio could affect liquidity.
As market interest rates have increased, we have ceased originating LIBOR-linked loans, implemented fallback languageexperienced significant unrealized losses on our available for LIBOR-linked commercial loans, adheredsale securities portfolio. Unrealized losses related to available for sale securities are reflected in accumulated other comprehensive income in our consolidated statements of condition and reduce the International Swapslevel of our book capital and Derivatives Association 2020 Fallbacks Protocoltangible common equity. However, such unrealized losses do not affect our regulatory capital ratios. During 2023, we rebalanced our investment securities portfolio by selling $102.5 million in book value available-for-sale securities with a weighted average rate of 1.54%, resulting in realized losses of $15.6 million, which are expected to be earned back over approximately 3 years. The net proceeds of the rebalancing were used to pay down FHLB advances and fund newly originated loans. We actively monitor our available-for-sale securities portfolio and we do not currently anticipate the need to realize material losses from the sale of securities for liquidity purposes. Furthermore, we believe it is unlikely that we would be required to sell any such securities before recovery of their amortized cost basis, which may be at maturity. Nonetheless, our access to liquidity sources could be affected by unrealized losses if securities must be sold at a loss; tangible capital ratios continue to decline from an increase in unrealized losses or realized credit losses; the FHLB or other funding sources reduce capacity; or bank regulators impose restrictions on us that impact the level of interest rate swap agreements, and have updatedrates we may pay on deposits or are in the process of updating our systemsability to accommodate SOFR-linked loans. In accordance with regulatory guidance, we intend to stop entering into new LIBOR transactions by the end of 2021.
access brokered deposits. Additionally, significant unrealized losses could negatively
impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.
We are subject to credit risk, which could adversely affect our profitability.
Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions. If the overall economic climate in the U.S. generally, or in our market areas specifically, experiences material disruption,
including as a result of the COVID-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
loancredit losses.
Our risk management practices, such as monitoring the concentrations of our loans and our credit approval, review and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting related customers and the quality of the loan portfolio. Many of our loans are made to small businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers. Consequently, we may have significant exposure if any of these borrowers becomes unable to pay their loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce, unemployment or death. A failure to effectively measure and limit the credit risk associated with our loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that we significantly increase our allowance for
loancredit losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect 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.
We make loans primarily to borrowers in the Washington, D.C. and Baltimore metropolitan areas, focusing on the Virginia counties of Arlington, Fairfax, Loudoun and Prince William and the independent cities located within those counties, Washington D.C., and its Maryland suburbs, and have a substantial portion of our loans secured by real estate. These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in such areas, or the continuation of such adverse developments, could increase the levels of nonperforming loans and charge-offs, and reduce loan demand and deposit growth. In that event, we would likely experience lower earnings or losses. Additionally, if economic conditions in the area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the
area’sarea's economy, our ability to develop our business relationships may be diminished, the quality and collectability of our loans may be adversely affected, our provision for
loancredit losses may increase, the value of collateral may decline and loan demand may be reduced.
Increases to our nonperforming assets or other problem assets will have an adverse effect on our earnings.
As of December 31, 2020,2023, we had nonperforming loans and loans 90 days or more past due of $5.6 $1.8 million, or 0.38%0.10% of total loans, $3.9 millionnet of other real estate owned, or OREO, and nonperforming assets of 0.52% of total assets. At that date, we had one loan considered a troubled debt restructuring totaling $97 thousand, which is included in our nonperforming loan totals above.deferred fees. If any of our loans which arebecome 90 or more days past due and still accruing becomeand move to nonaccrual, loans, we will not record interest income on such loans, and may be required to reverse prior accruals, thereby adversely affecting our earnings. If the level of our nonperforming or other problem assets increases, we may be required to make additional provisions for loancredit losses, which will negatively impact our earnings. If we are required to foreclose on any collateral properties securing our loans, we will incur legal and other expenses in connection with the foreclosure and sale process and possible losses on the sale of OREOother real estate owned ("OREO") or other collateral. Additionally, the resolution of nonperforming assets troubled debt restructurings 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.
As of December 31, 2023, we had no OREO.
Our concentrations of loans may create a greater risk of loan defaults and losses.
A substantial portion of our loans are secured by various types of real estate in the Washington, D.C. metropolitan area and substantially all of our loans are to borrowers in that area. At December 31, 2020, 80.2% of2023, 87.7% of our total loans were secured by real estate; commercial real estate loans, excluding construction and land development, comprised the largest portion of these loans at 53.7% 59.7% of our portfolio. This concentration exposes us to the risk that adverse developments in the real estate market, or the general economic conditions in our market, could increase our nonperforming loans and charge-offs, reduce the value of our collateral and adversely impact our results of operations and financial condition. Management believes that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices, rigorous portfolio monitoring and ongoing market analysis. Construction and land development loans comprised 15.1% 8.1% of total loans at December 31, 2020.2023. Commercial and industrial loans, excluding PPP, comprised 8.1% 11.8%, of total loans at December 31, 2020.2023. These categories of loans have historically carried a higher risk of default than other types of loans, such as single family residential mortgage loans. The repayment of these loans often depends on the successful operation of a business or the sale or development of the underlying property, and, as a result, are more likely to be adversely affected by adverse conditions in the real estate market or the economy in general. While we believe that our loan portfolio is well diversified in terms of borrowers and industries, these concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in the Washington, D.C. metropolitan area, could increase the levels of nonperforming loans and charge-offs, and reduce loan demand. In that event, we would likely experience lower earnings or losses. Additionally, if, for any reason, economic conditions in our market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’sarea's economy, our ability to develop our business relationships may be diminished, the quality and collectability of our loans may be adversely affected, our provision for loancredit losses may increase, the value of collateral may decline and loan demand may be reduced. Commercial real estate loans tend to have larger balances than single family mortgage loans and other consumer
loans.loans because repayment of the loans often depends on the successful operation of the properties and the income stream of the borrowers. Because the loan portfolio contains a significant number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets.
Some segments have shown some signs of weakness as rising expenses and debt costs and lower valuations have impacted credit quality metrics. Vacancy rates have risen in the office sector, which is experiencing significant structural shifts that could take several years to fully materialize as remote work practices normalize. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for
loancredit losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.
The federal banking agencies have issued guidance governing financial institutions that have concentrations in commercial real estate lending. The guidance provides that institutions which have (i) total reported loans for construction, land development, and other land loans 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, where 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 which 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 may be required to hold higher levels of capital. We have a concentration in commercial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. As of December 31, 2023, commercial real estate loans, as defined for regulatory purposes, represented 399% of our total risk-based capital. Of those loans, commercial construction, development and land loans represented 57% of our total risk based capital. Owner-occupied commercial real estate loans represented an additional 81% of our total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, we could be required to maintain higher levels of capital as a result of our commercial real estate concentration, 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.
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’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, 2020, 8.1%2023, 11.8% of our total loans were outstanding to commercial and industrial customers. Of that, approximately 31.4% 47.9% 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 $178.0$311.4 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 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.
Our allowance for
loancredit losses may be inadequate to absorb
actual 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 maintain an allowance for credit losses in an amount that is believed to be appropriate to provide for expected losses inherent in the portfolio. We have a proactive program to monitor credit quality and to identify loans that may experiencebecome non-performing; however, at any time there could be loans in the portfolio that may result in losses, for reasons beyond our control, suchbut that have not been identified as non-performing or potential problem credits. We may be unable to identify all deteriorating credits prior to them becoming non-performing assets, or to limit losses on those loans that are identified. As a result, future additions to the impact of generalallowance may be necessary. Additionally, future additions to the allowance may be required based on changes in the forecasted economic conditions, on customerschanges in the loans comprising the portfolio and their businesses. Inchanges in the financial condition of borrowers, or as a result of assumptions used by management 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. allowance.
Although we endeavor to maintain our allowance for loancredit losses at a level adequate to absorb any inherent losses in the loan portfolio, the determination of the appropriate level of the allowance for loancredit 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
loancredit losses in excess of our current allowance for
loancredit 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.credit losses.
Our federal and state banking regulators, as an integral part of their supervisory function, periodically review the
adequacy of our allowance for
loancredit losses. These regulatory agencies may require us to increase our provision for
loancredit 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.
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, 2020, 2023, approximately $701.8 million,$1.06 billion, or 53.3%57.8%, of the loans in our loan portfolio (excluding PPP loans) 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—1.571.76 years; commercial and industrial loans—1.411.45 years; commercial construction loans—1.141.44 years; consumer residential loans—1.221.54 years; and consumer nonresidential loans—1.731.34 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.”"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 loancredit losses, which could have a material adverse effect on our business, financial condition and results of operations.
We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers, which could adversely impact our profitability.
The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Washington, D.C. metropolitan area and elsewhere, as well as nontraditional competitors such as fintech companies and internet-based lenders, depositories and payment systems. Our profitability depends upon our continued ability to successfully compete with traditional and new financial services providers, some of which maintain a physical presence in our market areas and others of which maintain only a virtual presence.
Our primary market area is a highly competitive, highly branched, banking market. Competition in the market area for loans to small and middle-market businesses and professionals, our target market, is intense and pricing is important. Several of our competitors have substantially greater resources and 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 a 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.
Liquidity Risks
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, 2020, we had $1.53 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 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.
Operational Risks
The success of our growth strategy depends, in part, on our ability to identify and retain individuals with experience and relationships in our market.
Our success depends, in large part, on our management team and key employees. The loss of any of our management team or our key employees could materially adversely affect our ability to execute our business strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able to retain the services of any members of our management team or other key employees. Failure to attract and retain a qualified management team and qualified key employees could have a material adverse effect on our business, financial condition and results of operations.
In order to continue to grow successfully, we must also identify and retain experienced
loanbanking officers with local expertise and relationships. We expect that competition for experienced loan
and deposit officers will continue to be intense and that there will be a limited number of qualified loan officers with knowledge of, and experience in, the community banking industry in our market area. Even if we identify individuals that we believe could assist us in building our franchise, we may be unable to recruit these individuals away from their current banks. In addition, the process of identifying and recruiting loan officers with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit and retain talented personnel could limit our growth and could adversely affect our business, financial condition and results of operations. The lack of acquisition opportunities in the future, or our inability to successfully bid for such opportunities as are available, could result in a slower pace of growth.
We may not be able to successfully manage continued growth.
As our capital base grows, so does our legal lending limit. We cannot be certain as to our ability to manage increased levels of assets and liabilities, or to successfully make and supervise higher balance loans. Further, we may not be able to maintain the relatively low number and level of nonperforming loans and charge-offs that we have experienced. We may be required to make additional investments in equipment, software, physical facilities and personnel to accumulate and manage higher asset levels and loan balances, which may adversely impact earnings, shareholder returns, and our efficiency ratio. Increases in operating expenses or nonperforming assets may have an adverse impact on the value of our common stock.
There can be no assurance that we will be able to continue to grow and to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent with our prior results of operations, or increase in the future. A downturn in economic conditions in our market, particularly in the real estate market, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, a failure to maintain adequate internal controls and compliance processes, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow assets, or increase profitability, as rapidly as we have in the past. Sustainable growth requires that we manage our risks by following prudent loan underwriting standards, balancing loan and deposit growth without materially increasing interest rate risk or compressing our net interest margin, maintaining more than adequate capital at all times, hiring and retaining qualified employees and successfully implementing our strategic initiatives. Our failure to sustain our historical rate of growth or adequately manage the factors that have contributed to our growth could have a material adverse effect on our earnings and profitability and therefore on our business, financial condition and results of operations.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.
The federal banking agencies have issued guidance governing financial institutions that have concentrations in commercial real estate lending. The guidance provides that institutions which have (i) total reported loans for construction, land development, and other land loans 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, where 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 which 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 may be required to hold higher levels of capital. We have a concentration in commercial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. As of December 31, 2020, commercial real estate loans, as defined for regulatory purposes, represented 372% of our total risk-based capital. Of those loans, commercial construction, development and land loans represented 99% of our total risk based capital. Owner-occupied commercial real estate loans represented an additional 82% of our total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, we could be required to maintain higher levels of capital as a result of our commercial real estate concentration, 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.
We may face risks with respect to future expansion or acquisition activity.
We selectively seek to expand our banking operations through limited de novo branching or opportunistic acquisition activities. We cannot be certain that any expansion activity, through de novo branching, acquisition of branches of another financial institution or a whole institution, or the establishment or acquisition of nonbanking financial service companies, will prove profitable or will increase shareholder value. The success of any acquisition will depend, in part, on our ability to realize the estimated cost savings and revenue enhancements from combining our business and that of the target company. Our ability to realize increases in revenue will depend, in part, on our ability to retain customers and employees, and to capitalize on existing relationships for the provision of additional products and services. If our estimates turn out to be incorrect or we are not able to successfully combine companies, the anticipated cost savings and increased revenues may not be realized fully or at all, or may take longer to realize than expected. It is possible that the integration process could result in the loss of key employees, the disruption of each company’scompany's ongoing business, diversion of
management attention, or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger. As with any combination of banking institutions, there also may be disruptions that cause us to lose customers or cause customers to withdraw their deposits. Customers may not readily accept changes to their banking arrangements that we make as part of or following an acquisition. Additionally, the value of an acquisition to us is dependent on our ability to successfully identify and estimate the magnitude of any asset quality issues of acquired companies.
We may not be successful in overcoming these risks or other problems encountered in connection with potential acquisitions or other expansion activity. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition or results of operations.
Additionally, at December 31, 2020,2023, we had $7.1$7.2 million ofof 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 goodwill is determined to be impaired, which would require us to take an impairment charge.
New lines of business, products, product enhancements or services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts. In developing, implementing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources. We 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 milestones set in initial timetables for the development and introduction of new lines of business, products, product enhancements or services, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. Any new line of business, product, product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. We may also decide to discontinue businesses or products, due to lack of customer acceptance or
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.
Operational Risks
We depend on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely affect our operations and financial condition.
Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems. We outsource many of our major systems, such as data processing, deposit processing, loan origination, email and anti-money laundering monitoring systems.
Of particular significance is our long-term contract for core data processing services with Fidelity National Information Services, Inc. The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations, and we could experience difficulty in implementing replacement solutions. In many cases, our operations rely heavily on secured processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, failure of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation.
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 business involves the storage and transmission of customers’customers' proprietary information and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. While we have incurred no material cyber-attacks or security breaches to date, a number of other financial services and other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers or both. Although we devote significant resources to maintain, regularly update and backup our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us or our customers, our security measures may not be effective against all potential cyber-attacks or security breaches. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate, or implement effective preventive measures against, all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our internet-based product offerings and expand our internal usage of web-based products and applications. If an actual or perceived security breach occurs, customer perception of the effectiveness of our security measures could be harmed and could result in the loss of customers.
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.
A successful penetration or circumvention of the security of our systems, including those of third party providers or other financial institutions, or the failure to meet regulatory requirements for security of our systems, could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers or counterparties, significant increases in compliance costs (such as repairing systems or adding new personnel or protection technologies), and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation and regulatory exposure, and harm to our reputation, all of which could have a material adverse effect on our business, financial condition and results of 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.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
We are at risk of increased losses from fraud.
Fraudulent activity that may be committed against us or our customers may result in financial losses or increased costs to us. Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. Such fraudulent activity has taken many forms, ranging from wire fraud, debit card fraud, check fraud, mechanical devices attached to ATMs, social engineering and phishing attacks to obtain personal information, business email compromise, or impersonation of clients through the use of falsified or stolen credentials. While we have policies and procedures, as well as fraud detection tools, designed to prevent fraud losses, such policies, procedures and tools may be insufficient to accurately detect and prevent fraud. A significant increase in fraudulent activities could lead us to take additional steps to reduce fraud risk, which could increase our costs. Fraud losses may materially and adversely affect our business, financial condition, and results of operations.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions. These losses could have a material adverse effect on our business, financial condition and results of operations.
If we fail to design and maintain effective internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, which could have a material adverse effect on us.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud.
We believe that a control system, no matter how well designed and managed, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control system in the future, and our failure to
maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and FDIC regulations 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.
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.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. In March 2024, the SEC adopted rules requiring public companies, such as the Company, to provide climate-related disclosures in their annual reports and registration statements. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of 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.
Risks Related to Our Securities
We may need to raise additional capital in the future, and we may not be able to do so.
Access to sufficient capital is critical in order to enable us to implement our business plan, support our business, expand our operations and meet applicable capital requirements. The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact our ability to support and to grow our operations. If we grow our operations faster than we generate capital internally, we will need to access the capital markets. We may not be able to raise additional capital in the form of additional debt or equity on acceptable terms, or at all. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, our financial condition and our results of operations. Economic conditions and a loss of confidence in financial institutions may increase our cost of capital and limit access to some sources of capital. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on our business, financial condition and results of operations.
We have no current plans to pay cash dividends.
Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. The Bank is our primary operating business and the source of substantially all of our earnings, and our ability to pay dividends will be subject to the earnings, capital levels, capital needs and limitations relating to the payment of dividends by the Bank to us. The amount of dividends that a bank may pay is limited by state and federal laws and regulations. While we have sufficient retained earnings and expect our future earnings to be sufficient to pay cash dividends, our board of directors currently intends to retain earnings for the purpose of financing growth. In addition, we are a bank holding company, and our ability to declare and pay dividends to our shareholders is dependent on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’sorganization's expected future needs, asset quality and financial condition.
Risks Related to Our Industry
Our industry is
We operate in a highly regulated
industry 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 protectiongovern our operations, corporate governance, executive compensation and financial accounting or reporting, including changes in them or our failure to comply with them, may adversely affect our results 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. operations.
We are subject to extensive regulation and supervision bythat govern almost all aspects of our operations. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the Federal 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 US generally accepted accounting principles ("GAAP"). Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations canoften impose additional compliance costs.
We face increasing regulation and supervision of our industry. The Dodd-Frank Act 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 interpretationsor
supervisory 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 ofexpensive or otherwise adversely affect our business differs from our assessment, we may be required to take additional charges or undertake, or refrain from taking, actions that could have a material adverse effect on our business,and financial condition and results of operations.
We may be required to act as a source of financial and managerial strength for our Bank in times of stress.
Under federal law and long-standing Federal Reserve policy, we, as a bank holding company, are required to act as a source of financial and managerial strength to the Bank and to commit resources 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.
condition. 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. Thesestatements.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.
Regulatory initiatives regarding bank capital requirements may require heightened capital.
Regulatory
We are subject to capital
rules, whichadequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, regulators implement
thechanges 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 adversely affected. The Basel III
regulatory capital reforms from the Basel Committee on Banking Supervision, include a common equity Tier 1 capital requirement 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 quality and increase the quantity of capital required to be held by banking organizations, and to better equip the U.S. banking system 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 to be deemed “well capitalized” for purposes of certain rules and prompt corrective action requirements. Bankbank holding companies and
banks aretheir 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
required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and discretionary executive compensation payments.The Federal Reserve may also set highercomply with the capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing significant internal growth or making acquisitions are expectedset forth in the “prompt corrective action” regulations pursuant 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 EGRRCPA directed the federal banking agencies 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%, then 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 orFDIA. Satisfying capital requirements to which it is subject. As described under "Supervision and Regulation," these CBLR rules were modified by the CARES Act in response to the COVID-19 pandemic. As of January 1, 2020 we adopted 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 morelimit our banking operations, retain net income or reduce dividends to improve regulatory 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 requirementslevels, which could have a significant material adverse effect onnegatively affect our business, financial condition and results of operations.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third party vendors in our business and we rely on some of these vendors for critical functions including, but not limited to, our core processing function. Third party relationships are subject to increasingly demanding regulatory requirements and attention by bank regulators. We expect our regulators to hold us responsible for deficiencies in our oversight or control of our third party vendor relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or that such vendors have not performed adequately, we could be subject to administrative penalties or fines as well as requirements for consumer remediation, any of which could have a material adverse effect on our business, financial condition and results of operations.
General Risks
Severe weather, natural disasters, geopolitical conditions, acts of war or terrorism, public health issues, and other external events could significantly impact our business.
Severe weather, natural disasters, geopolitical conditions, acts of war or terrorism, public health issues, and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability 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 loss of revenue, and/or cause us to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Item
1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Information security, which includes cybersecurity, is a significant operational risk facing our business. Cybersecurity risks include intentional malicious attacks or unintentional acts that result in an impact to the confidentiality, integrity or availability of our or our clients’ or third parties' operations, systems or data.
Management assesses and manages material risks from cybersecurity threats through designated management positions and committees that are responsible for overseeing technology and information security. Our Information Security Officer is responsible for information security and cybersecurity risk management. He has over 40+ years of financial services related experience, including 10+ years of experience in cybersecurity program strategy, security architecture and security team leadership. Our Chief Technology Officer, who has over 25+ years of experience in financial services, including 15+ years in information technology, among other duties, is responsible for the security and integrity of systems, applications and databases and coordinates security implementations, monitoring and enforcement in conjunction with the Information Security Officer.
We maintain a comprehensive information security policy that is intended to maintain the security and confidentiality of client information, protect against threats to the security or integrity of such information, and protect against unauthorized access to or use of such information. We have a written information security program that is aligned to our information security policy and designed to assess, identify and manage risks that result from cybersecurity threats. Our information security program is centered on preparing for, preventing, detecting, mitigating, responding to and recovering from cyber threats and cyber incidents while ensuring our processes continue to operate effectively. On an annual basis, the Board of Directors reviews and approves our information security program and information security policy.
We use the Federal Financial Institutions Examination Council’s Cybersecurity Assessment Tool to help us identify our cybersecurity risks and determine our cybersecurity preparedness. This assessment tool incorporates regulatory guidance as well as concepts from other industry standards, including the National Institute of Standards and Technology Cybersecurity Framework. The results of the assessment are used to determine risk management practices and controls in order to align our cybersecurity preparedness to address the identified risks within our risk appetite. We engage a third-party to provide an annual risk assessment of our compliance with interagency guidelines for safeguarding confidential customer information. This risk assessment focuses on our information security program and the controls in place to protect client information. The results of the risk assessment are analyzed and used to improve our information security program where needed. Internal audits, regulatory examinations and third-party assessments of our processes in information technology and information security also help us assess our cybersecurity preparedness and whether risk management practices and controls need adjustment. Risk issues are identified through assessments, audits, examinations and security testing. Findings are tracked and reported to the Bank’s Technology Committee, and the Audit Committee of the Board of Directors.
We have contracted with various service providers (vendors) who provide a broad range of services, including core banking, communications, collaboration and infrastructure services. We have established a vendor management policy to establish the principles, framework, and guidance for the effective review, engagement, monitoring, and oversight of vendors to ensure that we adequately manage operational, strategic, reputational, and other related risks inherent in outsourcing of services or operations. We manage the cybersecurity risks posed by our use of third-party service providers by conducting periodic risk assessments.
We leverage multiple managed security service providers to monitor key system and network activity on a 24 hour basis to detect and alert the information technology team of cyber threats and potential cybersecurity events of concern. In addition to monitoring for security events, cyber threat intelligence sources are analyzed in order to understand potential cyber threats and techniques that may be used in cyberattacks against us and to monitor for such threats. Examples of cyber threat intelligence sources include the Financial Services Information Sharing and Analysis Center, trade organizations, the Cybersecurity and Infrastructure Security Agency, security service providers, vendor alerts, and open-source intelligence sources. The Bank utilizes two cybersecurity tools to detect and prevent successful phishing campaigns. All employees receive semi-annual training covering social engineering, phishing and current scam events, followed by periodic testing.
Our cybersecurity risk management processes are integrated into our overall risk management system through our risk management committee structure. These committees have processes to help facilitate appropriate and effective oversight of cybersecurity risk, including tracking and reporting of cybersecurity risks and remediation plans. The Bank
maintains a chartered Technology Committee, which is responsible for the oversight of policies and practices relating to the identification, assessment, measurement, monitoring and management of our technology and information security risks. The Technology Committee is chaired by our Chief Technology Officer and members include two members from our Board of Directors, one independent Director and the President, the Information Security Officer, Chief Financial Officer, Chief Banking Officer, and officers of key business systems. The Information Security Officer reports the cyber security status of the Bank to our Board of Directors on a monthly basis. These reports include performance metrics, security events, penetration testing, training, audit results, new system and vulnerability assessments and the identification and remediation of cybersecurity risks. The Information Security Officer also provides information regarding the threat environment and our efforts to detect, prevent and respond to internal and external critical threats
The Board of Directors, leveraging the efforts of the Technology Committee, oversees our continuing efforts to strengthen our information security infrastructure and staffing, adhere to regulatory guidelines and enhance our processes, technology controls and cybersecurity defenses. Our Information Security Officer regularly reports to the Board of Directors on security matters, our Risk Management Committee establishes and reviews key cyber risk indicators and performance metrics, and our Technology Committee assesses and disseminates periodic updates on information security risk, the maturity of our information security program, and related investments and results.
Our executive offices and the main office of the Bank are located at 11325 Random Hills Road, Fairfax, Virginia, 22030. In addition to our main office, we also maintain
9nine additional branch offices in Arlington, 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.
We are committed to being highly selective in our branching decisions, and we intend to continue to explore opportunities for establishing additional strategically located branches in the Washington and Baltimore MSAs based primarily on commercial deposit and loan potential and demographic support. We typically establish branches as necessary to provide support for established business development
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.
Item
3. Legal ProceedingsIn the ordinary course of our operations, we become party to various legal proceedings. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’smanagement's knowledge, threatened against us. Item
4. Mine Safety DisclosuresNone.
Item
5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price for Common Stock and Dividends. Our common stock is currently listed on the Nasdaq Capital Market under the symbol “FVCB.”"FVCB." As of March 17, 2021,15, 2024, there were 498432 holders of record of our common stock and approximately 1,2641,644 total beneficial shareholders. To date, we have not paid, and we do not currently
intend to pay, a cash dividend on our common stock. Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. As we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends on our common stock depends, in large part, upon our receipt of dividends from the Bank. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, our ability to service debt obligations senior to our common stock, banking regulations, contractual, legal, tax and regulatory restrictions, and limitations on the payment of dividends by us to our shareholders or by the Bank to us, and such other factors as our board of directors may deem relevant.
Regulations of the Federal Reserve and Virginia law place limits on the amount of dividends the Bank may pay to the Company without prior approval. Prior regulatory approval is required to pay dividends which exceed the
Bank’sBank's net profits for the current year plus its retained net profits for the preceding two calendar years, less required transfers to surplus. Under Virginia law, dividends may only be paid out of retained earnings. State and federal bank regulatory agencies also have authority to prohibit a bank from paying dividends if such payment is deemed to be an unsafe or unsound practice, and the Federal Reserve has the same authority over bank holding companies. Under Virginia law, the Company generally may not pay dividends or distributions to holders of common stock if it would be unable to pay its debts as they become due in the ordinary course of business or if its total assets would be less than the sum of its total liabilities plus the amount of the liquidation preference of any class of shares with superior rights than the common stock.
The Federal Reserve has established requirements with respect to the maintenance of appropriate levels of capital by registered bank holding companies. Compliance with such standards, as presently in effect, or as they may be amended from time to time, could possibly limit the amount of dividends that the Company may pay in the future. The Federal Reserve has issued guidance on the payment of cash dividends by bank holding companies. In the statement, the Federal Reserve expressed its view that a holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income, or which could only be funded in ways that weaken the holding
company’scompany's financial health, such as by borrowing. Under Federal Reserve guidance, as a general matter, the board of directors of a holding company should inform the Federal Reserve and should eliminate, defer, or significantly reduce the dividends if: (i) the holding
company’scompany's net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the holding
company’scompany's prospective rate of earnings retention is not consistent with the capital needs and overall current and prospective financial condition; or (iii) the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. As a depository institution, the deposits of which are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due the FDIC. The Bank currently is not in default under any of its obligations to the FDIC.
Repurchases
No shares were repurchased during
On December 15, 2022, the
three months ended DecemberCompany announced that the Board of Directors approved a five-for-four split of the Company's common stock in the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31,
2020.2023.
Repurchases
On February 4, 2020,March 16, 2023, we publicly announced that the Board of Directors had adopted a program to repurchase up to 8% of our outstanding shares of common stock at December 31, 2019; such program was set to expire on December 31, 2020. On January 21, 2021, we extended the share repurchase program and increased the number of shares subject to repurchase. Under the revised repurchase program, we may repurchase up to 1,080,8601,300,000 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2020. The repurchase program will2022, which would expire on DecemberMarch 31, 2021, subject to earlier termination of the program by the Board of Directors.
2024. 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. Shares may be repurchased in the open market or through privately negotiated transactions. SinceFor the inceptionyear ended
December 31, 2023, 115,750 shares of our common stock
were repurchased at a total cost of
$7.3 million.$1.4 million under the program. All of these shares have been cancelled and returned to the status of authorized but unissued.
Item 6. Selected Financial Data
Selected Financial Data
(Dollars and shares in thousands, except per share data)
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
Income Statement Data: | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
| | | | | | | | | | | | | | | | |
Interest income | | $ | 67,103 | | $ | 66,734 | | $ | 51,924 | | $ | 40,302 | | $ | 32,587 | |
Interest expense | | | 14,483 | | | 18,671 | | | 12,110 | | | 8,195 | | | 5,387 | |
Net interest income | | | 52,620 | | | 48,063 | | | 39,814 | | | 32,107 | | | 27,200 | |
Provision for loan losses | | | 5,016 | | | 1,720 | | | 1,920 | | | 1,200 | | | 1,471 | |
Net interest income after provision for loan losses | | | 47,604 | | | 46,343 | | | 37,894 | | | 30,907 | | | 25,729 | |
Non‑interest income | | | 2,891 | | | 2,546 | | | 1,661 | | | 2,975 | | | 1,220 | |
Non‑interest expense | | | 30,838 | | | 28,877 | | | 26,448 | | | 19,346 | | | 16,446 | |
Net income before income taxes | | | 19,657 | | | 20,012 | | | 13,107 | | | 14,536 | | | 10,503 | |
Provision for income taxes | | | 4,156 | | | 4,184 | | | 2,238 | | | 6,846 | | | 3,571 | |
Net income | | $ | 15,501 | | $ | 15,828 | | $ | 10,869 | | $ | 7,690 | | $ | 6,932 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,821,481 | | $ | 1,537,295 | | $ | 1,351,576 | | $ | 1,053,224 | | $ | 909,305 | |
Loans receivable, net of fees | | | 1,466,083 | | | 1,270,526 | | | 1,136,743 | | | 888,677 | | | 768,102 | |
Allowance for loan losses | | | (14,958) | | | (10,231) | | | (9,159) | | | (7,725) | | | (6,452) | |
Total investment securities | | | 126,415 | | | 141,589 | | | 125,298 | | | 117,712 | | | 113,988 | |
Total deposits | | | 1,532,493 | | | 1,285,722 | | | 1,162,440 | | | 928,163 | | | 775,991 | |
Other borrowed funds | | | 25,000 | | | 49,487 | | | 24,407 | | | 24,327 | | | 51,247 | |
Total shareholders’ equity | | | 189,500 | | | 179,078 | | | 158,336 | | | 98,283 | | | 79,811 | |
Common shares outstanding | | | 13,511 | | | 13,902 | | | 13,713 | | | 10,869 | | | 10,179 | |
Per Common Share Data: | | | | | | | | | | | | | | | | |
Basic net income | | $ | 1.14 | | $ | 1.15 | | $ | 0.93 | | $ | 0.74 | | $ | 0.68 | |
Fully diluted net income | | | 1.10 | | | 1.07 | | | 0.85 | | | 0.67 | | | 0.63 | |
Book value | | | 14.03 | | | 12.88 | | | 11.55 | | | 9.04 | | | 7.84 | |
Tangible book value(1) | | | 13.41 | | | 12.26 | | | 10.93 | | | 9.03 | | | 7.83 | |
Performance Ratios: | | | | | | | | | | | | | | | | |
Return on average assets | | | 0.91 | % | | 1.09 | % | | 0.94 | % | | 0.80 | % | | 0.88 | % |
Return on average equity | | | 8.48 | | | 9.32 | | | 9.29 | | | 8.63 | | | 8.91 | |
Net interest margin(2) | | | 3.28 | | | 3.48 | | | 3.51 | | | 3.43 | | | 3.51 | |
Efficiency ratio(3) | | | 55.55 | | | 57.06 | | | 63.07 | | | 57.16 | | | 58.02 | |
Non‑interest income to average assets | | | 0.17 | | | 0.18 | | | 0.14 | | | 0.31 | | | 0.15 | |
Non‑interest expense to average assets | | | 1.80 | | | 1.99 | | | 2.28 | | | 2.02 | | | 2.08 | |
Loans receivable, net of fees to total deposits | | | 95.67 | | | 98.82 | | | 97.79 | | | 95.75 | | | 98.98 | |
Asset Quality Ratios: | | | | | | | | | | | | | | | | |
Net charge‑offs (recoveries) to average loans receivable, net of fees | | | 0.02 | % | | 0.05 | % | | 0.05 | % | | (0.01) | % | | 0.19 | % |
Nonperforming loans to loans receivable, net of fees | | | 0.38 | | | 0.84 | | | 0.34 | | | 0.09 | | | 0.03 | |
Nonperforming assets to total assets | | | 0.52 | | | 0.95 | | | 0.57 | | | 0.44 | | | 0.03 | |
Allowance for loan losses to nonperforming loans | | | 266.11 | | | 95.39 | | | 285.24 | | | 979.09 | | | 2,591.16 | |
Allowance for loan losses to loans receivable, net of fees | | | 1.02 | | | 0.81 | | | 0.81 | | | 0.87 | | | 0.84 | |
Capital Ratios (Bank Only): | | | | | | | | | | | | | | | | |
Tier 1 risk‑based capital | | | NA | % | | 12.72 | % | | 13.27 | % | | 12.05 | % | | 12.37 | % |
Total risk‑based capital | | | NA | | | 13.43 | | | 14.02 | | | 12.83 | | | 13.16 | |
Common Equity Tier 1 capital | | | NA | | | 12.72 | | | 13.27 | | | 12.05 | | | 12.37 | |
Leverage capital ratio | | | 11.65 | | | 12.15 | | | 12.41 | | | 11.79 | | | 11.89 | |
Other: | | | | | | | | | | | | | | | | |
Average shareholders’ equity to average total assets | | | 10.70 | % | | 11.71 | % | | 10.09 | % | | 9.32 | % | | 9.85 | % |
Average loans receivable, net of fees to average total deposits | | | 98.51 | % | | 98.56 | % | | 96.56 | % | | 97.74 | % | | 96.05 | % |
Average common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 13,542 | | | 13,817 | | | 11,715 | | | 10,435 | | | 10,170 | |
Diluted | | | 14,134 | | | 14,825 | | | 12,822 | | | 11,545 | | | 10,922 | |
| (1) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Tangible book value is calculated(a) Total Number of Shares Purchased | | (b) Average Price Paid per Share ($) | | (c) Total Number of Shares Purchased as total shareholders’ equity, less goodwill and other intangible assets, divided by common shares outstanding.Part of Publicly Announced Program | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Program |
| October 1 - October 31, 2023 | | — | | — | | — | | — |
| November 1 - November 30, 2023 | | — | | — | | — | | — |
| December 1 - December 31, 2023 | | — | | — | | — | | 1,275,202 |
| Total | | — | | — | | — | | 1,275,202 |
(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, |
Non‑GAAP Reconciliation | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total shareholders’ equity | | $ | 189,500 | | $ | 179,078 | | $ | 158,336 | | $ | 98,283 | | $ | 79,811 |
Less: goodwill and intangibles, net | | | (8,357) | | | (8,689) | | | (8,443) | | | (99) | | | (119) |
Tangible Common Equity | | $ | 181,143 | | $ | 170,389 | | $ | 149,893 | | $ | 98,184 | | $ | 79,692 |
Book value per common share | | $ | 14.03 | | $ | 12.88 | | $ | 11.55 | | $ | 9.04 | | $ | 7.84 |
Less: intangible book value per common share | | | (0.62) | | | (0.62) | | | (0.62) | | | (0.01) | | | (0.02) |
Tangible book value per common share | | $ | 13.41 | | $ | 12.26 | | $ | 10.93 | | $ | 9.03 | | $ | 7.82 |
Item 6. Reserved
Item 7.
Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
The following presents
management’smanagement's discussion and analysis of our consolidated financial condition at December 31,
20202023 and
20192022 and the results of our operations for the years ended December 31,
20202023 and
2019.2022. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.
In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’smanagement's expectations.
We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank, was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.
On October 12, 2018,August 31, 2021, we completedannounced that the Bank made an investment in ACM for $20.4 million to obtain a 28.7% ownership interest in ACM. 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 our acquisitionheld to investment loan portfolio.
On December 15, 2022, the Company announced that the Board of Colombo Bank (“Colombo”). Colombo, which was headquarteredDirectors approved a five-for-four split of the Company's common stock in Rockville, Maryland, merged into FVCbank effective October 12, 2018, adding five banking locations in Washington, D.C.,the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31, 2023. Earnings per share and Montgomery County andall other per share information reflected herein have been adjusted for the Cityfive-for-four split of Baltimore in Maryland.the Company's common stock for comparative purposes.
Net interest income is our primary source of revenue. We define revenue as net interest income plus 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 limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterestnon-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 (“BOLI”("BOLI"), and gains and losses on sales of investment securities available-for-sale.
On October 13, 2020, we announced the completion of our private placement of $20 million of our 4.875% Fixed to Floating Subordinated Notes due 2030 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes. We plan to use the proceeds from the placement of the Notes for general corporate purposes, to include supporting capital ratios at the Bank, and potential repayment of a portion of the $25.0 million outstanding subordinated debt callable June 30, 2021.
Critical Accounting Policies
The accounting principles we apply under GAAP are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.
The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for
loancredit losses
accounting- loans & reserve for
purchase credit-impaired loans,unfunded commitments, allowance for credit losses - securities, and fair value
measurements, and the valuation of other real estate owned.measurements.
Allowance for
LoanCredit Losses
- Loans & Unfunded Commitments
We maintain the allowance for loancredit losses ("ACL") at a level that represents management’s best estimate of known and inherentexpected losses in our loan portfolio. We are not required to implementadopted the provisions of the CECL untilaccounting standard as of January 1, 2023 in accordance with the required implementation date and are continuingrecorded the impact of the adoption to account forretained earnings, net of deferred income taxes, as required by the allowance for loan losses understandard. Prior to the adoption of CECL, we utilized an incurred loss model. Both the amountmodel to derive our best estimate of the provision expenseACL.
Accounting Standards Codification ("ASC") 326 requires that an estimate of CECL be immediately recognized and reevaluated over the levelcontractual life of the allowance forfinancial asset. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loan lossesportfolio. Loans, or portions thereof, are impacted by many factors, including general and industry-specific economic conditions, actualcharged off against the ACL when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously and expected credit losses, historical trendsto be charged-off.
Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and
specific conditions ofwhen deemed appropriate are assigned a reserve based on an individual
borrowers. Unusual and infrequently occurring events, such as weather-related disasters and health related events, such as COVID-19 pandemic and associated efforts to restrict the spreadevaluation. The remainder of the
disease, may impact our assessmentportfolio, representing all loans not evaluated individually for impairment, is segmented based on call report code and processed through a cash flow valuation model. In particular, loan-level probability of
possible credit losses. Asdefault ("PD") and severity (also referred to as loss given default ("LGD")) is applied to derive a
part of our analysis, we use comparative peer group data and qualitative factors suchbaseline expected loss 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.The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segmentsvaluation date. These expected default and severity rates, which are further disaggregatedregression-derived and evaluated collectively for impairment based on loan segments, whichpeer historical loan-level performance data, are largely based on the typecalibrated to incorporate our reasonable and supportable forecast of collateral underlying each loan. For purposes of this analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. future losses as well as any necessary qualitative adjustments.
Typically, financial institutions use their historical loss experience and trends in losses for each loan categorysegment which are then adjusted for portfolio trends and economic and environmental factors in determining their allowance for loan losses.the ACL. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. BecauseDue to the fact that limited internal loss history exists to generate statistical significance, we determined it was most prudent to rely on peer data when deriving our best estimate of this,PD and LGD. As part of our estimation process, we will continue to assess the reasonableness of the data, assumptions, and model methodology utilized to derive our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for credit losses.
For each of the
five categoriesmodeled loan segments, we generate cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of
loans.Our peer groupexpected prepayment speeds is defined by selecting commercial banking institutions of similar size within Virginia, Maryland and the District of Columbia. This is known as our custom peer group. The commercial banking institutions comprising the custom peer group can change based on certaininternal loan-level historical data. For our cash flow model, we utilize national unemployment for reasonable and supportable forecasting of expected default. To further adjust the ACL for expected losses not already within the quantitative component of the calculation, we may consider qualitative factors including but not limitedas prescribed in ASC 326.
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. Our exposure to credit loss in the event of nonperformance by the other party to the characteristics, size, and geographic footprintfinancial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. We record a reserve for unfunded commitments on off-balance sheet credit exposures through a charge to provision for credit loss expense in our Consolidated Statement of Income. The reserve for unfunded commitments is estimated by call report code segmentation as of the institution. We have identified 22 banksvaluation date under the CECL model using the same methodologies as portfolio loans taking utilization rates into consideration. The reserve for unfunded commitments is reflected as a liability on our custom peer group which are within $1 billionConsolidated Statement of Condition.
While our methodology in establishing the ACL attributes portions of a combined reserve to $3 billion in total assets,multiple elements, we believe that the majoritycombined allowance of whom are geographically concentratedcredit losses (which is inclusive of the reserve for unfunded commitments) represents the most appropriate coverage metric for loss absorption purposes.
Our methodology utilized in the Washington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areasestimation of the country. These baseline peer group loss rates are then adjusted based on an analysis ofACL, which is performed at least quarterly, is designed to be dynamic and responsive to changes in our loan portfolio characteristics, trends,credit quality, composition, and forecasted economic considerationsconditions. The review of the reasonableness and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updatedappropriateness of the ACL is reviewed by the ACL Committee for approval as of the valuation date. Additionally, information is provided to the Board of Directors on a quarterly basis.basis along with our consolidated financial statements.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. We evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the fair value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan.
Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan lossesACL and the current level of the allowance and reserve on unfunded commitments are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.
Allowance for Loan Losses — Acquired
Collateral Dependent Financial Assets
Loans
Acquired loans accounted for under Accounting Standards Codification (“ASC”) 310-30
that do not share risk characteristics are evaluated on an individual basis. For our acquired loans, to the extentcollateral dependent financial assets where we have determined that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisitionforeclosure of the loans, an allowance for loan losses wouldcollateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be establishedprovided substantially through the sale of the collateral, the ACL is measured based on our estimatethe difference between the fair value of futurethe collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses overare calculated as the remaining lifeamount by which the amortized cost basis of the loans.
Acquired loans accounted for under ASC 310-20
Subsequentfinancial asset exceeds the net present value from the operation of the collateral. When repayment is expected to be from the acquisition date, we establish our allowance for loansale of the collateral, expected credit 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,are calculated as the amount by which includes a reviewthe amortized cost basis of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimatedfinancial asset exceeds the fair value of the underlying collateral economic conditions, historical net loan loss experience, carryingless estimated cost to sell. The ACL may be zero if the fair value of the loans, which includescollateral at the remaining net purchase discountmeasurement date exceeds the amortized cost basis of the financial asset.
Allowance for Credit Losses - Securities
We evaluate our available-for-sale and held-to-maturity debt securities portfolios for expected credit losses as of the valuation date under ASC 326. For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or
premium, and other factorsif it is more likely than not that
warrant recognition in determiningwe will be required to sell, the security before recovery of our
allowance for loan losses.Purchased Credit-Impaired Loans
Purchased credit-impaired (“PCI”) loans, which areamortized cost basis. If either criterion is met, the loans acquired in our acquisition of Colombo, are loans acquired at a discount (thatsecurity’s amortized cost basis is due, in part,written down to credit quality). These loans are initially recorded at fair value (as determined bythrough income during the current period. For available-for-sale debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other driving factors. If our assessment indicates that a credit loss exists, 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, 2020, we had specific reserves for impairment of three acquired loans within our allowance for loan losses totaling $196 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, requirecollected from the continued use of key assumptions and estimates, similarsecurity is compared to the initial estimateamortized cost basis of fair value. Changes in the contractual required payments due and estimatedsecurity. If the present value of cash flows expected to be collected may resultis less than the amortized cost basis, an ACL is recorded for the credit loss (which represents the difference between the expected cash flows and amortized cost basis), limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in changesother comprehensive income.
The entire amount of an impairment loss is recognized in earnings only when: (1) we intend to sell the security; or (2) it is more likely than not that we will have to sell the security before recovery of our amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.
Changes in the accretable yieldACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when we believe the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an ACL is recognized in other comprehensive income as a noncredit-related impairment.
As part of our estimation process, we have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and non-accretable difference or reclassifications between accretable yield andreport accrued interest separately in other assets in the non-accretable difference. On an aggregate basis, if the acquired poolsConsolidated Statement of PCI loans perform better than originally expected,Condition. Available-for-sale debt securities are placed on nonaccrual status when we wouldno longer expect to receive more future cash flows than originally modeledall contractual amounts due, which is generally at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that90 days past due. Accrued interest receivable is recognized as a prospective increase to ourreversed against interest income when a security is placed on loans.
nonaccrual status. Accordingly, we do not recognize an ACL against accrued interest receivable. This approach is consistent with our nonaccrual policy implemented for our loan portfolio.
We separately evaluate our held-to-maturity investment securities for any credit losses. If we determine that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis. As of December 31, 2023, we had one security classified as held-to-maturity with an amortized cost basis of $264 thousand with the remainder of the securities portfolio held as available-for-sale.
We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
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.
LIBOR and Other Benchmark Rates
In 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (“IBOR”) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (“ARRs”) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.
To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, we have established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs.
COVID-19 Pandemic Discussion Matters
Employee Matters
As a result of the COVID-19 pandemic stay at home orders to reduce the spread of the disease, the majority of our workforce transitioned to remote access operations towards the end of March 2020. Our information technology infrastructure has afforded our employees the ability to work predominantly remotely with little interruption as we continue to service the needs of our clients in a customer secure environment. As government imposed stay at home orders have further relaxed, more than half of our employees have returned to our offices, under social distancing guidelines requiring employees to maintain safe distances and with more frequent cleaning of our facilities and other practices encouraging a safe work environment. Management remains connected to employees through monthly company-wide conference calls and regular notifications and updates through both email and the Company’s intranet as warranted.
Branch Hours
Branch hours and availability, which were modified in consideration of the safety of our employees and clients, were reinstated during the second quarter of 2020. All of our locations have been opened with advanced safety measures and are available during our normal business hours.
Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021.
In response to the COVID-19 pandemic, the 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:
| ● | Community Bank Leverage Ratio. The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. |
| ● | Temporary Troubled Debt Restructurings Relief. The CARES Act allowed banks to elect to suspend requirements under U.S. generally accepted accounting principles (“GAAP”) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring (“TDR”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking agencies are required to defer to the determination of the banks making such suspension. The Appropriations Act extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022. |
| ● | Small Business Administration Paycheck Protection Program. The CARES Act created the SBA’s PPP and it was extended by the Appropriations Act. Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans. |
Loans made under the PPP are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. government. PPP loans afford borrowers forgiveness up to the principal amount of the PPP covered loan if the proceeds are used to retain workers and maintain payroll or make mortgage interest, lease and utility payments. The SBA will reimburse banks that participate in this program for any amount of a PPP covered loan that is forgiven. Because of the SBA guarantee, we are currently not reserving an allowance for loan losses for these loans.
We actively participated in originating PPP loans, and began processing applications at the inception of the program and through the program's initial expiration. As of December 31, 2020, we had originated 755 applications for approximately $170.3 million, net of deferred fees. We continue to originate PPP loans as part of the 2021 program for first and second draw loans.
Loan Portfolio Exposures
As a result of the COVID-19 pandemic, we implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. On March 1, 2021, remaining payment deferred loans totaled $10.1 million, or 0.68% of the total loan portfolio, comprising five loans. One loan is a hotel participation loan totaling $9.7 million, one loan is SBA guaranteed totaling $334 thousand and the remaining three loans totaling $89 thousand are consumer unsecured loans.
We are closely and proactively monitoring the effects of the pandemic on our loan and deposit customers and are focused on assessing risks within the loan portfolio and working with customers to minimize losses. We consider pandemic impacted loans to include commercial real estate loans made to hotels, churches, and certain retail and special purpose asset classes. During our assessment of the allowance for loan losses, we addressed the credit risks associated with these pandemic impacted segments and those loans that have requested payment deferrals. The following table shows the number of loans and outstanding loan balances by pandemic-impacted asset class as of December 31, 2020.
COVID Impacted Loans By Asset Class
Year Ended December 31, 2020
(Dollars in thousands)
| | | | | |
| | Number of | | | |
Asset Class | | Total Loans | | Amount |
Commercial Real Estate - Retail | | 106 | | $ | 196,025 |
Commercial Real Estate - Mixed Use | | 52 | | | 84,437 |
Specialty Use-Hotel/Lodging/Motel | | 11 | | | 60,919 |
Commercial Real Estate - Office | | 111 | | | 107,766 |
Multi-Family First Lien | | 85 | | | 108,077 |
Commercial Real Estate - Industrial | | 68 | | | 97,891 |
Commercial Real Estate - Special Use/Church | | 22 | | | 41,621 |
Special Purpose | | 25 | | | 32,405 |
| | 480 | | $ | 729,141 |
| | | | | |
Other Loan Categories Not Impacted by COVID | | 2,808 | | | 742,244 |
| | 3,288 | | $ | 1,471,385 |
We believe that as a result of our conservative underwriting discipline at loan origination coupled with the active dialogue we have had with our borrowers, we have the ability and necessary flexibility to assist our customers through this pandemic.
Liquidity and Backup Sources
Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $267.2 million at December 31, 2020, or 14.7% of total assets, an increase from $174.5 million, or 11.4%, at December 31, 2019. 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, 2020 was approximately $124.1 million. Borrowing capacity with the FRB was approximately $124.3 million at December 31, 2020. We also have unsecured federal funds purchased lines of $269.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors as we endure through this pandemic.
In addition to the funding sources noted above, the Federal Reserve has established a PPP Liquidity Facility (“PPPLF”), authorized under Section 13(3) of the Federal Reserve Act, that can be used to pledge PPP loans we originate as collateral under the CARES Act. Under Section 1102 of the CARES Act, a PPP loan is assigned a zero risk weighting under the risk based capital rules of the federal banking agencies. In addition, an interim rule issued on April 9, 2020 from the federal banking agencies will allow banks to neutralize the effect of PPP loans financed under the PPPLF on leverage capital ratios. We do not anticipate using this facility to provide us with additional liquidity. The interest rate on this facility is fixed at 0.35% for the term of the facility.
Share Repurchases
While our capital position remains well above the levels to be considered well capitalized for regulatory purposes, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, we temporarily suspended stock repurchases on March 20, 2020. For the year ended December 31, 2020, we repurchased and cancelled a total of 487,531 shares of common stock at an average price of $14.90, totaling $7.3 million, all of which occurred during the first quarter of 2020. On January 21, 2021, we approved a new share repurchase program pursuant to which we may repurchase up to 1,080,860 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2020. The repurchase program will expire on December 31, 2021, subject to earlier termination of the program by the Board of Directors.
Risks and Uncertainties
The COVID-19 pandemic has adversely impacted a broad range of industries in which our customers operate and could impair their ability to fulfill their financial obligations to us. The pandemic has caused significant disruptions to the U.S. economy and has disrupted banking and other financial activity in the areas we operate. While there has been no material impact to our employees to date, COVID-19 could also potentially create widespread business continuity issues for us.
The U.S. government and its agencies have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19; certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.
Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. While it is not possible to know the full universe or extent that the impact of COVID-19 and resulting measures to curtail its spread will have on our business, we are aware of the following items that are potentially material to us and our operations.
Financial Condition and Results of Operations
Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.
Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.
Capital and Liquidity
While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our regulatory capital ratios could be adversely impacted by future credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt when necessary. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.
We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us, and rates for short term funding have recently been quite low. If funding costs become elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Asset Valuation
Currently, we do not expect COVID-19 to affect our ability to account timely for the valuation of assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
COVID-19 could cause a sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
During the fourth quarter of 2020, we engaged a third party specialist to perform an independent goodwill and other intangible assets valuation. During 2020, bank stocks in general as well as our market capitalization declined as a result of the events surrounding the COVID-19 pandemic. Based on the qualitative analysis completed, we do not believe this decline is indicative of permanent deterioration of the value of the Bank, and as such, no impairment was recorded as of December 31, 2020.
Processes, Controls and Business Continuity Plan
We have invoked our Board approved Pandemic Preparedness Plan that includes a remote working strategy. We do not anticipate incurring additional material cost related to our continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. We do not currently face any material resource constraint through the implementation of our business continuity plans.
Lending Operations and Accommodations to Borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, we executed a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, we are deferring either the full loan payment or the principal component of the loan payment generally for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. As of March 1, 2021, remaining payment deferred loans totaled $10.1 million, or 0.68% of the total loan portfolio, comprising five loans. In accordance with the CARES Act and interagency guidance issued in March 2020, these short term deferrals are not considered TDRs.
With the passage of the PPP, administered by the SBA, we actively participated in assisting our customers with applications for resources through the program. The majority of the PPP loans we originated have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2020, we have closed or approved with the SBA 755 PPP loans representing $170.3 million in funding, net of deferred fees. At December 31, 2020, PPP loans totaled $155.8 million, as loans started to be forgiven by the SBA during the fourth quarter of 2020. We continue to originate PPP loans as part of the 2021 program for first and second draw loans. It is our understanding that loans funded through PPP are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for loan losses through a charge to earnings.
Credit
We are working with customers directly affected by COVID-19. We are prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communications with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise. Should economic conditions worsen, we could experience further increases in our required allowance for loan losses and record additional provision for loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Financial Overview
For the years ended December 31, 20202023 and 2019,2022, we continued to expand our market area throughfocused on organic growth, capitalizing on market disruptionnew customer relationships we obtained through centers of influence and portfolio cultivation.
•Total assets decreased to $2.19 billion compared to $2.34 billion at December 31, 2023 and 2022, respectively, a decrease of $153.8 million, or 7%. The decrease in total assets is primarily attributable to our strategic balance sheet management which focused on repositioning the balance sheet through two investment securities restructurings and reducing our reliance on wholesale funding to limit funding costs.
•Total loans, net of deferred fees, decreased $11.9 million, or 1%, from December 31, 2022 to December 31, 2023. Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets of 0.08% at December 31, 2023, compared to 0.19% at December 31, 2022.
•Total deposits increased $15.1 million or 1%, from December 31, 2022 to December 31, 2023. Noninterest-bearing deposits were $396.7 million at December 31, 2023, or 21.5% of total deposits. At December 31, 2023, core deposits, which exclude wholesale deposits, increased $17.9 million from December 31, 2022, or 1%.
•Net income totaling $3.8 million was recorded for the year ended December 31, 2023 compared to $25.0 million for 2022. The year ended December 31, 2023 results include after-tax losses of $12.2 million for the first quarter 2023 and fourth quarter 2023 securities repositionings. Core bank operating earnings, which excludes the securities sales and other nonrecurring items discussed more fully below under "Results of Operations", for the year ended December 31, 2023 was $16.3 million. For a reconciliation of this non-GAAP information which excludes the effect of these non-recurring items, please refer to the table below.
•Net interest income decreased $10.8 million, or 17%, to $54.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Interest income on loans increased $24.7 million and interest expense on deposits increased $34.9 million for 2023, compared to 2022. Net interest margin for 2023 was 2.49% compared to 3.19% for 2022.
•The provision for credit losses for 2023 totaled $0.1 million compared to a provision for credit losses totaling $2.6 million in 2022. The provision for credit losses for 2023 was a reflection of the credit quality of the loan portfolio and the decrease in total loans for the 2023 period.
•Noninterest income for 2023 decreased to a loss of $13.4 million compared to income of $2.8 million for 2022. This decrease was primarily driven by the loss related to the sales of available-for-sale securities during 2023.
•Noninterest expense was $36.7 million and $34.5 million for the years ended December 31, 2023 and 2022, respectively. The increase of $2.2 million, or 6%, was primarily a result of merger activity within the Washington MSA. In addition, as a resultincreases in internet banking, software expense and state franchise taxes, which are more fully discussed below under "Results of our participation in the PPP, we were able to assist over 225 new customers, which has contributed to our growth during 2020 and represents future loan and deposit growth opportunities.Operations". | ● | Total assets increased to $1.82 billion compared to $1.54 billion at December 31, 2020 and 2019, respectively, an increase of $284.2 million, or 18.5%. The increase in total assets is primarily attributable to our PPP loan originations, net of fees, totaling $155.8 million at December 31, 2020. |
| ● | Total loans, net of deferred fees, increased $195.6 million, or 15.4%, from December 31, 2019 to December 31, 2020. Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.31% at December 31, 2020, compared to 0.70% at December 31, 2019. Nonperforming assets, which includes nonperforming loans and OREO, as a percentage of total assets were 0.52% and 0.95%, at December 31, 2020 and 2019, respectively. |
| ● | Total deposits increased $246.8 million, or 19.2%, from December 31, 2019 to December 31, 2020, the increase attributable to a combination of deposits from new customer relationships (many acquired through PPP originations) as well as growth in existing customer deposits. |
| ● | Tangible book value per share at December 31, 2020 was $13.41, an increase from $12.26 at December 31, 2019. |
| ● | Net income was $15.5 million for the year ended December 31, 2020 compared to $15.8 million for the same period of 2019. Our 2020 results were impacted by a recorded impairment from branch closures totaling $676 thousand. In addition, provision for loan losses were elevated as a result of the COVID-19 pandemic during 2020, increasing $3.3 million to $5.0 million for the year ended December 31, 2020 as compared to 2019. Excluding the branch closure impairment, we would have recorded net income of $16.0 million for the year ended December 31, 2020. Our 2019 results were impacted by merger-related expenses from our acquisition of Colombo totaling $102 thousand, net of tax. Excluding these merger-related expenses, we would have recorded net income of $15.9 million for the year ended December 31, 2019. For a reconciliation of this non-GAAP information which excludes the effect of the impairment from branch closures and merger-related expenses, please refer to the table below. |
Reconciliation of Net Income (GAAP) to Commercial Bank Operating Earnings (Non-GAAP)
Years Ended December 31,
20202023 and
20192022
(Dollars in thousands, except per share data)
| | | | | | | | | | | |
| 2023 | | 2022 |
| Net income (as reported) | $ | 3,822 | | | $ | 24,984 | |
| Add: Merger and acquisition expense | — | | | 125 | |
| Add: Loss on sale of available-for-sale investment securities | 15,577 | | | — | |
| | | |
| Add: Office space reduction and severance costs | 457 | | | — | |
| (Subtract) Add: (Provision) Benefit for income taxes associated with non-GAAP adjustments | (3,527) | | | (28) | |
| Non-GAAP Commercial Bank Operating Earnings, excluding above items | $ | 16,329 | | | $ | 25,081 | |
| Earnings per share - basic (GAAP net income) | $ | 0.22 | | | $ | 1.43 | |
| Earnings per share - Non-GAAP expenses including provision for income taxes | $ | 0.70 | | | $ | 0.01 | |
| Earnings per share - basic (non-GAAP core bank operating earnings) | $ | 0.92 | | | $ | 1.44 | |
| Earnings per share - diluted (GAAP net income) | $ | 0.21 | | | $ | 1.35 | |
| Earnings per share - Non-GAAP expenses including provision for income taxes | $ | 0.69 | | | $ | 0.01 | |
| Earnings per share - diluted (non-GAAP core bank operating earnings) | $ | 0.90 | | | $ | 1.36 | |
| Return on average assets (GAAP net income) | 0.17 | % | | 1.18 | % |
| Non-GAAP expenses including provision for income taxes | 0.55 | % | | — | % |
| Return on average assets (non‑GAAP core bank operating earnings) | 0.72 | % | | 1.18 | % |
| Return on average equity (GAAP net income) | 1.82 | % | | 12.34 | % |
| Non-GAAP expenses including provision for income taxes | 5.96 | % | | 0.05 | % |
| Return on average equity (non‑GAAP core bank operating earnings) | 7.78 | % | | 12.39 | % |
| | | |
Below shows selected financial data for the periods ended December 31, 2023 and 2022.
Selected Financial Data
(Dollars and shares in thousands, except per share data)
| | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | |
| Income Statement Data: | | | | |
| Interest income | $ | 106,615 | | | $ | 80,682 | | |
| Interest expense | 52,219 | | | 15,438 | | |
| Net interest income | 54,396 | | | 65,244 | | |
| Provision for credit losses | 132 | | | 2,629 | | |
| Net interest income after provision for credit losses | 54,264 | | | 62,615 | | |
| Non‑interest income (loss) | (13,370) | | | 2,834 | | |
| Non‑interest expense | 36,662 | | | 34,460 | | |
| Net income before income taxes | 4,232 | | | 30,989 | | |
| Provision for income taxes | 410 | | | 6,005 | | |
| Net income | $ | 3,822 | | | $ | 24,984 | | |
| Balance Sheet Data: | | | | |
| Total assets | $ | 2,190,558 | | | $ | 2,344,322 | | |
| Loans receivable, net of fees | 1,828,564 | | | 1,840,434 | | |
| Allowance for credit losses | (18,871) | | | (16,040) | | |
| Total investment securities | 171,859 | | | 278,333 | | |
| Total deposits | 1,845,292 | | | 1,830,162 | | |
| Other borrowed funds | 104,620 | | | 284,565 | | |
| Total shareholders' equity | 217,117 | | | 202,382 | | |
| Common shares outstanding | 17,807 | | | 17,476 | | |
Table of Contents | | | | | | | |
| | 2020 | | 2019 | |
Net income (as reported) | | $ | 15,501 | | $ | 15,828 | |
Add: impairment on branch closures | | | 676 | | | — | |
Add: merger and acquisition expense | | | — | | | 133 | |
Less: provision for income taxes associated with impairment and merger and acquisition expense | | | (142) | | | (31) | |
Non-GAAP Operating Earnings, excluding above items | | $ | 16,035 | | $ | 15,930 | |
Earnings per share - basic (non-GAAP net income) | | $ | 1.18 | | $ | 1.15 | |
Earnings per share - diluted (non-GAAP net income) | | $ | 1.13 | | $ | 1.07 | |
Return on average assets (non‑GAAP net income) | | | 0.94 | % | | 1.10 | % |
Return on average equity (non‑GAAP net income) | | | 8.77 | % | | 9.38 | % |
| | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | |
Per Common Share Data(1): | | | | |
| Basic net income | $ | 0.22 | | | $ | 1.43 | | |
| Fully diluted net income | 0.21 | | | 1.35 | | |
| Book value | 12.19 | | | 11.58 | | |
Tangible book value(2) | 11.77 | | | 11.14 | | |
| Performance Ratios: | | | | |
| Return on average assets | 0.17 | % | | 1.18 | % | |
| Return on average equity | 1.82 | | | 12.34 | | |
Net interest margin(3) | 2.49 | | | 3.19 | | |
Efficiency ratio(4) | 89.36 | | | 50.62 | | |
| Non‑interest income to average assets | (0.59) | | | 0.13 | | |
| Non‑interest expense to average assets | 1.61 | | | 1.62 | | |
| Loans receivable, net of fees to total deposits | 99.09 | | | 100.56 | | |
| Asset Quality Ratios: | | | | |
| Net charge‑offs (recoveries) to average loans receivable, net of fees | 0.02 | % | | 0.03 | % | |
| Nonperforming loans to loans receivable, net of fees | 0.10 | | | 0.24 | | |
| Nonperforming assets to total assets | 0.08 | | | 0.19 | | |
| Allowance for credit losses to nonperforming loans | 1,031.77 | | | 357.00 | | |
| Allowance for credit losses on loans to loans receivable, net of fees | 1.03 | | | 0.87 | | |
| Capital Ratios (Bank Only): | | | | |
| Tangible common equity | 10.12 | % | | 8.86 | % | |
| Total risk‑based capital | 13.83 | | 13.28 | |
| Common Equity Tier 1 capital | 12.80 | | 12.45 | |
| Leverage capital ratio | 10.77 | | 10.75 | |
| Other: | | | | |
| Average shareholders' equity to average total assets | 9.24 | % | | 9.53 | % | |
| Average loans receivable, net of fees to average total deposits | 96.52 | | 86.77 | |
Average common shares outstanding (1): | | | | |
| Basic | 17,723 | | | 17,431 | | |
| Diluted | 18,231 | | | 18,484 | | |
______________________
(1)Amounts for all periods include the effect of a 5-for-4 stock split declared on December 15, 2022.
(2)Non-GAAP: Tangible book value is calculated as total stockholders' equity, less goodwill and other intangible assets, divided by common shares outstanding.
(3)Net interest margin is calculated as net interest income divided by total average earning assets.
(4)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, |
| Non‑GAAP Reconciliation | | | | | |
| (Dollars in thousands, except per share data) | | 2023 | | 2022 | |
| Total stockholders' equity | | $ | 217,117 | | | $ | 202,382 | | |
| Less: goodwill and intangibles, net | | (7,585) | | | (7,790) | | |
| Tangible Common Equity | | $ | 209,532 | | | $ | 194,592 | | |
| Book value per common share | | $ | 12.19 | | $ | 11.58 | |
| Less: intangible book value per common share | | (0.42) | | | (0.44) | | |
| Tangible book value per common share | | $ | 11.77 | | $ | 11.14 | |
Results of Operations—Years Ended December 31,
20202023 and December 31,
20192022
We recorded net income of $15.5$3.8 million, or $1.10$0.21 per diluted common share, for the year ended December 31, 2020,2023, compared to net income of $15.8$25.0 million, or $1.07$1.35 per diluted common share for the year ended December 31, 2019.2022. Our 20202023 results were impacted by one-time branch closurea decrease in net interest income, primarily due to the increase in our funding costs during 2023. In addition, we completed two balance sheet repositionings where we sold $102.5 million in book value available-for-sale investment securities, which resulted in after-tax losses of $676 thousand$12.2 million. Commercial bank operating earnings (non-GAAP), which exclude these securities losses and increased provision for loan losses. Excluding the branch closure costs, we would haveother nonrecurring expense items that were recorded income of $16.0during 2023 and 2022, were $16.3 million or $1.13and $25.1 million, respectively. Diluted commercial bank operating earnings per diluted common share (non-GAAP) for the year ended December 31, 2020. Our 2019 results2023 and 2022 were impacted by additional merger-related expenses related$0.90 and $1.36, respectively.
Net interest income decreased $10.8 million to our acquisition of Colombo totaling $133 thousand. Excluding these merger-related expenses, we would have recorded income of $15.9$54.4 million or $1.07 per diluted common share, for the year ended December 31, 2019.2023, compared to $65.2 million for the year ended December 31, 2022. For the year ended December 31, 2023, we recorded a provision for credit losses of $132 thousand compared to $2.6 million for the year ended December 31, 2022. The provision for credit losses was primarily impacted by net loan growth for both 2023 and 2022. We reported noninterest income as a loss of $13.4 million for the year ended December 31, 2023, compared to noninterest income of $2.8 million for 2022, a decrease of $16.2 million, which was primarily driven by the losses recorded on the sale of available-for-sale securities totaling $15.6 million for the year ended December 31, 2023.
Noninterest expense was $36.7 million and $34.5 million for the years ended December 31, 2023 and 2022, respectively, an increase of $2.2 million, or 6%. The increase in noninterest expense was primarily a result of an increases in internet banking and software expense and FDIC insurance fees. Included in noninterest expense for the year ended December 31, 2023 was $457 thousand related to office space reductions and severance costs. Excluding these nonrecurring expenses, noninterest expense for the year ended December 31, 2023 increased $1.7 million, or 5%, year-over year.
The return on average assets for the years ended December 31, 2023 and 2022 was 0.17% and 1.18%, respectively. The return on average equity for the years ended December 31, 2023 and 2022 was 1.82% and 12.34%, respectively. The return on average assets for the years ended December 31, 2023 and 2022 based on operating earnings (a non-GAAP metric) was 0.72% and 1.18%, respectively. The return on average equity for the years ended December 31, 2023 and 2022 based on core bank operating earnings (non-GAAP) was 7.78% and 12.39%, respectively. See the above table for a reconciliation of GAAP net income to core bank operating earnings (non-GAAP).
Net interest income increased $4.6 million to $52.6 million for the year ended December 31, 2020, compared to $48.1 million for the year ended December 31, 2019, primarily as a resultTable of decreases in the costs of interest-bearing deposits. Provision for loan losses was $5.0 million for the year ended December 31, 2020, compared to $1.7 million for the same period of 2019, elevated primarily as a result of qualitative factors related to the COVID-19 pandemic. Noninterest income increased $345 thousand to $2.9 million for the year ended December 31, 2020 as compared to $2.5 million for 2019, primarily as a result of an increase in service charges on deposit accounts and income related to bank-owned life insurance. Noninterest expense was $30.8 million for the year ended December 31, 2020 compared to $28.9 million for the same period of 2019. Noninterest expense increased during 2020 primarily as a result of our planned network infrastructure upgrades, branch closure costs, and an increased in FDIC insurance (which was a result of assessment credits expiring in 2019).ContentsThe return on average assets for the year ended December 31, 2020 and 2019 was 0.91% and 1.09%, respectively. The return on average equity for the year ended December 31, 2020 and 2019 was 8.48% and 9.32%, respectively. Excluding branch closure costs and the associated taxes recorded during 2020, return on average assets and return on average equity for the year ended December 31, 2020 would have been 0.94% and 8.77%, respectively. Excluding merger-related expenses and associated taxes recorded during 2019, return on average assets and return on average equity for the year ended December 31, 2019 would have been 1.10% and 9.38%, respectively. See above table for a reconciliation of GAAP net income to operating earnings (non-GAAP).
Net Interest Income/Margin
The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2020, 2019,2023 and 2018.2022.
Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
Years Ended December 31,
2020, 20192023 and
20182022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | |
| Average
Balance | | Interest
Income/
Expense | | Average
Yield/
Rate | | Average
Balance | | Interest
Income/
Expense | | Average
Yield/
Rate | |
| Assets | | | | | | | | | | | | |
| Interest‑earning assets: | | | | | | | | | | | | |
| Loans receivable, net of fees | | | | | | | | | | | | |
| Commercial real estate | $ | 1,103,325 | | | $ | 53,356 | | | 4.84 | % | | $ | 978,983 | | | $ | 42,646 | | | 4.36 | % | |
| Commercial and industrial | 206,432 | | | 15,170 | | | 7.35 | % | | 181,540 | | | 9,820 | | | 5.41 | % | |
| Commercial construction | 154,658 | | | 10,917 | | | 7.06 | % | | 165,088 | | | 8,762 | | | 5.31 | % | |
| Consumer real estate | 358,740 | | | 17,039 | | | 4.75 | % | | 240,055 | | | 10,079 | | | 4.20 | % | |
| Warehouse facilities | 19,097 | | | 1,343 | | | 7.03 | % | | 43,268 | | | 1,612 | | | 3.73 | % | |
| Consumer nonresidential | 6,056 | | | 548 | | | 9.05 | % | | 9,143 | | | 705 | | | 7.71 | % | |
Total loans(1) | 1,848,308 | | | 98,373 | | | 5.32 | % | | 1,618,077 | | | 73,624 | | | 4.55 | % | |
| | | | | | | | | | | | |
Investment securities(2)(3) | 287,454 | | | 5,606 | | | 1.95 | % | | 352,064 | | | 6,382 | | | 1.81 | % | |
| | | | | | | | | | | | |
| Interest-bearing deposits at other financial institutions | 50,705 | | | 2,641 | | | 5.21 | % | | 74,477 | | | 685 | | | 0.92 | % | |
| Total interest‑earning assets and interest income | 2,186,467 | | | 106,620 | | | 4.88 | % | | 2,044,618 | | | 80,691 | | | 3.95 | % | |
| | | | | | | | | | | | |
| Noninterest‑earning assets: | | | | | | | | | | | | |
| Cash and due from banks | 6,168 | | | | | | | 873 | | | | | | |
| Premises and equipment, net | 1,121 | | | | | | | 1,410 | | | | | | |
| Accrued interest and other assets | 97,440 | | | | | | | 92,761 | | | | | | |
| Allowance for credit losses | (18,602) | | | | | | | (14,596) | | | | | | |
| Total assets | $ | 2,272,594 | | | | | | | $ | 2,125,066 | | | | | | |
| | | | | | | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | | | | | | | |
| Interest ‑ bearing liabilities: | | | | | | | | | | | | |
| Interest ‑ bearing deposits: | | | | | | | | | | | | |
| Interest checking | $ | 581,655 | | | $ | 16,903 | | | 2.91 | % | | $ | 724,881 | | | $ | 5,966 | | | 0.82 | % | |
| Savings and money markets | 254,721 | | | 6,102 | | | 2.40 | % | | 315,653 | | | 2,662 | | | 0.84 | % | |
| Time deposits | 349,270 | | | 12,791 | | | 3.66 | % | | 203,719 | | | 2,908 | | | 1.43 | % | |
| Wholesale deposits | 303,472 | | | 11,549 | | | 3.81 | % | | 61,478 | | | 932 | | | 1.52 | % | |
| Total interest ‑ bearing deposits | 1,489,118 | | | 47,345 | | | 3.18 | % | | 1,305,731 | | | 12,468 | | | 0.95 | % | |
| | | | | | | | | | | | |
| Other borrowed funds | 102,050 | | | 3,844 | | | 3.77 | % | | 70,299 | | | 1,939 | | | 2.76 | % | |
| Subordinated notes, net of issuance costs | 19,590 | | | 1,030 | | | 5.26 | % | | 19,535 | | | 1,031 | | | 5.28 | % | |
| Total interest‑bearing liabilities and interest expense | 1,610,758 | | | 52,219 | | | 3.24 | % | | 1,395,565 | | | 15,438 | | | 1.11 | % | |
| Noninterest‑bearing liabilities: | | | | | | | | | | | | |
| Demand deposits | 425,914 | | | | | | | 501,962 | | | | | | |
| Other liabilities | 26,013 | | | | | | | 25,059 | | | | | | |
| Common stockholders' equity | 209,909 | | | | | | | 202,480 | | | | | | |
| Total liabilities and stockholders' equity | $ | 2,272,594 | | | | | | | $ | 2,125,066 | | | | | | |
| | | | | | | | | | | | |
| Net interest income and net interest margin | | | $ | 54,401 | | | 2.49 | % | | | | $ | 65,253 | | | 3.19 | % | |
| | | | | | | | | | | | |
________________________
(1) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
| | | | | Interest | | Average | | | | | Interest | | Average | | | | | Interest | | Average | |
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | |
| | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest‑earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans(1): | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 777,545 | | $ | 35,064 | | 4.51 | % | $ | 733,465 | | $ | 35,174 | | 4.80 | % | $ | 587,060 | | $ | 27,714 | | 4.72 | % |
Commercial and industrial | | | 107,980 | | | 5,891 | | 5.46 | % | | 127,706 | | | 7,844 | | 6.14 | % | | 109,475 | | | 6,174 | | 5.64 | % |
Paycheck protection program | | | 114,344 | | | 2,993 | | 2.62 | % | | — | | | — | | 0.00 | % | | — | | | — | | 0.00 | % |
Commercial construction | | | 222,708 | | | 10,343 | | 4.64 | % | | 192,528 | | | 10,819 | | 5.62 | % | | 133,691 | | | 7,170 | | 5.36 | % |
Consumer residential | | | 178,479 | | | 7,760 | | 4.35 | % | | 125,573 | | | 6,362 | | 5.07 | % | | 113,643 | | | 5,316 | | 4.68 | % |
Consumer nonresidential | | | 15,325 | | | 1,159 | | 7.56 | % | | 26,446 | | | 1,983 | | 7.50 | % | | 28,014 | | | 1,842 | | 6.58 | % |
Total loans(1) | | | 1,416,381 | | | 63,210 | | 4.46 | % | | 1,205,718 | | | 62,182 | | 5.16 | % | | 971,883 | | | 48,216 | | 4.96 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities(2) | | | 120,074 | | | 3,185 | | 2.65 | % | | 137,263 | | | 3,550 | | 2.59 | % | | 124,510 | | | 2,843 | | 2.28 | % |
Loans held for sale, at fair value | | | 3,431 | | | 236 | | 6.87 | % | | — | | | — | | 0.00 | % | | — | | | — | | 0.00 | % |
Restricted stock | | | 6,331 | | | 342 | | 5.41 | % | | 5,488 | | | 321 | | 5.86 | % | | 4,211 | | | 291 | | 6.92 | % |
Deposits at other financial institutions and federal funds sold | | | 60,587 | | | 153 | | 0.25 | % | | 34,104 | | | 705 | | 2.07 | % | | 34,193 | | | 599 | | 1.75 | % |
Total interest‑earning assets and interest income | | | 1,606,804 | | | 67,126 | | 4.18 | % | | 1,382,573 | | | 66,758 | | 4.83 | % | | 1,134,797 | | | 51,949 | | 4.58 | % |
Noninterest‑earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | | 17,252 | | | | | | | | 8,606 | | | | | | | | 2,683 | | | | | | |
Premises and equipment, net | | | 1,880 | | | | | | | | 2,134 | | | | | | | | 1,555 | | | | | | |
Accrued interest and other assets | | | 95,346 | | | | | | | | 66,157 | | | | | | | | 28,480 | | | | | | |
Allowance for loan losses | | | (12,420) | | | | | | | | (9,701) | | | | | | | | (8,266) | | | | | | |
Total assets | | $ | 1,708,862 | | | | | | | $ | 1,449,769 | | | | | | | $ | 1,159,249 | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest ‑ bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest ‑ bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest checking | ��� | $ | 363,408 | | $ | 2,839 | | 0.78 | % | $ | 309,938 | | $ | 4,287 | | 1.38 | % | $ | 182,532 | | $ | 2,150 | | 1.18 | % |
Savings and money markets | | | 264,987 | | | 1,819 | | 0.69 | % | | 252,028 | | | 3,644 | | 1.45 | % | | 258,462 | | | 2,680 | | 1.04 | % |
Time deposits | | | 317,850 | | | 6,447 | | 2.03 | % | | 316,201 | | | 7,080 | | 2.24 | % | | 265,038 | | | 4,258 | | 1.61 | % |
Wholesale deposits | | | 100,885 | | | 1,228 | | 1.22 | % | | 74,715 | | | 1,819 | | 2.43 | % | | 77,466 | | | 1,266 | | 1.63 | % |
Total interest ‑ bearing deposits | | | 1,047,130 | | | 12,333 | | 1.18 | % | | 952,882 | | | 16,830 | | 1.77 | % | | 783,498 | | | 10,354 | | 1.32 | % |
Other borrowed funds | | | 57,915 | | | 2,150 | | 3.71 | % | | 36,680 | | | 1,841 | | 5.02 | % | | 32,730 | | | 1,756 | | 5.37 | % |
Total interest‑bearing liabilities and interest expense | | | 1,105,045 | | | 14,483 | | 1.31 | % | | 989,562 | | | 18,671 | | 1.89 | % | | 816,228 | | | 12,110 | | 1.48 | % |
Noninterest‑bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 390,672 | | | | | | | | 270,397 | | | | | | | | 222,972 | | | | | | |
Other liabilities | | | 30,327 | | | | | | | | 19,996 | | | | | | | | 3,057 | | | | | | |
Common stockholders’ equity | | | 182,818 | | | | | | | | 169,814 | | | | | | | | 116,992 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,708,862 | | | | | | | $ | 1,449,769 | | | | | | | $ | 1,159,249 | | | | | | |
Net interest income and net interest margin | | | | | $ | 52,643 | | 3.28 | % | | | | $ | 48,087 | | 3.48 | % | | | | $ | 39,839 | | 3.51 | % |
(1) | Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the years presented. |
(2) | The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 21% for 2020, 22.5% for 2019, and 21% for 2018. |
(2)The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22% for 2023 and 21% for 2022.
(3)The average balances for investment securities includes restricted stock.
The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. See “Quantitative and Qualitative Disclosures About Market Risk” below for further information. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities.liabilities for the years ended December 31, 2023 and 2022.
Years Ended December 31,
2020, 20192023 and
20182022
| | | | | | | | | | | | | | | | | | | | |
| 2023 Compared to 2022 | |
| Average Volume | | Average
Rate | | Increase
(Decrease) | |
| Interest income: | | | | | | |
| Loans(1): | | | | | | |
| Commercial real estate | $ | 5,417 | | | $ | 5,293 | | | $ | 10,710 | | |
| Commercial and industrial | 1,346 | | | 4,004 | | | 5,350 | | |
| | | | | | |
| Commercial construction | (554) | | | 2,709 | | | 2,155 | | |
| Consumer residential | 4,983 | | | 1,977 | | | 6,960 | | |
| Warehouse facilities | (901) | | | 632 | | | (269) | | |
| Consumer nonresidential | (238) | | | 81 | | | (157) | | |
Total loans(1) | 10,053 | | | 14,696 | | | 24,749 | | |
| | | | | | |
Investment securities(2) | (1,171) | | | 395 | | | (776) | | |
| | | | | | |
| Deposits at other financial institutions and federal funds sold | (219) | | | 2,175 | | | 1,956 | | |
| | | | | | |
| Total interest income | 8,663 | | | 17,266 | | | 25,929 | | |
| | | | | | |
| Interest expense: | | | | | | |
| | | | | | |
| Interest - bearing deposits: | | | | | | |
| Interest checking | (1,179) | | | 12,116 | | | 10,937 | | |
| Savings and money markets | (514) | | | 3,954 | | | 3,440 | | |
| Time deposits | 2,078 | | | 7,805 | | | 9,883 | | |
| Wholesale deposits | 3,669 | | | 6,948 | | | 10,617 | | |
| Total interest - bearing deposits | 4,054 | | | 30,823 | | | 34,877 | | |
| | | | | | |
| Other borrowed funds | 876 | | | 1,029 | | | 1,905 | | |
| Subordinated notes, net of issuance costs | 3 | | | (4) | | | (1) | | |
| Total interest expense | 4,933 | | | 31,848 | | | 36,781 | | |
| | | | | | |
| Net interest income | $ | 3,730 | | | $ | (14,582) | | | $ | (10,852) | | |
_________________________
(1) | | | | | | | | | | | | | | | | | | |
| | 2020 Compared to 2019 | | 2019 Compared to 2018 |
| | Average | | Average | | Increase | | Average | | Average | | Increase |
| | Volume(3) | | Rate | | (Decrease) | | Volume(3) | | Rate | | (Decrease) |
Interest income: | | | | | | | | | | | | | | | | | | |
Loans(1): | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 2,114 | | $ | (2,224) | | $ | (110) | | $ | 6,912 | | $ | 548 | | $ | 7,460 |
Commercial and industrial | | | (1,212) | | | (741) | | | (1,953) | | | 1,028 | | | 642 | | | 1,670 |
Paycheck protection program | | | 2,993 | | | — | | | 2,993 | | | — | | | — | | | — |
Commercial construction | | | 1,696 | | | (2,172) | | | (476) | | | 3,155 | | | 494 | | | 3,649 |
Consumer residential | | | 2,680 | | | (1,282) | | | 1,398 | | | 558 | | | 488 | | | 1,046 |
Consumer nonresidential | | | (834) | | | 10 | | | (824) | | | (103) | | | 244 | | | 141 |
Total loans(1) | | | 7,437 | | | (6,409) | | | 1,028 | | | 11,550 | | | 2,416 | | | 13,966 |
| | | | | | | | | | | | | | | | | | |
Investment securities(2) | | | (445) | | | 80 | | | (365) | | | 287 | | | 420 | | | 707 |
Loans held for sale, at fair value | | | — | | | 236 | | | 236 | | | — | | | — | | | — |
Restricted stock | | | 49 | | | (28) | | | 21 | | | 88 | | | (58) | | | 30 |
Deposits at other financial institutions and federal funds sold | | | 547 | | | (1,099) | | | (552) | | | (2) | | | 108 | | | 106 |
| | | | | | | | | | | | | | | | | | |
Total interest income | | | 7,588 | | | (7,220) | | | 368 | | | 11,923 | | | 2,886 | | | 14,809 |
| | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Interest - bearing deposits: | | | | | | | | | | | | | | | | | | |
Interest checking | | | 740 | | | (2,188) | | | (1,448) | | | 1,501 | | | 636 | | | 2,137 |
Savings and money markets | | | 187 | | | (2,012) | | | (1,825) | | | (67) | | | 1,031 | | | 964 |
Time deposits | | | 37 | | | (670) | | | (633) | | | 822 | | | 2,000 | | | 2,822 |
Wholesale deposits | | | 637 | | | (1,228) | | | (591) | | | (45) | | | 598 | | | 553 |
Total interest - bearing deposits | | | 1,601 | | | (6,098) | | | (4,497) | | | 2,211 | | | 4,265 | | | 6,476 |
| | | | | | | | | | | | | | | | | | |
Other borrowed funds | | | 1,066 | | | (757) | | | 309 | | | 212 | | | (127) | | | 85 |
Total interest expense | | | 2,667 | | | (6,855) | | | (4,188) | | | 2,423 | | | 4,138 | | | 6,561 |
| | | | | | | | | | | | | | | | | | |
Net interest income | | $ | 4,921 | | $ | (365) | | $ | 4,556 | | $ | 9,500 | | $ | (1,252) | | $ | 8,248 |
(2)The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 22% for 2023 and 21% for 2022.
(1) | Non-accrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the years presented. |
(2) | The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 21% for 2020, 22.5% for 2019, and 21% for 2018. |
(3) | Changes attributable to rate/volume have been allocated to volume. |
Net interest income, on a tax equivalent basis, is a financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our federal and state statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.
Supplemental Financial Data and Reconciliations to GAAP Financial Measures
Years Ended December 31,
2020, 2019,2023 and
20182022
(Dollars in thousands)
| | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
GAAP Financial Measurements: | | | | | | | | | | |
Interest income: | | | | | | | | | | |
Loans | | $ | 63,446 | | $ | 62,182 | | $ | 48,216 | |
Deposits at other financial institutions and federal funds sold | | | 153 | | | 705 | | | 599 | |
Investment securities available‑for‑sale | | | 3,156 | | | 3,496 | | | 2,767 | |
Investment securities held‑to‑maturity | | | 6 | | | 30 | | | 51 | |
Restricted stock | | | 342 | | | 321 | | | 291 | |
Total interest income | | | 67,103 | | | 66,734 | | | 51,924 | |
Interest expense: | | | | | | | | | | |
Interest‑bearing deposits | | | 12,333 | | | 16,830 | | | 10,354 | |
Other borrowed funds | | | 2,150 | | | 1,841 | | | 1,756 | |
Total interest expense | | | 14,483 | | | 18,671 | | | 12,110 | |
Net interest income | | $ | 52,620 | | $ | 48,063 | | $ | 39,814 | |
Non‑GAAP Financial Measurements: | | | | | | | | | | |
Add: Tax benefit on tax‑exempt interest income - securities | | | 23 | | | 24 | | | 25 | |
Total tax benefit on interest income | | $ | 23 | | $ | 24 | | $ | 25 | |
Tax equivalent net interest income | | $ | 52,643 | | $ | 48,087 | | $ | 39,839 | |
Net interest margin on a tax-equivalent basis | | | 3.28 | % | | 3.48 | % | | 3.51 | % |
| | | | | | | | | | | | | | |
| 2023 | | 2022 | |
| GAAP Financial Measurements: | | | | |
| Interest income: | | | | |
| Loans | $ | 98,373 | | | $ | 73,624 | | |
| Deposits at other financial institutions and federal funds sold | 2,641 | | | 685 | | |
| Investment securities available‑for‑sale | 4,949 | | | 5,959 | | |
| Investment securities held‑to‑maturity | 6 | | | 6 | | |
| Dividend on Restricted stock | 646 | | | 408 | | |
| Total interest income | 106,615 | | | 80,682 | | |
| Interest expense: | | | | |
| Interest‑bearing deposits | 47,345 | | | 12,468 | | |
| Other borrowed funds | 4,874 | | | 2,970 | | |
| Total interest expense | 52,219 | | | 15,438 | | |
| Net interest income | $ | 54,396 | | | $ | 65,244 | | |
| Non‑GAAP Financial Measurements: | | | | |
| Add: Tax benefit on tax‑exempt interest income - securities | 5 | | | 9 | | |
| Total tax benefit on interest income | $ | 5 | | | $ | 9 | | |
| Tax equivalent net interest income | $ | 54,401 | | | $ | 65,253 | | |
| Net interest margin on a tax-equivalent basis | 2.49 | % | | 3.19 | % | |
Net interest income for the year ended December 31,
20202023 was
$52.6$54.4 million on a fully taxable-equivalent basis, compared to
$48.1$65.3 million for the year ended December 31,
2019, an increase2022, a decrease of
$4.6$10.9 million, or
9.5%17%. The
increasedecrease in net interest income
wasis primarily
due to an increase in funding costs, which have increased precipitously as a result of
Federal Reserve monetary policy, coupled with the need to meet intense competition from market area banks, brokerages, other financial institutions and the U.S. Treasury. We have been disciplined in our approach to rising interest rates, which has resulted in a
decreasecycle-to-date beta (calculated comparing the change in
the costdeposit interest rates from March 31, 2022 to December 31, 2023, including non-interest bearing deposits and excluding wholesale deposits) of
interest-bearing deposits, reflecting our efforts to decrease deposit rates in light of the current rate environment. During March 2020, in response to market conditions as the economy was impacted by COVID-19, the Federal Open Market Committee ofapproximately 42% since the Federal Reserve
reducedenacted its
targeted fed funds rate an unprecedented 150 basis points. We responded quickly by reducing deposit rates substantially to offsetcontractionary monetary policy through the
repricingincrease of
the variable rate portion of our loan portfolio. We continue to reviewshort-term interest rates
on deposits and other borrowed funds and reduce rates where possible.to combat inflation.
Our net interest margin, on a tax equivalent basis, for the years ended December 31,
20202023 and
20192022 was
3.28%2.49% and
3.48%3.19%, respectively. The decrease in our net interest margin was primarily a result of the
decreasedpreviously mentioned increased rate environment during
2020, decreasing the yields on interest-earning assets, offset by the decrease in the2023, as our cost of
funds increased more than our
interest-bearing liabilities.yield on earning assets during the year. The yield on interest-earning assets decreased 65increased 93 basis points to 4.18%4.88% for the year ended December 31, 2020,2023, compared to 4.83%3.95% for the same period of 2019,2022, a result of the decreasedincreased rate environment during 2020. In addition, our origination of PPP loans during 2020, which earn an interest rate of 1% plus net deferred fees, reduced net interest margin by 5 basis points along with excess liquidity, which reduced net interest margin an additional 5 basis points, for 2020.2023. Offsetting this decreasethe increase in yields on earning assets was a 58213 basis point decreaseincrease in the cost of interest-bearing liabilities, reflectingwhich was primarily attributable to the decreases inrepricing of our interest-bearing deposits to higher interest rates we madeduring 2023. Cost of deposits (which includes noninterest-bearing deposits) was 2.47% for the year ended December 31, 2023 compared to help offset0.69% for the decreased yields on our earning assets during 2020.
same period of 2022. Cost of other borrowed funds increased 101 basis points to 3.77% for the year ended December 31, 2023 compared to 2.76% for the year ended December 31, 2022.
Average interest-earning assets increased by 16.2%7% to $1.61$2.19 billion at December 31, 20202023 compared to $1.38$2.04 billion at December 31, 2019,2022, which resulted in an increase in total interest income on a tax equivalent basis of $368 thousand,$25.9 million, to $67.1$106.6 million for the year ended December 31, 20202023 compared to $66.8$80.7 million for the year ended December 31, 2019. While2022. Both average volume increased during 2020, contributing $7.6 million in additional interest income, the decreases in averageand rate significantly impacted interest income earned, decreasingduring 2023, with volume contributing an additional $8.7 million in interest income by $7.2 million.and rate contributing an additional $17.3 million in interest income when compared to the prior year.
Average loans receivable increased $230.2 million to $1.85 billion for the year ended December 31, 2023, compared to $1.62 billion for the year ended December 31, 2022. The yield on average loans increased 77 basis points to 5.32% for the year ended December 31, 2023. The increase in our earning assets was primarily driven by anaverage rate of loans receivable contributed $14.7 million to interest income while the increase in average loan volume of loans receivable of $210.7contributed $10.1 million which contributed to an additional $7.4 million in interest income. Over half of the increase in loan volume was attributable to PPP loan originations, which increased our 2020 average loan balances by $114.3 million, and yielded 2.62%. The increase in interest income on loans was impacted by a decrease in yields earned on the loan portfolio, which decreased interest income $6.4 million. Average 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 20202023 and 2019.2022.Total average interest-bearing deposits increased $94.2
Average investment securities decreased $64.6 million to
$1.05 billion at$287.5 million for the year ended December 31,
20202023, compared to
$952.9$352.1 million
atfor the year ended December 31,
2019. Average noninterest-bearing deposits increased $120.3 million, or 44.5% to $390.7 million at December 31, 2020, compared to $270.4 million at December 31, 2019.2022. The
increase in total deposits, and specifically noninterest-bearing deposits, reflects a combination of new customer relationships (primarily from PPP originations) and as well as growthdecrease in average
deposit balances from existing customers. The largest increase in average interest-bearing deposit balancesinvestment securities was
in our interest checking accounts, which increased $53.5 million compared to 2019. Average time deposits increased $1.6 million to $317.9 million as of December 31, 2020 compared to $316.2 million at December 31, 2019, as customers now prefer short-term deposit options such as interest checking accounts asprimarily a result of
repositioning the
low interest rate environment. Average wholesale depositsinvestment portfolio with the sale of $102.5 million in book value available-for-sale investment securities during 2023. The yield on average investment securities increased
$26.2 million to $100.9 million as of December 31, 2020 compared to $74.7 million as of December 31, 2019, as this became a cheaper source of funding for the Bank during 2020. This change in the mix of our interest-bearing liabilities, in addition to the action taken by the Bank to reduce deposit rates during 2020, have contributed to the decrease in our cost of interest-bearing deposits to 1.18% in 2020 from 1.77% in 2019.The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes used to help fund our balance sheet growth, decreased 13114 basis points to 3.71% in 2020 from 5.02% in 2019. The decrease in1.95% for the cost of other borrowed funds was a result of FHLB advances recorded during 2020 with an average rate of 1.15%. The average volume of other borrowed funds increased $21.2 million during 2020 to $57.9 million from $36.7 million in 2019,year ended December 31, 2023, primarily as a result of the subordinated debt we issuedsale of lower yielding securities relative to the average yield of the securities portfolio.
Average interest-earning deposits at other financial institutions, consisting primarily of excess cash reserves maintained at the Federal Reserve, decreased $23.8 million to $50.7 million for the year ended December 31, 2023, compared to $74.5 million for the year ended December 31, 2022. The decrease in average interest-earning deposits at other financial institutions was primarily a result of our deployment of excess liquidity during 2023 to reduce the fourth quarterBank's reliance on wholesale funding. The yield on average interest-earning deposits increased 429 basis points to 5.21% for the year ended December 31, 2023.
Total average interest-bearing liabilities increased $215.2 million to $1.61 billion at December 31, 2023 compared to $1.40 billion at December 31, 2022, which resulted in an increase in interest expense of 2020$36.8 million to $52.2 million for the year ended December 31, 2023 compared to $15.4 million for the year ended December 31, 2022. Average rate significantly impacted interest expense during 2023, as average volume only contributed an additional $4.9 million in interest expense while average rate increases contributed an additional $31.9 million in interest expense compared to the prior year.
Total average interest-bearing deposits increased $183.4 million to $1.49 billion at
December 31, 2023 compared to $1.31 billion at December 31, 2022, which resulted in an increase in interest expense on deposits of $34.9 million to $47.3 million for the year ended December 31, 2023 compared to $12.5 million for the year ended December 31, 2022. Average noninterest-bearing deposits decreased $76.0 million, or 15%, to $425.9 million at December 31, 2023, compared to $502.0 million at December 31, 2022. During 2023, competition for deposits along with higher interest rates resulted in customers' movement of excess funds from noninterest-bearing into interest-bearing deposit products. Average interest checking deposits decreased $143.2 million to $581.7 million as of December 31, 2023 compared to $724.9 million as of December 31, 2022. Average time deposits increased $145.6 million to $349.3 million as of December 31, 2023 compared to $203.7 million at December 31, 2022, as customers preferred to fix a
rateportion of
4.88%.their funds at higher interest rates. Average wholesale deposits increased $242.0 million to $303.5 million as of December 31, 2023 compared to $61.5 million as of December 31, 2022.
Average other borrowed funds increased $31.8 million to $102.1 million for the year ended December 31, 2023, compared to $70.3 million for the year ended December 31, 2022. Interest expense on other borrowed funds increased $1.9 million for the year ended December 31, 2023 to $3.8 million compared to $1.9 million for the same period of 2022.
Provision Expense and Allowance for
LoanCredit Losses
Our policy is to maintain the allowance for loan lossesACL at a level that represents our best estimate of inherentexpected losses in the loan portfolio.portfolio as of the valuation date. Both the amount of the provision and the level of the allowance for loancredit losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. We are not required to implement the provisionsadopted CECL as of CECL until January 1, 2023 in accordance with the required implementation date and recorded the impact of the adoption to retained earnings, net of deferred income
taxes, as required by the standard. Note that prior to the adoption of CECL, we are continuingutilized an incurred loss model to accountderive our best estimate of the ACL.
As a result of the adoption of CECL, reserves for
credit losses increased $3.7 million and consisted of increases to the allowance for
credit losses
underon loans as well as an increase in reserves for unfunded commitments (referred to as combined ACL herein). For the
incurred loss model.Weyear ended December 31, 2023, subsequent to the aforementioned adoption, we recorded a provision for loancredit losses of $5.0$132 thousand for the year ended December 31, 2023 compared to $2.6 million for the year ended December 31, 2020 compared to a provision for loan losses of $1.7 million for the same period of 2019.2022. The allowance for loancredit losses at December 31, 20202023 was $15.0$18.9 million compared to $10.2$16.0 million at December 31, 2019.2022. Our allowance for loancredit loss ratio as a percent of total loans, net of deferred fees and costs, for December 31, 20202023 and 20192022 was 1.02%1.03% and 0.81%1.02%, respectively. The increased provision for loan losses
We lend to well-established and relationship-driven borrowers which has contributed to our track record of low historical credit losses. We continue to maintain our disciplined credit guidelines during
2020 as compared to 2019 primarily reflects changes in certain qualitative factors as a resultthe current rate environment. We proactively monitor the impact of
the local economic conditions resulting from the ongoing COVID-19 pandemic, in addition to a slight increase in loan origination volume during 2020, excluding PPP loans. In addition, we evaluatedinterest rates on our
exposure to certain credit risks within industry segments in our loan portfolio that are most impacted by the pandemic and for those loans that have deferred payments. Industry subgroups such as retail, hotels, churches, and other commercial real estate loans were isolated within our allowance model, in addition to those loans deferring payments, and qualitative factors were adjusted to increase reserves for theseadjustable loans as
a resultthe industry navigates through this economic cycle of
their risk profiles. Specific reserves increased
$1.7 million to $2.1 millioninflation and higher interest rates. Credit quality metrics improved for the year ended December 31,
2020,2023 as nonperforming loans and loans 90 days or more past due totaled $1.8 million, or 0.08% of total assets, compared to
$393 thousand$4.5 million, or 0.19%, of total assets at December 31,
2019,2022. Watchlist credits increased to $28.8 million at December 31, 2023, an increase of $14.3 million from December 31, 2022, as
a resultwe proactively manage the credit quality of
our loan portfolio, including reducing our commercial real estate concentrations, which has resulted in limited credit losses over our history. We had no other real estate owned at December 31, 2023. We recorded net charge-offs of $375 thousand during the
impairment analysis completedyear ended December 31, 2023 and net charge-offs of $418 thousand for
impaired loans during 2020.same period of 2022.
See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.
The following table provides detail for non-interest income for the years ended December 31,
20202023 and
2019.Non-Interest2022.
Years Ended December 31,
20202023 and
20192022
(Dollars in thousands)
| | | | | | |
| | 2020 | | 2019 |
Service charges on deposit accounts | | $ | 1,008 | | $ | 890 |
Fees on loans | | | 511 | | | 582 |
Gain on sale of securities available‑for‑sale | | | 141 | | | — |
Gain on calls of securities held‑to‑maturity | | | — | | | 3 |
Loss on loans held for sale | | | (451) | | | (145) |
BOLI income | | | 1,109 | | | 662 |
Other fee income | | | 573 | | | 554 |
Total non‑interest income | | $ | 2,891 | | $ | 2,546 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Change from Prior Year |
| 2023 | | 2022 | | Amount | | Percent |
| Service charges on deposit accounts | $ | 1,028 | | | $ | 954 | | | $ | 74 | | | 7.8 | % |
| Fees on loans | 388 | | | 232 | | | 156 | | | 67.2 | % |
| | | | | | | |
| | | | | | | |
| BOLI income | 1,452 | | | 1,200 | | | 252 | | | 21.0 | % |
| (Loss) income from minority membership interest | (1,110) | | | (33) | | | (1,077) | | | 3263.6 | % |
| Loss on sale of available-for-sale securities | (15,577) | | | — | | | (15,577) | | | — | % |
| Other fee income | 449 | | | 481 | | | (32) | | | (6.7) | % |
| Total non‑interest income (loss) | $ | (13,370) | | | $ | 2,834 | | | $ | (16,204) | | | (571.8) | % |
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. Noninterest income was recorded as a loss for the yearsyear ended December 31, 2020 and 2019 was $2.92023 totaling $13.4 million and $2.5compared to income of $2.8 million respectively. for same period in 2022. During 2023, we recorded $15.6 million in losses for the sale of $102.5 million in book value available-for-sale investment securities. We also recorded a loss from minority membership interest, primarily from our investment in ACM, totaling $1.1 million for the year ended December 31, 2023, compared a loss of $33 thousand for the year ended December 31, 2022.
Fee income from serviceloans was $388 thousand for the year ended December 31, 2023, compared to $232 thousand for the same period of 2022. Service charges on deposits and other fee income was $1.6$1.5 million for the year ended December 31, 2020, an increase of 9.7%, as2023, compared to $1.4 million for the same period of 2019, primarily a result of an increase in customer deposit relationships over the past year.2022. Loan swap fees for the yearsyear ended December 31, 2020 and 2019 were $3782023 totaled $187 thousand and $449 thousand, respectively.compared to none for the same period of December 31, 2022. Income from BOLI increased 67.5%21% to $1.1$1.5 million for the year ended December 31, 20202023 as compared to the year ended December 31, 2019, primarily as a result of purchases of additional policies during 2019 totaling $20.0 million. Noninterest income$1.2 million for the year ended December 31, 2020 included gains on the sale of securities available-for-sale totaling $141 thousand. These securities were sold as they had larger premiums susceptible to prepayment risk, decreasing future interest income. There were no gains on security sales during 2019. Noninterest income for 2020 and 2019 were impacted by losses on loans held for sale totaling $451 thousand and $145 thousand, respectively. Loans held for sale were comprised of consumer unsecured loans which were transferred to held for sale at the end of 2019. On April 1, 2020, we transferred these loans back to held for investment at the lower of cost or market as the market for these types of loans receded2022, primarily due to market volatility as a resultthe purchase of $15 million in additional BOLI during the COVID-19 pandemic.second quarter of 2022.
The following table reflects the components of
non-interestnoninterest expense for the years ended December 31,
20202023 and
2019.Non-Interest2022.
Years Ended December 31,
20202023 and
20192022
(Dollars in thousands)
| | | | | | |
| | 2020 | | 2019 |
Salaries and employee benefits | | $ | 16,815 | | $ | 17,047 |
Occupancy and equipment expense | | | 3,329 | | | 3,400 |
Data processing and network administration | | | 2,028 | | | 1,638 |
State franchise taxes | | | 1,864 | | | 1,696 |
Audit, legal and consulting fees | | | 986 | | | 826 |
Merger and acquisition expense | | | — | | | 133 |
Loan related expenses | | | 1,087 | | | 476 |
FDIC insurance | | | 748 | | | 244 |
Marketing, business development and advertising | | | 222 | | | 396 |
Director fees | | | 554 | | | 532 |
Postage, courier and telephone | | | 178 | | | 195 |
Internet banking | | | 517 | | | 439 |
Dues, memberships & publications | | | 131 | | | 165 |
Bank insurance | | | 373 | | | 356 |
Printing and supplies | | | 149 | | | 145 |
Bank charges | | | 72 | | | 143 |
State assessments | | | 209 | | | 164 |
Core deposit intangible amortization | | | 345 | | | 385 |
Impairment on branch closures | | | 676 | | | — |
Other operating expenses | | | 555 | | | 497 |
Total non‑interest expense | | $ | 30,838 | | $ | 28,877 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Change from Prior Year |
| 2023 | | 2022 | | Amount | | Percent |
| Salaries and employee benefits | $ | 20,643 | | | $ | 20,316 | | | $ | 327 | | | 1.6 | % |
| Occupancy expense | 2,357 | | | 2,190 | | | 167 | | | 7.6 | % |
| Internet banking and software expense | 2,505 | | | 1,707 | | | 798 | | | 46.8 | % |
| Data processing and network administration | 2,468 | | | 2,303 | | | 165 | | | 7.2 | % |
| State franchise taxes | 2,338 | | | 2,036 | | | 302 | | | 14.8 | % |
| Audit, legal and consulting fees | 858 | | | 1,210 | | | (352) | | | (29.1) | % |
| Merger and acquisition expense | — | | | 125 | | | (125) | | | (100.0) | % |
| Loan related expenses | (10) | | | 555 | | | (565) | | | (101.8) | % |
| FDIC insurance | 1,433 | | | 620 | | | 813 | | | 131.1 | % |
| Marketing, business development and advertising | 724 | | | 483 | | | 241 | | | 49.9 | % |
| Director fees | 660 | | | 668 | | | (8) | | | (1.2) | % |
| Postage, courier and telephone | 185 | | | 181 | | | 4 | | | 2.2 | % |
| Dues, memberships & publications | 253 | | | 194 | | | 59 | | | 30.4 | % |
| Bank insurance | 449 | | | 453 | | | (4) | | | (0.9) | % |
| Printing and supplies | 148 | | | 147 | | | 1 | | | 0.7 | % |
| Bank charges | 98 | | | 90 | | | 8 | | | 8.9 | % |
| State assessments | 210 | | | 161 | | | 49 | | | 30.4 | % |
| Office space reduction costs | 273 | | | — | | | 273 | | | 100.0 | % |
| Core deposit intangible amortization | 205 | | | 262 | | | (57) | | | (21.8) | % |
| | | | | | | |
| Tax credit amortization | 126 | | | 126 | | | — | | | — | % |
| Other operating expenses | 739 | | | 633 | | | 106 | | | 16.7 | % |
| Total non‑interest expense | $ | 36,662 | | | $ | 34,460 | | | $ | 2,202 | | | 6.4 | % |
Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was
$30.8$36.7 million and
$28.9$34.5 million for the years ended December 31,
20202023 and
2019, respectively.2022.
During the third quarter of 2020, we closed two branch office locations. Because of the COVID-19 pandemic, more clients have transitioned to our electronic banking products, reducing the need to have physical branch locations to serve our customers. The right-of-use assets and leasehold improvements written off as a result of closing these locations totaled $676 thousand. Annual costs savings for the closure of these locations related to occupancy expense is expected to be approximately $350 thousand, of which, we began to see a portion of those cost savings during the fourth quarter of 2020, which contributed to the decrease in occupancy expense year-over-year. Other savings of approximately $250 thousand include salariesSalaries and benefits expense as the employees for each of these locations filled other vacant positions with the Bank, reducing the need to hire additional personnel.Data processing and network administration expense increased $390$327 thousand to $2.0$20.6 million for the year ended December 31, 2020 as2023 compared to $1.6$20.3 million for the year ended December 31, 2019, assame period in 2022, which was primarily related to a result of planned upgrades to our network infrastructure. Loan related expenses for the year ended December 31, 2020 totaled $1.1 million, an increase of $611 thousand as compared to the year ended December 31, 2019, primarily as a result of legal expenses incurred to resolve several problem loans during 2020. Lastly, FDIC insurancedecrease in salaries deferred associated with loan origination activity. Internet banking and software expense increased $504 to $748$798 thousand for the year ended December 31, 2020 as2023 to $2.5 million, compared to 2019,$1.7 million for the same period in 2022, primarily as a result of the implementation of enhanced customer software solutions. FDIC insurance premium expense increased $813 thousand for the year ended December 31, 2023 compared to the same period in 2022, a result of the FDIC increasing the assessment creditsrate to replenish its deposit insurance fund. Marketing expenses increased $241 thousand to $724 thousand for the year ended December 31, 2023 compared to the same period in 2022, which was primarily related to expenses associated with low cost deposit gathering and branding efforts. Audit, legal and consulting fees decreased $352 thousand to $858 thousand for the year ended December 31, 2023 as compared to the same period of 2022, primarily as a result of expense management. Lastly, loan related expenses decreased $565 thousand during 2023 compared to the prior year, as we received bya recovery of legal expenses in 2023 associated with a previous watchlist credit.
During the Bank expiring during 2019.
fourth quarter of 2023, we reduced our future occupancy expense through a reduction in office space. We wrote-off two leases totaling $273 thousand to reduce excess office space and to consolidate two branch locations in
Montgomery County, Maryland. We also reduced staffing which resulted in severance costs of $184 thousand for the year ended December 31, 2023. These initiatives reduce operating expenses in 2024 by over $1.0 million.
We recorded a provision for income tax expense of $4.2 million$410 thousand for each of the yearsyear ended December 31, 2020 and 2019.2023, compared to $6.0 million for the year ended December 31, 2022. Our effective tax rate for December 31, 20202023 was 21.1%9.7%, compared to 20.9%19.4% for 2019.2022. Our effective tax raterates for 2019 is2023 and 2022 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.the aforementioned periods.
DisDiscussioncussion and Analysis of Financial Condition
At December 31,
2020,2023, total assets were
$1.82$2.2 billion,
an increasea decrease of
18.5%7%, or
$284.2$153.8 million, from
$1.54$2.34 billion at December 31,
2019.2022. Total loans receivable, net of deferred fees and costs,
increased 15.4%decreased 1%, or
$195.6$11.9 million, to
$1.47$1.83 billion at December 31,
2020,2023, from
$1.27$1.84 billion at December 31,
2019.2022. Total investment securities decreased by
$15.2$106.5 million, or
10.7%38%, to
$126.4$171.9 million at December 31,
2020,2023, from
$141.6$278.3 million at December 31,
2019.2022. Total deposits increased
19.2%1%, or
$246.8$15.1 million, to
$1.53$1.85 billion at December 31,
2020,2023, from
$1.29$1.83 billion at December 31,
2019.2022. 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.
For December 31, 2023, we had no federal funds purchased compared to $30 million at December 31, 2022. The Bank had FHLB advances outstanding of
$25.0$85.0 million and
$15.0$235.0 million for the years ended December 31, 2023 and 2022, respectively. Subordinated debt, net of unamortized issuance costs, totaled $19.6 million at
each of December 31,
20202023 and
2019, respectively. At December 31, 2020, we had no federal funds purchased. Federal funds purchased at December 31, 2019 was $10.0 million.On October 13, 2020, we announced the completion2022.
We review our balance sheet and interest rate sensitivity on an ongoing basis as part of our private placementasset/liability risk management process. During 2023, with the expectation that short-term interest rates would continue to increase during year, we modeled various scenarios to improve balance sheet efficiency, reduce our cost of $20funds, improve margin and our capital ratios. As a result, we sold $102.5 million in book value available-for-sale investment securities. The proceeds were utilized to paydown high cost short-term FHLB advances and assist in the funding of higher yielding newly originated commercial loans through out 2023. The sale of these investment securities generated an after-tax loss of $12.2 million. These transactions were neutral to shareholders’ equity and tangible book value, as the loss recorded was already reflected in our accumulated other comprehensive loss.
Additionally, during the first quarter of 2023, we fixed $150 million of our
4.875% Fixed to Floating Subordinated Notes due 2030 (the "Notes") to certain qualified institutional buyers and accredited investors.wholesale funding through the execution of pay-fixed/receive-floating interest rate swaps. The
Notesinterest rate swaps have a weighted average rate of 3.50%, have a maturity
date of
October 15, 2030five years, and
carryare designated against a
fixed ratemix of
interestFHLB advances and brokered certificates of
4.875% fordeposits. Classified as cash flow hedges, the
first five years. Thereafter, the Notesmarket value fluctuations will
pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes. We plan to use the proceeds from the placement of the Notes for general corporate purposes, to include supporting capital ratios at the Bank, and potential repayment of a portion of the $25.0 million outstanding subordinated debt callable June 30, 2021.not impact future earnings, but will impact accumulated other comprehensive income.
Total loans receivable, net of deferred fees,
and costs, were
$1.47$1.83 billion at December 31,
2020, an increase2023, a decrease of
$195.6$11.9 million, or
15.4%1%, compared to
$1.27$1.84 billion at December 31,
2019. The increase in the loans receivable portfolio was primarily attributable to PPP loan originations, net of deferred fees, totaling $153.0 million as of December 31, 2020 assisting both existing and new customers, in addition to organic loan growth primarily in our commercial real estate and commercial construction portfolios. At December 31, 2019, we had loans held for sale totaling $11.2 million compared to none for 2020. During 2019, we reclassified our unsecured consumer loan portfolio, as the earnings stream from this segment of our loan portfolio was not as expected as a result of net charge-offs totaling $647 thousand recorded during 2019. On April 1, 2020, we transferred these loans back to held for investment at the lower of cost or market as the market for these types of loans receded due to market volatility as a result of the COVID-19 pandemic.2022.
Commercial real estate loans totaled $790.0 million$1.10 billion at each of December 31, 2020, compared to $747.7 million at2023 and December 31, 2019, an increase2022, comprising 60% of $42.4 million, or 5.7%.total loans for each period. Owner-occupied commercial real estate loans were $182.9$212.4 million at December 31, 20202023 compared to $205.9$206.8 million at December 31, 2019.2022. Nonowner-occupied commercial real estate loans were $607.5$879.3 million at December 31, 20202023 compared to $547.8$893.2 million at December 31, 2019. Construction2022. Commercial construction loans totaled $222.3$148.0 million at December 31, 2020, or 15.1%2023, compared to $147.3 million at December 31, 2022 and comprised 8% of total loans receivable. Of the $222.3$148.0 million in construction loans $38.8at December 31, 2023, $26.3 million are collateralized by land and thereonly $1.4 million are no lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio). Our regulatory commercial real estate concentration (which includes nonowner-occupied real estate and construction loans) was 399% of our total risk based capital at December 31, 2023. 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 concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices.
The following table presents the composition of our
Commercial and industrial loans receivable portfolioincreased $1.5 million to $216.4 million at each of the five years ended December 31, 2020.
Loans Receivable
At2023, from $214.9 million at December 31, 2020, 2019, 2018, 2017 and 2016
(Dollars2022. Consumer residential loans increased $32.7 million to $363.3 million at December 31, 2023, from $330.6 million at December 31, 2022. The increase in thousands)
residential loans was primarily a result of purchasing ACM construction-to-permanent mortgages originated during 2022, a portfolio product offered by the Bank which met our underwriting criteria.
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
Commercial real estate | | $ | 790,025 | | 53.69 | % | $ | 747,675 | | 58.74 | % | $ | 683,602 | | 60.07 | % |
Commercial and industrial | | | 119,529 | | 8.12 | % | | 115,103 | | 9.04 | % | | 137,328 | | 12.07 | % |
Paycheck protection program | | | 155,805 | | 10.59 | % | | — | | — | % | | — | | — | % |
Commercial construction | | | 222,319 | | 15.11 | % | | 215,983 | | 16.97 | % | | 153,339 | | 13.47 | % |
Consumer residential | | | 167,872 | | 11.41 | % | | 182,812 | | 14.36 | % | | 131,431 | | 11.55 | % |
Consumer nonresidential | | | 15,835 | | 1.08 | % | | 11,290 | | 0.89 | % | | 32,308 | | 2.84 | % |
Gross loans | | | 1,471,385 | | 100.00 | % | | 1,272,863 | | 100.00 | % | | 1,138,008 | | 100.00 | % |
Less: | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 14,958 | | | | | 10,231 | | | | | 9,159 | | | |
Unearned income and (unamortized premiums) | | | 5,302 | | | | | 2,337 | | | | | 1,265 | | | |
Loans receivable, net | | $ | 1,451,125 | | | | $ | 1,260,295 | | | | $ | 1,127,584 | | | |
| | | | | | | | | | | |
| | 2017 | | 2016 | |
Commercial real estate | | $ | 526,657 | | 59.21 | % | $ | 476,851 | | 62.08 | % |
Commercial and industrial | | | 98,150 | | 11.04 | % | | 112,061 | | 14.59 | % |
Commercial construction | | | 123,444 | | 13.88 | % | | 53,167 | | 6.92 | % |
Consumer residential | | | 108,926 | | 12.25 | % | | 106,549 | | 13.87 | % |
Consumer nonresidential | | | 32,232 | | 3.62 | % | | 19,548 | | 2.54 | % |
Gross loans | | | 889,409 | | 100.00 | % | | 768,176 | | 100.00 | % |
Less: | | | | | | | | | | | |
Allowance for loan losses | | | 7,725 | | | | | 6,452 | | | |
Unearned income and (unamortized premiums) | | | 732 | | | | | 75 | | | |
Loans receivable, net | | $ | 880,952 | | | | $ | 761,649 | | | |
The following table sets forth the repricing characteristics and sensitivity to interest rate changes to the outstanding principal balance of our loan portfolio at December 31, 2020.
2023.
Loan Maturities and Interest Rate Sensitivity
(Dollars in thousands)
| | | | | | | | | | | | |
| | One Year | | Between One | | After | | | |
| | or Less | | and Five Years | | Five Years | | Total |
Commercial real estate | | $ | 44,829 | | $ | 362,752 | | $ | 382,444 | | $ | 790,025 |
Commercial and industrial | | | 22,898 | | | 49,722 | | | 46,909 | | | 119,529 |
Paycheck protection program | | | — | | | 155,805 | | | — | | | 155,805 |
Commercial construction | | | 68,746 | | | 74,379 | | | 79,194 | | | 222,319 |
Consumer residential | | | 5,673 | | | 74,970 | | | 87,229 | | | 167,872 |
Consumer nonresidential | | | 3,840 | | | 3,785 | | | 8,210 | | | 15,835 |
Total loans receivable | | $ | 145,986 | | $ | 721,413 | | $ | 603,986 | | $ | 1,471,385 |
Fixed—rate loans | | $ | 64,504 | | $ | 512,471 | | $ | 294,833 | | $ | 871,808 |
Floating—rate loans | | | 81,482 | | | 208,942 | | | 309,153 | | | 599,577 |
| | $ | 145,986 | | $ | 721,413 | | $ | 603,986 | | $ | 1,471,385 |
*
| Payments due by period are based on the repricing characteristics and not contractual maturities.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year
or Less | | Between One
and Five Years | | Between Five and Fifteen Years | | After Fifteen Years | | Total |
| Commercial real estate | $ | 109,088 | | $ | 623,050 | | $ | 344,231 | | $ | 17,844 | | $ | 1,094,213 |
| Commercial and industrial | 118,625 | | 48,399 | | 53,443 | | — | | 220,467 |
| | | | | | | | | |
| Commercial construction | 84,174 | | 35,332 | | 28,943 | | — | | 148,449 |
| Consumer residential | 44,294 | | 48,968 | | 33,764 | | 231,319 | | 358,345 |
| Consumer nonresidential | 4,814 | | 348 | | 552 | | 28 | | 5,742 |
| Total loans receivable | $ | 360,995 | | $ | 756,097 | | $ | 460,933 | | $ | 249,191 | | $ | 1,827,216 |
| Fixed—rate loans | $ | 69,951 | | $ | 510,025 | | $ | 455,766 | | $ | 159,268 | | $ | 1,195,010 |
| Floating—rate loans | 291,044 | | 246,072 | | 5,167 | | 89,923 | | 632,206 |
| Total loans receivable | $ | 360,995 | | $ | 756,097 | | $ | 460,933 | | $ | 249,191 | | $ | 1,827,216 |
________________________
Table of Contents*
Payments due by period are based on the repricing characteristics and not contractual maturities.Nonperforming
assets,loans, defined as nonaccrual loans
and loans contractually past due 90 days or more as to principal or interest and still accruing,
were $1.8 million and
OREO at December 31, 2020 were $9.5 million compared to $14.6$4.5 million at December 31,
2019. Our ratio2023 and 2022, respectively, a decrease of
nonperforming assets to total assets was 0.52% at December 31, 2020 compared to 0.95% at December 31, 2019. TDRs, as of December 31, 2020 and 2019 totaled $97 thousand and $3.9$2.7 million,
respectively. The TDR recorded during 2019 is included in our total of nonaccrual loans and nonperforming assets as of December 31, 2019. However, this TDR did pay off in full, including past due interest and late fees, during the first quarter of 2020.Nonperforming loans, which are primarily commercial real estate and commercial and industrial loans, decreased $5.1 million during 2020 as compared to 2019.or 60%. Loans that we have classified as nonperforming are a result of customer specific deterioration, mostly financial in nature, andthat are not 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 havehad specific reserves totaling $2.1 million$676 thousand and $392$86 thousand at December 31, 20202023 and 2019,2022, respectively. Because these loans are individually evaluated for impairment,Our ratio of nonperforming loans are excluded fromto total assets was 0.08% and 0.19% at December 31, 2023 and 2022, respectively. We had no other real estate owned and there were $3.5 million in loan modifications for borrowers who were experiencing financial difficulty during the general reserve allocation.year ended December 31, 2023.
We categorize 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. We analyze 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,
2020,2023, we had
$12.1$6.2 million in loans identified as special mention,
within the originated loan portfolio, a decrease of
$4.9$4.2 million from December 31,
2019.2022. Special mention rated loans
are loans that have a potential weakness that deserves
management’sour close attention; however, the borrower continues to pay in accordance with their
contract.contractual terms, unless modified and disclosed. The decrease from December 31,
2019 is a result of a significant number2022 was driven by $9.3 million of loans being
either upgraded or
having been paid off,
during 2020. Theseoffset by three additional loans
identified as special mention. Loans rated as special mention do not have a specific reserve and are considered well-secured.
At December 31,
2020,2023, we had
$17.1$22.5 million in loans identified as substandard,
within the originated loan portfolio, an increase of
$7.3$18.4 million from December 31,
2019. The increase in substandard loans was primarily related to one loan, which is a payment deferred COVID-19 modified hotel loan. This borrower is currently making interest only payments and has agreed to continue to do so for the next 12 months. This loan also does not qualify as a TDR as this customer was current and paying as agreed upon prior to the start of the COVID-19 pandemic, and was only modified as a result of the COVID-19 pandemic which has impacted their business operations. We expect that this borrower will resume making regularly scheduled loan payments at the end of the forbearance period.2022. 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.
The increase from December 31, 2022 was primarily related to one owner-occupied commercial loan totaling $20.0 million, which was downgraded due to concerns regarding the financial condition of this borrower's parent company. This loan is current and paying as agreed to with no modifications in terms since its origination. No impairment was indicated as a result of the liquidation analysis completed as the loan was and continues to be well-collateralized. At December 31,
2020,2023, specific reserves
on originated and acquired loans totaling
$2.1 million, has been$676 thousand were allocated within the allowance for
loancredit losses to supplement any shortfall of
collateral.collateral for the additional $2.5 million in substandard loans.
We recorded annualized net charge-offs (recoveries) of 0.02% and 0.05%0.03% for the years ended December 31, 20202023 and 2019,2022, respectively. The following tables provide additional information on our asset quality for the periods presented.
At December 31,
2020, 2019, 2018, 20172023 and
20162022
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
Nonperforming assets: | | | | | | | | | | | | | | | | | |
Nonaccrual loans | | | $ | 5,349 | | $ | 9,693 | | $ | 2,180 | | $ | 741 | | $ | 94 | |
Loans contractually past‑due 90 days or more | | | | 272 | | | 1,032 | | | 1,031 | | | 48 | | | 155 | |
Total nonperforming loans (NPLs) | | | $ | 5,621 | | $ | 10,725 | | $ | 3,211 | | $ | 789 | | $ | 249 | |
Other real estate owned (OREO) | | | | 3,866 | | | 3,866 | | | 4,224 | | | 3,866 | | | — | |
Total nonperforming assets (NPAs) | | | $ | 9,487 | | $ | 14,591 | | $ | 7,435 | | $ | 4,655 | | $ | 249 | |
Performing troubled debt restructurings (TDRs) | | | $ | 97 | | $ | — | | $ | 203 | | $ | 1,671 | | $ | 11,523 | |
NPLs/Total Assets | | | | 0.31 | % | | 0.70 | % | | 0.24 | % | | 0.07 | % | | 0.03 | % |
NPAs/Total Assets | | | | 0.52 | % | | 0.95 | % | | 0.57 | % | | 0.44 | % | | 0.03 | % |
NPAs and TDRs/Total Assets | | | | 0.53 | % | | 0.95 | % | | 0.57 | % | | 0.60 | % | | 1.29 | % |
Allowance for loan losses/NPLs | | | | 266.11 | % | | 95.39 | % | | 285.24 | % | | 979.09 | % | | 2,591.16 | % |
Nonperforming Loans
| | | | | | | | | | | | | | |
| 2023 | | 2022 | |
| Nonperforming assets: | | | | |
| Nonaccrual loans, gross | $ | 1,689 | | | $ | 3,150 | | |
| Loans contractually past‑due 90 days or more and still accruing | 140 | | | 1,343 | | |
| Total nonperforming loans (NPLs) | $ | 1,829 | | | $ | 4,493 | | |
| | | | |
| Total nonperforming assets (NPAs) | $ | 1,829 | | | $ | 4,493 | | |
| | | | |
| | | | |
| NPLs/Total Assets | 0.08 | % | | 0.19 | % | |
| NPAs/Total Assets | 0.08 | % | | 0.19 | % | |
| | | | |
| Allowance for credit losses on loans/NPLs | 1,031.77 | % | | 357.00 | % | |
| Combined allowance for credit losses/NPLs | 1,064.70 | % | | 357.00 | % | |
We are closely and proactively monitoring the effects of recent market activity. As mentioned above, our commercial real estate loan portfolio totaled $1.10 billion, or 60% of total, at both December 31, 2023 and at December 31, 2022. The commercial real estate portfolio, including construction loans, is diversified by
Typeasset type and geographic concentration. We manage this portion of the portfolio in a disciplined manner, and have comprehensive policies to monitor, measure and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices. Included in commercial real estate are loans secured by office buildings totaling $92.9 million, or 5% of total loans, and retail shopping centers totaling $264.0 million, or 14% of total loans, at December 31, 2023. Multi-family commercial properties totaled $178.6 million, or 10% of total loans, at December 31, 2023. The following table provides further stratification of these asset classes as of December 31, 2023 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owner Occupied Commercial Real Estate | Non-Owner Occupied Commercial Real Estate | Construction | Total CRE | |
| Asset Class | Average Loan-to-Value (1) | Number of Total Loans | Bank Owned Principal (2) | Average Loan-to-Value (1) | Number of Total Loans | Bank Owned Principal (2) | Top 3 Geographic Concentration | Number of Total Loans | Bank Owned Principal (2) | Total Bank Owned Principal (2) | % of Total Loans |
| Office, Class A | 70% | 6 | $7,558 | 47% | 4 | $3,776 | Counties of Fairfax and Loudoun, Virginia and Montgomery County, Maryland | — | $— | $11,334 | |
| Office, Class B | 46% | 35 | 13,751 | 47% | 31 | 61,323 | — | — | 75,074 | |
| Office, Class C | 52% | 7 | 3,793 | 41% | 8 | 1,953 | 1 | 780 | 6,526 | |
| Subtotal | | 48 | $25,102 | | 43 | $67,052 | 1 | $780 | $92,934 | 5% |
| | | | | | | | | | | |
| Retail- Neighborhood/Community Shop | | — | $— | 44% | 31 | $84,627 | Prince George's County, Maryland, Fairfax County, Virginia and Washington, D.C. | 2 | $10,944 | 95,571 | |
| Retail- Restaurant | 57% | 9 | 8,183 | 45% | 16 | 26,931 | — | — | 35,114 | |
| Retail- Single Tenant | 59% | 5 | 2,001 | 42% | 20 | 36,255 | — | — | 38,256 | |
| Retail- Anchored,Other | 71% | 1 | 2,046 | 53% | 12 | 41,572 | — | — | 43,618 | |
| Retail- Grocery-anchored | | — | — | 46% | 8 | 50,154 | 1 | 1,264 | 51,418 | |
| Subtotal | | 15 | $12,230 | | 87 | $239,539 | 4 | $12,208 | $263,977 | 14% |
| | | | | | | | | | | |
| Multi-family, Class A (Market) | | — | $— | 27% | 1 | $— | Washington, D.C., Baltimore City, Maryland and Arlington County, Virginia | 1 | $729 | 729 | |
| Multi-family, Class B (Market) | | — | — | 63% | 21 | 78,559 | — | — | 78,559 | |
| Multi-family, Class C (Market) | | — | — | 57% | 57 | 71,902 | 2 | 6,816 | 78,718 | |
| Multi-Family-Affordable Housing | | — | — | 53% | 10 | 16,524 | 1 | 4,075 | 20,599 | |
| Subtotal | | 0 | $— | | 89 | $166,985 | 4 | $11,620 | $178,605 | 10% |
| | | | | | | | | | | |
| Industrial | 52% | 43 | $70,267 | 50% | 38 | $128,238 | Prince William County, Virginia, Fairfax County, Virginia and Howard County, Maryland | 1 | $269 | 198,774 | |
| Warehouse | 52% | 14 | 18,761 | 33% | 10 | 11,557 | — | — | 30,318 | |
| Flex | 51% | 15 | 18,727 | 54% | 14 | 56,531 | 2 | — | 75,258 | |
| Subtotal | | 72 | $107,755 | | 62 | $196,326 | 3 | $269 | $304,350 | 17% |
| | | | | | | | | | | |
| Hotels | | — | $— | 43% | 9 | $52,588 | | 1 | $6,410 | $58,998 | 3% |
| Mixed Use | 47% | 10 | 6,174 | 61% | 37 | 68,489 | | — | $— | $74,663 | 4% |
| | | | | | | | | | | |
| Other (including net deferred costs) | | | $61,628 | | | $87,765 | | | $116,711 | $266,104 | 14% |
| Total commercial real estate and construction loans, net of fees, at December 31, 2023 | | | $212,889 | | $878,744 | | | $147,998 | $1,239,631 | 68% |
| | | | | | | | | | | |
|
|
_________________________
(1).Loan-to-value is determined at origination date against current bank owned principal.
(2).Minimum debt service coverage policy is 1.30x for owner occupied and 1.25x for non-owner occupied at origination.
The loans shown in the above table exhibit strong credit quality, reflecting only one classified delinquency at December 31, 2023. During our assessment of the allowance for credit losses on loans, we addressed the credit risks associated with these portfolio segments and believe that as a result of our conservative underwriting discipline at loan origination and our ongoing loan monitoring procedures, we have appropriately reserved for possible credit concerns in the event of a downturn in economic activity.
At December 31,
2020, 2019, 2018, 20172023 and
2016(Dollars in thousands)
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Commercial real estate | | $ | 2,309 | | $ | 4,912 | | $ | 56 | | $ | 154 | | $ | 155 |
Commercial and industrial | | | 2,883 | | | 4,142 | | | 2,800 | | | 48 | | | 94 |
Commercial construction | | | — | | | 820 | | | — | | | — | | | — |
Consumer residential | | | 385 | | | 839 | | | 355 | | | 587 | | | — |
Consumer nonresidential | | | 44 | | | 12 | | | — | | | — | | | — |
| | $ | 5,621 | | $ | 10,725 | | $ | 3,211 | | $ | 789 | | $ | 249 |
At December 31, 2020 and 2019,2022, there were no performing loans considered a potential problem loan.loans. Potential problem loans are defined as loans that are not included in the 90 daydays or more past due, nonaccrual or adversely classified or restructured categories, but for which known information about possible credit problems causes managementus 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. 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 for credit losses on loans estimation methodology incorporates increased reserve factors for certain loans that are adversely rated but not impaired as comparedadjusts expected losses to calibrate the general portfolio.
As previously mentioned, we have evaluated our exposurelikelihood of a default event to credit risks directly related tooccur through the COVID-19 pandemic and have identified the following subgroupsuse of industry segments most impacted by the pandemic. As a result of the COVID-19 pandemic, we implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. During the first and second quarters of 2020, we modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. On March 1, 2021, remaining payment deferred loans totaled $10.1 million, or 0.68% of the total loan portfolio, comprising five loans. One loan is a hotel participation loan totaling $9.7 million (mentioned above in the substandard loans discussion), one loan is SBA guaranteed totaling $334 thousand and the remaining three loans totaling $89 thousand are consumer unsecured loans.
risk ratings.
We are closely and proactively monitoring the effects of the pandemic on our loan and deposit customers and are focused on assessing risks within the loan portfolio and working with customers to minimize losses. We consider pandemic impacted loans to include commercial real estate loans made to hotels, churches, and certain retail and special purpose asset classes. During our assessment of the allowance for loan losses, we addressed the credit risks associated with these pandemic impacted segments and those loans that have requested payment deferrals. The following table shows the number of loans and outstanding loan balances by pandemic-impacted asset class as of December 31, 2020.
COVID Impacted Loans By Asset Class
Year Ended December 31, 2020
(Dollars in thousands)
| | | | | |
| | Number of | | | |
Asset Class | | Total Loans | | Amount |
Commercial Real Estate - Retail | | 106 | | $ | 196,025 |
Commercial Real Estate - Mixed Use | | 52 | | | 84,437 |
Specialty Use-Hotel/Lodging/Motel | | 11 | | | 60,919 |
Commercial Real Estate - Office | | 111 | | | 107,766 |
Multi-Family First Lien | | 85 | | | 108,077 |
Commercial Real Estate - Industrial | | 68 | | | 97,891 |
Commercial Real Estate - Special Use/Church | | 22 | | | 41,621 |
Special Purpose | | 25 | | | 32,405 |
| | 480 | | $ | 729,141 |
| | | | | |
Other Loan Categories Not Impacted by COVID | | 2,808 | | | 742,244 |
| | 3,288 | | $ | 1,471,385 |
We believe that as a result of our conservative underwriting discipline at loan origination coupled with the active dialogue we have had with our borrowers, we have the ability and necessary flexibility to assist our customers through this pandemic.
At December 31, 2020 and 2019, we had one OREO property with a fair value of $3.9 million. We are in 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.
While our loan growth has continued to be strong, unexpectedUnexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs, allowance for credit losses, and provision for loancredit losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit 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, 2020, our commercial real estate portfolio (including construction lending) was 68.8% 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.
See “Critical Accounting Policies” above for more information on our allowance for
loancredit losses methodology.
The following tables present additional information pertaining to the activity in and allocation of the allowance for loancredit losses on loans by loan type and the percentage of the loan type to the total loan portfolio. The allocation of the allowance for loancredit losses on loans to a category of loans is not necessarily indicative of future losses or charge-offs, and does not restrict the use of the allowance to any specific category of loans.
Allowance for LoanCredit Losses
on Loans
Years Ended December 31, 2020, 2019, 2018, 20172023 and 20162022
(Dollars in thousands)
| | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Beginning balance | | $ | 10,231 | | $ | 9,159 | | $ | 7,725 | | $ | 6,452 | | $ | 6,239 |
Provision for loan losses | | | 5,016 | | | 1,720 | | | 1,920 | | | 1,200 | | | 1,471 |
Loans charged off: | | | | | | | | | | | | | | | |
Commercial real estate | | | (115) | | | (20) | | | — | | | — | | | (513) |
Commercial and industrial | | | — | | | — | | | (86) | | | (44) | | | (669) |
Consumer residential | | | (41) | | | — | | | (187) | | | — | | | (76) |
Consumer nonresidential | | | (254) | | | (692) | | | (292) | | | (33) | | | — |
Total loans charged off | | | (410) | | | (712) | | | (565) | | | (77) | | | (1,258) |
Recoveries: | | | | | | | | | | | | | | | |
Commercial real estate | | | 9 | | | 4 | | | — | | | — | | | — |
Commercial and industrial | | | 62 | | | 35 | | | 26 | | | 117 | | | — |
Consumer residential | | | 2 | | | 2 | | | 1 | | | — | | | — |
Consumer nonresidential | | | 48 | | | 23 | | | 52 | | | 33 | | | — |
Total recoveries | | | 121 | | | 64 | | | 79 | | | 150 | | | — |
Net (charge-offs) recoveries | | | (289) | | | (648) | | | (486) | | | 73 | | | (1,258) |
Ending balance | | $ | 14,958 | | $ | 10,231 | | $ | 9,159 | | $ | 7,725 | | $ | 6,452 |
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
Loans, net of deferred fees: | | | | | | | | | | | | | | | | |
Balance at period end | | $ | 1,466,083 | | $ | 1,270,526 | | $ | 1,136,743 | | $ | 888,677 | | $ | 768,102 | |
Allowance for loan losses to loans receivable, net of fees | | | 1.02 | % | | 0.81 | % | | 0.81 | % | | 0.87 | % | | 0.84 | % |
Allowance for loan losses to loans receivable, net of fees, excluding PPP | | | 1.14 | % | | N/A | | | N/A | | | N/A | | | N/A | |
Net charge‑offs (recoveries) to average loans receivable | | | 0.02 | % | | 0.05 | % | | 0.05 | % | | (0.01) | % | | 0.19 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Net (charge-offs) recoveries | | Percentage of net charge-offs to average loans outstanding during the year | | Net (charge-offs) recoveries | | Percentage of net charge-offs to average loans outstanding during the year |
| Commercial real estate | $ | (53) | | | — | % | | $ | — | | | — | % |
| Commercial and industrial | (347) | | | (0.02) | % | | (396) | | | (0.02) | % |
| Consumer residential | 1 | | | — | % | | 1 | | | — | % |
| Consumer nonresidential | 24 | | | — | % | | (23) | | | — | % |
| Total | $ | (375) | | | (0.02) | % | | $ | (418) | | | (0.03) | % |
| Average loans outstanding during the period | $ | 1,848,308 | | | | | $ | 1,618,077 | | | |
| | | | | | | |
| | | | | December 31, |
| | | | | 2023 | | 2022 |
| Allowance for credit losses to loans receivable, net of fees | | | | | 1.03 | % | | 0.87 | % |
| Combined allowance for credit losses to loans receivable, net of fees | | | | | 1.06 | % | | 0.87 | % |
Allocation of the Allowance for LoanCredit Losses
on Loans
At December 31, 2020, 2019, 2018, 20172023 and 20162022
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Allocation | | % of Total* | | Allocation | | % of Total* |
| Commercial real estate | $ | 10,174 | | | 59.88 | % | | $ | 10,777 | | | 59.77 | % |
| Commercial and industrial | 3,385 | | | 12.07 | % | | 2,623 | | | 13.32 | % |
| | | | | | | |
| Commercial construction | 1,425 | | | 8.13 | % | | 1,499 | | | 8.04 | % |
| Consumer residential | 3,822 | | | 19.61 | % | | 1,044 | | | 18.45 | % |
| Consumer nonresidential | 65 | | | 0.31 | % | | 97 | | | 0.42 | % |
| Total allowance for credit losses | $ | 18,871 | | | 100.00 | % | | $ | 16,040 | | | 100.00 | % |
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
| | Allocation | | % of Total* | | Allocation | | % of Total* | | Allocation | | % of Total* | |
Commercial real estate | | $ | 9,291 | | 53.69 | % | $ | 6,399 | | 64.55 | % | $ | 5,548 | | 60.07 | % |
Commercial and industrial | | | 2,546 | | 8.12 | % | | 1,275 | | 9.04 | % | | 1,474 | | 12.07 | % |
Paycheck protection program | | | — | | 10.59 | % | | — | | 0.00 | % | | — | | 0.00 | % |
Commercial construction | | | 1,960 | | 15.11 | % | | 2,067 | | 16.97 | % | | 1,285 | | 13.47 | % |
Consumer residential | | | 690 | | 11.41 | % | | 417 | | 8.55 | % | | 518 | | 11.55 | % |
Consumer nonresidential | | | 471 | | 1.08 | % | | 73 | | 0.89 | % | | 334 | | 2.84 | % |
Unallocated | | | — | | 0.00 | % | | — | | 0.00 | % | | — | | 0.00 | % |
Total allowance for loan losses | | $ | 14,958 | | 100.00 | % | $ | 10,231 | | 100.00 | % | $ | 9,159 | | 100.00 | % |
| | | | | | | | | | | |
| | 2017 | | 2016 | |
| | Allocation | | % of Total* | | Allocation | | % of Total* | |
Commercial real estate | | $ | 4,832 | | 59.21 | % | $ | 4,266 | | 62.08 | % |
Commercial and industrial | | | 768 | | 11.04 | % | | 1,032 | | 14.59 | % |
Paycheck protection program | | | | | | | | | | | |
Commercial construction | | | 1,191 | | 13.88 | % | | 375 | | 6.92 | % |
Consumer residential | | | 626 | | 12.25 | % | | 500 | | 13.87 | % |
Consumer nonresidential | | | 268 | | 3.62 | % | | 121 | | 2.54 | % |
Unallocated | | | 40 | | 0.00 | % | | 158 | | 0.00 | % |
Total allowance for loan losses | | $ | 7,725 | | 100.00 | % | $ | 6,452 | | 100.00 | % |
___________________
*
| Percentage of loan type to the total loan portfolio.
|
*Percentage of loan type to the total loan portfolio.
Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale and investment securities 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, 20202023 and 2019,2022 totaled $264 thousand, 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 our investment securities available-for-sale was $126.2was $171.6 million at December 31, 2020,2023, a decrease of $15.2$106.5 million, or 10.7%38%, from $141.3$278.1 million at December 31, 2019. We sold $13.22022, primarily as a result of the $102.5 million inof book value available-for-sale investment securities sold during 2020 as these securities had larger premiums susceptible to prepayment risk, decreasing future interest income.the year.
As of December 31, 20202023 and 2019,2022, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. InvestmentInvestment securities which 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. The effective duration of the investment securities portfolio continues to be slightly over five years, which is within the industry average. Investment securities that were pledged to secure public deposits totaled $9.2$7.2 million and $11.3 and $104.6 million at December 31, 20202023 and 2022, respectively.
In accordance with ASC 326, we complete periodic assessments on at least a quarterly basis to determine if credit deterioration exists within our investment securities portfolio and if an allowance for credit losses would be required as of a valuation date. For additional details related to management's assessment process, see the “Critical Accounting Policies” section above. As a result of the assessment performed as of December 31,
2019, respectively.We complete reviews for other-than-temporary impairment at least quarterly. At December 31, 2020 and December 31, 2019, only2023, the 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 interest rate conditions in the current market environment and not as a result of permanent credit impairment.deterioration. Contractual cash flows for the agency mortgage-backed securitiesagency-backed portfolios are guaranteed and/orand 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 impairedinvestment securities portfolio prior to the recovery of the amortized cost.
No other-than-temporarythe valuation date. As such, no impairment has beenwas recognized for the securities in our investment securities portfolio as of December 31, 2020, and December 31, 2019.
2023.
We hold restricted investments in equities of the FRB and FHLB. At December 31,
2020,2023, we owned
$2.4$3.6 million in
FHLBFRB stock and
$4.0$5.8 million in
FRBFHLB stock. At December 31,
2019,2022, we owned
$1.9$4.4 million in FRB stock and $11.1 million in FHLB
stock and $4.0 million in FRB stock.
The following table reflects the composition
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
| | | | | Percent of | | | | | Percent of | | | | | Percent of | |
| | Balance | | Total | | Balance | | Total | | Balance | | Total | |
Held‑to‑maturity | | | | | | | | | | | | | | | | |
Securities of state and local municipalities tax exempt | | $ | 264 | | 0.21 | % | $ | 264 | | 0.19 | % | $ | 264 | | 0.21 | % |
Securities of U.S. government and federal agencies | | | — | | 0.00 | % | | — | | 0.00 | % | | 1,497 | | 1.16 | % |
Total held‑to‑maturity securities | | $ | 264 | | 0.21 | % | $ | 264 | | 0.19 | % | $ | 1,761 | | 1.37 | % |
Available‑for‑sale | | | | | | | | | | | | | | | | |
Securities of U.S. government and federal agencies | | $ | — | | 0.00 | % | $ | 4,000 | | 2.84 | % | $ | 1,000 | | 0.78 | % |
Securities of state and local municipalities | | | 4,202 | | 3.41 | % | | 4,631 | | 3.29 | % | | 6,056 | | 4.72 | % |
Corporate bonds and securities | | | 12,974 | | 10.52 | % | | 6,984 | | 4.97 | % | | 5,000 | | 3.89 | % |
Mortgage‑backed securities | | | 105,910 | | 85.86 | % | | 124,757 | | 88.71 | % | | 114,379 | | 89.05 | % |
Certificates of deposit | | | — | | 0.00 | % | | — | | 0.00 | % | | 245 | | 0.19 | % |
Total available‑for‑sale securities | | $ | 123,086 | | 99.79 | % | $ | 140,372 | | 99.81 | % | $ | 126,680 | | 98.63 | % |
Total investment securities | | $ | 123,350 | | 100.00 | % | $ | 140,636 | | 100.00 | % | $ | 128,441 | | 100.00 | % |
The following table presents the 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, 2020.
2023 and 2022.
Investment Securities by Stated
MaturityYields
At December 31, 20202023
and 2022 (Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | |
| | Within One Year | | One to Five Years | | Five to Ten Years | | Over Ten Years | | Total | |
| | | | | Weighted | | | | | Weighted | | | | | Weighted | | | | | Weighted | | | | | Weighted | |
| | Amortized | | Average | | Amortized | | Average | | Amortized | | Average | | Amortized | | Average | | Amortized | | Average | |
| | Cost | | Yield | | Cost | | Yield | | Cost | | Yield | | Cost | | Yield | | Cost | | Yield | |
Held‑to‑maturity | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of state and local municipalities tax exempt | | $ | — | | — | | $ | — | | — | | $ | 264 | | 2.32 | % | $ | — | | — | | $ | 264 | | 2.32 | % |
Total held‑to‑maturity securities | | $ | — | | — | | $ | — | | — | | $ | 264 | | 2.32 | % | $ | — | | — | | $ | 264 | | 2.32 | % |
Available‑for‑sale | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of state and local municipalities | | $ | — | | — | | $ | 2,021 | | 2.29 | % | $ | 379 | | 2.25 | % | | 1,802 | | 2.98 | % | | 4,202 | | 2.58 | % |
Corporate bonds | | | — | | — | | | 2,000 | | 2.77 | % | | 10,974 | | 5.26 | % | | — | | — | | | 12,974 | | 4.88 | % |
Mortgaged‑backed securities | | | — | | — | | | — | | — | | | 17,245 | | 2.19 | % | | 88,665 | | 2.08 | % | | 105,910 | | 2.09 | % |
Total available‑for‑sale securities | | $ | — | | — | | $ | 4,021 | | 2.53 | % | $ | 28,598 | | 3.37 | % | $ | 90,467 | | 2.09 | % | $ | 123,086 | | 2.40 | % |
Total investment securities | | $ | — | | — | | $ | 4,021 | | 2.53 | % | $ | 28,862 | | 3.36 | % | $ | 90,467 | | 2.09 | % | $ | 123,350 | | 2.40 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
| Within One Year | One to Five Years | | Five to Ten Years | Over Ten Years | | Total |
| | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield |
| Held‑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 | | — | % | | — | % | | 1.59 | % | | — | % | | 1.59 | % |
| Securities of state and local municipalities | | 3.00 | % | | — | % | | — | % | | 2.92 | % | | 2.98 | % |
| Corporate bonds | | — | % | | 10.35 | % | | 4.09 | % | | — | % | | 4.40 | % |
| Mortgaged‑backed securities | | — | % | | 2.11 | % | | 3.22 | % | | 1.60 | % | | 1.61 | % |
| Total available‑for‑sale securities | | 3.00 | % | | 9.52 | % | | 3.23 | % | | 1.60 | % | | 1.89 | % |
| Total investment securities | | 3.00 | % | | 8.13 | % | | 3.23 | % | | 1.60 | % | | 1.89 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Within One Year | One to Five Years | | Five to Ten Years | Over Ten Years | | Total |
| | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield | | Weighted
Average
Yield |
| Held‑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 | % |
Deposits and Other Borrowed Funds
The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31, 2023 and 2022:
Average Deposit Balance
Years Ended December 31, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| (Dollars in thousands) | 2023 | | 2022 |
| Noninterest-bearing demand | $ | 425,914 | | | 22.24 | % | | $ | 501,962 | | | 27.77 | % |
| Interest-bearing deposits | | | | | | | |
| Interest checking | 581,655 | | | 30.37 | % | | 724,881 | | | 40.10 | % |
| Savings and money markets | 254,721 | | | 13.30 | % | | 315,653 | | | 17.46 | % |
| Certificate of deposits, $100,000 to $249,999 | 106,865 | | | 5.58 | % | | 51,490 | | | 2.85 | % |
| Certificate of deposits, $250,000 or more | 242,405 | | | 12.66 | % | | 152,229 | | | 8.42 | % |
| Other time deposits | 303,472 | | | 15.85 | % | | 61,478 | | | 3.39 | % |
| Total | $ | 1,915,032 | | | 100.00 | % | | $ | 1,807,693 | | | 100.00 | % |
Total deposits
were $1.53increased $15.1 million, or 1%, to $1.85 billion at December 31,
2020, an increase of $246.8 million, or 19.2%,2023 from
$1.29$1.83 billion at December 31,
2019.2022. Noninterest-bearing deposits
totaled $399.1were $396.7 million at December 31,
2020, comprising 26.0%2023, or 21% of total
deposits and increased $92.8 million, or 30.3%, compared to December 31, 2019. The increase in total deposits during 2020 reflects a combination of new customer relationships (primarily from PPP loan originations) as well as growth in deposit balances from existing customers.deposits. At December 31,
2020,2023, core deposits,
from municipalities, which
are secured by a letter of credit issued by the FHLB and a portion of our investment securities, represented 6.4% 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 maintainexclude wholesale 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 atincreased $17.9 million from December 31, 2020.
Deposit Composition
At December 31, 2020
(Dollars in thousands)
| | | | | | |
| | 2020 | |
| | | | | Average | |
| | Balance | | Rate | |
Noninterest bearing demand | | $ | 399,062 | | — | |
Interest bearing - checking, savings and money market | | | 820,378 | | 0.32 | % |
Time deposits $100,000 or more | | | 194,190 | | 1.54 | % |
Other time deposits | | | 118,863 | | 0.88 | % |
| | $ | 1,532,493 | | | |
The remaining maturity of time2022, or 1%. Time deposits at December 31, 2020 are as follows:
| | | |
| | 2020 |
Three months or less | | $ | 115,707 |
Over three months through six months | | | 60,490 |
Over six months through twelve months | | | 53,053 |
Over twelve months | | | 83,803 |
| | $ | 313,053 |
Wholesale deposits decreased(which exclude wholesale deposits) increased $45.9 million, or 18%, to $50.0$306.3 million at December 31, 2020,2023 from $100.0December 31, 2022, and were 19% of core deposits, representing new and existing customer deposits as customers were looking to fix interest rates on their deposit balances.
Wholesale deposits were $245.3 million at December 31, 2023 compared to $248.0 million at December 31, 2019.2022, a decrease of $2.7 million, or 1%. Wholesale deposits are partially fixed at a weighted average rate of 3.77% as we have executed $165.0 million in pay-fixed/receive-floating interest rate swaps to reduce funding costs. In addition, we are a member of the IntraFi Network (“IntraFi”), which gives us the ability to offer Certificates of Deposit Account Registry Service (“CDARS”), and Insured Cash Sweep (“ICS”), products to our customers who seek to maximize FDIC insurance protection. When a customer places a large deposit with us for 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, 20202023 and December 31, 2019,2022, we had $138.9 $254.1 million and $71.4$117.6 million, respectively, in either CDARS reciprocal or ICS reciprocal products. The increase from
As of December 31,
2019 is a result2023 and 2022, the estimated amount of
certain customers wanting additionaltotal uninsured deposits (excluding collateralized deposits) was $574.6 million, or 31.1%, and $727.3 million, or 39.7%, of total deposits, respectively. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance
protection as a resultlimit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the
pandemic in addition to increases in customer deposit activity in these products.Bank's regulatory reporting requirements.
The following table reports thosematurities of the estimated amount of uninsured certificates of deposit that exceed $100,000 by maturity for the year ended at December 31, 2020.2023.
Certificates of Deposit Over $100,000 and Greater
than $250,000
| | | | | |
| 2023 |
| Three months or less | $ | 46,571 |
| Over three months through six months | 35,475 |
| Over six months through twelve months | 30,984 |
| Over twelve months | 51,681 |
| $ | 164,711 |
| | | |
| | 2020 |
Three months or less | | $ | 48,388 |
Over three months through six months | | | 46,739 |
Over six months through twelve months | | | 36,327 |
Over twelve months | | | 62,736 |
| | $ | 194,190 |
Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $69.1$104.6 million at December 31, 2023, and $284.6 million at December 31, 2020, and $49.5 million at2022. For December 31, 2019. At December 31, 2020, we2023 and 2022, we had $25.0$85.0 million and $235.0 million, respectively, in FHLB advances. The decrease in FHLB advances $44.1was primarily a result of the aforementioned paydown from the proceeds of the sale of available-for-sale investment securities during 2023. These FHLB advances are fixed at a weighted average rate of 3.21% as we have executed $85.0 million in subordinatedpay-fixed/receive-floating interest rate swaps to reduce funding costs. Subordinated debt, net of unamortized issuance costs, and no federal funds purchased. Attotaled $19.6 million at each of December 31, 2019,2023 and 2022. For December 31, 2023 and 2022, we had $10.0$0 and $30.0 million in federal funds purchased, $15.0 million in FHLB advances and $24.5 million in subordinated notes.
On October 13, 2020, we announced the completion of our private placement of $20 million of our 4.875% Fixed to Floating Subordinated Notes due 2030 (the “Notes”) to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes. We plan to use the proceeds from the placement of the Notes for general corporate purposes, to include supporting capital ratios at the Bank, and potential repayment of a portion of the $25.0 million outstanding subordinated debt callable June 30, 2021.respectively.
The following table reflects the short-term borrowings and other borrowed funds outstanding at December 31, 2020, 2019, and 2018.
Short-Term Borrowings and Other Borrowed Funds
At December 31, 2020, 2019 and 2018
(Dollars in thousands)
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |
| | | | | Weighted | | | | | Weighted | | | | | Weighted | |
| | Amount | | Average | | Amount | | Average | | Amount | | Average | |
| | Outstanding | | Rate | | Outstanding | | Rate | | Outstanding | | Rate | |
Other short‑term borrowed funds: | | | | | | | | | | | | | | | | |
Federal funds purchased | | $ | — | | 0.00 | % | $ | 10,000 | | 1.60 | % | $ | — | | — | |
FHLB advances - short term | | | 25,000 | | 1.15 | % | | 15,000 | | 1.73 | % | | — | | — | |
Total short-term borrowed funds and weighted average rate | | $ | 25,000 | | 1.15 | % | $ | 25,000 | | 1.68 | % | $ | — | | — | |
Other borrowed funds: | | | | | | | | | | | | | | | | |
Subordinated debt | | | 44,085 | | 6.26 | % | | 24,487 | | 6.00 | % | | 24,407 | | 6.00 | % |
Total other borrowed funds and weighted average rate | | $ | 44,085 | | 6.26 | % | $ | 24,487 | | 6.00 | % | $ | 24,407 | | 6.00 | % |
Total borrowed funds and weighted average rate | | $ | 69,085 | | 4.41 | % | $ | 49,487 | | 3.82 | % | $ | 24,407 | | 6.00 | % |
Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements for the Bank are: (i) a 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 ourthe Bank’s CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we currently consider ourthe Bank’s 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.
On January 1, 2020, the federal banking agencies adopted a CBLR,“Community Bank Leverage Ratio", which is calculated by dividing tangible equity capital by average consolidated total assets. If a “qualified community bank,” generally a depository institution or depository institution holding company with consolidated assets of less than $10$10.00 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,Federal Deposit Insurance Act, 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 basebased on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposuresexposures; and such other facts as the appropriate federal banking agencies determine to be appropriate.In April 2020, as required by the CARES Act, the federal banking agencies issued two interim final rules related to the CBLR framework. One interim final rule provides that, as of the second quarter of 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.
At January 1, 2020, we qualified for and adopted this simplified capital structure, however, there can be no assurance that satisfactionstructure. Effective September 30, 2022, we opted out of the CBLR will provide adequateframework. 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 for our operationsadequacy requirements to which it was subject as of December 31, 2023 and growth, or an adequate cushion against increased levels of nonperforming assets or weakened economic conditions.
Shareholders’2022.
Stockholders' equity at December 31, 20202023 was $189.5$217.1 million, an increase of $10.4$14.7 million, compared to $179.1$202.4 million at December 31, 2019.2022. The increase in shareholders’stockholders' equity was primarily attributable to a decrease in accumulated other comprehensive loss of $12.4 million, which was primarily related to the recognitionsale of available-for-sale investment securities and an improvement in the market value of the investment securities portfolio, and net income of $15.5 millionrecorded for the year ended
December 31,
2020. Common stock issued as a result of option exercises increased shareholders’ equity by $375 thousand for the year ended December 31, 2020. Accumulated other comprehensive income increased $1.12023 totaling $3.8 million. Retained earnings decreased $2.8 million
during 2020, primarily as a result of
an increase in market valuethe adoption of
our available-for-sale investment securities portfolio.During the first quarter of 2020, we adopted a share repurchase program. The Company was authorized to repurchase up to 1,112,165 shares of our issued and outstanding shares of common stock, or approximately 8% of outstanding shares as of December 31, 2019. For the year ended December 31, 2020, we repurchased and cancelled a total of 487,531 shares of common stock at an average price of $14.90, totaling $7.3 million, all of which occurred during the first quarter of 2020. Due to the uncertainty related to the potential economic impact of the COVID-19 pandemic, we temporarily suspended share repurchasesCECL on March 20, 2020. On January 21, 2021, we approved a new share repurchase program pursuant to which we may repurchase up to 1,080,860 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2020. The repurchase program will expire on December 31, 2021, subject to earlier termination of the program by the Board of Directors.
1, 2023.
Total shareholders’stockholders' equity to total assets for December 31, 20202023 and 2022 was 10.4% 9.9% and for December 31, 2019 was 11.7%.8.6%, respectively. Tangible book value per sharesshare (a non-GAAP financial measure which is defined in the table below) at December 31, 20202023 and December 31, 20192022 was $13.41$11.77 and $12.26,$11.14, respectively. The Bank’s CBLR at December 31, 2020 was 11.65%. Total risk-based capital to risk-weighted assets for the Bank was 13.43% at December 31, 2019, which was the former capitalization calculation completed prior to the adoption of CBLR. Accordingly, we were considered “well capitalized” for regulatory purposes at December 31, 2020 and December 31, 2019.
As noted above, regulatory capital levels for the bank meets those established for “well capitalized”"well capitalized" institutions. While we are currently considered “well"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.
As the Company is a bank holding company with less than
$3$3.00 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities,
andor (iii) have a material amount of securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”), it is not currently subject to risk-based capital requirements adopted by the Federal Reserve, pursuant to the small bank holding company policy statement. 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.
The following tables shows the minimum capital requirement and our capital position at December 31,
20202023 and
December 31, 20192022 for the Bank.
At December 31,
20202023 and
20192022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement (1) | | Minimum to be Well Capitalized Under Prompt Corrective Action |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| At December 31, 2023 | | | | | | | | | | | |
| Total risk-based capital | $ | 261,403 | | | 13.83 | % | | $ | 198,413 | | > | 10.50 | % | | $ | 188,965 | | > | 10.00 | % |
| Tier 1 risk-based capital | 241,930 | | | 12.80 | % | | 160,620 | | > | 8.50 | % | | 151,172 | | > | 8.00 | % |
| Common equity tier 1 capital | 241,930 | | | 12.80 | % | | 132,275 | | > | 7.00 | % | | 122,827 | | > | 6.50 | % |
| Leverage capital ratio | 241,930 | | | 10.77 | % | | 89,842 | | > | 4.00 | % | | 112,302 | | > | 5.00 | % |
| 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 | % |
| | | | | | | | | | | |
________________________
(1). | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | To Be Well Capitalized | |
| | | | | | | | | | | | | | Under Prompt | |
| | | | | | | For Capital Adequacy | | Corrective Action | |
| | Actual | | Purposes(1) | | Provisions | |
| | Amount | | Ratio | | Amount | | | | Ratio | | Amount | | | | Ratio | |
At December 31, 2020 | | | | | | | | | | | | | | | | | | | | |
Leverage capital ratio | | $ | 209,359 | | 11.65 | % | $ | 143,823 | | ≥ | | 8.00 | % | | | | | | | |
At December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
Total risk‑based capital | | $ | 192,364 | | 13.43 | % | $ | 150,369 | | ≥ | | 10.500 | % | $ | 143,208 | | ≥ | | 10.00 | % |
Tier I risk‑based capital | | | 182,121 | | 12.72 | % | | 121,727 | | ≥ | | 8.500 | % | | 114,567 | | ≥ | | 8.00 | % |
Common equity tier I capital | | | 182,121 | | 12.72 | % | | 100,246 | | ≥ | | 7.000 | % | | 93,085 | | ≥ | | 6.50 | % |
Leverage capital ratio | | | 182,121 | | 12.15 | % | | 98,214 | | ≥ | | 6.500 | % | | 75,550 | | ≥ | | 5.00 | % |
Includes capital conservation buffer.
Reconciliation of Book Value (GAAP) to Tangible Book Value (non-GAAP)
At December 31,
20202023 and
20192022
(Dollars in thousands, except per share
datadata)
| | | | | | | | | | | |
| 2023 | | 2022 |
| Total stockholders' equity (GAAP) | $ | 217,117 | | $ | 202,382 |
| Less: goodwill and intangibles, net | (7,585) | | | (7,790) | |
| Tangible Common Equity (non-GAAP) | $ | 209,532 | | $ | 194,592 |
| | | |
| Book value per common share (GAAP) | $ | 12.19 | | $ | 11.58 |
| Less: intangible book value per common share | (0.42) | | | (0.44) | |
| Tangible book value per common share (non-GAAP) | $ | 11.77 | | $ | 11.14 |
Liquidity
| | | | | | |
| | 2020 | | 2019 |
Total stockholders’ equity (GAAP) | | $ | 189,500 | | $ | 179,078 |
Less: goodwill and intangibles, net | | | (8,357) | | | (8,689) |
Tangible Common Equity (non-GAAP) | | $ | 181,143 | | $ | 170,389 |
| | | | | | |
Book value per common share (GAAP) | | $ | 14.03 | | $ | 12.88 |
Less: intangible book value per common share | | | (0.62) | | | (0.62) |
Tangible book value per common share (non-GAAP) | | $ | 13.41 | | $ | 12.26 |
Liquidity
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.
pricing. As of December 31, 2023, estimated uninsured deposits (excluding collateralized deposits) for the Bank improved to 31.1% of total deposits from 39.7% at December 31, 2022.In addition to deposits, we have access to the differentvarious wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the IntraFi Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. We alsoAs part of our membership with the IntraFi Network, we have one-way authority with IntraFi 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.
Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.
We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.
Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled
$267.2$232.1 million at December 31,
2020,2023, or
14.7%11% of total assets,
an increasea decrease from
$174.5$359.6 million, or
11.4%15%, at December 31,
2019.2022. As of December 31, 2023 and 2022, $9.4 million and $104.6 million, respectively, in investment securities available for sale were pledged as collateral for municipal deposits. 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,
20202023 was approximately
$124.1$401.6 million. Borrowing capacity with the FRB was approximately
$124.3$118.5 million at December 31,
2020. These facilities are subject to the FHLB and the FRB approving disbursement to us.2023. We also have unsecured federal funds purchased lines of
$269.0$185.0 million available to
us.us, of which none were used at December 31, 2023. 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.
In addition to the funding sources noted above, the Federal Reserve has established the PPPLF, authorized under Section 13(3) As of the Federal Reserve Act, that can be used to pledge PPP loans we originate as collateral under the CARES Act. Under Section 1102December 31, 2023, our liquidity position was significantly in excess of the CARES Act, a PPP loan is assigned a zero risk weighting under the risk based capital rulesour estimated uninsured deposits of the federal banking agencies. In addition, an interim rule issued on April 9, 2020 from the federal banking agencies will allow banks to neutralize the effect31.1% of PPP loans financed under the PPPLF on leverage capital ratios. We do not anticipate using this facility to provide us with additional liquidity. The interest rate on this facility is fixed at 0.35% for the term of the facility.
total deposits.
Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable
to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events.
As discussed under the caption “Deposits and Other Borrowed Funds” above, we have a deposit concentration related to municipalities at December 31, 2020. 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.
Financial Instruments with Off-Balance-Sheet Risk and Credit Risk
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank’s maximum 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 is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on management’sour evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
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 up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.
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.
Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to
the business of the Company.our business.
At December 31,
20202023 and
December 31, 2019,2022, unused commitments to fund loans and lines of credit totaled
$166.3$215.9 million and
$244.4$235.6 million, respectively. Commercial and standby letters of credit totaled
$5.5$26.0 million and
$9.0$6.5 million at December 31,
20202023 and
December 31, 2019,2022, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 (“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 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, 2020, our asset/liability position was neutral based on our interest rate sensitivity model in the one-year time frame and asset sensitive in the two-year time frame. Our net interest income would decrease by 0.5% in an up 100 basis point scenario and would decrease by 0.6% 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 3.5% in an up 100 basis point scenario and would increase by 12.5% in an up 400 basis point scenario. This neutral asset/liability position is caused by the level of fixed-rate PPP loans we originated and the increase in non-interest demand deposits we have experienced during 2020. At December 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 can be found below.
| | | | | | | |
Interest Rate Risk to Earnings (Net Interest Income) | |
December 31, 2020 | | December 31, 2019 | |
Change in interest | | Percentage change in | | Change in interest | | Percentage change in | |
rates (basis points) | | net interest income | | rates (basis points) | | net interest income | |
+400 | | −0.62 | % | +400 | | −0.69 | % |
+300 | | −0.55 | % | +300 | | −0.20 | % |
+200 | | −0.63 | % | +200 | | 0.11 | % |
+100 | | −0.54 | % | +100 | | 0.11 | % |
0 | | — | | 0 | | — | |
−100 | | −0.07 | % | −100 | | 0.56 | % |
−200 | | −1.58 | % | −200 | | −0.80 | % |
Economic value of equity (“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, 2020 and December 31, 2019 is shown below and reflects that our market value of capital is in an asset position in which an increase in short-term interest rates is expected to generate higher market values of capital. At December 31, 2020 and December 31, 2019, all EVE stress tests measures were within our board policy established limits.
| | | | | | | |
Interest Rate Risk to Capital | |
December 31, 2020 | | December 31, 2019 | |
Change in interest | | Percentage change in | | Change in interest | | Percentage change in | |
rates (basis points) | | economic value of equity | | rates (basis points) | | economic value of equity | |
+400 | | 6.64 | % | +400 | | −13.72 | % |
+300 | | 6.14 | % | +300 | | −9.36 | % |
+200 | | 4.84 | % | +200 | | −5.21 | % |
+100 | | 2.68 | % | +100 | | −1.99 | % |
0 | | — | | 0 | | — | |
−100 | | −4.15 | % | −100 | | 1.68 | % |
−200 | | −3.41 | % | −200 | | 1.55 | % |
Item 8. Financial Statements and Supplementary Data
FVCBankcorp, Inc. and Subsidiary
CONSOLIDATED FINANCIAL REPORT
December 31,
2020C O N T E N T S
2023CONTENTS
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CONSOLIDATED FINANCIAL STATEMENTS | |
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Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors
and Stockholders
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of FVCBankcorp, Inc. and its
Subsidiarysubsidiary (the Company) as of December 31,
20202023 and
2019,2022, 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,
20202023 and
2019,2022, 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.
Adoption of New Accounting Standard
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for the allowance for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, including all related amendments.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
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’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Loans Collectively Evaluated for Credit Losses
As further described in Notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for credit losses on January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended. The allowance for credit losses on loans (ACLL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms. Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions. The Company’s ACLL related to collectively evaluated loans represented $18.2 million of the total recorded ACLL of $18.9 million as of December 31, 2023. The collectively evaluated ACLL consists of quantitative and qualitative components.
The quantitative component consists of loss estimates derived from probability of default-loss given default calculation using peer loss data adjusted for forecasts of future conditions over a reasonable and supportable period, which is then applied to projected loan cash flows. These estimates consider large amounts of data in tabulating loss and prepayment rates and require complex calculations as well as management judgment in the selection of appropriate inputs.
In addition to the quantitative component, the collectively evaluated ACLL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. Factors considered by management in developing its qualitative estimates include changes and expected changes in the nature and volume of the loan portfolio and the existence, growth, and effect of any concentrations of credit. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Management exercised significant judgment when estimating the ACLL on collectively evaluated loans. We identified the estimation of the collectively evaluated ACLL as a critical audit matter as auditing the collectively evaluated ACLL involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
The primary audit procedures we performed to address this critical audit matter included:
•Substantively testing management’s process for measuring the collectively evaluated ACLL, including:
•Evaluating conceptual soundness, assumptions, and key data inputs of the Company’s loss rate methodology, including the identification of loan segments, the calculation of loss rate inputs, and the calculation of prepayment rate inputs for each segment.
•Evaluating the methodology and testing the reasonableness of incorporating reasonable and supportable forecasts in the collectively evaluated ACLL estimate.
•Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.
•Evaluating the qualitative factors for directional consistency in comparison to prior periods and for reasonableness in comparison to underlying supporting data
•Testing the mathematical accuracy of the ACLL for collectively evaluated loans including both the probability of default-loss given default calculation applied to projected loan cash flows and qualitative factor components of the calculations.
/s/
Yount, HydeYOUNT, HYDE &
Barbour,BARBOUR, P.C.
We have served as the Company's auditor since 2007.
FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Condition
December 31,
20202023 and
20192022
(In thousands, except share data)
| | | | | | | | | | |
| | | | | | 2020 | | 2019 |
Assets | | | | | | | | | | |
Cash and due from banks | | | | | | $ | 20,835 | | $ | 14,916 |
Interest-bearing deposits at other financial institutions | | | | | | | 120,228 | | | 18,226 |
Securities held-to-maturity (fair value of $0.3 million for both December 31, 2020 and 2019, respectively) | | | | | | | 264 | | | 264 |
Securities available-for-sale, at fair value | | | | | | | 126,151 | | | 141,325 |
Restricted stock, at cost | | | | | | | 6,563 | | | 6,017 |
Loans held for sale, at fair value | | | | | | | — | | | 11,198 |
Loans, net of allowance for loan losses of $15.0 million and $10.2 million at December 31, 2020 and 2019, respectively | | | | | | | 1,451,125 | | | 1,260,295 |
Premises and equipment, net | | | | | | | 1,654 | | | 2,084 |
Accrued interest receivable | | | | | | | 9,135 | | | 4,094 |
Prepaid expenses | | | | | | | 621 | | | 546 |
Deferred tax assets, net | | | | | | | 8,552 | | | 7,683 |
Goodwill and intangibles, net | | | | | | | 8,357 | | | 8,689 |
Bank owned life insurance (BOLI) | | | | | | | 38,178 | | | 37,069 |
Other real estate owned (OREO) | | | | | | | 3,866 | | | 3,866 |
Operating lease right-of-use assets | | | | | | | 11,125 | | | 13,279 |
Other assets | | | | | | | 14,827 | | | 7,744 |
Total assets | | | | | | $ | 1,821,481 | | $ | 1,537,295 |
Liabilities and Stockholders' Equity | | | | | | | | | | |
Liabilities | | | | | | | | | | |
Deposits: | | | | | | | | | | |
Noninterest-bearing | | | | | | $ | 399,062 | | $ | 306,235 |
Interest-bearing checking, savings and money market | | | | | | | 820,378 | | | 557,148 |
Time deposits | | | | | | | 313,053 | | | 422,339 |
Total deposits | | | | | | $ | 1,532,493 | | $ | 1,285,722 |
Federal funds purchased | | | | | | $ | — | | $ | 10,000 |
FHLB advances | | | | | | | 25,000 | | | 15,000 |
Subordinated notes, net of issuance costs | | | | | | | 44,085 | | | 24,487 |
Accrued interest payable | | | | | | | 685 | | | 605 |
Operating lease liabilities | | | | | | | 12,123 | | | 13,686 |
Accrued expenses and other liabilities | | | | | | | 17,595 | | | 8,717 |
Total liabilities | | | | | | $ | 1,631,981 | | $ | 1,358,217 |
Commitments and Contingent Liabilities | | | | | | | | | | |
Stockholders' Equity | | | | | | | | | | |
| | 2020 | | 2019 | | | | | | |
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 | | 13,510,760 | | 13,902,067 | | $ | 135 | | $ | 139 |
Additional paid-in capital | | | | | | | 119,568 | | | 125,779 |
Retained earnings | | | | | | | 67,971 | | | 52,470 |
Accumulated other comprehensive income, net | | | | | | | 1,826 | | | 690 |
Total stockholders' equity | | | | | | $ | 189,500 | | $ | 179,078 |
Total liabilities and stockholders' equity | | | | | | $ | 1,821,481 | | $ | 1,537,295 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2023 | | 2022 |
| Assets | | | | | | | |
| Cash and due from banks | | | | | $ | 8,042 | | | $ | 7,253 | |
| Interest-bearing deposits at other financial institutions | | | | | 52,480 | | | 74,300 | |
| Securities held-to-maturity (fair value of $252 thousand and $252 thousand for December 31, 2023 and 2022), net of allowance for credit losses of $0 and $0 at December 31, 2023 and 2022 | | | | | 264 | | | 264 | |
| Securities available-for-sale, at fair value | | | | | 171,595 | | | 278,069 | |
| Restricted stock, at cost | | | | | 9,488 | | | 15,612 | |
| Loans, net of allowance for credit losses of $18.9 million and $16.0 million at December 31, 2023 and 2022, respectively | | | | | 1,809,693 | | | 1,824,394 | |
| Premises and equipment, net | | | | | 997 | | | 1,220 | |
| Accrued interest receivable | | | | | 10,321 | | | 9,435 | |
| Prepaid expenses | | | | | 3,506 | | | 3,273 | |
| Deferred tax assets, net | | | | | 14,823 | | | 18,533 | |
| Goodwill and intangibles, net | | | | | 7,585 | | | 7,790 | |
| Bank owned life insurance (BOLI) | | | | | 56,823 | | | 55,371 | |
| | | | | | | |
| Operating lease right-of-use assets | | | | | 8,395 | | | 9,680 | |
| Other assets | | | | | 36,546 | | | 39,128 | |
| Total assets | | | | | $ | 2,190,558 | | | $ | 2,344,322 | |
| Liabilities and Stockholders' Equity | | | | | | | |
| Liabilities | | | | | | | |
| Deposits: | | | | | | | |
| Noninterest-bearing | | | | | $ | 396,724 | | | $ | 438,269 | |
| Interest-bearing checking, savings and money market | | | | | 896,969 | | | 883,480 | |
| Time deposits | | | | | 551,599 | | | 508,413 | |
| Total deposits | | | | | $ | 1,845,292 | | | $ | 1,830,162 | |
| | | | | | | |
| Federal funds purchased | | | | | $ | — | | | $ | 30,000 | |
| Federal Home Loan Bank ("FHLB") advances | | | | | 85,000 | | | 235,000 | |
| Subordinated notes, net of issuance costs | | | | | 19,620 | | | 19,565 | |
| Accrued interest payable | | | | | 2,415 | | | 1,269 | |
| Operating lease liabilities | | | | | 9,241 | | | 10,394 | |
| Reserves for unfunded commitments | | | | | 602 | | | — | |
| Accrued expenses and other liabilities | | | | | 11,271 | | | 15,550 | |
| Total liabilities | | | | | $ | 1,973,441 | | | $ | 2,141,940 | |
| | | | | | | |
| Commitments and Contingent Liabilities | | | | | | | |
| | | | | | | |
| Stockholders' Equity | 2023 | | 2022 | | | | |
| 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 | 17,806,995 | | | 17,475,109 | | | $ | 178 | | | $ | 175 | |
| Additional paid-in capital | | | | | 125,209 | | | 123,886 | |
| Retained earnings | | | | | 115,890 | | | 114,888 | |
| Accumulated other comprehensive (loss), net | | | | | (24,160) | | | (36,567) | |
| Total stockholders' equity | | | | | $ | 217,117 | | | $ | 202,382 | |
| Total liabilities and stockholders' equity | | | | | $ | 2,190,558 | | | $ | 2,344,322 | |
See Notes to Consolidated Financial Statements.
FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Income
For the years ended December 31,
20202023 and
20192022
(In thousands, except per share data)
| | | | | | |
| | 2020 | | 2019 |
Interest and Dividend Income | | | | | | |
Interest and fees on loans | | $ | 63,446 | | $ | 62,182 |
Interest and dividends on securities held-to-maturity | | | 6 | | | 30 |
Interest and dividends on securities available-for-sale | | | 3,156 | | | 3,496 |
Dividends on restricted stock | | | 342 | | | 321 |
Interest on deposits at other financial institutions | | | 153 | | | 705 |
Total interest and dividend income | | $ | 67,103 | | $ | 66,734 |
Interest Expense | | | | | | |
Interest on deposits | | $ | 12,333 | | $ | 16,830 |
Interest on federal funds purchased | | | 81 | | | 145 |
Interest on short-term debt | | | 267 | | | 116 |
Interest on subordinated notes | | | 1,802 | | | 1,580 |
Total interest expense | | $ | 14,483 | | $ | 18,671 |
Net Interest Income | | $ | 52,620 | | $ | 48,063 |
Provision for loan losses | | | 5,016 | | | 1,720 |
Net interest income after provision for loan losses | | $ | 47,604 | | $ | 46,343 |
Noninterest Income | | | | | | |
Service charges on deposit accounts | | $ | 1,008 | | $ | 890 |
Gain on sale of securities available-for-sale | | | 141 | | | — |
Gain on calls of securities held-to-maturity | | | — | | | 3 |
Loss on loans held for sale | | | (451) | | | (145) |
BOLI income | | | 1,109 | | | 662 |
Other income | | | 1,084 | | | 1,136 |
Total noninterest income | | $ | 2,891 | | $ | 2,546 |
Noninterest Expenses | | | | | | |
Salaries and employee benefits | | $ | 16,815 | | $ | 17,047 |
Occupancy and equipment expense | | | 3,329 | | | 3,400 |
Data processing and network administration | | | 2,028 | | | 1,638 |
State franchise taxes | | | 1,864 | | | 1,696 |
Audit, legal and consulting fees | | | 986 | | | 826 |
Merger and acquisition expense | | | — | | | 133 |
Loan related expenses | | | 1,087 | | | 476 |
FDIC insurance | | | 748 | | | 244 |
Marketing, business development and advertising | | | 222 | | | 396 |
Director fees | | | 554 | | | 532 |
Postage, courier and telephone | | | 178 | | | 195 |
Internet banking | | | 517 | | | 439 |
Core deposit intangible amortization | | | 345 | | | 385 |
Impairment on branch closures | | | 676 | | | — |
Other operating expenses | | | 1,489 | | | 1,470 |
Total noninterest expenses | | $ | 30,838 | | $ | 28,877 |
Net income before income tax expense | | $ | 19,657 | | $ | 20,012 |
Income tax expense | | | 4,156 | | | 4,184 |
Net income | | $ | 15,501 | | $ | 15,828 |
Earnings per share, basic | | $ | 1.14 | | $ | 1.15 |
Earnings per share, diluted | | $ | 1.10 | | $ | 1.07 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Interest and Dividend Income | | | |
| Interest and fees on loans | $ | 98,373 | | | $ | 73,624 | |
| Interest and dividends on securities held-to-maturity | 6 | | | 6 | |
| Interest and dividends on securities available-for-sale | 4,949 | | | 5,959 | |
| Dividends on restricted stock | 646 | | | 408 | |
| Interest on deposits at other financial institutions | 2,641 | | | 685 | |
| Total interest and dividend income | $ | 106,615 | | | $ | 80,682 | |
| Interest Expense | | | |
| Interest on deposits | $ | 47,345 | | | $ | 12,468 | |
| Interest on federal funds purchased | 11 | | | 688 | |
| Interest on short-term debt | 3,833 | | | 1,251 | |
| Interest on subordinated notes | 1,030 | | | 1,031 | |
| Total interest expense | $ | 52,219 | | | $ | 15,438 | |
| Net Interest Income | $ | 54,396 | | | $ | 65,244 | |
| Provision for credit losses | 132 | | | 2,629 | |
| Net interest income after provision for credit losses | $ | 54,264 | | | $ | 62,615 | |
| Noninterest Income | | | |
| Service charges on deposit accounts | $ | 1,028 | | | $ | 954 | |
| | | |
| | | |
| | | |
| BOLI income | 1,452 | | | 1,200 | |
| (Loss) from minority membership interest | (1,110) | | | (33) | |
| Loss on sale of securities available-for-sale | (15,577) | | | — | |
| Other income | 837 | | | 713 | |
| Total noninterest income (loss) | $ | (13,370) | | | $ | 2,834 | |
| Noninterest Expenses | | | |
| Salaries and employee benefits | $ | 20,643 | | | $ | 20,316 | |
| Occupancy and equipment expense | 2,357 | | | 2,190 | |
| Internet banking and software expense | 2,505 | | | 1,707 | |
| Data processing and network administration | 2,468 | | | 2,303 | |
| State franchise taxes | 2,338 | | | 2,036 | |
| Audit, legal and consulting fees | 858 | | | 1,210 | |
| Merger and acquisition expense | — | | | 125 | |
| Loan related (benefit)/expenses | (10) | | | 555 | |
| FDIC insurance | 1,433 | | | 620 | |
| Director fees | 660 | | | 668 | |
| Core deposit intangible amortization | 205 | | | 262 | |
| Office space reduction costs | 273 | | | — | |
| Tax credit amortization | 126 | | | 126 | |
| Other operating expenses | 2,806 | | | 2,342 | |
| Total noninterest expenses | $ | 36,662 | | | $ | 34,460 | |
| Net income before income tax expense | $ | 4,232 | | | $ | 30,989 | |
| Income tax expense | 410 | | | 6,005 | |
| Net income | $ | 3,822 | | | $ | 24,984 | |
| Earnings per share, basic | $ | 0.22 | | | $ | 1.43 | |
| Earnings per share, diluted | $ | 0.21 | | | $ | 1.35 | |
See Notes to Consolidated Financial Statements.
FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(Loss)
For the years ended December 31,
20202023 and
20192022
(In thousands)
| | | | | | |
| | 2020 | | 2019 |
Net income | | $ | 15,501 | | $ | 15,828 |
Other comprehensive income: | | | | | | |
Unrealized gain on securities available for sale, net of tax expense of $473 and $932 in 2020 and 2019, respectively. | | | 1,780 | | | 3,164 |
Unrealized loss on interest rate swaps, net of tax benefit of $142 and $17 in 2020 and 2019, respectively. | | | (532) | | | (63) |
Reclassification adjustment for losses realized in income, net of tax expense of $29 and $0 for 2020 and 2019, respectively. | | | (112) | | | — |
Total other comprehensive income | | $ | 1,136 | | $ | 3,101 |
Total comprehensive income | | $ | 16,637 | | $ | 18,929 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Net income | $ | 3,822 | | | $ | 24,984 | |
| Other comprehensive income (loss): | | | |
| Unrealized gain (loss) on securities available for sale, net of tax expense of $0.4 million and net of tax benefit of $11.0 million in 2023 and 2022, respectively. | 1,300 | | | (37,943) | |
| Unrealized (loss) gain on interest rate swaps, net of tax benefit of $0.3 million and net of tax expense of $0.9 million in 2023 and 2022, respectively. | (1,043) | | | 3,419 | |
| Reclassification adjustment for securities losses realized in income, net of tax expense of $3.4 million and $0 for 2023 and 2022, respectively. | 12,150 | | | — | |
| Total other comprehensive income (loss) | $ | 12,407 | | | $ | (34,524) | |
| Total comprehensive (loss) income | $ | 16,229 | | | $ | (9,540) | |
See Notes to Consolidated Financial Statements.
FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31,
20202023 and
20192022
(In thousands)
| | | | | | |
| | 2020 | | 2019 |
Cash Flows From Operating Activities | | | | | | |
Net income | | $ | 15,501 | | $ | 15,828 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation | | | 615 | | | 643 |
Provision for loan losses | | | 5,016 | | | 1,720 |
Net amortization of premium of securities | | | 497 | | | 377 |
Net amortization of deferred loan costs and purchase premiums | | | 2,782 | | | 755 |
Net accretion of acquisition accounting adjustments | | | (1,073) | | | (487) |
Gain on sale of available-for-sale securities | | | (141) | | | — |
Gain on calls of held-to-maturity securities | | | — | | | (3) |
Loss on loans held for sale | | | 451 | | | 145 |
Impairment loss on long lived assets | | | 676 | | | — |
Payments received on loans held for sale, net | | | 1,107 | | | — |
Amortization of subordinated debt issuance costs | | | 88 | | | 80 |
Core deposits intangible amortization | | | 345 | | | 385 |
Equity-based compensation expense | | | 690 | | | 679 |
BOLI income | | | (1,109) | | | (662) |
Deferred income tax (benefit) expnese | | | (1,159) | | | 185 |
Changes in assets and liabilities: | | | | | | |
Increase in accrued interest receivable, prepaid expenses and other assets | | | (10,061) | | | (2,044) |
Increase in accrued interest payable, accrued expenses and other liabilities | | | 6,204 | | | 1,826 |
Net cash provided by operating activities | | $ | 20,429 | | $ | 19,427 |
Cash Flows From Investing Activities | | | | | | |
Maturities of certificates of deposits purchased for investment | | $ | — | | $ | 245 |
Decrease (increase) in interest-bearing deposits at other financial institutions | | | (102,002) | | | 15,834 |
Purchases of securities available-for-sale | | | (34,796) | | | (36,619) |
Proceeds from sales of securities available-for-sale | | | 13,239 | | | — |
Proceeds from maturities and calls of securities held-to-maturity | | | — | | | 1,500 |
Proceeds from maturities and calls of securities available-for-sale | | | 4,250 | | | 1,250 |
Proceeds from paydowns of securities available-for-sale | | | 34,237 | | | 21,055 |
Net purchase of restricted stock | | | (546) | | | (718) |
Net increase in loans | | | (187,895) | | | (146,221) |
Proceeds from sale of OREO | | | — | | | 358 |
Cash acquired in acquisition | | | — | | | — |
Purchases of BOLI | | | — | | | (20,000) |
Purchases of premises and equipment, net | | | (353) | | | (311) |
Net cash used in investing activities | | $ | (273,866) | | $ | (163,627) |
Cash Flows From Financing Activities | | | | | | |
Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits | | $ | 356,057 | | $ | 46,329 |
Net increase (decrease) in time deposits | | | (109,306) | | | 77,132 |
(Decrease) increase in federal funds purchased | | | (10,000) | | | 10,000 |
Net increase in FHLB advances | | | 10,000 | | | 15,000 |
Issuance of subordinated notes, net | | | 19,510 | | | — |
Repurchase of shares of common stock | | | (7,280) | | | — |
Common stock issuance | | | 375 | | | 1,220 |
Net cash provided by financing activities | | $ | 259,356 | | $ | 149,681 |
Net increase in cash and cash equivalents | | $ | 5,919 | | $ | 5,481 |
Cash and cash equivalents, beginning of year | | | 14,916 | | | 9,435 |
Cash and cash equivalents, end of year | | $ | 20,835 | | $ | 14,916 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Cash Flows From Operating Activities | | | |
| Net income | $ | 3,822 | | | $ | 24,984 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation | 390 | | | 424 | |
| Provision for credit losses | 132 | | | 2,629 | |
| Net amortization of premium of securities | 593 | | | 607 | |
| Net accretion of deferred loan costs and fees | (1,855) | | | (2,255) | |
| Net accretion of acquisition accounting adjustments | (421) | | | (315) | |
| Loss on sale of available-for-sale investment securities | 15,577 | | | — | |
| Office space reduction costs | 273 | | | — | |
| Loss from minority membership interest | 1,110 | | | 33 | |
| | | |
| | | |
| | | |
| Amortization of subordinated debt issuance costs | 55 | | | 55 | |
| Core deposits intangible amortization | 205 | | | 262 | |
| Tax credits amortization | 126 | | | 126 | |
| Equity-based compensation expense | 1,143 | | | 1,183 | |
| BOLI income | (1,452) | | | (1,200) | |
| Deferred income tax expense | 934 | | | 395 | |
| Changes in assets and liabilities: | | | |
| Decrease in accrued interest receivable, prepaid expenses and other assets | (16) | | | (9,094) | |
| Increase (decrease) in accrued interest payable, accrued expenses and other liabilities | (4,347) | | | 4,558 | |
| Net cash provided by operating activities | $ | 16,269 | | | $ | 22,392 | |
| Cash Flows From Investing Activities | | | |
| (Increase) decrease in interest-bearing deposits at other financial institutions | $ | 21,820 | | | $ | 142,045 | |
| Purchases of securities available-for-sale | — | | | (47,160) | |
| Proceeds from sales of securities available-for-sale | 86,922 | | | — | |
| | | |
| Proceeds from redemptions of securities available-for-sale | 20,795 | | | 37,076 | |
| Net redemption (purchase) of restricted stock | 6,124 | | | (9,240) | |
| Net increase (decrease) in loans | 13,777 | | | (334,426) | |
| Purchase of bank-owned life insurance | — | | | (15,000) | |
| Distribution received from minority owned investment | — | | | 1,040 | |
| | | |
| | | |
| Purchases of premises and equipment, net | (212) | | | (166) | |
| Net cash provided by (used in) investing activities | $ | 149,226 | | | $ | (225,831) | |
| Cash Flows From Financing Activities | | | |
| Net (decrease) increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits | $ | (28,056) | | | $ | (330,603) | |
| Net increase (decrease) in time deposits | 43,179 | | | 276,989 | |
| Redemption of subordinated debt, net | — | | | (1,250) | |
| (Decrease) increase in federal funds purchased | (30,000) | | | 30,000 | |
| Net (decrease) increase in FHLB advances | (150,000) | | | 210,000 | |
| | | |
| Repurchase of shares of common stock | (1,460) | | | (730) | |
| Taxes from vesting of restricted stock units | (113) | | | — | |
| Common stock issuance | 1,744 | | | 1,673 | |
| Net cash (used in) provided by financing activities | $ | (164,706) | | | $ | 186,079 | |
| Net increase (decrease) in cash and cash equivalents | $ | 789 | | | $ | (17,360) | |
| Cash and cash equivalents, beginning of year | 7,253 | | | 24,613 | |
| Cash and cash equivalents, end of year | $ | 8,042 | | | $ | 7,253 | |
See Notes to Consolidated Financial Statements.
FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Changes in
Stockholders’Stockholders' Equity
For the years ended December 31,
20202023 and
20192022
(In thousands)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | |
| | | | | | | Additional | | | | | Other | | | |
| | | | Common | | Paid-in | | Retained | | Comprehensive | | | |
| | Shares | | Stock | | Capital | | Earnings | | Income (Loss) | | Total |
Balance at December 31, 2018 | | 13,713 | | $ | 137 | | $ | 123,882 | | $ | 36,728 | | $ | (2,411) | | $ | 158,336 |
Net income | | — | | | — | | | — | | | 15,828 | | | — | | | 15,828 |
Adoption of lease accounting standard | | — | | | — | | | — | | | (86) | | | — | | | (86) |
Other comprehensive income | | — | | | — | | | — | | | — | | | 3,101 | | | 3,101 |
Common stock issuance for options exercised, net | | 174 | | | 2 | | | 1,218 | | | — | | | — | | | 1,220 |
Vesting of restricted stock grants | | 15 | | | — | | | — | | | — | | | — | | | — |
Stock-based compensation expense | | — | | | — | | | 679 | | | — | | | — | | | 679 |
Balance at December 31, 2019 | | 13,902 | | $ | 139 | | $ | 125,779 | | $ | 52,470 | | $ | 690 | | $ | 179,078 |
Net income | | — | | | — | | | — | | | 15,501 | | | — | | | 15,501 |
Other comprehensive income | | — | | | — | | | — | | | — | | | 1,136 | | | 1,136 |
Repurchase of common stock | | (487) | | | (5) | | | (7,275) | | | — | | | — | | | (7,280) |
Common stock issuance for options exercised, net | | 62 | | | 1 | | | 374 | | | — | | | — | | | 375 |
Vesting of restricted stock grants | | 34 | | | — | | | — | | | — | | | — | | | — |
Stock-based compensation expense | | — | | | — | | | 690 | | | — | | | — | | | 690 |
Balance at December 31, 2020 | | 13,511 | | $ | 135 | | $ | 119,568 | | $ | 67,971 | | $ | 1,826 | | $ | 189,500 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| 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 | |
| Net income | — | | | — | | | — | | | 3,822 | | | — | | | 3,822 | |
| Impact of adoption of ASU 2016-13 | — | | | — | | | — | | | (2,808) | | | — | | | (2,808) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 12,407 | | | 12,407 | |
| Repurchase of common stock | (116) | | | (1) | | | (1,447) | | | (12) | | | — | | | (1,460) | |
| Common stock issuance for options exercised, net | 364 | | | 4 | | | 1,740 | | | — | | | — | | | 1,744 | |
| Vesting of restricted stock grants | 84 | | | — | | | (113) | | | — | | | — | | | (113) | |
| | | | | | | | | | | |
| Stock-based compensation expense | — | | | — | | | 1,143 | | | — | | | — | | | 1,143 | |
| Balance at December 31, 2023 | 17,807 | | | $ | 178 | | | $ | 125,209 | | | $ | 115,890 | | | $ | (24,160) | | | $ | 217,117 | |
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(
Dollars$ in thousands, except
share and per share data)
Note 1. Organization and Summary of Significant Accounting Policies
FVCBankcorp, Inc. (the
“Company”"Company"), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the
“Bank”"Bank"). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.
The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C.
and Baltimore metropolitan
area.areas. The Bank commenced
regular operations on November 27, 2007 and is a member of the Federal Reserve System
and the Federal Deposit Insurance Corporation.(the "Federal Reserve"). It is subject to the regulations of the
Board of Governors of the Federal Reserve
System and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.
Note 2.
On August 31, 2021, the Bank made an investment in Atlantic Coast Mortgage, LLC ("ACM") for $20.4 million. As a result of this investment, the Bank obtained a 28.7% ownership interest in ACM. The investment is accounted for using the equity method of accounting. In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanant financing line, and has developed portfolio mortgage products to diversify the Bank's held to investment loan portfolio.
On December 15, 2022, the Company announced that the Board of Directors approved a five-for-four split of the Company's common stock in the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31, 2023. Earnings per share and all other per share information reflected in the Company's consolidated financial statements have been adjusted for the five-for-four split of the Company's common stock for comparative purposes.
Summary of Significant Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America
("GAAP") and conform to general practices within the banking industry.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and contingent liabilities,
atas of the date of the consolidated financial statements and reported 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
business combinations and impairment testing of goodwill, the allowance for
loancredit losses
- loans, the allowance for credit losses - securities, and the valuation of deferred tax
assets, other-than-temporary impairment, and the valuation of other real estate owned.assets.
(c) Accounting for Business Combinations
Business combinations are accounted for under the acquisition method. The acquisition 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
($ in thousands, except per share data)
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
(e) Investment Securities
Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive
(loss) income, net of tax. Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Gains and losses on the sale of securities are determined using the specific identification method.
The Company regularly evaluates its securities whose values have declined below their amortized cost to assess whether the decline in fair value
An individual debt security is other-than-temporary. The Company considers various factors in determining whether a decline in fair value is other-than-temporary including the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads, the expected recovery period and other quantitative and qualitative information. The valuation of securities for impairment is a process subject to estimation, judgment and uncertainty and is intended to determine whether declines inimpaired when the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions and future changes in assessments of the aforementioned factors. Itsecurity is expected that such factors will change in the future, which may result in future other-than-temporary impairments. For impairments of debt securities that are deemed to be other-than-temporary, the credit portion of an other-than-temporary impairment loss is recognized in earnings and the non-credit portion is recognized in accumulated other comprehensive income in those situations whereless than its amortized cost. If the Company does not intendintends to sell thean available-for-sale security andin an unrealized loss position or it is more likely than not will be reversed through our provision for credit losses, then the difference between the amortized cost basis of the security and its fair value is recognized in the Company's consolidated statements of income. For impaired debt securities that the Company will not be requiredhas both the intent and ability to sellhold, the securities are evaluated to determine if a credit loss exists. The allowance for credit losses on the investment securities is recognized through our provision for credit losses and limited by the unrealized losses of a security priormeasured as the difference between the security’s amortized cost and fair value.
The Company charges off any portion of an investment security that it determines is uncollectible. The amortized cost basis, excluding accrued interest, is charged off through the allowance for credit losses. Accrued interest is charged off as a reduction to
recovery.interest income. Recoveries of previously charged off principal amounts are recognized in our provision for credit losses when received.
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.method.
(f) Loans and Allowance for
LoanCredit Losses
Loans receivable that management has
Allowance for Credit Losses
The Company adopted the
intent and ability to hold for the foreseeable future or until loan maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, and net of the allowance for loan losses and deferred fees and costs. Loan origination fees and certain direct origination costs are deferred and amortized as an adjustment of the yield using the payment terms required by the loan contract.During 2018, as a result of the Company’s acquisition of Colombo, the loan portfolio was segregated between loans initially accounted forcurrent expected credit loss model ("CECL") 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”Update ("ASU") Topic 310-30 or ASC Topic 310-20.
Purchased credit-impaired (“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 0 allowance for loan losses.Instruments” on January 1, 2023. The Company accounts for interest income on all loans acquired atrecorded a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows.net reduction of retained earnings of $2.8 million upon adoption. 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 throughadoption adjustment to any previously recognized allowance for loan loss for that pool of loans and then through an increase in the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision andincluded an increase in the allowance for loan losses. Therefore,credit losses on loans of $2.9 million in addition to an increase of $800 thousand to the reserve for unfunded commitments.
Allowance for Credit Losses - Loans and Unfunded Commitments
The allowance for
credit losses ("ACL") represents an estimate of the expected credit losses in the Company's held for investment loan
portfolio as of a valuation date. Accounting Standards Codification ("ASC") 326 replaced the incurred loss impairment model that recognizes losses
on these impaired pools reflect onlywhen it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses
incurred afterimmediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the
acquisition (representingamortized cost basis of loans to present the
present value of all cash flows that were expected at acquisition but currently are not expected to be received).The Company periodically evaluates the remaining contractual required payments due and estimates of cash flowsnet amount expected to be collected on the held for PCI loans. These evaluations, performed quarterly, requireinvestment loan portfolio. Loans, or portions thereof, are charged off against the continued use of key assumptions and estimates, similarACL when they are deemed uncollectible. Expected recoveries are recorded to the initial estimateextent they do not exceed the aggregate of fair value. Changes in the contractual required payments dueamounts previously charged-off 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 better than originally expected, the Company 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 the Company’s interest incomecharged-off.
Reserves on
loans.Loans are generally placed into nonaccrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management, the collection of principal and/or interest is in doubt. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest or past-due less than 90 days and the borrower demonstrates the ability to pay and remain current. Loans are charged-off when a loan or a portion thereof is considered uncollectible. When cash payments are received, they are applied to principal first, then to accrued interest. It is the Company’s policy not to record interest income on nonaccrual loans until principal has become current. In certain instances, accruing loans that do not share risk characteristics are past due 90 days or more as to principal or interest may not goevaluated on nonaccrual status if the Company determines that thean individual basis. Nonaccrual loans are well securedspecifically reviewed for loss potential and when deemed appropriate are in the process of collection.
Nonperforming assets include nonaccrual loans, loans past-due 90 days or more and other real estate owned.
assigned a reserve based on an individual evaluation. The allowance for loan losses is increased or decreased by provisions for reversal of loan losses, increased by recoveries of previously charged-off loans, and decreased by loan charge-offs.
The Company maintains the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in the loan portfolio. Both the amountremainder of the provision expense and the level of the allowanceportfolio, representing all loans not evaluated individually for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit 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 credit 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.
For purposes of monitoring the performance of the loan portfolio and estimating the allowance for loan losses, the Company’s loans receivable portfolioimpairment, is segmented as follows: commercial real estate, commercial and industrial, commercial construction, consumer residential, and consumer nonresidential.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
Commercial Real Estate Loans. Commercial real estate loans are secured by both owner occupiedbased on call report code and investor owned commercial properties, including multi-family residential real estate. Collateral for this loan type includes various typesprocessed through a cash flow valuation model. In particular, loan-level probability of commercial real estate, including office, retail, warehouse, industrialdefault ("PD") and other non-residential types of properties.
These loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income-producing propertiesseverity (also referred to as loss given default ("LGD")) is typically dependent upon the successful operation ofapplied to derive a business or real estate project and thus may be subject to adverse conditions in the commercial real estate market or in the general economy. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans generally do not exceed 80%.
Commercial and Industrial Loans. The Company makes commercial loans to qualified businesses within its market area. The commercial lending portfolio consists primarily of commercial and industrial loans for a variety of business purposes, including working capital and the financing of accounts receivable, property, plant and equipment. The Company has a government contract lending group which provides secured lending to government contracting firms and businesses based primarily on receivables from the federal government.
Commercial and industrial loans generally have a higher degree of risk than other certain types of loans. Commercial loans typically are made on the basisbaseline expected loss as of the borrower’s ability to repay the loan from the cash flow from its businessvaluation date. These expected default and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory, the values of which may fluctuate over time and generally cannot be appraised with as much precision as residential real estate. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent upon the commercial success of the business itself. To manage these risks, the Company’s policy is to secure commercial loans originated with both the assets of the business,severity rates, which are subject to the risks described above,regression-derived and other additional collateral and guarantees that may be available.
Commercial Construction 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.
Consumer Residential. This portfolio consists primarily of home equity lines of credit (“HELOC”) 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.
Consumer 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.
Consumer loans may entail greater risk than certain other types of loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciable assets, such as automobiles.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The Company’s policy for consumer loans is to accept moderate risk while minimizing losses, primarily through a careful credit and financial analysis of the borrower. In evaluating consumer loans, 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.
The Company’s allowance for loan losses is based first on a segmentation of its loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on loan segments, whichpeer historical loan-level performance data, are largely based oncalibrated to incorporate the typeCompany's reasonable and supportable forecast of collateral underlying each loan. For purposes of this analysis, the Company categorizes loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. future losses as well as any necessary qualitative adjustments.
Typically, financial institutions use their historical loss experience and trends in losses for each loan categorysegment which are then adjusted for portfolio trends and economic and environmental factors in determining their allowance for loan losses.the ACL. Since the Bank’s inception in 2007, the BankCompany has experienced minimal loss history within its loan portfolio. BecauseDue to the fact that limited internal loss history exists to generate statistical significance, management determined it was most prudent to rely on peer data when deriving its best estimate of this,PD and LGD. As part of the Company's estimation process, management will continue to assess the reasonableness of the data, assumptions, and model methodology utilized to derive its allowance for credit losses.
For each of the modeled loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on internal loan-level historical data. The Company utilizes national unemployment for its reasonable and supportable forecasting of expected default within the cash flow model. 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.
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a reserve for unfunded commitments on off-balance sheet credit exposures through a charge to provision for credit loss expense in its Consolidated Statement of Income. The reserve for unfunded commitments is estimated by call report code segmentation as of the valuation date under the CECL model usesusing the average losssame methodologies as portfolio loans taking utilization rates of similar institutions (a custom peer group)into consideration. The reserve for unfunded commitments is reflected as a baselineliability on the Company's Consolidated Balance Sheet.
The Company's methodology utilized in the estimation of the ACL, which is then adjustedperformed at least quarterly, is designed to be dynamic and responsive to changes in its loan portfolio credit quality, composition, and forecasted economic conditions. The review of the reasonableness and appropriateness of the ACL is reviewed by the ACL Committee for approval as of the valuation date. Additionally, information is provided to the Board of Directors on a quarterly basis along with the Company's consolidated financial statements.
Collateral Dependent Financial Assets
Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the
Company’s particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.The Company also maintains an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining discount recorded at the time of acquisition.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. The Company determines and recognizes impairment of certain loans when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including past-due interest. The Company individually assigns loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. The Company evaluates the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, ordifference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the loan, discountedfair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Notes to consider estimated costsConsolidated Financial Statements
($ in thousands, except per share data)
Allowance for Credit Losses - Securities
The Company evaluates its available-for-sale and held-to-maturity debt securities portfolios for expected credit losses as of the valuation date under ASC 326. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it would be required to sell, the collateral for collateral-dependent loans.security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income during the current period. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other driving factors. If the net collateralCompany's assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the credit loss (which represents the difference between the expected cash flows and amortized cost basis), limited by the amount that the fair value is less than the loan balance (includingamortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.
The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that the Company will have to sell the security before recovery of the Company's amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.
Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when the Company believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a noncredit-related impairment.
As part of its estimation process, the Company have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and any unamortized premium or discount associatedreport accrued interest separately in other assets in the Consolidated Balance Sheet. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable. This approach is consistent with the loan) an impairmentCompany's nonaccrual policy implemented for its loan portfolio.
The Company separately evaluates its held-to-maturity investment securities for any credit losses. If it determines that a security indicates evidence of deteriorated credit quality, the security is
recognizedindividually-evaluated and a
specific reservediscounted cash flow analysis is
established forperformed and compared to the
impaired loan. Loansamortized cost basis. As of December 31, 2023, the Company had one security classified as
loss loans are fully reserved or charged-off.In addition, various regulatory agencies, as partheld-to-maturity with an amortized cost basis of their examination process, periodically review the Company’s allowance for loan losses. These agencies may require the Company to recognize additions to the allowance based on their risk evaluation and credit judgment. Management believes that the allowance for loan losses at December 31, 2020 and 2019 is a reasonable estimate of known and inherent losses in the loan portfolio at those dates.
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$264 thousand with the restructured terms. Loans may be removed fromremainder of 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.
securities portfolio held as available-for-sale. Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
(g) Premises, Equipment, and Equipment
Leases
Land is carried at cost. Premises, furniture, equipment, and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation of premises, furniture and equipment is computed using the straight-line method over estimated useful lives from three to seven years.years. Amortization of leasehold improvements is computed using the straight-line method over the useful lives of the improvements or the lease term, whichever is shorter. Purchased computer software which is capitalized is amortized over estimated useful lives of one to three years.On January 1, 2019, the
The Company
adoptedfollows ASU
No. 2016-02
“Leases"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 $12.7 million for leases existing at the date of adoption.Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less.
Lease liabilities represent the Company’sCompany's obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’sCompany's incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’sCompany's right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than twelve months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. The Company’sCompany's leases provide known escalators that are included in the determination of the lease liability, with the exceptionexception of three lease agreements.The Company’s
Most of the Company's leases offer the option to extend the lease term. For each of the leases, the Company is reasonably certain it will exercise the options and has included the additional time and lease payments in the calculation of the lease liability. None of the
Company’sCompany's leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.
During 2020, the Company closed 2 branch office locations, which resulted in an impairment loss on right-of -use assets of $508 thousand and derecognition of right-of-use assets and lease liabilities of $458 thousand.
(h) Goodwill and Intangible Assets
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is not amortized but is evaluated at least annually for impairment by comparing its fair value with its carrying amount. Impairment is indicated when the carrying amount of a reporting unit exceeds its estimated fair value.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist; that indicate that a goodwill impairment test should be performed. The Company performs the 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.
NaN
No impairment was recorded for
20202023 and
2019.2022.
(i) Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale. At the time of acquisition, these properties are recorded at fair value less estimated selling costs, with any write down charged to the allowance for loan lossesACL and any gain on foreclosure recorded in net income, establishing a new cost basis. Subsequent to foreclosure, valuations of the assets are periodically performed by management, and these assets are subsequently accounted for at lower of cost or fair value less estimated selling costs. Adjustments are made for subsequent decline in the fair value of the assets less selling costs. Revenue and expenses from operations and valuation changes are charged to operating income in the year of the transaction. The Company did not foreclose on any properties during the years endedhad no other real estate owned ("OREO") at December 31, 20202023 and 2019. The Company, through its acquisition of Colombo, did acquire 1 residential real estate property, which was sold for its recorded value in 2019.2022.
(j) Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance date, which is the cash surrender value. The increase in the cash surrender value over time is recorded as other non-interest income. The Company monitors the financial strength and condition of the
counterparty.counterparties.
(k) Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the 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 the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Deferred taxes are provided on a liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’smanagement's judgment. The Company had no such liability recorded as of December 31, 20202023 and 2019.2022. 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.
(m) Comprehensive Income (Loss)
Comprehensive income
(loss) consists of net income and other comprehensive
income.income (loss). Other comprehensive income (loss) includes unrealized gains (losses) on securities available-for-sale and interest rate swaps for
20202023 and
2019,2022, 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 on sale of securities available-for-sale” in the Company’s consolidated statements of income.
(n) Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17.16. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
(o) Equity-based Compensation
The Company recognizes in the income statement the grant date fair value of stock options and other equity-based compensation. The Company classifies stock awards as either an equity award or a liability award. Equity classified awards are valued as of the grant date using either an observable market price or a valuation methodology. Liability classified awards are valued at fair value at each reporting date. For the
periodsyears presented, all of the
Company’sCompany's stock options are classified as equity awards.
The fair value related to forfeitures of stock options and other equity-based compensation are recorded to the income statement as they occur, reducing equity-based compensation expense in that period. During
2017,2018, the Company began granting restricted stock units which are granted at the fair market value of the
Company’sCompany'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,
20202023 and
2019.2022.
Employee 401(k) plan expense is the amount of matching contributions paid by the Company. 401(k) plan expense was $350 $431 thousand and $367$424 thousand for the years ended December 31, 20202023 and 2019,2022, respectively.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Common stock equivalents that may be issued by the Company consist primarily
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
of outstanding stock options and restricted stock units, and the dilutive potential common shares resulting from outstanding stock options and restricted stock units are determined using the treasury method. The effects of anti-dilutive common stock equivalents are excluded from the calculation of diluted earnings per share.
Certain prior year amounts have been reclassified to conform to the current
year’syear's method of presentation. None of these reclassifications were significant.
(s)
Recent Accounting PronouncementsIn
June 2016,August 2020, the Financial Accounting
StandardsStandard Board
(“FASB”("FASB") issued
ASU 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting
Standards Update (“ASU”) No. 2016-13, “Financialfor Convertible Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”and Contracts in an Entity's Own Equity". The
amendmentsASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single 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 derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation 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 today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.certain areas. In addition, the
ASU amendsamendment updates the
accountingdisclosure requirements for
credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updatesconvertible instruments 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 toincrease the
codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has identified a third party vendor to assist in the measurement of expected credit losses under this standard. The implementation committee has completed the data collection process, validated the data inputs, and is in the initial phases of evaluating various allowance methodologies for certain loan segments within 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.Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“ASC”) 326, "Financial Instruments - Credit Losses." It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
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 740 (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.information transparency. For public business entities, such as the Company, 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.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected 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. For public business entities, such as the Company,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.
In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions". ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark ("CODM"), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively. The Bank does not expect the adoption of ASU 2023-06 to have a material impact on its (consolidated) financial statements
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Bank does not expect the adoption of ASU 2023-06 to have a material impact on its (consolidated) financial statements.
(t) Recently Adopted Accounting Developments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. This standard is commonly referred to as the current expected credit loss ("CECL") methodology. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and reserve for unfunded loan commitments, was $3.7 million. The adjustment, net of tax, recorded to stockholders’ equity totaled $2.8 million at January 1, 2023.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructuring ("TDRs"), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. ASU 2022-02 resulted in no material impact to the Company's consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value 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, the FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major 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 or 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. ASU 2022-01 was effective for the Company on January 1, 2023. ASU 2022-01 resulted in no material impact to the Company's consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for 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. ASU 2021-08 was effective for the Company on January 1, 2023. ASU 2021-08 resulted in no material impact to the Company's consolidated financial statements.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principlesGAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”("LIBOR") or another reference rate expected to be discontinued.. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.
The Company had certain loans, interest rate swap agreements, investment securities, and debt obligations with interest rates indexed to LIBOR. The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023. Central banks and regulators around the world commissioned working groups to find suitable replacements for LIBOR and other benchmark rates and to implement financial benchmark reforms more generally.
The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate ("SOFR") for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected.
To facilitate an orderly transition from interbank offered rates (“IBORs”) and other benchmark rates to alternative reference rates (“ARRs”),ARRs, the Company has established an enterprise-wide initiative led by senior management. The objective of this initiative iswas to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. The Company is assessingbenchmarks. ASU 2020-04 and itswas effective for the Company on January 1, 2023. Adoption of ASU 2020-04 resulted in no material impact onto the Company's transition away from LIBOR for its loan and otherconsolidated financial instruments.On March 12, 2020, the SEC finalized amendments to the definitions of its "accelerated filer" and "large accelerated filer" definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer's first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes-Oxley Act concerning auditor attestation over internal control over financial reporting as an "accelerated filer" as it had more than $75 million in public float but less than $700 million at the end of the Company's most recent second quarter. The rule change expands the definition of "smaller reporting companies" to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company meets this expanded category of small reporting company and is no longer considered an accelerated filer. If the Company's annual revenues exceed $100 million, its category will change back to "accelerated filer". The classifications of "accelerated filer" and "large accelerated filer" require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All are required to obtain and file annual financial statement audits, as well as provide management's assertion on effectiveness of ICFR, but the external auditor attestation of ICFR is not required for smaller reporting companies. As the Company has total assets exceeding $1.0 billion, it remains subject to the Federal Deposit Insurance Corporation Act, which requires an auditor attestation concerning ICFR. As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company's annual reporting and audit requirements.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (the agencies), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors," a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment generally for 90 days. As of December 31, 2020, the Company has executed 277 of these deferrals on outstanding loan balances of $360.2 million. There were 6 loans that remained under deferral on outstanding loan balances of $12.5 million at December 31, 2020.
In August 2020, the FASB issued ASU No. 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single 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 derivative 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 the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, in cluding 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 2020-06 to have a material impact on its consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs." This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.
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 price of the Company’s common stock during the five trading day period ended on October 10, 2018 of $19.614 (the “Average Closing Price”), the shareholders 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, 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 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 severance payments. In 2019, $133 thousand of primarily legal and contract termination expenses associated with the Colombo acquisition was recorded.
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Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transactions:
| | | |
Assets acquired: | | October 12, 2018 |
Cash and cash equivalents | | $ | 23,469 |
Interest-bearing deposits | | | 3,874 |
Securities available-for-sale | | | 12,732 |
Restricted stock, at cost | | | 1,391 |
Loans | | | 142,593 |
Premises and equipment | | | 789 |
Deferred tax assets, net | | | 4,289 |
Goodwill | | | 6,512 |
Core deposit intangible, net | | | 1,950 |
Accrued interest receivable | | | 406 |
Prepaid expense | | | 161 |
Other real estate owned (OREO) | | | 358 |
Other assets | | | 638 |
Total assets acquired | | $ | 199,162 |
| | | |
Liabilities assumed: | | | |
Deposits: | | | |
Non-interest bearing | | $ | 19,080 |
Interest-bearing checking, savings and money market | | | 48,426 |
Time deposits | | | 70,778 |
Total deposits | | | 138,284 |
FHLB advances | | | 27,577 |
Accrued interest payable | | | 127 |
Accrued expenses and other liabilities | | | 294 |
Total liabilities assumed: | | $ | 166,282 |
Total consideration paid | | $ | 32,880 |
The fair value estimates were subject to change for up to one year after the closing date of 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 thousand for a purchase credit impaired loan inadvertently included in the purchase performing loan category and for deferred tax assets based on the additional credit mark and final tax return of Colombo.
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.
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Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
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.
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.
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Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
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.
Note 4.2. Investment Securities and Other Investments
Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of December 31,
20202023 and
2019,2022, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
| 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 | $ | 9,998 | | | $ | — | | | $ | (1,528) | | | $ | 8,470 | |
| Securities of state and local municipalities tax exempt | 1,000 | | | — | | | (3) | | | 997 | |
| Securities of state and local municipalities taxable | 453 | | | — | | | (49) | | | 404 | |
| Corporate bonds | 20,204 | | | — | | | (2,556) | | | 17,648 | |
| SBA pass-through securities | 62 | | | — | | | (5) | | | 57 | |
| Mortgage-backed securities | 170,179 | | | — | | | (29,237) | | | 140,942 | |
| Collateralized mortgage obligations | 3,809 | | | — | | | (732) | | | 3,077 | |
| Total Available-for-sale Securities | $ | 205,705 | | | $ | — | | | $ | (34,110) | | | $ | 171,595 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
| 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 | |
No allowance f | | | | | | | | | | | | |
| | December 31, 2020 |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | (Losses) | | Value |
Held-to-maturity | | | | | | | | | | | | |
Securities of state and local municipalities tax exempt | | $ | 264 | | $ | 10 | | $ | — | | $ | 274 |
Total Held-to-maturity Securities | | $ | 264 | | $ | 10 | | $ | — | | $ | 274 |
Available-for-sale | | | | | | | | | | | | |
Securities of state and local municipalities tax exempt | | $ | 3,398 | | $ | 95 | | $ | — | | $ | 3,493 |
Securities of state and local municipalities taxable | | | 804 | | | 14 | | | — | | | 818 |
Corporate bonds | | | 12,974 | | | 80 | | | (237) | | | 12,817 |
SBA pass-through securities | | | 138 | | | 3 | | | — | | | 141 |
Mortgage-backed securities | | | 81,296 | | | 2,479 | | | (61) | | | 83,714 |
Collateralized mortgage obligations | | | 24,476 | | | 718 | | | (26) | | | 25,168 |
Total Available-for-sale Securities | | $ | 123,086 | | $ | 3,389 | | $ | (324) | | $ | 126,151 |
or credit losses was recognized as of December 31, 2023 related to the Company's investment portfolio.
| | | | | | | | | | | | |
| | December 31, 2019 |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | (Losses) | | Value |
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 | | $ | 4,000 | | $ | — | | $ | (4) | | $ | 3,996 |
Securities of state and local municipalities tax exempt | | | 3,662 | | | 76 | | | — | | | 3,738 |
Securities of state and local municipalities taxable | | | 969 | | | — | | | (14) | | | 955 |
Corporate bonds | | | 6,984 | | | 78 | | | (81) | | | 6,981 |
SBA pass-through securities | | | 163 | | | — | | | (4) | | | 159 |
Mortgage-backed securities | | | 96,358 | | | 1,077 | | | (246) | | | 97,189 |
Collateralized mortgage obligations | | | 28,236 | | | 290 | | | (219) | | | 28,307 |
Total Available-for-sale Securities | | $ | 140,372 | | $ | 1,521 | | $ | (568) | | $ | 141,325 |
The Company had securities with a market value of $9.2of $0.0 million and $11.3$4.1 million pledged with the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”"FRB") for the years ended December 31, 20202023 and 2019,2022, respectively.
There were 0 The Company had securities of $7.2 million and $104.6 million pledged with the Treasury Board of Virginia at the Community Bankers’Bankers' Bank atfor the years ended December 31, 20202023 and 2019.
2022, respectively.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The Company monitors the credit quality of held-to-maturity securities through the use of credit ratings. The Company monitors credit ratings on a periodic basis. The following table summarizes the amortized cost of held-to-maturity securities at December 31, 2023, aggregated by credit quality indicator:
| | | | | | | | |
| | Held-to-maturity |
| December 31, 2023 | | Securities of state and local municipalities tax exempt |
| Aa3 | | $ | 264 | |
| Total | | $ | 264 | |
The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 20202023 and 2019,2022, respectively.One security was held as of December 31, 2023 for which the book value and fair value were equal and therefore neither an unrealized gain nor loss was reflected herein. 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 daysdays during the priorpast twelve-month period. SecuritiesAvailable-for-sale securities that have been in a continuous unrealized loss position as of December 31, 2023 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| At December 31, 2023 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Securities of U.S. government and federal agencies | | $ | — | | | $ | — | | | $ | 8,470 | | | $ | (1,528) | | | $ | 8,470 | | | $ | (1,528) | |
| Securities of state and local municipalities tax exempt | | — | | | — | | | 997 | | | (3) | | | 997 | | | (3) | |
| Securities of state and local municipalities taxable | | — | | | — | | | 404 | | | (49) | | | 404 | | | (49) | |
| Corporate bonds | | — | | | — | | | 16,898 | | | (2,556) | | | 16,898 | | | (2,556) | |
| SBA pass-through securities | | — | | | — | | | 57 | | | (5) | | | 57 | | | (5) | |
| Mortgage-backed securities | | — | | | — | | | 140,942 | | | (29,237) | | | 140,942 | | | (29,237) | |
| Collateralized mortgage obligations | | — | | | — | | | 3,077 | | | (732) | | | 3,077 | | | (732) | |
| Total | | $ | — | | | $ | — | | | $ | 170,845 | | | $ | (34,110) | | | $ | 170,845 | | | $ | (34,110) | |
Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| At December 31, 2022 | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| Securities of U.S. government and federal agencies | | $ | — | | | $ | — | | | $ | 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) | |
Table of Contents | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
At December 31, 2020 | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Corporate bonds | | $ | 4,240 | | $ | (10) | | $ | 2,000 | | $ | (227) | | $ | 6,240 | | $ | (237) |
Mortgage-backed securities | | | 17,504 | | | (61) | | | — | | | — | | | 17,504 | | | (61) |
Collateralized mortgage obligations | | | 2,098 | | | (26) | | | — | | | — | | | 2,098 | | | (26) |
Total | | $ | 23,842 | | $ | (97) | | $ | 2,000 | | $ | (227) | | $ | 25,842 | | $ | (324) |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Securities of U.S. government and federal agencies: | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
At December 31, 2019 | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Securities of U.S. government and federal agencies | | $ | 2,997 | | $ | (3) | | $ | 999 | | $ | (1) | | $ | 3,996 | | $ | (4) |
Securities of state and local municipalities taxable | | | — | | | — | | | 955 | | | (14) | | | 955 | | | (14) |
Corporate bonds | | | 2,463 | | | (22) | | | 941 | | | (59) | | | 3,404 | | | (81) |
SBA pass-through securities | | | — | | | — | | | 159 | | | (4) | | | 159 | | | (4) |
Mortgage-backed securities | | | 15,529 | | | (73) | | | 20,475 | | | (173) | | | 36,004 | | | (246) |
Collateralized mortgage obligations | | | 7,479 | | | (94) | | | 7,975 | | | (125) | | | 15,454 | | | (219) |
Total | | $ | 28,468 | | $ | (192) | | $ | 31,504 | | $ | (376) | | $ | 59,972 | | $ | (568) |
Corporate bonds: The unrealized losses on the investments in corporate bondstwo available-for-sale securities were caused by interest rate increases. The contractual terms of thosethese investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. NaN
Securities of state and local municipalities tax-exempt: The unrealized losses on two of the investments in securities of state and local municipalities was 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. These investments carry an S&P investment grade rating of AA+ and AA3.
Securities of state and local municipalities taxable: The unrealized loss on one of the investments in securities of state and local municipalities was caused by interest rate increases. The contractual terms of this investment does 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 AAA.
Corporate bonds: The unrealized losses on the investments in corporate bonds 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. One of these investments carries an S&P investment grade rating of BBB+, while one has a rating of BB.BBB. The remaining tenthirteen investments do not carry a rating.
SBA pass-through securities: The unrealized losses on one available-for-sale security was 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.
Mortgage-backed securities: The unrealized losses on the Company'sCompany’s investment in 436 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, 2020.2023.
Collateralized mortgage obligations (CMOs)("CMOs"): The unrealized loss associated with 211 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, 2020.2023.
The Company has evaluated its available-for-sale investments securities in an unrealized loss position for credit related impairment at December 31, 2023 and 2022 and concluded no impairment existed based on several factors which included: (1) the majority of these securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) issuers continue to make timely principal and interest payments, and (4) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis. Additionally, the Company’s mortgage-backed investment securities are primarily guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association and do not have credit risk given the implicit and explicit government guarantees associated with these agencies.During 2023, the Company executed a balance sheet repositioning strategy and sold available-for-sale investment securities with a total book value of $102.5 million at a pre-tax loss of $15.6 million and used the net proceeds to reduce existing high cost short-term Federal Home Loan Bank of Atlanta ("FHLB") advances and to fund higher yielding newly originated commercial loans. No securities were sold during 2022.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The amortized cost and fair value of securities available-for-sale as ofat December 31, 2020,2023, 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.
| | | | | | | | | | | | |
| | 2020 |
| | Held-to-maturity | | Available-for-sale |
| | Amortized | | Fair | | Amortized | | Fair |
| | Cost | | Value | | Cost | | Value |
After 1 year through 5 years | | $ | — | | $ | — | | $ | 4,021 | | $ | 4,029 |
After 5 years through 10 years | | | 264 | | | 274 | | | 28,598 | | | 29,232 |
After 10 years | | | — | | | — | | | 90,467 | | | 92,890 |
Total | | $ | 264 | | $ | 274 | | $ | 123,086 | | $ | 126,151 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | | | | | | | | | | |
| Held-to-maturity | | Available-for-sale | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | | | | | | | | | | | | | | | | |
| After 3 months through 1 year | $ | — | | | $ | — | | | $ | 1,000 | | | $ | 997 | | | | | | | | | | | | | | | | | | |
| After 1 year through 5 years | 264 | | | 252 | | | 1,113 | | | 1,099 | | | | | | | | | | | | | | | | | | |
| After 5 years through 10 years | — | | | — | | | 30,148 | | | 26,033 | | | | | | | | | | | | | | | | | | |
| After 10 years | — | | | — | | | 173,444 | | | 143,466 | | | | | | | | | | | | | | | | | | |
| Total | $ | 264 | | | $ | 252 | | | $ | 205,705 | | | $ | 171,595 | | | | | | | | | | | | | | | | | | |
For the years ended December 31,
20202023 and
2019,2022, proceeds from
maturities, calls, and principal repayments of securities were
$38.5$20.8 million and
$24.1$37.1 million,
respectively. During 2020 and 2019, proceeds from sales of securities amounted to $13.2 million and $0 , respectively, and gross realized gains amounted to $141 thousand and $3 thousand, respectively. There were
0$86.9 million securities sold during 2023 and none in 2022. There were 15.6 million realized losses in
20202023 and
2019.none in 2022.
The Company has other investments in the form of restricted stock totaling
$6.6$9.5 million and
$6.0$15.6 million at December 31,
20202023 and
2019,2022, respectively. The following table discloses the types of investments included in other investments:
| | | | | | |
| | 2020 | | 2019 |
Federal Reserve stock | | $ | 3,973 | | $ | 4,018 |
FHLB stock | | | 2,443 | | | 1,852 |
Community Bankers' Bank stock | | | 122 | | | 122 |
Atlantic Bankers' Bank stock | | | 25 | | | 25 |
| | $ | 6,563 | | $ | 6,017 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Federal Reserve stock | $ | 3,586 | | | $ | 4,378 | |
| FHLB stock | 5,755 | | | 11,087 | |
| Community Bankers' Bank stock | 122 | | | 122 | |
| Atlantic Bankers' Bank stock | 25 | | | 25 | |
| Total | $ | 9,488 | | | $ | 15,612 | |
As
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’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.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Note
5.3. Loans and Allowance for
LoanCredit Losses
A summary of loan balances by type follows:
| | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| | Originated | | Acquired | | Total | | Originated | | Acquired | | Total |
Commercial real estate | | $ | 761,876 | | $ | 28,149 | | $ | 790,025 | | $ | 709,046 | | $ | 38,629 | | $ | 747,675 |
Commercial and industrial | | | 271,039 | | | 4,295 | | | 275,334 | | | 107,698 | | | 7,405 | | | 115,103 |
Commercial construction | | | 220,845 | | | 1,474 | | | 222,319 | | | 210,933 | | | 5,050 | | | 215,983 |
Consumer real estate | | | 133,940 | | | 33,932 | | | 167,872 | | | 136,762 | | | 46,050 | | | 182,812 |
Consumer nonresidential | | | 15,802 | | | 33 | | | 15,835 | | | 11,205 | | | 85 | | | 11,290 |
| | $ | 1,403,502 | | $ | 67,883 | | $ | 1,471,385 | | $ | 1,175,644 | | $ | 97,219 | | $ | 1,272,863 |
Less: | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 14,333 | | | 625 | | | 14,958 | | | 10,202 | | | 29 | | | 10,231 |
Unearned income and (unamortized premiums), net | | | 5,302 | | | — | | | 5,302 | | | 2,337 | | | — | | | 2,337 |
Loans, net | | $ | 1,383,867 | | $ | 67,258 | | $ | 1,451,125 | | $ | 1,163,105 | | $ | 97,190 | | $ | 1,260,295 |
| | | | | | | | |
| | December 31, 2023 |
| | Total |
| Commercial real estate | | $ | 1,091,633 | |
| Commercial and industrial | | 219,873 | |
| Commercial construction | | 147,998 | |
| Consumer real estate | | 363,317 | |
| Consumer nonresidential | | 5,743 | |
| | $ | 1,828,564 | |
| Less: | | |
| Allowance for credit losses | | 18,871 | |
| | |
| Loans, net | | $ | 1,809,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | | | | | Originated | | Acquired | | Total |
| Commercial real estate | | | | | | | $ | 1,085,513 | | | $ | 14,748 | | | $ | 1,100,261 | |
| Commercial and industrial | | | | | | | 242,307 | | | 2,913 | | | 245,220 | |
| Commercial construction | | | | | | | 147,436 | | | 503 | | | 147,939 | |
| Consumer real estate | | | | | | | 322,579 | | | 17,012 | | | 339,591 | |
| Consumer nonresidential | | | | | | | 7,661 | | | 24 | | | 7,685 | |
| | | | | | | $ | 1,805,496 | | | $ | 35,200 | | | $ | 1,840,696 | |
| Less: | | | | | | | | | | | |
| Allowance for credit losses | | | | | | | 16,040 | | | — | | | 16,040 | |
| Unearned income and (unamortized premiums), net | | | | | | | 262 | | | — | | | 262 | |
| Loans, net | | | | | | | $ | 1,789,194 | | | $ | 35,200 | | | $ | 1,824,394 | |
The loan portfolio summary is presented on amortized cost basis as of December 31, 2023. For the year ended December 31, 2022, the loan portfolio is presented at outstanding principal balance.
During 2018, 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).
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC 310-20. The outstanding principal balance and related carrying amount of acquired loans included in the consolidated statement of conditionbalance sheets as of December 31, 2020 and 2019 are2022 is as follows:
| | | |
| | 2020 |
Purchased credit impaired acquired loans evaluated individually for future credit losses | | | |
Outstanding principal balance | | $ | 4,010 |
Carrying amount | | | 3,064 |
Other acquired loans | | | |
Outstanding principal balance | | | 65,656 |
Carrying amount | | | 64,819 |
Total acquired loans | | | |
Outstanding principal balance | | | 69,666 |
Carrying amount | | | 67,883 |
| | | |
| | 2019 |
Purchased credit impaired acquired loans evaluated individually for future credit losses | | | |
Outstanding principal balance | | $ | 5,605 |
Carrying amount | | | 4,810 |
Other acquired loans | | | |
Outstanding principal balance | | | 93,587 |
Carrying amount | | | 92,409 |
Total acquired loans | | | |
Outstanding principal balance | | | 99,192 |
Carrying amount | | | 97,219 |
| | | | | |
| December 31, 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 | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The following table presents changes forduring the year ended December 31, 2020 and 20192022, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.
| | | |
(In thousands) | | | |
Balance at January 1, 2020 | | $ | 371 |
Accretion | | | (878) |
Reclassification of nonaccretable difference due to improvement in expected cash flows | | | 691 |
Other changes, net | | | 32 |
Balance at December 31, 2020 | | $ | 216 |
(In thousands) | | | |
Balance at January 1, 2019 | | $ | 357 |
Accretion | | | (136) |
Reclassification of nonaccretable difference due to improvement in expected cash flows | | | 78 |
Other changes, net | | | 72 |
Balance at December 31, 2019 | | $ | 371 |
| | | | | |
| |
| 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 | $ | — | |
| |
| |
| |
| |
| |
| |
An analysis of the allowance for
loancredit losses for the years ended December 31,
20202023 and
20192022 follows:
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Real Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
2020 | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 6,399 | | $ | 1,275 | | $ | 2,067 | | $ | 417 | | $ | 73 | | $ | 10,231 |
Charge-offs | | | (115) | | | — | | | — | | | (41) | | | (254) | | | (410) |
Recoveries | | | 9 | | | 62 | | | — | | | 2 | | | 48 | | | 121 |
Provision | | | 2,998 | | | 1,209 | | | (107) | | | 312 | | | 604 | | | 5,016 |
Ending Balance | | $ | 9,291 | | $ | 2,546 | | $ | 1,960 | | $ | 690 | | $ | 471 | | $ | 14,958 |
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Real Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
2019 | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 5,548 | | $ | 1,474 | | $ | 1,285 | | $ | 518 | | $ | 334 | | $ | 9,159 |
Charge-offs | | | (20) | | | — | | | — | | | — | | | (692) | | | (712) |
Recoveries | | | 4 | | | 35 | | | — | | | 2 | | | 23 | | | 64 |
Provision | | | 867 | | | (234) | | | 782 | | | (103) | | | 408 | | | 1,720 |
Ending Balance | | $ | 6,399 | | $ | 1,275 | | $ | 2,067 | | $ | 417 | | $ | 73 | | $ | 10,231 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
Real Estate | | Commercial and
Industrial | | Commercial
Construction | | Consumer Real
Estate | | Consumer
Nonresidential | | Total |
| 2023 | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | |
| Beginning Balance, Prior to January 1, 2023 Adoption of ASC 326 | | $ | 10,777 | | | $ | 2,623 | | | $ | 1,499 | | | $ | 1,044 | | | $ | 97 | | | $ | 16,040 | |
| Impact of Adoption of ASC 326 | | 498 | | | 452 | | | 70 | | | 1,856 | | | (12) | | | 2,864 | |
| Charge-offs | | (53) | | | (350) | | | — | | | — | | | (15) | | | (418) | |
| Recoveries | | — | | | 3 | | | — | | | 1 | | | 39 | | | 43 | |
| Provision (reversal) | | (1,048) | | | 657 | | | (144) | | | 921 | | | (44) | | | 342 | |
| Ending Balance | | $ | 10,174 | | | $ | 3,385 | | | $ | 1,425 | | | $ | 3,822 | | | $ | 65 | | | $ | 18,871 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
Real Estate | | Commercial and
Industrial | | Commercial
Construction | | Consumer Real
Estate | | Consumer
Nonresidential | | Total |
| 2022 | | | | | | | | | | | | |
| Allowance for credit 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 | |
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2023:
| | | | | | | | | | | | | | |
| | Real Estate | | Business / Other Assets |
| Collateral-Dependent Loans | | | | |
| Commercial real estate | | $ | 20,765 | | | $ | — | |
| Commercial and industrial | | — | | | 1,070 | |
| Commercial construction | | — | | | — | |
| Consumer real estate | | 654 | | | — | |
| Consumer nonresidential | | — | | | — | |
| Total | | $ | 21,419 | | | $ | 1,070 | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The following table presentstables present the recorded investment in loans and impairmentevaluation method as of December 31, 2020 and 2019,2022, by portfolio segment:
| | | | | | | | | | | | | | | | | | |
| | Allowance for Loan Losses |
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial | | Commercial | | Consumer | | Consumer | | | |
| | Real Estate | | and Industrial | | Construction | | Real Estate | | Nonresidential | | Total |
2020 | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Ending Balance: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 625 | | $ | 1,450 | | $ | — | | $ | 25 | | $ | — | | $ | 2,100 |
Purchased credit impaired | | | — | | | — | | | — | | | — | | | — | | | — |
Collectively evaluated for impairment | | | 8,666 | | | 1,096 | | | 1,960 | | | 665 | | | 471 | | | 12,858 |
| | $ | 9,291 | | $ | 2,546 | | $ | 1,960 | | $ | 690 | | $ | 471 | | $ | 14,958 |
| | | | | | | | | | | | | | | | | | |
| | Loans Receivable |
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial | | Commercial | | Consumer | | Consumer | | | |
| | Real Estate | | and Industrial | | Construction | | Real Estate | | Nonresidential | | Total |
2020 | | | | | | | | | | | | | | | | | | |
Financing receivables: | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 13,379 | | $ | 7,086 | | $ | — | | $ | 254 | | $ | — | | $ | 20,719 |
Purchased credit impaired loans | | | 3,007 | | | — | | | — | | | 57 | | | — | | | 3,064 |
Collectively evaluated for impairment | | | 773,639 | | | 268,248 | | | 222,319 | | | 167,561 | | | 15,835 | | | 1,447,602 |
| | $ | 790,025 | | $ | 275,334 | | $ | 222,319 | | $ | 167,872 | | $ | 15,835 | | $ | 1,471,385 |
| | | | | | | | | | | | | | | | | | |
| | Allowance for Loan Losses |
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial | | Commercial | | Consumer | | Consumer | | | |
| | Real Estate | | and Industrial | | Construction | | Real Estate | | Nonresidential | | Total |
2019 | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Ending Balance: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | — | | $ | 364 | | $ | — | | $ | 29 | | $ | — | | $ | 393 |
Purchased credit impaired loans | | | — | | | — | | | — | | | — | | | — | | | — |
Collectively evaluated for impairment | | | 6,399 | | | 911 | | | 2,067 | | | 388 | | | 73 | | | 9,838 |
| | $ | 6,399 | | $ | 1,275 | | $ | 2,067 | | $ | 417 | | $ | 73 | | $ | 10,231 |
| | | | | | | | | | | | | | | | | | |
| | Loans Receivable |
| | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial | | Commercial | | Consumer | | Consumer | | | |
| | Real Estate | | and Industrial | | Construction | | Real Estate | | Nonresidential | | Total |
2019 | | | | | | | | | | | | | | | | | | |
Financing receivables: | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 12,962 | | $ | 5,208 | | $ | 820 | | $ | 1,260 | | $ | — | | $ | 20,250 |
Purchased credit impaired loans | | | 4,043 | | | 400 | | | — | | | 367 | | | — | | | 4,810 |
Collectively evaluated for impairment | | | 730,670 | | | 109,495 | | | 215,163 | | | 181,185 | | | 11,290 | | | 1,247,803 |
| | $ | 747,675 | | $ | 115,103 | | $ | 215,983 | | $ | 182,812 | | $ | 11,290 | | $ | 1,272,863 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Credit Losses |
| Commercial
Real Estate | | Commercial
and Industrial | | Commercial
Construction | | Consumer
Real Estate | | Consumer
Nonresidential | | Total |
| 2022 | | | | | | | | | | | |
| Allowance for credit 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 Estate | | Commercial
and Industrial | | Commercial
Construction | | Consumer
Real Estate | | Consumer
Nonresidential | | Total |
| 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 | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
Impaired loans by class excluding purchased credit impaired as ofat December 31, 2020 and 20192022, are summarized as follows:
Impaired Loans – Originated Loan Portfolio
| | | | | | | | | | | | | | | |
| | | | | Unpaid | | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | Investment | | Recognized |
2020 | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Commercial and industrial | | | 5,287 | | | 5,287 | | | 1,450 | | | 5,682 | | | 358 |
Commercial construction | | | — | | | — | | | -- | | | -- | | | — |
Consumer real estate | | | 97 | | | 97 | | | 25 | | | 99 | | | 6 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 5,384 | | $ | 5,384 | | $ | 1,475 | | $ | 5,781 | | $ | 364 |
2020 | | | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 9,926 | | $ | 9,930 | | $ | — | | $ | 9,938 | | $ | 133 |
Commercial and industrial | | | 1,799 | | | 1,799 | | | — | | | 2,433 | | | 148 |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | — | | | — | | | — | | | — | | | — |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 11,725 | | $ | 11,729 | | $ | — | | $ | 12,371 | | $ | 281 |
Impaired Loans – Acquired Loan Portfolio
| | | | | | | | | | | | | | | |
| | | | | Unpaid | | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | Investment | | Recognized |
2020 | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 3,303 | | $ | 4,316 | | $ | 625 | | $ | 4,811 | | $ | 267 |
Commercial and industrial | | | — | | | — | | | — | | | — | | | — |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | — | | | — | | | — | | | — | | | — |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 3,303 | | $ | 4,316 | | $ | 625 | | $ | 4,811 | | $ | 267 |
2020 | | | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 150 | | $ | 164 | | $ | — | | $ | 164 | | $ | 13 |
Commercial and industrial | | | 157 | | | 215 | | | — | | | 215 | | | 12 |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | — | | | — | | | — | | | — | | | — |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 307 | | $ | 379 | | $ | — | | $ | 379 | | $ | 25 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded
Investment | | Unpaid
Principal
Balance | | Related
Allowance | | Average
Recorded
Investment | | Interest
Income
Recognized |
| 2022 | | | | | | | | | |
| 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 | |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(DollarsThere were no impaired loans in thousands, except share and per share data)
Impaired Loans – Originated Loan Portfolio
| | | | | | | | | | | | | | | |
| | | | | Unpaid | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | Investment | | Recognized |
2019 | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Commercial and industrial | | | 2,040 | | | 2,040 | | | 364 | | | 2,081 | | | 157 |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | — | | | — | | | — | | | — | | | — |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 2,040 | | $ | 2,040 | | $ | 364 | | $ | 2,081 | | $ | 157 |
2019 | | | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 12,792 | | $ | 12,796 | | $ | — | | $ | 13,617 | | $ | 661 |
Commercial and industrial | | | 3,168 | | | 3,323 | | | — | | | 5,387 | | | 340 |
Commercial construction | | | 820 | | | 820 | | | — | | | 816 | | | 56 |
Consumer real estate | | | 940 | | | 940 | | | — | | | 940 | | | 38 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 17,720 | | $ | 17,879 | | $ | — | | $ | 20,760 | | $ | 1,095 |
Impaired Loans – Acquired Loan Portfolio
| | | | | | | | | | | | | | | |
| | | | Unpaid | | | | | Average | | Interest |
| | Recorded | | Principal | | Related | | Recorded | | Income |
| | Investment | | Balance | | Allowance | | Investment | | Recognized |
2019 | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Commercial and industrial | | | — | | | — | | | — | | | — | | | — |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | 169 | | | 163 | | | 29 | | | 163 | | | 10 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 169 | | $ | 163 | | $ | 29 | | $ | 163 | | $ | 10 |
2019 | | | | | | | | | | | | | | | |
With no related allowance: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 170 | | $ | 165 | | $ | — | | $ | 165 | | $ | 13 |
Commercial and industrial | | | — | | | — | | | — | | | — | | | — |
Commercial construction | | | — | | | — | | | — | | | — | | | — |
Consumer real estate | | | 151 | | | 152 | | | — | | | 155 | | | 8 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | — |
| | $ | 321 | | $ | 317 | | $ | — | | $ | 320 | | $ | 21 |
the acquired loan portfolio at December 31, 2022. 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.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
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:
Pass – — 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.
Special Mention – — 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.
Substandard – — 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.
Doubtful – — 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.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Loss – — 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.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Based on the most recent analysis performed, amortized cost basis of loans by risk category, class and year of origination was as follows as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Prior | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Revolving Loans Amort. Cost Basis | | Revolving Loans Convert. to Term | | Total |
| Commercial Real Estate | | | | | | | | | | | | | | | | | | |
| Grade: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 341,765 | | | $ | 82,924 | | | $ | 70,564 | | | $ | 147,252 | | | $ | 211,786 | | | $ | 57,422 | | | $ | 153,838 | | | $ | — | | | $ | 1,065,551 | |
| Special mention | | 1,268 | | | 1,361 | | | — | | | 2,688 | | | — | | | — | | | — | | | — | | | 5,317 | |
| Substandard | | — | | | — | | | 849 | | | — | | | — | | | 19,916 | | | — | | | — | | | 20,765 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 343,033 | | | $ | 84,285 | | | $ | 71,413 | | | $ | 149,940 | | | $ | 211,786 | | | $ | 77,338 | | | $ | 153,838 | | | $ | — | | | $ | 1,091,633 | |
| Commercial and Industrial | | | | | | | | | | | | | | | | | | |
| Grade: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 9,997 | | | $ | 2,285 | | | $ | 6,296 | | | $ | 13,623 | | | $ | 54,784 | | | $ | 42,034 | | | $ | 88,926 | | | $ | — | | | $ | 217,945 | |
| Special mention | | — | | | — | | | — | | | 76 | | | — | | | — | | | 782 | | | — | | | 858 | |
| Substandard | | — | | | — | | | — | | | — | | | 884 | | | — | | | 186 | | | — | | | 1,070 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 9,997 | | | $ | 2,285 | | | $ | 6,296 | | | $ | 13,699 | | | $ | 55,668 | | | $ | 42,034 | | | $ | 89,894 | | | $ | — | | | $ | 219,873 | |
| Commercial Construction | | | | | | | | | | | | | | | | | | |
| Grade: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 11,149 | | | $ | — | | | $ | — | | | $ | 6,204 | | | $ | — | | | $ | 709 | | | $ | 129,936 | | | $ | — | | | $ | 147,998 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 11,149 | | | $ | — | | | $ | — | | | $ | 6,204 | | | $ | — | | | $ | 709 | | | $ | 129,936 | | | $ | — | | | $ | 147,998 | |
| Consumer Real Estate | | | | | | | | | | | | | | | | | | |
| Grade: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 35,240 | | | $ | 8,196 | | | $ | 8,914 | | | $ | 28,848 | | | $ | 196,678 | | | $ | 51,767 | | | $ | 32,963 | | | $ | — | | | $ | 362,606 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | 57 | | | — | | | 57 | |
| Substandard | | 108 | | | — | | | — | | | — | | | — | | | — | | | 546 | | | — | | | 654 | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 35,348 | | | $ | 8,196 | | | $ | 8,914 | | | $ | 28,848 | | | $ | 196,678 | | | $ | 51,767 | | | $ | 33,566 | | | $ | — | | | $ | 363,317 | |
| Consumer Nonresidential | | | | | | | | | | | | | | | | | | |
| Grade: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 659 | | | $ | — | | | $ | 7 | | | $ | 3 | | | $ | 36 | | | $ | 177 | | | $ | 4,861 | | | $ | — | | | $ | 5,743 | |
| Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 659 | | | $ | — | | | $ | 7 | | | $ | 3 | | | $ | 36 | | | $ | 177 | | | $ | 4,861 | | | $ | — | | | $ | 5,743 | |
| Total Recorded Investment | | $ | 400,186 | | | $ | 94,766 | | | $ | 86,630 | | | $ | 198,694 | | | $ | 464,168 | | | $ | 172,025 | | | $ | 412,095 | | | $ | — | | | $ | 1,828,564 | |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
As of December 31, 2023 – Total Loan Portfolio
| | | | | | | | |
| | Total |
| Grade: | | |
| Pass | | $ | 1,799,843 | |
| Special mention | | 6,232 | |
| Substandard | | 22,489 | |
| Doubtful | | — | |
| Loss | | — | |
| Total Recorded Investment | | $ | 1,828,564 | |
Based on the most recent analysis performed, the risk category of loans by class of loans was as follows as of December 31,
2020 and 2019:
20202022:
As of December 31, 2022 – Originated Loan Portfolio
| | | | | | | | | | | | | | | | | | |
| | Commercial Real | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
Grade: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 741,570 | | $ | 262,355 | | $ | 220,845 | | $ | 133,750 | | $ | 15,802 | | $ | 1,374,322 |
Special mention | | | 10,380 | | | 1,598 | | | — | | | 93 | | | — | | | 12,071 |
Substandard | | | 9,926 | | | 7,086 | | | — | | | 97 | | | — | | | 17,109 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | — |
Loss | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | $ | 761,876 | | $ | 271,039 | | $ | 220,845 | | $ | 133,940 | | $ | 15,802 | | $ | 1,403,502 |
2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Real
Estate | | Commercial and
Industrial | | Commercial Construction | | Consumer Real Estate | | Consumer Nonresidential | | Total |
| 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 | |
As of December 31, 2022 – Acquired Loan Portfolio
| | | | | | | | | | | | | | | | | | |
| | Commercial Real | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
Grade: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 24,696 | | $ | 4,295 | | $ | 1,474 | | $ | 33,844 | | $ | 33 | | $ | 64,342 |
Special mention | | | — | | | — | | | — | | | — | | | — | | | — |
Substandard | | | 3,453 | | | — | | | — | | | 88 | | | — | | | 3,541 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | — |
Loss | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | $ | 28,149 | | $ | 4,295 | | $ | 1,474 | | $ | 33,932 | | $ | 33 | | $ | 67,883 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Real
Estate | | Commercial and
Industrial | | Commercial Construction | | Consumer Real Estate | | Consumer Nonresidential | | Total |
| 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 | |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
2019 – Originated Loan Portfolio
| | | | | | | | | | | | | | | | | | |
| | Commercial Real | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
Grade: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 690,082 | | $ | 102,491 | | $ | 210,113 | | $ | 134,913 | | $ | 11,186 | | $ | 1,148,785 |
Special mention | | | 14,772 | | | 476 | | | — | | | 1,748 | | | 19 | | | 17,015 |
Substandard | | | 4,192 | | | 4,731 | | | 820 | | | 101 | | | — | | | 9,844 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | — |
Loss | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | $ | 709,046 | | $ | 107,698 | | $ | 210,933 | | $ | 136,762 | | $ | 11,205 | | $ | 1,175,644 |
2019 – Acquired Loan Portfolio
| | | | | | | | | | | | | | | | | | |
| | Commercial Real | | Commercial and | | Commercial | | Consumer Real | | Consumer | | | |
| | Estate | | Industrial | | Construction | | Estate | | Nonresidential | | Total |
Grade: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 35,284 | | $ | 7,005 | | $ | 5,050 | | $ | 45,365 | | $ | 85 | | $ | 92,789 |
Special mention | | | 3,089 | | | — | | | — | | | 139 | | | — | | | 3,228 |
Substandard | | | 256 | | | 400 | | | — | | | 546 | | | — | | | 1,202 |
Doubtful | | | — | | | — | | | — | | | — | | | — | | | — |
Loss | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | $ | 38,629 | | $ | 7,405 | | $ | 5,050 | | $ | 46,050 | | $ | 85 | | $ | 97,219 |
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, 2020,2023, the Company had $12.1$6.2 million in loans identified as special mention, within the originated loan portfolio, a decrease of $4.9from $10.4 million from December 31, 2019.2022. Special mention rated loans are loans that have a potential weakness that deservedeserves management’s close attention. These loansattention; however, the borrower continues to pay in accordance with their contract. Loans rated as special mention do not have a specific reserve and are considered well-secured.
At December 31,
2020,2023, the Company had
$17.1$22.5 million in loans identified as substandard,
within the originated loan portfolio, an increase of
$7.3$18.4 million from December 31, 2019.2022. The increase in substandard loans was primarily related to the addition of one loan. 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 ofcompleted At December 31, 2020, specific reserves on originated and acquired loans2023, an individually assessed allowance for credit losses totaling $2.1$0.7 million, has been
allocated within the allowance for loan lossesestimated to supplement any shortfall of collateral.
The increase in substandard rated loans from December 31, 2022 was primarily related to one owner-occupied commercial loan totaling $20.0 million, which was downgraded due to concerns regarding
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
the financial condition of this borrower's parent company. This loan is current and paying as agreed to with no modifications in terms since its origination. No impairment was indicated as a result of the liquidation analysis completed as the loan was and continues to be well-collateralized.
Past due and nonaccrual loans presented by loan class were as follows as of December 31,
20202023 and
2019:20202022:
As of December 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past due | | 60-89 days past due | | 90 days or more past due | | Total past due loans | | Current | | Nonaccruals | | Total Recorded Investment in Loans |
| Commercial real estate | | $ | 1,115 | | | $ | — | | | $ | — | | | $ | 1,115 | | | $ | 1,089,669 | | | $ | 849 | | | $ | 1,091,633 | |
| Commercial and industrial | | 51 | | | 1,387 | | | — | | | 1,438 | | | 218,249 | | | 186 | | | 219,873 | |
| Commercial construction | | 2,569 | | | 391 | | | — | | | 2,960 | | | 145,038 | | | — | | | 147,998 | |
| Consumer real estate | | 1,300 | | | — | | | 134 | | | 1,434 | | | 361,229 | | | 654 | | | 363,317 | |
| Consumer nonresidential | | — | | | — | | | 6 | | | 6 | | | 5,737 | | | — | | | 5,743 | |
| Total | | $ | 5,035 | | | $ | 1,778 | | | $ | 140 | | | $ | 6,953 | | | $ | 1,819,922 | | | $ | 1,689 | | | $ | 1,828,564 | |
As of December 31, 2022 – Originated Loan Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past | | 60-89 days past | | 90 days or more | | | | | | | | | | 90 days past due | | | |
| | due | | due | | past due | | Total past due | | Current | | Total loans | | and still accruing | | Nonaccruals |
Commercial real estate | | $ | — | | $ | 88 | | $ | — | | $ | 88 | | $ | 761,788 | | $ | 761,876 | | $ | — | | $ | — |
Commercial and industrial | | | — | | | — | | | — | | | — | | | 271,039 | | | 271,039 | | | — | | | 2,883 |
Commercial construction | | | — | | | 13 | | | — | | | 13 | | | 220,832 | | | 220,845 | | | — | | | — |
Consumer real estate | | | 347 | | | 76 | | | — | | | 423 | | | 133,517 | | | 133,940 | | | — | | | — |
Consumer nonresidential | | | — | | | — | | | 44 | | | 44 | | | 15,758 | | | 15,802 | | | 44 | | | — |
Total | | $ | 347 | | $ | 177 | | $ | 44 | | $ | 568 | | $ | 1,402,934 | | $ | 1,403,502 | | $ | 44 | | $ | 2,883 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| 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 | |
As of December 31, 2022 – Acquired Loan Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| 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 | | | $ | — | | | $ | — | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
2020 – Acquired Loan Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past | | 60-89 days past | | 90 days or more | | | | | | | | | | 90 days past due | | | |
| | due | | due | | past due | | Total past due | | Current | | Total loans | | and still accruing | | Nonaccruals |
Commercial real estate | | $ | 694 | | $ | — | | $ | — | | $ | 694 | | $ | 27,455 | | $ | 28,149 | | $ | — | | $ | 2,309 |
Commercial and industrial | | | — | | | — | | | — | | | — | | | 4,295 | | | 4,295 | | | — | | | — |
Commercial construction | | | 111 | | | — | | | — | | | 111 | | | 1,363 | | | 1,474 | | | — | | | — |
Consumer real estate | | | 353 | | | 108 | | | 228 | | | 689 | | | 33,243 | | | 33,932 | | | 228 | | | 157 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | 33 | | | 33 | | | — | | | — |
Total | | $ | 1,158 | | $ | 108 | | $ | 228 | | $ | 1,494 | | $ | 66,389 | | $ | 67,883 | | $ | 228 | | $ | 2,466 |
2019 – Originated Loan Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past | | 60-89 days past | | 90 days or more | | | | | | | | | | 90 days past due | | | |
| | due | | due | | past due | | Total past due | | Current | | Total loans | | and still accruing | | Nonaccruals |
Commercial real estate | | $ | 8,443 | | $ | — | | $ | 498 | | $ | 8,941 | | $ | 700,105 | | $ | 709,046 | | $ | 753 | | $ | 3,903 |
Commercial and industrial | | | 1,184 | | | — | | | 48 | | | 1,232 | | | 106,466 | | | 107,698 | | | 48 | | | 3,822 |
Commercial construction | | | 2,000 | | | — | | | — | | | 2,000 | | | 208,933 | | | 210,933 | | | — | | | 820 |
Consumer real estate | | | 396 | | | 153 | | | 356 | | | 905 | | | 135,857 | | | 136,762 | | | 101 | | | — |
Consumer nonresidential | | | 77 | | | 56 | | | 12 | | | 145 | | | 11,060 | | | 11,205 | | | 12 | | | — |
Total | | $ | 12,100 | | $ | 209 | | $ | 914 | | $ | 13,223 | | $ | 1,162,421 | | $ | 1,175,644 | | $ | 914 | | $ | 8,545 |
2019 – Acquired Loan Portfolio
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 days past | | 60-89 days past | | 90 days or more | | | | | | | | | | 90 days past due | | | |
| | due | | due | | past due | | Total past due | | Current | | Total loans | | and still accruing | | Nonaccruals |
Commercial real estate | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 38,629 | | $ | 38,629 | | $ | — | | $ | 256 |
Commercial and industrial | | | — | | | — | | | — | | | — | | | 7,405 | | | 7,405 | | | — | | | 272 |
Commercial construction | | | — | | | — | | | — | | | — | | | 5,050 | | | 5,050 | | | — | | | — |
Consumer real estate | | | 1,138 | | | 241 | | | 118 | | | 1,497 | | | 44,553 | | | 46,050 | | | 118 | | | 620 |
Consumer nonresidential | | | — | | | — | | | — | | | — | | | 85 | | | 85 | | | — | | | — |
Total | | $ | 1,138 | | $ | 241 | | $ | 118 | | $ | 1,497 | | $ | 95,722 | | $ | 97,219 | | $ | 118 | | $ | 1,148 |
There were overdrafts of $72 thousand and $181 thousand at December 31, 2020 and 2019 which have been reclassified from deposits to loans. At December 31, 2020 and 2019, loans with a carrying value of $132.6 million and $154.0 million were pledged to the FHLB.
There were no defaults of TDRs where the default occurred within twelve months of the restructuring during the year ended December 31, 2020. There was a default of one TDR during the twelve months of restructuring during the year ended December 31, 2019 with an outstanding loan balance of $3.9 million.
The following table presents the TDRs originated during the year ended December 31, 2020 and 2019:
At December 31, 2020
| | | | | | | | |
| | | | Pre-Modification | | Post-Modification |
| | | | Outstanding | | Outstanding |
| | Number of | | Recorded | | Recorded |
Troubled Debt Restructurings | | Contracts | | Investment | | Investment |
Commercial real estate | | 1 | | $ | 97 | | $ | 97 |
Total | | 1 | | $ | 97 | | $ | 97 |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
At December 31, 2019
| | | | | | | | |
| | | | Pre-Modification | | Post-Modification |
| | | | Outstanding | | Outstanding |
| | Number of | | Recorded | | Recorded |
Troubled Debt Restructurings | | Contracts | | Investment | | Investment |
Commercial real estate | | 1 | | $ | 3,903 | | $ | 3,903 |
Total | | 1 | | $ | 3,903 | | $ | 3,903 |
Asnonaccrual loans as of December 31, 2020 and 2019, the Company has a recorded investment in TDRs of $97 thousand and $3.9 million, respectively.
The concessions made in TDRs were extensions of the maturity dates or reductions in the stated interest rate for the remaining life of the debt. The payment deferrals that were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.
Note 6. Other Real Estate Owned
OREO activity was $3.9 million at December 31, 2020 and 2019. There was no activity in 2020 and 2019.There were 0 foreclosed residential real estate properties recorded in OREO as a result of obtaining physical possession of the property at December 31, 2020 and 2019. 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nonaccrual with No Allowance for Credit Losses | | Nonaccrual with an Allowance for Credit Losses | | Total Nonaccrual Loans | | Interest Income Recognized |
| Nonaccrual Loans | | | | | | | | |
| Commercial real estate | | $ | 849 | | | $ | — | | | $ | 849 | | | $ | 37 | |
| Commercial and industrial | | — | | | 186 | | | 186 | | | 19 | |
| Commercial construction | | — | | | — | | | — | | | — | |
| Consumer real estate | | 654 | | | — | | | 654 | | | 53 | |
| Consumer nonresidential | | — | | | — | | | — | | | — | |
| Total | | $ | 1,503 | | | $ | 186 | | | $ | 1,689 | | | $ | 109 | |
There were 0no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings arewere in process as of December 31, 2020.2023 and 2022, respectively.
There were overdrafts of $0.1 million and $1.3 million at December 31, 2023 and 2022, respectively, which have been reclassified from deposits to loans. At December 31, 2019, there was $1772023 and 2022, loans with a carrying value of $530.2 million and $458.7 million were pledged to the FHLB.
Modifications with Borrowers Experiencing Financial Difficulty
On January 1, 2023, the Company adopted ASU 2022-02, which eliminates the accounting guidance for TDRs and enhances the disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty ("FDMs"). FDMs occur as a result of loss mitigation activities. A variety of solutions are offered to borrowers, including loan modifications that may result in principal forgiveness, interest rate reductions, term extensions, payment delays, repayment plans or combinations thereof. FDMs exclude loans held for sale and loans accounted for under the fair value option. Loans with guarantor support, or guaranteed loans are included in the Company's disclosed population of FDMs when those loan modifications are granted to a borrower experiencing financial difficulty.
There were five loans of $3.5 million modified during the year ended December 31, 2023 with a combination of payment delays and contractual extension to the maturity of the loan. No loans were modified with principal and interest forgiveness or an interest rate reduction. All loans modified during the year ended December 31, 2023 are performing according the modified contractual terms.
Prior to the adoption of ASC 326, the Company had zero reserves for unfunded commitments as of December 31, 2022. Upon adoption of ASC 326, the Company established a reserve for unfunded commitments of $811 thousand as of consumer mortgage loans secured by residential real estate propertiesJanuary 1, 2023. As of December 31, 2023, the reserve for which formal foreclosure proceedings areunfunded commitments increased to $602 thousand.
The following table presents a breakdown of the provision for credit losses included in
process. The Company recorded 0 impairment charges during 2020 and 2019.the Consolidated Statements of Income for the applicable periods:
| | | | | | | | | | | | | | | | | | |
| | | For the Year Ended |
| | | | | | December 31, 2023 | | December 31, 2022 |
| Provision for (reversal of) credit losses - loans | | | | | | $ | 342 | | | $ | 2,629 | |
| Provision for (reversal of) credit losses - unfunded commitments | | | | | | (210) | | | — | |
| Total provision for credit losses | | | | | | $ | 132 | | | $ | 2,629 | |
Note
7.4. Goodwill and Intangibles
As a result of the Company’s acquisition of Colombo in October 2018,Company's past acquisitions, the Company recognized goodwill and core deposit intangibles. During the fourth quarter
Notes to perform an independent goodwill and other intangible assets valuation. During 2020, bank stocksConsolidated Financial Statements
($ in
general as well as the Company's market capitalization declined as a result of the events surrounding the COVID-19 pandemic. Based on the qualitative analysis completed, the Company does not believe this decline is indicative of permanent deterioration of the value of the Bank, and as such, no impairment was recorded as of December 31, 2020.thousands, except per share data)
Information concerning amortizable intangibles follows:
| | | | | | | | | | | | | | | | | | |
| | Acquisition of 1st Commonwealth | | Acquisition of Colombo Bank | | Total |
| | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated |
| | Amount | | Amortization | | Amount | | Amortization | | Amount | | Amortization |
Balance at December 31, 2018 | | $ | 204 | | $ | 125 | | $ | 1,950 | | $ | 98 | | $ | 2,154 | | $ | 223 |
2019 activity: | | | | | | | | | | | | | | | | | | |
1st Commonwealth amortization | | | — | | | 20 | | | — | | | — | | | — | | | 20 |
Colombo Bank amortization | | | — | | | — | | | — | | | 365 | | | — | | | 365 |
Balance at December 31, 2019 | | $ | 204 | | $ | 145 | | $ | 1,950 | | $ | 463 | | $ | 2,154 | | $ | 608 |
2020 activity: | | | | | | | | | | | | | | | | | | |
1st Commonwealth amortization | | | — | | | 20 | | | — | | | — | | | — | | | 20 |
Colombo Bank amortization | | | — | | | — | | | — | | | 326 | | | — | | | 326 |
Balance at December 31, 2020 | | $ | 204 | | $ | 165 | | $ | 1,950 | | $ | 789 | | $ | 2,154 | | $ | 954 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of 1st Commonwealth | | Acquisition of Colombo Bank | | Total |
| Gross Carrying
Amount | | Accumulated
Amortization | | Gross Carrying
Amount | | Accumulated
Amortization | | Gross Carrying
Amount | | Accumulated
Amortization |
| 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 | |
| 2023 activity: | | | | | | | | | | | |
| 1st Commonwealth amortization | — | | | — | | | — | | | — | | | — | | | — | |
| Colombo Bank amortization | — | | | — | | | — | | | 205 | | | — | | | 205 | |
| Balance at December 31, 2023 | $ | 204 | | | $ | 204 | | | $ | 1,950 | | | $ | 1,522 | | | $ | 2,154 | | | $ | 1,726 | |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The aggregate amortization expense was $345$205 thousand for 20202023 and $385$262 thousand for 2019. The2022. As of December 31, 2023, the estimated amortization expense for the next five years and thereafter is as follows:
| | | |
2021 | | $ | 305 |
2022 | | | 262 |
2023 | | | 205 |
2024 | | | 165 |
2025 | | | 125 |
Thereafter | | | 138 |
| | | | | |
| 2024 | $ | 165 | |
| 2025 | 125 | |
| 2026 | 85 | |
| 2027 | 45 | |
| 2028 | 8 | |
| Thereafter | — | |
| $ | 428 | |
The carrying amount of goodwill for the years ended December 31,
20202023 and
2019 were2022 is as follows:
| | | |
Balance at December 31, 2018 | | $ | 6,512 |
Colombo measurement period adjustment | | | 645 |
Balance at December 31, 2019 and 2020 | | $ | 7,157 |
| | | | | |
| Balance at December 31, 2023 and 2022 | $ | 7,157 | |
Note
8.5. Premises,
Equipment, and
EquipmentA summary ofLeases
The following table summarizes the cost and accumulated depreciation of premises and equipment
follows:as of December 31, 2023 and 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Leasehold improvements | $ | 2,622 | | | $ | 3,068 | |
| Furniture, fixtures and equipment | 3,833 | | | 4,310 | |
| Computer software | 1,183 | | | 1,169 | |
| Land | 61 | | | 61 | |
| Buildings | 196 | | | 196 | |
| Vehicles | 47 | | | 47 | |
| Premises and equipment, gross | $ | 7,942 | | | $ | 8,851 | |
| Less: accumulated depreciation | 6,945 | | | 7,631 | |
| Premises and equipment, net | $ | 997 | | | $ | 1,220 | |
Table of Contents | | | | | | |
| | 2020 | | 2019 |
Leasehold improvements | | $ | 2,715 | | $ | 2,899 |
Furniture, fixtures and equipment | | | 4,081 | | | 3,957 |
Computer software | | | 1,233 | | | 1,079 |
Land | | | 61 | | | 61 |
Buildings | | | 196 | | | 196 |
| | $ | 8,286 | | $ | 8,192 |
Less: accumulated depreciation | | | 6,632 | | | 6,108 |
| | $ | 1,654 | | $ | 2,084 |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
For the years ended December 31,
20202023 and
2019,2022, depreciation expense was
$615$390 thousand and
$643$424 thousand, respectively.
The Company has entered into operating leases for office space over various terms. The leases cover an agreed upon period of time and generally have options to renew and are subject to annual increases as well as allocations for real estate taxes and certain operating expenses. During the fourth quarter of 2023, the Company reduced its office space and recognized $273 thousand of impairment of existing right-of-use assets and losses on disposals of equipment.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The following tables present information about leases as of and for the years ended December 31, 20202023 and 2019:
| | | | | | | |
| | 2020 | | 2019 | |
Right-of-Use-Asset | | $ | 11,125 | | $ | 13,279 | |
Lease Liability | | $ | 12,123 | | $ | 13,686 | |
Weighted Average Remaining Lease Term (Years) | | | 9.8 | | | 11.1 | |
Weighted Average discount rate | | | 3.22 | % | | 3.32 | % |
| | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
Operating Lease Expense | | $ | 1,694 | | $ | 1,784 |
| | | | | | |
Cash paid for amounts included in lease liabilities | | $ | 1,582 | | $ | 1,642 |
Impairment loss on right-of-use asset | | | 508 | | | — |
Derecognition of right-of-use asset and lease liabilities | | | 458 | | | — |
Right-of-use assets obtained in exchange for operating lease liabilities | | | 59 | | | 2,378 |
2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Right-of-Use-Asset | $ | 8,395 | | | $ | 9,680 | |
| Lease Liability | $ | 9,241 | | | $ | 10,394 | |
| Weighted Average Remaining Lease Term (Years) | 7.1 | | 7.9 |
| Weighted Average discount rate | 3.27 | % | | 3.21 | % |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 |
| Operating Lease Expense | $ | 1,733 | | | $ | 1,504 | |
| | | |
| Cash paid for amounts included in lease liabilities | $ | 1,840 | | | $ | 1,541 | |
| Impairment loss on right-of-use asset | 228 | | | — | |
| Modification of right-of-use assets and lease liability | — | | | 283 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | 820 | | | 522 | |
The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease
liability:
| | | |
2021 | | $ | 1,561 |
2022 | | | 1,599 |
2023 | | | 1,595 |
2024 | | | 1,566 |
2025 | | | 1,441 |
Thereafter | | | 6,456 |
Total | | $ | 14,218 |
Less: discount | | | (2,095) |
| | $ | 12,123 |
liability as of December 31, 2023:
| | | | | |
| 2024 | $ | 1,814 | |
| 2025 | 1,665 | |
| 2026 | 1,574 | |
| 2027 | 1,448 | |
| 2028 | 814 | |
| Thereafter | 3,061 | |
| Total | $ | 10,376 | |
| Less: discount | (1,135) | |
| $ | 9,241 | |
Remaining maturities on certificates of deposit are as
follows:follows as of December 31, 2023:
| | | | | |
| 2024 | $ | 438,745 | |
| 2025 | 81,721 | |
| 2026 | 12,822 | |
| 2027 | 17,397 | |
| 2028 | 914 | |
| Thereafter | — | |
| $ | 551,599 | |
Table of Contents | | | |
2021 | | $ | 229,251 |
2022 | | | 59,200 |
2023 | | | 16,297 |
2024 | | | 5,583 |
2025 | | | 2,722 |
| | $ | 313,053 |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Total time deposits ofgreater than $250,000 were $164.9 millionand greater were $100.8 million and $147.5$159.5 million at December 31, 20202023 and 2019,2022, respectively.
At December 31, 20202023 and 2019,2022, the Company had 1 one customer relationship whose related balance on deposit exceeded 5% of outstanding deposits. This customer relationship comprises 10% 9% of outstanding deposits at December 31, 20202023 and 7%9% of outstanding deposits at December 31, 2019.2022.
Brokered deposits totaled $50.0$245.3 million and $100.0$248.0 million at December 31, 20202023 and 2019,2022, respectively.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Note 10.7. Other Borrowed Funds
Other borrowed funds at December 31,
20202023 and
20192022 consist of the following:
| | | | | | | | | | | |
| | 2020 | | 2019 | |
| | | | | Weighted | | | | | Weighted | |
| | Amount | | Average Rate | | Amount | | Average Rate | |
Federal funds purchased | | $ | — | | 0.00 | % | $ | 10,000 | | 1.60 | % |
FHLB advances | | | 25,000 | | 1.15 | % | | 15,000 | | 1.73 | % |
Subordinated debt, net | | | 44,085 | | 6.26 | % | | 24,487 | | 6.00 | % |
Total borrowings | | $ | 69,085 | | 4.41 | % | $ | 49,487 | | 3.82 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Funds Purchased | | FHLB Advances | | Subordinated Debt, net |
| 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| Balance Outstanding at December 31, | $ | — | | | $ | 30,000 | | | $ | 85,000 | | | $ | 235,000 | | | $ | 19,620 | | | $ | 19,565 | |
| Maximum balance at any month end during the year | $ | — | | | $ | 115,000 | | | $ | 245,000 | | | $ | 235,000 | | | $ | 19,620 | | | $ | 19,565 | |
| Average balance for the year | $ | — | | | $ | 22,164 | | | $ | 101,682 | | | $ | 48,134 | | | $ | 19,590 | | | $ | 19,535 | |
| Weighted average rate on borrowings for the year ended | — | % | | 3.11 | % | | 3.77 | % | | 2.60 | % | | 5.26 | % | | 5.28 | % |
The Company had
$25$85.0 million and $235.0 million of FHLB advances at
each of December 31,
20202023 and
$152022 respectively. $85.0 million
of FHLB advances outstanding at December
31,2019.31, 2023 mature during the first quarter of 2024. At December 31,
2020,2023, 1-4 family residential loans with a lendable value of
$7.6$176.6 million, multi-family residential loans with a
booklendable value of
$6.3$66.2 million, home equity lines of credit with a
booklendable value of
$9.3$4.9 million and commercial real estate loans with a
booklendable value of
$72.8$177.7 million were pledged against an available line of credit with the
Federal Home Loan BankFHLB totaling
$95.9$575.0 million as of December 31,
2020.2023. The
Bank has a letter of credit with the FHLB in the amount of $85.0 million for the purpose of providing collateral for Virginia public deposits. The remaining lendable collateral value
excess at December 31,
20202023 totaled
$362.8$260.4 million.
The Company has unsecured lines of credit with correspondent banks totaling
$269.0$185.0 million at December 31,
20202023 and
$199.0$265.0 million at December 31,
2019,2022, available for overnight borrowing. At December 31,
20202023, the Company had no advances outstanding and
2019, $0.0 and $10.0$30 million
respectively, of these lines of credit with correspondent banks were drawn upon.in December 31, 2022.
On June 20, 2016, the Company issued $25.0 million in fixed-to-floating rate subordinated notes due June 30, 2026 in a private placement transaction. Interest
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.
The Company
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
days nor greater than 60
days’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.subordinated notes that the notes would be redeemed in full on September 30, 2021 or such later date as the holder returned its note to the Company. $23.8 million of principal was redeemed and paid during the year ended December 31, 2021.
On October 13, 2020, the Company completed its private placement of $20 million of its 4.875%
Fixed to Floating Subordinated Notesfixed-to-floating subordinated notes due 2030 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at
3-month SOFRthe then current three-month Secured Overnight Financing Rate plus
471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The
Notes have been structured to qualify as Tier 2 capital for regulatory purposes. The Company
plans to useused the proceeds from the placement of the Notes for general corporate purposes,
including to
include supportingsupport capital ratios at the
Company's subsidiary, FVCbank,Bank, and
potentialthe repayment
of a portion of the $25.0 million outstanding subordinated debt
callable June 30,called in August 2021.
The subordinated notesNotes qualify as Tier 2
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
capital for the Company to the fullest extent permitted under the Basel 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, 2020 and 2019, $41 million and $21 million, respectively, of the proceeds of the Company’s subordinated notes have been included in the Bank’s Tier 1 capital.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31,
20202023 and
20192022 are presented below:
| | | | | | |
| | 2020 | | 2019 |
Deferred Tax Assets: | | | | | | |
Allowance for loan losses | | $ | 3,365 | | $ | 2,302 |
Net operating loss carryforward – federal and state | | | 3,204 | | | 3,666 |
Bank premises and equipment | | | 224 | | | 168 |
Nonqualified stock options and restricted stock | | | 546 | | | 554 |
Organizational and start-up expenses | | | 34 | | | 47 |
Acquisition accounting adjustments | | | 181 | | | 454 |
Non-accrual loan interest | | | 66 | | | 58 |
Deferred loan (fees) costs | | | 1,193 | | | 526 |
Lease liability | | | 2,728 | | | 3,079 |
Unrealized loss on interest rate swap | | | 158 | | | 18 |
| | $ | 11,699 | | $ | 10,872 |
Deferred Tax Liabilities: | | | | | | |
Right-of-use assets | | $ | (2,503) | | $ | (2,987) |
Unrealized gain on securities available for sale | | | (644) | | | (214) |
| | $ | (3,147) | | $ | (3,201) |
Net Deferred Tax Assets | | $ | 8,552 | | $ | 7,671 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Deferred Tax Assets: | | | |
| Allowance for credit losses | $ | 4,304 | | | $ | 3,698 | |
| Net operating loss carryforward – federal and state | 3,061 | | | 2,466 | |
| Bank premises and equipment | 301 | | | 265 | |
| Nonqualified stock options and restricted stock | 500 | | | 658 | |
| Organizational and start-up expenses | 13 | | | 10 | |
| Acquisition accounting adjustments | — | | | 257 | |
| Non-accrual loan interest | 52 | | | 59 | |
| Deferred loan costs | — | | | 60 | |
| Lease liability | 2,108 | | | 2,396 | |
| Unrealized loss on securities available for sale | 7,777 | | | 11,876 | |
| Reserves for unfunded commitments | 137 | | | — | |
| $ | 18,253 | | | $ | 21,745 | |
| Deferred Tax Liabilities: | | | |
| Right-of-use assets | $ | (1,894) | | | $ | (2,232) | |
| Deferred loan costs | (307) | | | — | |
| Acquisition accounting adjustments | (564) | | | — | |
| Unrealized gain on interest rate swap | (665) | | | (980) | |
| $ | (3,430) | | | $ | (3,212) | |
| Net Deferred Tax Assets | $ | 14,823 | | | $ | 18,533 | |
The income tax expense charged to operations for the years ended December 31,
20202023 and
20192022 consists of the following:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Current tax (benefit) expense | $ | (524) | | | $ | 5,610 | |
| Deferred tax expense | 934 | | | 395 | |
| $ | 410 | | | $ | 6,005 | |
Table of Contents | | | | | | |
| | 2020 | | 2019 |
Current tax expense | | $ | 5,315 | | $ | 3,999 |
Deferred tax expense (benefit) | | | (1,159) | | | 185 |
| | $ | 4,156 | | $ | 4,184 |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
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:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Computed "expected" tax expense | $ | 875 | | | $ | 6,313 | |
| Increase (decrease) in income taxes resulting from: | | | |
| State income tax expense | 275 | | | 503 | |
| Non-deductible expense | 163 | | | 138 | |
| Tax free income | (310) | | | (259) | |
| Tax benefits from exercise of stock options | (352) | | | (364) | |
| Other | (241) | | | (326) | |
| $ | 410 | | | $ | 6,005 | |
| | | | | | |
| | 2020 | | 2019 |
Computed "expected" tax expense | | $ | 4,128 | | $ | 4,203 |
Increase (decrease) in income taxes resulting from: | | | | | | |
State income tax expense (benefit) | | | 294 | | | 490 |
Non-deductible expense | | | 31 | | | 38 |
Tax free income | | | (251) | | | (158) |
Tax benefits from exercise of stock options | | | (89) | | | (179) |
Other | | | 43 | | | (210) |
| | $ | 4,156 | | $ | 4,184 |
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 2017.
2020.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Under the provisions of the Internal Revenue Code, the Company has $13.3$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$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.
Note
12.9. Derivative Financial Instruments
The Company enters into interest rate swap agreements (“("swap agreements”agreements") to facilitate the risk management strategies needed in order to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’sCompany's consolidated statements of condition (asset positions are included in other assets and liability positions are included in other liabilities) as of December 31, 2020.2023. 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’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, 2020,2023, the Company entered into 21 interest17 interest rate swap agreements which arewere collateralized by $14.0 million$30 thousand in cash. 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. The notional amount and fair value of the
Company’sCompany's derivative financial instruments as of December 31,
20202023 and
20192022 were as follows:
| | | | | | | | | | | |
| December 31, 2023 |
| Notional Amount | | Fair Value |
| Interest Rate Swap Agreements | | | |
| Receive Fixed/Pay Variable Swaps | $ | 82,483 | | | $ | 2,853 | |
| Pay Fixed/Receive Variable Swaps | 82,483 | | | (2,853) | |
Table of Contents | | | | | | |
| | December 31, 2020 |
| | Notional Amount | | Fair Value |
|
Interest Rate Swap Agreements | | |
Receive Fixed/Pay Variable Swaps | | $ | 157,658 | | $ | 13,633 |
Pay Fixed/Receive Variable Swaps | | | 157,658 | | | (13,633) |
| | | | | | |
| | December 31, 2019 |
| | Notional Amount | | Fair Value |
|
Interest Rate Swap Agreements | | |
Receive Fixed/Pay Variable Swaps | | $ | 94,755 | | $ | (6,001) |
Pay Fixed/Receive Variable Swaps | | | 94,755 | | | 6,001 |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
| | | | | | | | | | | |
| 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) | |
Interest Rate Risk Management—Cash Flow Hedging Instruments
The Company uses FHLB advances and other wholesale funding from time to time as a source of funds for use in the Company's lending and investment activities and other general business purposes. This wholesale funding exposes the Company to increased interest rate risk as a result of the variability in cash flows (future interest payments). The Company believes it is prudent to reduce this interest rate risk. To meet this objective, the Company entered into an interest rate swap agreementagreements whereby the Company reduces the interest rate risk associated with the Company’sCompany's variable rate advances (or other wholesale funding) from the designation date and going through the maturity date.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
At December 31, 20202023 and 2019,2022, 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) | | 2020 | | 2019 | |
Notional amount | | $ | 60,000 | | $ | 15,000 | |
Weighted average pay rate | | | 0.87 | % | | 1.88 | % |
Weighted average receive rate | | | 0.24 | % | | 1.90 | % |
Weighted average maturity in years | | | 2.10 years | | | 3 years | |
Unrealized loss relating to interest rate swaps | | $ | (754) | | $ | (80) | |
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Notional amount | | $ | 250,000 | | | $ | 145,000 | |
| Weighted average pay rate | | 3.25 | % | | 2.12 | % |
| Weighted average receive rate | | 5.34 | % | | 4.74 | % |
| Weighted average maturity in years | | 4.03 | | 3.49 |
| Unrealized gain/(loss) relating to interest rate swaps | | $ | 2,915 | | | $ | 4,251 | |
These agreements provided for the Company to receive payments determined by a specific index
(three month LIBOR) in exchange for making payments at a fixed rate. At December 31,
20202023 and
2019,2022, 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,
20202023 and
2019,2022, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.
Note
13.10. Financial Instruments with Off-Balance Sheet Risk
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The
Company’sCompany's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
At December 31,
20202023 and
2019,2022, the following financial instruments were outstanding which contract amounts represent credit risk:
| | | | | | |
| | 2020 | | 2019 |
Commitments to grant loans | | $ | 13,598 | | $ | 27,260 |
Unused commitments to fund loans and lines of credit | | | 166,259 | | | 244,367 |
Commercial and standby letters of credit | | | 5,529 | | | 9,002 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Commitments to grant loans | $ | 36,650 | | | $ | 135,441 | |
| Unused commitments to fund loans and lines of credit | 215,892 | | | 235,617 | |
| Commercial and standby letters of credit | 26,024 | | | 6,503 | |
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
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
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’smanagement's credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The amount of collateral obtained, if it is deemed necessary by the Company, is based on
management’smanagement's credit evaluation of the customer.
Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments, if deemed necessary.
The Company enters into rate lock commitments to finance residential mortgage loans with its customers. These commitments offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The Company maintains its cash accounts with the Federal Reserve BankFRB and correspondent banks. The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $25.3 million$41 thousand and $10.6$1.4 million at December 31, 20202023 and 2019,2022, respectively.
Note
14.11. Minimum Regulatory Capital Requirements
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 Company’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 sheet items as calculated under regulatory accounting practices. A financial institution’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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 assets below a specified asset threshold from the consolidated regulatory capital requirements. The
interim final rule
expandsexpanded 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 a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.
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 Bank’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-sheet items as calculated under regulatory accounting practices. A financial institution’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks
(the “Basel III Rules”(“Basel III”) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being fully phased in 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 Bankrules, institutions must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios.
Management believes as of December 31, 2020 and 2019, the Bank meets all capital adequacy requirement to which they are subject.
Prompt corrective action regulations,
which also apply to the Bank, provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
At year-end 2020 and 2019, 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.Pursuant to the EGRRCPA, regulatorsfederal banking agencies have provided for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework (“CBLR”), framework, for qualifying community bank organizations. Banksorganizations with
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
less than $10 billion in consolidated total assets. Organizations that qualify could 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%.that 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 opted in to the CBLR framework.
The CARES Act, passed in response to the COVID-19 pandemic, directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as theA banking organization maintains a leverage ratiothat opts out of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirementframework can subsequently opt back into the CBLR framework if it meets the criteria proscribed. As of December 31, 2023 and 2022, the Bank meets all capital adequacy requirements to a 9% CBLR requirement. It establishes a minimum CBLR of 8% forwhich it is subject and is considered well capitalized under the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.
The Bank continues to be subject to various capital requirements administered by banking agencies. prompt corrective action regulations.
The capital ratios for the Bank as of December 31,
20202023 and
20192022 are shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement | | Minimum to be Well Capitalized Under Prompt Corrective Action |
| Amount | | Ratio | | Amount | | Ratio (1) | | Amount | | Ratio |
| At December 31, 2023 | | | | | | | | | | | |
| Total risk-based capital | $ | 261,403 | | | 13.83 | % | | $ | 198,413 | | | 10.50 | % | | $ | 188,965 | | > | 10.00 | % |
| Tier 1 risk-based capital | 241,930 | | | 12.80 | % | | 160,620 | | | 8.50 | % | | 151,172 | | > | 8.00 | % |
| Common equity tier 1 capital | 241,930 | | | 12.80 | % | | 132,275 | | | 7.00 | % | | 122,827 | | > | 6.50 | % |
| Leverage capital ratio | 241,930 | | | 10.77 | % | | 89,842 | | | 4.00 | % | | 112,302 | | > | 5.00 | % |
| 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 | % |
________________________
(1). | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Well | |
| | | | | | | | | | | | Capitalized Under | |
| | | | | | | Minimum | | Prompt Corrective | |
| | Actual | | Capital Requirement(1) | | Action Provisions | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
As of December 31, 2020: | | | | | | | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | | $ | 209,359 | | 11.65 | % | $ | 143,823 | | 8.000 | % | | — | | — | |
As of December 31, 2019: | | | | | | | | | | | | | | | | |
Total Risk Based Capital (to Risk Weighted Assets) | | $ | 192,364 | | 13.43 | % | $ | 150,369 | | 10.500 | % | $ | 143,208 | | 10.000 | % |
Tier 1 Capital (to Risk Weighted Assets) | | $ | 182,121 | | 12.72 | % | $ | 121,727 | | 8.500 | % | $ | 114,567 | | 8.000 | % |
Common Tier 1 (CET1) (to Risk Weighted Assets) | | $ | 182,121 | | 12.72 | % | $ | 100,246 | | 7.000 | % | $ | 93,085 | | 6.500 | % |
Tier 1 Capital (to Average Assets) | | $ | 182,121 | | 12.15 | % | $ | 98,214 | | 6.500 | % | $ | 75,550 | | 5.000 | % |
(1) Except with regard to the Bank’s Tier 1 to average assets ratio, the minimum Ratios include capital requirement includes the Basel III Capital Rules capital conservaionconservation buffer.
Dividend Restrictions – The
Company’sCompany'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,
2020, $55.22023, $33.9 million of retained earnings is available to pay dividends.
Note
15.12. Related Party Transactions
Officers, directors and their affiliates had borrowings of
$14.3$47.6 million and
$14.5$37.9 million at December 31,
20202023 and
20192022, respectively, with the Company. During the years ended December 31,
20202023 and
2019,2022, total principal additions were
$476 thousand$10.6 million and
$292 thousand ,$19.9 million, respectively, and total principal payments were
$608 thousand$0.9 million and
$611 thousand,$1.5 million, respectively.
Related party deposits amounted to
$43.7$33.0 million and
$46.2$38.4 million at December 31,
20202023 and
2019,2022, respectively.
Note
16.13. Stock-Based Compensation Plan
The Company’s Amended and Restated 2008 Option Plan (the “Plan”"Plan"), which is shareholder-approved,stockholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock.stock in connection with their service to the Company. In June 2018,May 2022, the shareholdersstockholders approved an amendment to the Amended and Restated 2008 Plan to extend the term of the plan until 2028 and increase the number of shares authorized for issuance under the Plan by 200,000 shares.
The Company has granted stock options and restricted stock units under the Plan.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The maximum number of shares with respect to which awards may be made is 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’sCompany's stock at the date of grant, generally vest annually over four years of continuous service and have a contractual terms of ten year contractual terms.years. At December 31, 2020, 148,6022023, 146,432 shares were available to grant under the Plan.
NaN No options were granted during 20202023 and 2019.2022. For the year ended December 31, 2020, 2,7372023, 63,634 shares were withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant. For the year ended December 31, 2019, 17,4912022, there were 4,772 shares were withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant.
A summary of option activity under the Plan as of December 31,
2020,2023, and changes during the year then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value (1) |
| Outstanding at January 1, 2023 | | 1,621,920 | | | $ | 6.82 | | | 1.81 | | |
| Granted | | — | | | — | | | | | |
| Exercised | | (427,135) | | | 5.99 | | | | | |
| Forfeited or expired | | (20,654) | | | 5.76 | | | | | |
| Outstanding and Exercisable at December 31, 2023 | | 1,174,131 | | | $ | 7.14 | | | 1.3 | | $ | 8,287,812 | |
________________________
(1) | | | | | | | | | | |
| | | | | | | Weighted- | | | |
| | | | Weighted- | | Average | | | |
| | | | Average | | Remaining | | Aggregate |
| | | | Exercise | | Contractual | | Intrinsic |
Options | | Shares | | Price | | Term | | Value (1) |
Outstanding at January 1, 2020 | | 1,797,516 | | $ | 8.09 | | 4.10 | | | — |
Granted | | — | | | — | | | | | |
Exercised | | (64,501) | | | 6.50 | | | | | |
Forfeited or expired | | (5,070) | | | 10.54 | | | | | |
Outstanding and Exercisable at December 31, 2020 | | 1,727,945 | | $ | 8.14 | | 3.17 | | $ | 11,334,386 |
| (1) | The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount changes based on changes in the market value of the Company’s stock. |
The compensation costaggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that haswould have been charged to income forreceived by the plan was $690 thousand and $679 thousand for 2020 and 2019, respectively. option holders had all option holders exercised their options on December 31, 2023. This amount changes based on changes in the market value of the Company's stock.
As of December 31,
2020,2023, all outstanding shares of the Plan are fully vested and amortized. Tax benefits recognized for qualified and non-qualified stock
optionsoption exercises during
20202023 and
20192022 totaled
$89$352 thousand and
$179$364 thousand, respectively.
A summary of the
Company’sCompany's restricted stock grant activity as of December 31,
20202023 is shown below.
| | | | | |
| | | | Weighted Average |
| | Number of | | Grant Date |
| | Shares | | Fair Value |
Nonvested at January 1, 2020 | | 109,718 | | $ | 18.70 |
Granted | | 0 | | | — |
Vested | | (34,460) | | | 18.44 |
Forfeited | | (2,515) | | | 18.69 |
Balance at December 31, 2020 | | 72,743 | | $ | 18.82 |
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average
Grant Date
Fair Value |
| Nonvested at January 1, 2023 | 278,245 | | | $ | 14.63 | |
| Granted | 11,438 | | | 10.77 | |
| Vested | (96,062) | | | 14.67 | |
| Forfeited | (14,506) | | | 15.36 | |
| Balance at December 31, 2023 | 179,115 | | | $ | 14.30 | |
The compensation cost that has been charged to income for the plan was $1.1 million and $1.2 million for 2023 and 2022, respectively. For the year ended December 31, 2023, 10,071 shares were withheld from issuance upon vesting of restricted stock units in order to cover the cost of the exercise by the participant. There were no shares withheld from issuance upon vesting of restricted stock units in order to cover the cost of the vesting by the participant for the year ended December 31, 2022. As of December 31,
2020,2023, there was
$1.2$1.9 million of total unrecognized compensation cost related to nonvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of
26 months.
25 months .
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
Note 17.14. Fair Value Measurements
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with
Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement
date.date (exit price). Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
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 -based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 — Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considerconsiders observable market data (Level 2).
Derivatives assets and liabilities:Cash flow hedges: The Company has loan interest rate swap derivatives and interest rate swap derivatives on certain time deposits and borrowings, which the latter are designated as cash flow hedges. These derivatives are recorded at fair value using published yield curve rates from a national valuation service. These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20202023 and 2019:
2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2023 Using |
| | Balance as of December 31, 2023 | | Quoted Prices
in Active
Markets for
Identical
Assets | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs |
| Description | | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | | |
| Available-for-sale | | | | | | | | |
| Securities of U.S. government and federal agencies | | $ | 8,470 | | | $ | — | | | $ | 8,470 | | | $ | — | |
| Securities of state and local municipalities tax exempt | | 997 | | | — | | | 997 | | | — | |
| Securities of state and local municipalities taxable | | 404 | | | — | | | 404 | | | — | |
| Corporate bonds | | 17,648 | | | — | | | 17,648 | | | — | |
| SBA pass-through securities | | 57 | | | — | | | 57 | | | — | |
| Mortgage-backed securities | | 140,942 | | | — | | | 140,942 | | | — | |
| Collateralized mortgage obligations | | 3,077 | | | — | | | 3,077 | | | — | |
| Total Available-for-Sale Securities | | $ | 171,595 | | | $ | — | | | $ | 171,595 | | | $ | — | |
| Derivative assets - interest rate swaps | | $ | 2,853 | | | $ | — | | | $ | 2,853 | | | $ | — | |
| Derivative assets - cash flow hedge | | 2,915 | | | — | | | 2,915 | | | — | |
| Liabilities | | | | | | | | |
| Derivative liabilities - interest rate swaps | | $ | 2,853 | | | $ | — | | | $ | 2,853 | | | $ | — | |
Table of Contents | | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2020 Using |
| | | | | Quoted Prices | | | | | | |
| | | | | in Active | | Significant | | | |
| | | | | Markets for | | Other | | Significant |
| | | | | Identical | | Observable | | Unobservable |
| | Balance as of | | Assets | | Inputs | | Inputs |
Description | | December 31, 2020 | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | | | | | | |
Available-for-sale | | | | | | | | | | | | |
Securities of state and local municipalities tax exempt | | $ | 3,493 | | | — | | $ | 3,493 | | | — |
Securities of state and local municipalities taxable | | | 818 | | | — | | | 818 | | | — |
Corporate bonds | | | 12,817 | | | — | | | 12,817 | | | — |
SBA pass-through securities | | | 141 | | | — | | | 141 | | | — |
Mortgage-backed securities | | | 83,714 | | | — | | | 83,714 | | | — |
Collateralized mortgage obligations | | | 25,168 | | | — | | | 25,168 | | | — |
Total Available-for-Sale Securities | | $ | 126,151 | | $ | — | | $ | 126,151 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2019 Using |
| | | | | Quoted Prices | | | | | | |
| | | | | in Active | | Significant | | | |
| | | | | Markets for | | Other | | Significant |
| | | | | Identical | | Observable | | Unobservable |
| | Balance as of | | Assets | | Inputs | | Inputs |
Description | | December 31, 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | | | | | | |
Available-for-sale | | | | | | | | | | | | |
Securities of U.S. government and federal agencies | | $ | 3,996 | | $ | — | | $ | 3,996 | | $ | — |
Securities of state and local municipalities tax exempt | | | 3,738 | | | — | | | 3,738 | | | — |
Securities of state and local municipalities taxable | | | 955 | | | — | | | 955 | | | — |
Corporate bonds | | | 6,981 | | | — | | | 6,981 | | | — |
SBA pass-through securities | | | 159 | | | — | | | 159 | | | — |
Mortgage-backed securities | | | 97,189 | | | — | | | 97,189 | | | — |
Collateralized mortgage obligations | | | 28,307 | | | — | | | 28,307 | | | — |
Total Available-for-Sale Securities | | $ | 141,325 | | $ | — | | $ | 141,325 | | $ | — |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2022 Using |
| | Balance as of December 31, 2022 | | Quoted Prices
in Active
Markets for
Identical
Assets | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs |
| Description | | | (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 | | | $ | — | |
| | | | | | | | |
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that
At December 31, 2023, all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impairedCompany's individually evaluated loans can bewere evaluated based on either the observable market price of the loan orupon the fair value of the collateral. In accordance with ASC 820, individually evaluated loans where an allowance is established based on the the fair value of collateral (i.e., those loans that are collateral dependent) require classification in the fair value hierarchy. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
Impaired Loans (prior to adoption of ASC 326): Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on the present value of future cash flows, observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
is a house or building in the process of construction, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the
Allowanceallowance for
Loan Lossescredit losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for
loancredit losses
on the Statements of Income.Loans Held for Sale: During the fourth quarter of 2019, the Company reclassified a portion of its consumer unsecured loan portfolio as held for sale and recorded a loss on the market value adjustment totaling $145 thousand. During the second quarter of 2020, the Company reclassified its consumer unsecured loans held for sale portfolio to held for investment at the lower of cost or market as the market for these types of loans receded due to current economic conditions. For the year ended December 31, 2020, the Company recorded a loss on the market value adjustment totaling $451 thousand. The portfolio totaled $6.5 million at December 31, 2020, compared to $11.2 million at December 31, 2019. The measurement of loss associated with the loans held for sale can be based on the observable market price of the loan portfolio. Any fair value adjustments are recorded in the 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. OREO properties are evaluated regularly for impairment and adjusted accordingly.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
The following table summarizes the Company’sCompany's assets that were measured at fair value on a nonrecurring basis at December 31, 20202023 and December 31, 2019:
| | | | | | | | | | | | |
| | | | | Fair Value Measurements |
| | | | | Using |
| | | | | Quoted Prices | | | | | | |
| | | | | in Active | | Significant | | | |
| | | | | Markets for | | Other | | Significant |
| | | | | Identical | | Observable | | Unobservable |
| | Balance as of | | Assets | | Inputs | | Inputs |
Description | | December 31, 2020 | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | | | | | | |
Impaired loans | | $ | 6,587 | | $ | — | | $ | — | | $ | 6,587 |
Other real estate owned | | $ | 3,866 | | $ | — | | $ | — | | $ | 3,866 |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements |
| | | | | Using |
| | | | | Quoted Prices | | | | | | |
| | | | | in Active | | Significant | | | |
| | | | | Markets for | | Other | | Significant |
| | | | | Identical | | Observable | | Unobservable |
| | Balance as of | | Assets | | Inputs | | Inputs |
Description | | December 31, 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | | | | | | |
Impaired loans | | $ | 1,816 | | $ | — | | $ | — | | $ | 1,816 |
Loans held for sale | | $ | 11,198 | | $ | — | | $ | 11,198 | | $ | — |
Other real estate owned | | $ | 3,866 | | $ | — | ��� | $ | — | | $ | 3,866 |
2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance as of December 31, 2023 | | Quoted Prices
in Active
Markets for
Identical
Assets | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs |
| Description | | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | | |
| Collateral-dependent loans | | | | | | | | |
| Commercial real estate | | $ | 849 | | | $ | — | | | $ | — | | | $ | 849 | |
| Commercial and industrial | | $ | 396 | | | $ | — | | | $ | — | | | $ | 396 | |
| Total Collateral-dependent loans | | $ | 1,245 | | | $ | — | | | $ | — | | | $ | 1,245 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Balance as of December 31, 2022 | | Quoted Prices
in Active
Markets for
Identical
Assets | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs |
| Description | | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | | |
| Impaired loans | | | | | | | | |
| Commercial and industrial | | $ | 1,233 | | | $ | — | | | $ | — | | | $ | 1,233 | |
| | | | | | | | |
| Total Impaired loans | | $ | 1,233 | | | $ | — | | | $ | — | | | $ | 1,233 | |
| | | | | | | | |
The following table displays quantitative information about Level 3 Fair Value Measurements for December 31,
20202023 and
2019:
| | | | | | | | | | | | | |
Quantitative information about Level 3 Fair Value Measurements for December 31, 2020 | |
(In thousands) | | | | | | | | | | | | | |
Assets | | Fair Value | | Valuation Technique(s) | | Unobservable input | | Range | | | (Avg.) | |
Impaired loans | | $ | 6,587 | | Discounted appraised value | | Marketability/Selling costs | | 0% - 8 | % | | (6.23) | % |
Other real estate owned | | $ | 3,866 | | Discounted appraised value | | Selling costs | | 10.51 | % | | | |
| | | | | | | | | | | | | |
Quantitative information about Level 3 Fair Value Measurements for December 31, 2019 | |
(In thousands) | | | | | | | | | | | | |
Assets | | Fair Value | | Valuation Technique(s) | | Unobservable input | | Range | | | (Avg.) | |
Impaired loans | | $ | 1,816 | | Discounted appraised value | | Marketability/Selling costs | | 5% - 8 | % | | (7.84) | % |
Other real estate owned | | $ | 3,866 | | Discounted appraised value | | Selling costs | | 10.51 | % | | | |
2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative information about Level 3 Fair Value Measurements for December 31, 2023 |
| Assets | | Fair Value | | Valuation Technique(s) | | Unobservable input | | Range | | (Avg.) |
| Collateral-dependent loans | | | | | | | | | | |
| Commercial real estate | | $ | 849 | | | Discounted appraised value | | Marketability/Selling costs | | 10% - 10% | | 10.00 | % |
| Commercial and industrial | | $ | 396 | | | Discounted appraised value | | Marketability/Selling costs | | 10% - 10% | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative information about Level 3 Fair Value Measurements for December 31, 2022 |
| Assets | | Fair Value | | Valuation Technique(s) | | Unobservable input | | Range | | (Avg.) |
| Impaired loans | | | | | | | | | | |
| Commercial and industrial | | $ | 1,233 | | | Discounted appraised value | | Marketability/Selling costs | | 8% - 8 % | | 8.00 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’sCompany's financial instruments as of December 31, 20202023 and 2019.2022. Fair values for December 31, 20202023 and 20192022 are estimated under the exit price notion in accordance with the prospective adoption of ASU 2016-01, “Recognition"Recognition and Measurement of Financial Assets and Financial Liabilities.”
| | | | | | | | | | | | |
| | | | | Fair Value Measurements as of December 31, 2020 using |
| | | | | Quoted Prices in | | | | | | |
| | | | | Active Markets | | Significant | | Significant |
| | Carrying | | for Identical | | Unobservable | | Unobservable |
| | Amount | | Assets | | Inputs | | Inputs |
| | | | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | | | |
Cash and due from banks | | $ | 20,835 | | $ | 20,835 | | $ | — | | $ | — |
Interest-bearing deposits at other institutions | | | 120,228 | | | 120,228 | | | — | | | — |
Securities held-to-maturity | | | 264 | | | — | | | 274 | | | — |
Securities available-for-sale | | | 126,151 | | | — | | | 126,151 | | | — |
Restricted stock | | | 6,563 | | | — | | | 6,563 | | | — |
Loans, net | | | 1,451,125 | | | — | | | — | | | 1,463,270 |
Bank owned life insurance | | | 38,178 | �� | | — | | | 38,178 | | | — |
Accrued interest receivable | | | 9,135 | | | — | | | 9,135 | | | — |
Financial liabilities: | | | | | | | | | | | | |
Checking, savings and money market accounts | | $ | 1,219,440 | | $ | — | | $ | 1,219,440 | | $ | — |
Time deposits | | | 313,053 | | | — | | | 316,341 | | | — |
FHLB advances and Subordinated notes | | | 25,000 | | | — | | | 25,000 | | | — |
Subordinated notes | | | 44,085 | | | — | | | 42,438 | | | — |
Accrued interest payable | | | 685 | | | — | | | 685 | | | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements as of December 31, 2019 using |
| | | | | Quoted Prices in | | | | | | |
| | | | | Active Markets | | Significant | | Significant |
| | Carrying | | for Identical | | Unobservable | | Unobservable |
| | Amount | | Assets | | Inputs | | Inputs |
| | | | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | | | |
Cash and due from banks | | $ | 14,916 | | $ | 14,916 | | $ | — | | $ | — |
Interest-bearing deposits at other institutions | | | 18,226 | | | 18,226 | | | — | | | — |
Securities held-to-maturity | | | 264 | | | — | | | 270 | | | — |
Securities available-for-sale | | | 141,325 | | | — | | | 141,325 | | | — |
Restricted stock | | | 6,017 | | | — | | | 6,017 | | | — |
Loans held for sale | | | 11,198 | | | — | | | 11,198 | | | — |
Loans, net | | | 1,260,295 | | | — | | | — | | | 1,254,685 |
Bank owned life insurance | | | 37,069 | | | — | | | 37,069 | | | — |
Accrued interest receivable | | | 4,094 | | | — | | | 4,094 | | | — |
Financial liabilities: | | | | | | | | | | | | |
Checking, savings and money market accounts | | $ | 863,383 | | $ | — | | $ | 863,383 | | $ | — |
Time deposits | | | 422,339 | | | — | | | 424,398 | | | — |
Federal funds purchased | | | 10,000 | | | — | | | 10,000 | | | — |
FHLB advances and Subordinated notes | | | 15,000 | | | — | | | 15,000 | | | — |
Subordinated notes | | | 24,487 | | | — | | | 24,564 | | | — |
Accrued interest payable | | | 605 | | | — | | | 605 | | | — |
" | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2023 using | |
| Carrying Amount | | Quoted Prices in Active Markets for Identical Assets | | Significant
Unobservable
Inputs | | Significant Unobservable Inputs | |
| | | Level 1 | | Level 2 | | Level 3 | |
| Financial assets: | | | | | | | | |
| Cash and due from banks | $ | 8,042 | | | $ | 8,042 | | | $ | — | | | $ | — | | |
| Interest-bearing deposits at other institutions | 52,480 | | | 52,480 | | | — | | | — | | |
| Securities held-to-maturity | 264 | | | — | | | 252 | | | — | | |
| Securities available-for-sale | 171,595 | | | — | | | 171,595 | | | — | | |
| Restricted stock | 9,488 | | | — | | | 9,488 | | | — | | |
| Loans, net | 1,809,693 | | | — | | | — | | | 1,725,785 | | |
| Bank owned life insurance | 56,823 | | | — | | | 56,823 | | | — | | |
| Accrued interest receivable | 10,321 | | | — | | | 10,321 | | | — | | |
| Derivative assets - interest rate swaps | 2,853 | | | — | | | 2,853 | | | — | | |
| Derivative assets - cash flow hedge | 2,915 | | | — | | | 2,915 | | | — | | |
| | | | | | | | |
| Financial liabilities: | | | | | | | | |
| Checking, savings and money market accounts | $ | 1,293,693 | | | $ | — | | | $ | 1,293,693 | | | $ | — | | |
| Time deposits | 551,599 | | | — | | | 551,949 | | | — | | |
| FHLB advances | 85,000 | | | — | | | 85,000 | | | — | | |
| Subordinated notes | 19,620 | | | — | | | 18,565 | | | — | | |
| Accrued interest payable | 2,415 | | | — | | | 2,415 | | | — | | |
| Derivative liabilities - interest rate swaps | 2,853 | | | — | | | 2,853 | | | — | | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2022 using |
| Carrying Amount | | Quoted Prices in Active Markets for Identical Assets | | Significant
Unobservable
Inputs | | Significant Unobservable Inputs |
| | | Level 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 | | | — | |
| | | | | | | |
Note
18.15. Earnings Per Share
Basic earnings per share ("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 – diluted includes only the potential dilution of stock options
and unvested restricted stock units as of as of December 31,
20202023 and
2019,2022, respectively.
The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common shareholders. There were
0no anti-dilutive shares for each of the years ended December 31,
20202023 and
2019.2022.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
The holders of restricted stock do not share in dividends and do not have voting rights during the vesting period.
| | | | | | |
| | Years Ended |
| | December 31, |
| | 2020 | | 2019 |
Net income | | $ | 15,501 | | $ | 15,828 |
Weighted average shares - basic | | | 13,542 | | | 13,817 |
Effect of dilutive securities | | | 592 | | | 1,008 |
Weighted average shares - diluted | | | 14,134 | | | 14,825 |
Basic EPS | | $ | 1.14 | | $ | 1.15 |
Diluted EPS | | $ | 1.10 | | $ | 1.07 |
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 |
| Net income | $ | 3,822 | | | $ | 24,984 | |
| | | |
| Weighted average - basic shares | 17,723 | | | 17,431 | |
Effect of dilutive securities, restricted stock units and options | 508 | | | 1,053 | |
| Weighted average - diluted shares | 18,231 | | | 18,484 | |
| | | |
| Basic EPS | $ | 0.22 | | | $ | 1.43 | |
| Diluted EPS | $ | 0.21 | | | $ | 1.35 | |
Note
19.16. Supplemental Cash Flow Information
| | | | | | |
| | For the Years Ended |
| | December 31, |
(dollars in thousands) | | 2020 | | 2019 |
| | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | |
Cash paid for: | | | | | | |
Interest on deposits and borrowed funds | | $ | 14,383 | | $ | 18,698 |
Income taxes | | | 3,505 | | | 2,268 |
Noncash investing and financing activities: | | | | | | |
Transfer of loans to loans held for sale | | | — | | | 11,343 |
Unrealized gain on securities available-for-sale | | | 2,112 | | | 4,096 |
Unrealized loss on interest rate swaps | | | (674) | | | — |
Transfer of loans held for sale to loans, net | | | 9,641 | | | — |
Initial right of use asset – operating leases | | | — | | | 12,249 |
Initial lease liability – operating leases | | | — | | | 12,656 |
Right-of-use assets obtained in the exchange for lease liabilities during the current period | | | 59 | | | 2,378 |
Derecognition of right-of-use assets and lease liability | | | 458 | | | — |
| | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| (In thousands) | | 2023 | | 2022 |
| | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | |
| Cash paid for: | | | | |
| Interest on deposits and borrowed funds | | $ | 51,017 | | | $ | 15,140 | |
| Income taxes | | 2,360 | | | 6,070 | |
| Noncash investing and financing activities: | | | | |
| Unrealized gain (loss) on securities available-for-sale | | 17,413 | | | (48,958) | |
| Unrealized (loss) gain on interest rate swaps | | (1,337) | | | 4,328 | |
| Adoption of CECL accounting standard | | (2,808) | | | — | |
| Right-of-use assets obtained in the exchange for lease liabilities during the current period | | 820 | | | 522 | |
| Modification of right-of-use assets and lease liability | | 455 | | | 283 | |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Note 20.17. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income
(loss) ("AOCI") for the years ended December 31,
20202023 and
20192022 are shown in the following table. The Company has
2two components of AOCI, which are available-for-sale securities and
interest rate swap,cash flow hedges, for each of the years ended December 31,
20202023 and
2019.2022.
| | | | | | | | | | | | | | | | | |
| 2023 |
| Available-for-
Sale Securities | | Cash Flow
Hedges | | Total |
| Balance, beginning of period | $ | (39,926) | | | $ | 3,359 | | | $ | (36,567) | |
| Net unrealized (losses) gains during the period | 1,300 | | | (1,043) | | | 257 | |
| Net reclassification adjustment for losses realized in income | 12,150 | | | — | | | 12,150 | |
| Other comprehensive (loss) income, net of tax | 13,450 | | | (1,043) | | | 12,407 | |
| Balance, end of period | $ | (26,476) | | | $ | 2,316 | | | $ | (24,160) | |
Table of Contents | | | | | | | | | |
| | 2020 |
| | Available-for- | | Cash Flow | | | |
| | Sale Securities | | Hedges | | Total |
Balance, beginning of period | | $ | 753 | | $ | (63) | | $ | 690 |
Net unrealized gains (losses) during the period | | | 1,780 | | | (532) | 3 | | 1,248 |
Net reclassification adjustment for gains realized in income | | | (112) | | | — | | | (112) |
Other comprehensive income (loss), net of tax | | | 1,668 | | | (532) | | | 1,136 |
Balance, end of period | | $ | 2,421 | | $ | (595) | | $ | 1,826 |
| | | | | | | | | |
| | 2019 |
| | Available-for- | | Cash Flow | | |
| | Sale Securities | | Hedges | | Total |
Balance, beginning of period | | $ | (2,411) | | $ | — | | $ | (2,411) |
Net unrealized gains (losses) during the period | | | 3,164 | | | (63) | | | 3,101 |
Other comprehensive income (loss), net of tax | | | 3,164 | | | (63) | | | 3,101 |
Balance, end of period | | $ | 753 | | $ | (63) | | $ | 690 |
The following table presents information related
Notes to reclassificationsConsolidated Financial Statements
($ in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| 2022 |
| Available-for-
Sale Securities | | Cash Flow
Hedges | | Total |
| Balance, beginning of period | $ | (1,983) | | | $ | (60) | | | $ | (2,043) | |
| Net unrealized (losses) gains during the period | (37,943) | | | 3,419 | | | (34,524) | |
| Other comprehensive income (loss), net of tax | (37,943) | | | 3,419 | | | (34,524) | |
| Balance, end of period | $ | (39,926) | | | $ | 3,359 | | | $ | (36,567) | |
During 2023, $102.5 million in investment securities available-for-sale, or 31% of the investment portfolio, were sold with a realized after-tax loss of $12.1 million that was reclassified from
accumulated other comprehensiveAOCI into income.
| | | | | | | | |
| | Amount Reclassified from AOCI | | Affected Line Item |
| | into Income | | in the Consolidated |
| | For the Years Ended December 31, | | Statements of |
Details about AOCI | | 2020 | | 2019 | | Income |
Gain on sale of available-for-sale securities | | $ | (141) | | $ | — | | Gain on sale of securities available-for-sale |
Income tax expense | | | 29 | | | — | | Income tax benefit |
Total | | $ | (112) | | $ | — | | Net of tax |
There were no gains or losses that were reclassified from AOCI into income for the year ended December 31, 2022, respectively.
Note
21.18. Revenue Recognition
The Company
adoptedrecognizes revenue in accordance with ASU
No. 2014-09
“Revenue‘‘Revenue from Contracts with
Customers” (Topic 606)Customers’’ ("Topic 606") and all subsequent ASUs that modified Topic 606 in recognizing revenue.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterestnon-interest income streams such as fees associated with mortgage servicing rights, gain on sale of securities, 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 noninterestnon-interest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. NoninterestNon-interest revenue streams in-scope of Topic 606 are discussed below.
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and personal checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges and are included in other income on
ourthe Company’s consolidated statements of income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. This income is reflected in other income on the Company’s consolidated statements of income.
Other
noninterestnon-interest income consists of loan swap fees, insurance commissions, and other miscellaneous revenue streams not meeting the criteria above. When the Company enters into an interest rate swap agreement, the Company may receive an additional one-time payment fee which is recognized as income when received. The Company receives monthly recurring commissions based on a percentage of premiums issued and revenue is recognized when received. Any residual miscellaneous fees are recognized as they occur, and therefore, the Company determined this consistent practice satisfies the obligation for performance.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31,
20202023 and
2019:
| | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
Noninterest Income | | | | | | |
In-scope of Topic 606 | | | | | | |
Service Charges on Deposit Accounts | | $ | 1,008 | | $ | 890 |
Fees, Exchange, and Other Service Charges | | | 345 | | | 429 |
Other income | | | 76 | | | 38 |
Noninterest Income (in-scope of Topic 606) | | | 1,429 | | | 1,357 |
Noninterest Income (out-scope of Topic 606) | | | 1,462 | | | 1,189 |
Total Noninterest Income | | $ | 2,891 | | $ | 2,546 |
2022: | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 |
| Non-interest Income | | | |
| In-scope of Topic 606 | | | |
| Service Charges on Deposit Accounts | $ | 1,028 | | | $ | 954 | |
| Fees, Exchange, and Other Service Charges | 350 | | | 374 | |
| Other income | 96 | | | 104 | |
| Non-interest Income (in-scope of Topic 606) | 1,474 | | | 1,432 | |
| Non-interest Income (out-scope of Topic 606) | (14,844) | | | 1,402 | |
| Total Non-interest (Loss) Income | $ | (13,370) | | | $ | 2,834 | |
Table of Contents
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterestnon-interest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 20202023 and 2019,2022, the Company did not have any significant contract balancesbalances..
Contract Acquisition Costs
Under Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company did not capitalize any contract acquisition cost during the years ended December 31, 20202023 or 2019.2022.
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
Note
22.19. Parent Company Only Financial Statements
The FVCBankcorp, Inc. (Parent Company only) condensed financial statements are as follows:
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CONDITION
December 31,
20202023 and
2019
| | | | | | |
Assets | | 2020 | | 2019 |
Cash and cash equivalents | | $ | 8,016 | | $ | 5,421 |
Securities available-for-sale | | | 1,012 | | | 1,040 |
Investment in subsidiary | | | 222,531 | | | 194,914 |
Other assets | | | 2,162 | | | 2,246 |
Total assets | | $ | 233,721 | | $ | 203,621 |
Liabilities and Stockholders' Equity | | | | | | |
Subordinated notes | | $ | 44,085 | | $ | 24,487 |
Other liabilities | | | 136 | | | 56 |
Total liabilities | | $ | 44,221 | | $ | 24,543 |
Total stockholders' equity | | $ | 189,500 | | $ | 179,078 |
Total liabilities and stockholders' equity | | $ | 233,721 | | $ | 203,621 |
2022 | | | | | | | | | | | | | | |
| Assets | | 2023 | | 2022 |
| Cash and cash equivalents | | $ | 85 | | | $ | 531 | |
| Securities available-for-sale | | 991 | | | 991 | |
| Investment in subsidiary | | 227,658 | | | 214,382 | |
| Other assets | | 8,391 | | | 6,404 | |
| Total assets | | $ | 237,125 | | | $ | 222,308 | |
| Liabilities and Stockholders' Equity | | | | |
| Subordinated notes | | $ | 19,620 | | | $ | 19,565 | |
| Other liabilities | | 388 | | | 361 | |
| Total liabilities | | $ | 20,008 | | | $ | 19,926 | |
| Total stockholders' equity | | $ | 217,117 | | | $ | 202,382 | |
| Total liabilities and stockholders' equity | | $ | 237,125 | | | $ | 222,308 | |
Notes to Consolidated Financial Statements
(Continued)
(
Dollars$ in thousands, except
share and per share data)
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31,
20202023 and
20192022
| | | | | | |
| | 2020 | | 2019 |
Income: | | | | | | |
Interest on securities available-for-sale | | $ | 65 | | $ | 65 |
Dividend income | | | 3,500 | | | — |
Total income | | $ | 3,565 | | $ | 65 |
Expense: | | | | | | |
Interest on subordinated notes | | | 1,802 | | | 1,580 |
Salaries and employee benefits | | | 699 | | | 687 |
Occupancy and equipment | | | 83 | | | 80 |
Audit, legal and consulting fees | | | 365 | | | 322 |
Other operating expenses | | | 217 | | | 194 |
Total expense | | | 3,166 | | | 2,863 |
| | | | | | |
Net loss before income tax benefit and equity in undistributed earnings of subsidiary | | $ | 399 | | $ | (2,798) |
Income tax benefit | | | (643) | | | (560) |
Equity in undistributed earnings of subsidiary | | | 14,459 | | | 18,066 |
Net income | | $ | 15,501 | | $ | 15,828 |
| | | | | | | | | | | |
| 2023 | | 2022 |
| Income: | | | |
| Interest on securities available-for-sale | $ | 101 | | | $ | 67 | |
| Income from minority membership interest | 1,654 | | | 626 | |
| Dividend income | 683 | | | 730 | |
| Total income | $ | 2,438 | | | $ | 1,423 | |
| Expense: | | | |
| Interest on subordinated notes | $ | 1,030 | | | $ | 1,031 | |
| Salaries and employee benefits | 1,151 | | | 1,192 | |
| Occupancy and equipment | 80 | | | 80 | |
| Audit, legal and consulting fees | 256 | | | 375 | |
| Other operating expenses | 252 | | | 194 | |
| Total expense | $ | 2,769 | | | $ | 2,872 | |
| | | |
| Net (loss) before income tax benefit and equity in undistributed earnings of subsidiary | $ | (331) | | | $ | (1,449) | |
| Income tax benefit | (477) | | | (580) | |
| Equity in undistributed earnings of subsidiary | 3,676 | | | 25,853 | |
| Net income | $ | 3,822 | | | $ | 24,984 | |
Notes to Consolidated Financial Statements
($ in thousands, except per share data)
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
20202023 and
2019
| | | | | | |
| | 2020 | | 2019 |
Cash Flows From Operating Activities | | | | | | |
Net income | | $ | 15,501 | | $ | 15,828 |
Equity in undistributed earnings of subsidiary | | | (14,459) | | | (18,066) |
Deferred income tax benefit | | | (6) | | | (44) |
Amortization of subordinated debt issuance costs | | | 88 | | | 80 |
Stock-based compensation expense | | | 690 | | | 679 |
Change in other assets and liabilities | | | 176 | | | (528) |
Net cash used in operating activities | | $ | 1,990 | | $ | (2,051) |
Cash Flows From Investing Activities | | | | | | |
Pushdown of capital to banking subsidiary | | $ | (12,000) | | $ | — |
Net cash used in investing activities | | $ | (12,000) | | $ | — |
Cash Flows From Financing Activities | | | | | | |
Issuance of subordinated notes, net | | $ | 19,510 | | $ | — |
Repurchase of shares of common stock | | | (7,280) | | | — |
Stock options exercised | | | 375 | | | 1,220 |
Net cash provided by financing activities | | $ | 12,605 | | $ | 1,220 |
Net (decrease) increase in cash and cash equivalents | | $ | 2,595 | | $ | (831) |
Cash and cash equivalents, beginning of year | | | 5,421 | | | 6,252 |
Cash and cash equivalents, end of year | | $ | 8,016 | | $ | 5,421 |
2022123
| | | | | | | | | | | |
| 2023 | | 2022 |
| Cash Flows From Operating Activities | | | |
| Net income | $ | 3,822 | | | $ | 24,984 | |
| Equity in undistributed earnings of subsidiary | (3,676) | | | (25,853) | |
| | | |
| Amortization of subordinated debt issuance costs | 55 | | | 55 | |
| Stock-based compensation expense | 1,143 | | | 1,183 | |
| Change in other assets and liabilities | (1,961) | | | (1,413) | |
| Net cash (used in) provided by operating activities | $ | (617) | | | $ | (1,044) | |
| Cash Flows From Investing Activities | | | |
| | | |
| Net cash used in investing activities | $ | — | | | $ | — | |
| Cash Flows From Financing Activities | | | |
| | | |
| Repayment of subordinated notes, net | $ | — | | | $ | (1,250) | |
| Repurchase of shares of common stock | (1,460) | | | (730) | |
| Vesting of restricted stock options | (113) | | | — | |
| Common stock issuance | 1,744 | | | 1,673 | |
| Net cash provided by (used in) financing activities | $ | 171 | | | $ | (307) | |
| Net decrease in cash and cash equivalents | $ | (446) | | | $ | (1,351) | |
| Cash and cash equivalents, beginning of year | 531 | | | 1,882 | |
| Cash and cash equivalents, end of year | $ | 85 | | | $ | 531 | |
67`Note 20: Subsequent Events
The Company surrendered $47.9 million of its bank-owned life insurance (“BOLI”). These policies yielded 2.74% (3.34% on a tax-equivalent basis). This transaction resulted in a non-recurring increase of $2.2 million to the Company’s tax provisioning related to the gain associated with the expected cash payout, which will be included in the Company’s first quarter earnings. The projected earn-back period is approximately one year. The Company expects to use the proceeds to pay down high cost funding and fund new loan growth. From an earnings perspective, this balance sheet re-positioning is expected to be accretive to net interest income, net interest margin and return on average assets in future periods.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
No changes in the
Company’sCompany's independent registered public accounting firm or disagreements on accounting and financial disclosure required to be reported hereunder have taken place.
Item
9A. Controls and ProceduresDisclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission and that such information is accumulated and communicated to the
Company’sCompany's management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the
Company’sCompany's disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision and with the participation of management, including the
Company’sCompany's Chief Executive Officer and Chief Financial Officer. Based on the evaluation, the aforementioned officers concluded that the
Company’sCompany's disclosure controls and procedures were effective as of the end of such period.
Management’s
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The
Company’sCompany's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the
Company’sCompany's financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’sCompany's internal control over financial reporting as of December 31, 2020.2023. In making this assessment, management used the 2013 criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on management’smanagement's assessment, management believes that as of December 31, 2020,2023, the Company’sCompany's internal control over financial reporting was effective based on criteria set forth by COSO in its 2013 Internal Control-Integrated Framework. The Company’sCompany's annual report does not include an attestation report of the Company’sCompany's independent registered public accounting firm, Yount, Hyde & Barbour. P.C. (“YHB”("YHB"), Auditor Firm ID: 613 regarding internal control over financial reporting under Public Company Accounting Oversight Board standards. Management’sManagement'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’smanagement's report in its annual report. The
20202023 consolidated financial statements have been audited by the independent registered public accounting firm of 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.
Changes in Internal Control Over Financial Reporting
There was no change in the
Company’sCompany's internal control over financial reporting identified in connection with the evaluation of internal controls that occurred during the fourth quarter of
20202023 that has materially affected, or is reasonably likely to materially affect, the
Company’sCompany's internal control over financial reporting.
Item
9B. Other InformationNone.
(b) During the quarter ended December 31, 2023, no director or Section 16 officer of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements.
.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
None.
Item
10. Directors, Executive Officers and Corporate GovernancePursuant to General Instruction G(3) of Form 10-K, the information contained under the captions
“Election"Election of Directors,
” “Executive" "Executive Officers,
” “Ownership" "Ownership of Company Securities – Delinquent Section 16(a)
Reports”Reports" and
“Corporate"Corporate Governance and The Board of
Directors”Directors" in the
Company’sCompany's Proxy Statement for the
20212024 Annual Meeting of
StockholdersShareholders is incorporated by reference.
Item
11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information contained under the captions
“Executive"Executive Compensation,
” “Corporate" "Corporate Governance and The Board of Directors – Director
Compensation”Compensation" and
“Corporate"Corporate Governance and The Board of Directors –
“Compensation"Compensation Committee Interlocks and Insider
Participation”Participation" in the
Company’sCompany's Proxy Statement for the
20212024 Annual Meeting of
StockholdersShareholders is incorporated by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management. Pursuant to General Instruction G(3) of Form 10-K, the information contained under the caption "Ownership of Company Securities - Security Ownership of Directors, , Executive Officers and Certain Beneficial Owners”Owners" in the Company’sCompany's Proxy Statement for the 20212024 Annual Meeting of StockholdersShareholders is incorporated by reference.
Equity Compensation Plan Information. The following table sets forth information as of December 31, 2020,2023, with respect to compensation plans under which shares of our Common Stock are authorized for issuance. | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | 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) |
| Equity Compensation Plans Approved by Stockholders: | | | | | | |
| Amended and Restated 2008 Stock Plan | | 1,174,131 | | $ | 7.14 | | | 146,432 |
| Equity Compensation Plans Not Approved by Stockholders (2) | | — | | — | | | — |
| Total | | 1,174,131 | | $ | 7.14 | | | 146,432 |
________________________
(1) | | | | | | | |
| | | | | | | Number of Securities |
| | Number of Securities to Be | | Weighted Average | | Remaining Available |
| | Issued Upon Exercise of | | Exercise Price of | | for Future Issuance |
| | Outstanding Options, | | Outstanding Options, | | Under Equity |
Plan Category | | Warrants and Rights | | Warrants and Rights | | Compensation Plans(1) |
Equity Compensation Plans Approved by Stockholders: | | | | | | | |
Amended and Restated 2008 Stock Plan | | 1,727,945 | | $ | 8.14 | | 148,602 |
Equity Compensation Plans Not Approved by Stockholders (2) | | — | | | — | | — |
Total | | 1,727,945 | | $ | 8.14 | | 148,602 |
(2)The Company does not have any equity compensation plans that have not been approved by stockholders.
(1) | Amounts exclude any securities to be issued upon exercise of outstanding options, warrants and rights. |
(2) | The Company does not have any equity compensation plans that have not been approved by stockholders. |
Item
13. Certain Relationships and Related Transactions, and Director IndependencePursuant to General Instruction G(3) of Form 10-K, the information contained under the captions
“Executive"Executive Compensation – Certain Relationships and Related
Transactions”Transactions" and
“Corporate"Corporate Governance and The Board of Directors – Director
Independence”Independence" in the
Company’sCompany's Proxy Statement for the
20212024 Annual Meeting of
StockholdersShareholders is incorporated by reference.
Item
14. Principal AccountingAccountant Fees and ServicesPursuant to General Instruction G(3) of Form 10-K, the information contained under the captions "Audit information
-– Fees of Independent Registered Public
Accountants”Accountants" and
“Audit"Audit Information
-– Audit Committee Pre-Approval Policies and
Procedures”Procedures" in the
Company’sCompany's Proxy Statement for the
20212024 Annual Meeting of
StockholdersShareholders is incorporated by reference.
Item
15. ExhibitsExhibit and Financial Statement Schedules
|
Number | |
Number
3.1 | |
| Description
|
3.1
|
| Articles of Incorporation of FVCBankcorp, Inc .Inc. (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
3.2 | |
| Amendment, dated May 11, 2018, to Articles of Incorporation of FVCBankcorp, Inc .Inc. (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
3.3 | |
| Bylaws of FVCBankcorp, Inc .,Inc., as amended (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on April 9, 2020) |
4.1 | |
| Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
4.2 | |
| Form of Subordinated Note due June 30, 2026 (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942))
|
4.3
|
| Form of Subordinated Note due October 15, 2030 (incorporated by referencedreference to Exhibit 4.1 of the Current Report on Form 8-K filed on October 14, 2020). |
4.4
4.3 | |
| Description of FVCBankcorp, Inc.'s Securities.Securities |
10.1 | |
| Amended and Restated Employment Agreement, dated as of March 16, 2021, by and among FVCBankcorp, Inc., FVCbank and David W. Pijor (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
10.2 | |
| Amended and Restated Change in Control Agreement, dated as of March 16, 2021, by and among FVCBankcorp, Inc., FVCbank and Patricia A. Ferrick (incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
10.3 | |
| Form of Subordinated Note PurchaseSupplemental Executive Retirement Plan Agreement, dated June 20, 20167, 2022, between FVCBankcorp, Inc. and David W. Pijor (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 7, 2022).
|
| 10.4 | | |
| 10.5 | | |
10.4
10.6 | | |
| 10.7 | | |
10.5
10.8 | |
| FVCBankcorp, Inc. Amended and Restated 2008 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.5Appendix A of the RegistrationProxy Statement for the Annual Meeting of Shareholders held on Form S-1May 18, 2022, filed on August 20, 2018 (Registration No. 333-226942))April 8, 2022) |
10.6
10.9 | |
| 1st Commonwealth Bank of Virginia 2009 Stock Option Plan (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 filed on August 20, 2018 (Registration No. 333-226942)) |
21 | |
| Subsidiaries of the Registrant |
23.1 | |
| Consent of Yount, Hyde & Barbour, P.C. |
31.1 | |
| Rule 13a-14(a) Certification of Chief Executive Officer |
31.2 | |
| Rule 13a-14(a) Certification of Chief Financial Officer |
32.1 | |
| Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
32.2 | |
| Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
101
97 | | |
| 101 | | Interactive data files pursuant to Item 405 of Regulation S-T |
| |
(i) |
| (i)
| Consolidated Statements of Condition at December 31, 20202023 and 2019 2022 |
| |
(ii) |
| (ii)
| Consolidated Statement of Income for the years ended December 31, 20202023 and 2019 2022 |
| | | | | | | | | | | |
| |
(iii) |
| (iii)
| Consolidated Statement of Comprehensive Income for the years ended December 31, 20202023 and 2019 2022 |
| |
(iv) |
| (iv)
| Consolidated Statement of Changes in Stockholders’Stockholders' Equity for the years ended December 31, 20202023 and 2019 2022 |
| |
(v) |
| (v)
| Consolidated Statement of Cash Flows for the years ended December 31, 20202023 and 2019 2022 |
| |
(vi) |
| (vi)
| Notes to the Consolidated Financial Statements |
|
|
|
|
104 | | |
|
| The cover page from the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2020,2023, formatted in Inline Extensible Business Reporting Language (included with Exhibit 101). |
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| FVCBankcorp, Inc. | | | |
March 21, 2024
| FVCBankcorp, Inc.
|
March 25, 2021
By: | By:
| /s/ David W. Pijor |
| |
Name: |
| Name:
| David W. Pijor |
| |
Title: |
| Title:
| Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 2021.
21, 2024.
| | | | | | | | |
| Signatures | |
Titles |
/s/ David W. Pijor | |
Chairman and Chief Executive Officer
(Principal Executive Officer) |
Name: David W. Pijor |
|
|
|
|
|
/s/ Jennifer L. Deacon | | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Name: Jennifer L. Deacon |
|
|
|
|
|
/s/ Patricia A. Ferrick | | | President and Director |
Name: Patricia A. Ferrick | |
| | |
/s/ Marc N. Duber | | Director |
Name: Marc N. Duber
|
|
|
| /s/ Morton A. Bender
|
| Director
Name: Morton A. Bender
|
|
|
|
|
|
/s/ L. Burwell Gunn | | Director | Director
|
Name: L. Burwell Gunn |
|
|
|
|
|
/s/ Meena Krishnan | | Director | Director
|
Name: Meena Krishnan | |
|
|
|
|
/s/ Scott Laughlin | | Director | Director
|
Name: Scott Laughlin |
|
|
|
|
|
/s/ Thomas L. Patterson
|
| Director
|
Name: Thomas L. Patterson
|
|
|
|
|
|
/s/ Devin Satz | | Director | Director
|
Name: Devin Satz |
|
|
|
|
|
/s/ Lawrence W. Schwartz | | Director | Director
|
Name: Lawrence W. Schwartz |
|
|
|
|
|
/s/ Sidney G. Simmonds | | Director | Director
|
Name: Sidney G. Simmonds |
|
|
|
|
|
/s/ Daniel M. Testa | | Director | Director
|
Name: Daniel M. Testa |
|
|
|
|
|
/s/ Philip R. Wills III | | Director | Director
|
Name: Philip R. Wills III |
|
|
|
|
|
/s/ Steven M. Wiltse | | Director | Director
|
Name: Steven M. Wiltse |
|
|