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What changed in FVCBankcorp, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FVCBankcorp, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+419 added−421 removedSource: 10-K (2024-03-21) vs 10-K (2023-03-24)

Top changes in FVCBankcorp, Inc.'s 2023 10-K

419 paragraphs added · 421 removed · 296 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

74 edited+10 added−20 removed152 unchanged
Biggest changeThe rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after 18 Table of Contents 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 its 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 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 threat to the financial stability of the United States.
Biggest changeThe rule requires financial institutions to notify their primary federal regulator as 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 its 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 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 threat to the financial stability of the United States. 18 Table of Contents 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.
In 2016, FASB issued the current expected credit losses ("CECL") model, which became applicable to us on January 1, 2023.
In 2016, the FASB issued the current expected credit losses ("CECL") model, which became applicable to us on January 1, 2023.
The guidance provides that institutions that have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution's total risk-based capital; or (ii) total reported commercial real estate loans, excluding loans secured by owner-occupied commercial real estate, representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months, are identified as having potential commercial real estate concentration risk.
The guidance provides that institutions that have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution's total risk-based capital; or (ii) total reported commercial real estate loans, excluding loans secured by owner-occupied commercial real estate, representing 300% or more of the institution's total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months, are identified as having potential commercial real estate concentration risk.
The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Riegle-Neal Act, by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.
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 (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.
On October 12, 2018, we completed our acquisition of Colombo Bank ("Colombo"), which was headquartered in Rockville, Maryland, and added five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland.
On October 12, 2018, we completed our acquisition of Colombo Bank ("Colombo"), which was headquartered in Rockville, Maryland, and which added banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland.
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 10 Table of Contents 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.
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.
The significant presence of national and international businesses make 5 Table of Contents the Washington MSA one of the most economically vibrant and diverse markets in the country. The Washington MSA is currently home to 16 Fortune 500 companies, including eight based in Fairfax County. The Baltimore MSA also has strong economic factors which enhance our business profile.
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 30 Fortune 500 companies, including eight based in Fairfax County. 5 Table of Contents The Baltimore MSA also has strong economic factors which enhance our business profile.
Capital Category Total Risk‑Based Capital Ratio Tier 1 Risk‑Based Capital Ratio Common Equity Tier 1 Capital Ratio Leverage Ratio Tangible Equity to Assets Supplemental Leverage Ratio Well Capitalized 10% or greater 8% or greater 6.5% or greater 5% or greater n/a n/a Adequately Capitalized 8% or greater 6% or greater 4.5% or greater 4% or greater n/a 3% or greater Undercapitalized Less than 8% Less than 6% Less than 4.5% Less than 4% n/a Less than 3% Significantly Undercapitalized Less than 6% Less than 4% Less than3% Less than 3% n/a n/a Critically Undercapitalized n/a n/a n/a n/a Less than 2% n/a 15 Table of Contents 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.
Capital Category Total Risk‑Based Capital Ratio Tier 1 Risk‑Based Capital Ratio Common Equity Tier 1 Capital Ratio Leverage Ratio Tangible Equity to Assets Supplemental Leverage Ratio Well Capitalized 10% or greater 8% or greater 6.5% or greater 5% or greater n/a n/a Adequately Capitalized 8% or greater 6% or greater 4.5% or greater 4% or greater n/a 3% or greater Undercapitalized Less than 8% Less than 6% Less than 4.5% Less than 4% n/a Less than 3% Significantly Undercapitalized Less than 6% Less than 4% Less than3% Less than 3% n/a n/a Critically Undercapitalized n/a n/a n/a n/a Less than 2% n/a An institution 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.
Community Reinvestment Act ("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's record of performance under the CRA is publicly available.
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's record of performance under the CRA is publicly available.
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.
A government contractor borrower must have an acceptable level of eligible accounts receivable, provide appropriate security instruments 7 Table of Contents 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.
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.
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 11 Table of Contents 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.
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 Board of Governors of the Federal Reserve System (the "Federal Reserve") and general economic conditions, nationally and in our market areas, could have a significant impact on our results of operations.
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.
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.
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 12 Table of Contents regulates the supply of money through various means including open market dealings in United States government securities.
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 may obtain exemptions from the restriction or conditions on the acceptance of brokered deposits. 13 Table of Contents Anti-Money Laundering Laws and Regulations.
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 may obtain exemptions from the restriction or conditions on the acceptance of brokered deposits. Anti-Money Laundering Laws and Regulations.
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.
These factors, along with the ability of the regional infrastructure to support remote working, have provided a greater amount of resiliency on the overall employment metrics for our market.
The Economic Growth, Regulatory Relief and Consumer Protection Act ("EGRRCPA") also directed the federal banking agencies to develop a "Community Bank Leverage Ratio" ("CBLR"), calculated by dividing tangible equity capital 14 Table of Contents by average consolidated total assets. In October 2019, the federal banking agencies adopted a CBLR of 9%.
The Economic Growth, Regulatory Relief and Consumer Protection Act ("EGRRCPA") also directed the federal banking agencies to develop a "Community Bank Leverage 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%.
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 6 Table of Contents of our client focused, relationship driven marketing.
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.
Upon implementation, an institution would recognize a one-time cumulative effect adjustment to the allowance for cr edit 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.
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.
We have determined that we have a concentration in 17 Table of Contents 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.
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.
Management believes the allowance for loan losses is adequate to cover probable incurred losses in our loan portfolio as of December 31, 2022. Comprehensive risk management practices and appropriate capital levels are essential elements of a sound commercial real estate lending program.
Management believes the allowance for credit losses is adequate to cover probable incurred losses in our loan portfolio as of December 31, 2023. Comprehensive risk management practices and appropriate capital levels are essential elements of a sound commercial real estate lending program.
Our investment policy authorizes investment primarily in securities of the U.S. government and its agencies; mortgage backed 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.
Our investment policy authorizes investment primarily in securities of the U.S. government and its agencies; mortgage backed securities and collateralized mortgage obligations issued and fully backed by U.S. government agencies, securities of 10 Table of Contents municipalities and to a lesser extent corporate bonds and other obligations, in each case meeting identified credit standards.
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.
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. 9 Table of Contents Our market area is a highly competitive, highly branched, banking market.
Commercial construction loans for the acquisition, development and construction of commercial real estate also comprise a significant and growing portion of the portfolio. At December 31, 2022, such loans represented 8.0% of the loan portfolio. Our t ypical commercial construction loan involves property that will ultimately be leased to a non-owner occupant.
Commercial construction loans for the acquisition, development and construction of comme rcial real estate also comprise a significant and growing portion of the portfolio. At December 31, 2023, such loans represented 8.0% of the loan portfolio. Our t ypical commercial construction loan involves property that will ultimately be leased to a non-owner occupant.
To the extent that we make mortgage loans, we are required to comply with these rules, subject to available 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.
To the extent that we make mortgage loans, we are required to comply with these rules, subject to available exceptions. 16 Table of Contents 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.
At December 31, 2022, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
At December 31, 2023, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
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 11 Table of Contents 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 5 years old, the Federal Reserve may approve the acquisition.
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 five years old, the Federal Reserve may approve the acquisition.
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.
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 8 Table of Contents institutions with concentrations in commercial real estate lending.
If implemented, the rule would, 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 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.
We have a concentration in comme rcial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. As of December 31, 2022, commercial real estate loans as defined for regulatory purposes represented 405% of our total risk-based capital.
We have a concentration in comme rcial 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.
We provide HELOCs a s a service to our customers and when we receive referrals from various mortgage brokers within our market area. As of December 31, 2022, HELOCs comprise 1.9% of total loans. Loans originated for residential 1-4 family trust investment purposes comprise 4.9% of total loans as of December 31, 2022.
We provide HELOCs a s a service to our customers and when we receive referrals from various mortgage brokers within our market area. As of December 31, 2023 , HELOCs comprise 1.7% of total loans. Loans originated for residential 1-4 family trust investment purposes comprise 4.3% of total loans as of December 31, 2023 .
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("the Act"), and is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve").
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to regulation and supervision by the Federal Reserve.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Regulatory Enforcement Authority . Federal banking law grants substantial enforcement powers to the federal banking agencies.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. 15 Table of Contents Regulatory Enforcement Authority . Federal banking law grants substantial enforcement powers to the federal banking agencies.
At December 31, 2022, consumer residential loans represented 18.5% 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.
At December 31, 2023, consumer residential loans represented 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.
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. Employees As of December 31, 2022 , we had 131 full-time employees and 4 part-time employees. N one of our employees are covered by a collective bargaining agreement.
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. Employees As of December 31, 2023, we had 116 full-time employees and 4 part-time employees. None of our employees are covered by a collective bargaining agreement.
The changes may also 16 Table of Contents require us to dedicate significant management attention and resources to evaluate and make necessary changes to comply with the new statutory and regulatory requirements. Mortgage Banking Regulation .
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. Mortgage Banking Regulation .
Concentration and Risk Guidance. The federal bank regulatory agencies have issued guidance governing financial institutions with concentrations in commercial real estate lending.
The federal bank regulatory agencies have issued guidance governing financial institutions with concentrations in commercial real estate lending.
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 ad equacy of the allowance for loan losses.
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 credit losses.
The proposed rule would require current reporting about material cybersecurity incidents and periodic disclosures about policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise and its oversight of cybersecurity risk.
The final rule requires current reporting about material cybersecurity incidents and periodic disclosures about policies and procedures to identify and manage cybersecurity risks, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise and its oversight of cybersecurity risk.
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 13.2% of our loan portfolio at December 31, 2022. The warehouse facility provided to ACM is also included in this loan type.
Commercial 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 12.0% of our loan portfolio at December 31, 2023 . The warehouse facility provided to ACM is also included in this loan type.
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 2.8% as of December 20 22.
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 2.5% as of December 31, 2023 .
We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements. Additional Information Our common stock is currently listed on the Nasdaq Capital Market under the symbol "FVCB." We maintain a website at www.fvcbank.com. We make available free of charge through our website all of our U.S.
We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements. Additional Information Our common stock is currently listed on the Nasdaq Capital Market under the symbol "FVCB." We maintain a website at https://www.fvcbank.com.
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's earnings.
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's earnings.
As of June 30, 2022, there were approximately $297.1 billion in total deposits shared between banking institutions located in the Washington MSA, according to the FDIC. As of the aforementioned date, our deposit market share was approximately 0.64% in the Washington MSA.
As of June 30, 2023, there were approximately $298.3 billion in total deposits shared between banking institutions located in the Washington MSA, according to the FDIC. As of the aforementioned date, our deposit market share was approximately 0.60% in the Washington MSA.
Advance rates will be up to 90% of prime eligible government receivables, and lower percentages depending on the nature of th e receivables. At December 31, 2022, outstanding loans to government contractors represented 40.3% of our commercial and industrial segment. Total commitments to government contractors totaled $305.1 million at December 31, 2022.
Advance rates will be up to 90% of prime eligible government receivables, and lower percentages depending on the nature of th e receivables. At December 31, 2023 , outstanding loans to government contractors represented 47.0% of our commercial and industrial segment. Total commitments to government contractors totaled $311.4 million at December 31, 2023.
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.
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.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including The Nasdaq Stock Market, LLC, the exchange on which our common stock is listed, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
The Nasdaq Stock Market, LLC, the exchange on which our 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.
However, our business opportunities may be tempered by concerns related to inflation, the cessation of pandemic-related government stimulus, and contractionary monetary policy. Volatility in global economic markets, continued domestic political turmoil and various episodes of geopolitical unrest continue to provide a degree of uncertainty in financial markets.
Our business opportunities in the future may be tempered by higher interest rates, inflation, and contractionary monetary policy. Volatility in global economic markets, continued domestic political turmoil and various episodes of geopolitical unrest continue to provide a degree of uncertainty in financial markets.
As of December 31, 2020, the Washington MSA had a median household income of $106,415, which ranks as sixth highest among all MSAs nationally, and a population of 6.3 million.
As of December 31, 2023, the Washington MSA had a median household income of $111,252, which ranks as sixth highest among all MSAs nationally, and a population of 6.4 million.
Commercial loans are typically made with variable or adjustable 7 Table of Contents rates. The cash flow of the borrower/borrower'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.
Commercial loans are typically made with variable or adjustable rates. The cash flow of the borrower/borrower'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.
Our loan portfolio consists primarily of commercial real estate loans, including construction and land 8 Table of Contents loans, which totaled $1.25 billion and constituted 67.8% of total loans as of December 31, 2022, and commercial loans, including loans to government contractors and the ACM warehouse lending facility, which totaled $243.2 million and constituted 13.2% of total loans as of December 31, 2022.
Our loan portfolio consists primarily of commercial real estate loans, including construction and land loans, which totaled $1.31 billion and constituted 67.8% of total loans as of December 31, 2023, and commercial loans, including loans to government contractors and the ACM warehouse lending facility, which totaled $219.9 million and constituted 12.0% of total loans as of December 31, 2023.
Securities and Exchange Commission ("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 www.sec.gov.
We make available free of charge through our website all of our 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.
Lending Products 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") 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.
We have partnered with experienced service providers in both insurance and merchant services to further augment the products available to our customers. 6 Table of Contents Lending Products 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") 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.
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's Office of Foreign Assets Control ("OFAC").
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's Office of Foreign Assets Control ("OFAC"). The OFAC-administered sanctions targeting countries take many different forms.
CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions. In 2022 and 2021, the Company recorded expense of $620 thousand and $770 thousand, respectively, for FDIC insurance premiums.
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.
In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework.
On October 24, 2023, the federal bank regulatory agencies jointly issued a final rule intended to strengthen and modernize the CRA regulatory framework.
The deposit insurance assessment base is based on average total assets minus average tangible equity, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act. Deposit insurance pricing is a “financial ratios method” based on “CAMELS” composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets.
Deposit insurance pricing is a “financial ratios method” based on “CAMELS” composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets.
Commercial real estate loans, which comprise the largest portion of the 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.
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, 2023 , owner occupied commercial real estate loans represented 12.0% of the loan portfolio.
The regulations of these various agencies govern most aspects of the Bank's business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices.
The regulations of these various agencies govern most aspects of the Bank's business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. 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.
Both globally and within the United States, the pandemic has resulted in negative impacts and a disruption to economic and commercial activity and financial markets. The local economy in which we operate began to strengthen and improve during 2021 and continued into 2022. This economic improvement resulted in lower unemployment, increased consumer confidence, and increased housing development and housing prices.
The local economies in which we operate that began to strengthen and improve during 2022 post pandemic, showed continued improvement in economic and commercial activity during 2023. This economic improvement resulted in lower unemployment, increased consumer confidence, and increased housing development and housing prices.
Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2021 and December 31, 2022.
Effective September 30, 2022, we opted out of the CBLR framework. A banking organization 14 Table of Contents that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above.
In October 2022, the FDIC adopted a final rule to increase the assessment base rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. The assessment base rate may increase further as a result of the recent activity transpired in the banking industry. Limitations on Incentive Compensation.
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.
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.
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.
While the region continues to experience the economic effects of the COVID-19 pandemic, the region's unemployment rate remained below the national average as the region has the benefit of a highly trained and educated workforce concentrated in government and professional service businesses.
Our market area's unemployment rate has generally remained below the national average for the last several years, as the region has the benefit of a highly trained and educated workforce concentrated in government and professional service businesses.
In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held to investment loan portfolio.
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.
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.
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.
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-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.
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- 13 Table of Contents terrorism purposes.
These limits will increase or decrease in response to increases or decreases in our level of capital. At December 31, 2022, the Bank had a legal lending limit of $38.5 million.
These limits will increase or decrease in response to increases or decreases in our level of capital. At December 31, 2023 , the Bank had a legal lending limit of $39.2 million. At December 31, 2023 , our average funded loan size outstanding, for commercial real estate (including commercial construction) and commercial loans was $2.1 million and $520 thousand, respectively.
Personal guarantees are generally required, but may be limited. We generally require that interest rates adjust not less frequently than five years.
We typically require a maximum loan to value of 80% and minimum cash flow and debt service coverages, of at least 1.20 to 1.00. Personal guarantees are generally required, but may be limited. We generally require that interest rates adjust not less frequently than five years.
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 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. Our strong infrastructure and wide range of products and services allowed us to develop deeper relationships with Colombo's customers, as well as enhance our platform for generating new relationships.
As of December 31, 2020, the Baltimore MSA had a median household income of $83,811 which represented 3.3% growth over the previous year. The Baltimore MSA has an unemployment rate of 3.1 % as of December 2022 .
As of December 31, 2023, the Baltimore MSA had a median household income of $90,505 which represented 4.0% growth over the previous year. The Baltimore MSA has an unemployment rate of 2.0% as of December 31, 2023. With a population of 3.0 million, the top industries of the Baltimore MSA include healthcare, education, and professional, scientific and technical services.
As discussed below, the Basel III rules 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.
We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2023 and December 31, 2022. As discussed below, the Basel III rules also integrate the new capital requirements into the prompt corrective action provisions under Section 38 of the FDIA.
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 1.00.
At December 31, 2023, non-owner occupied commercial real estate loans represented approximately 48.0% of the loan portfolio and multi-family residential real estate comprise d 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.
As of June 30, 2022, the Washington MSA had total deposits of $297.1 billion and the Baltimore MSA had total deposits of $104.6 billion, based on Federal Deposit Insurance Corporation ("FDIC") data. Our market area's unemployment rate has generally remained below the national average for the last several years.
As of June 30, 2023, t he Washington MSA had total deposits of $298.3 billion and the Baltimore MSA had total deposits of $96.5 billion, based on Federal Deposit Insurance Corporation ("FDIC") data.
The adjustment recorded at adoption was not significant to the overall allowance for credit losses or shareholders' equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans as well as an adjustment to the Company's reserve for unfunded commitments. Prompt Corrective Action .
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 .
Removed
Our strong infrastructure and wide range of products and services allowed us to develop deeper relationships with Colombo'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.
Added
Any acquired loans must meet our standard underwriting requirements. Commercial Real Estate Loans. Commercial real estate loans, which comprise the largest portion of our loan portfolio, are secured by both owner occupied and investor owned commercial properties, including multi-family residential real estate.
Removed
This ownership interest is subject to an earnback option of up to 3.7% over the next three years. As of December 31, 2022, our percentage ownership had decreased to 27.7%.
Added
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.
Removed
With a population of 2.8 million, the top industries of the Baltimore MSA include health care, education, and professional, scientific and technical services. Our business, financial condition, and results of operations have been profoundly affected by the pandemic, which will potentially have adverse effects on our future performance.
Added
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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf 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 loan losses. 21 Table of Contents 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.
Biggest changeIf the overall economic climate in the U.S. generally, or in our market areas specifically, experiences material disruption, 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 credit losses.
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 loan losses, each of which could adversely affect our net income.
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 credit losses, each of which could adversely affect our net income.
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 loan 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.
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 credit 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.
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'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 loan losses may increase, the value of collateral may decline and loan demand may be reduced.
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'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 credit losses may increase, the value of collateral may decline and loan demand may be reduced.
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'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 loan losses may increase, the value of collateral may decline and loan demand may be reduced.
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'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 credit losses may increase, the value of collateral may decline and loan demand may be reduced.
Our federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses. These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours.
Our federal and state banking regulators, as an integral part of their supervisory function, periodically review the adequacy of our allowance for credit losses. These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours.
Moreover, larger institutions operating in the Washington, D.C. metropolitan area may have access to borrowed funds at lower cost than will be available to us. Additionally, deposit competition among institutions in the market area is strong.
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.
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 operations may be adversely affected if that goo dwill is determined to be impaired, which would require us to take an impairment charge.
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 operations may be adversely affected if that goodwill is determined to be impaired, which would require us to take an impairment charge.
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.
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. 29 Table of Contents 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.
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 22 Table of Contents loans and charge-offs, and reduce loan demand.
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.
Nevertheless, if delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.
Nevertheless, if delinquencies and defaults increase, we may be required to increase our provision for credit losses, which could have a material adverse effect on our business, financial condition and results of operations.
It is possible that the integration process could result in the loss of key employees, the disruption of each company'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.
It is possible that the integration process could result in the loss of key employees, the disruption of each company's ongoing business, diversion of 26 Table of Contents 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.
We are actively seeking to expand our exposure to this business segment. While we believ e 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.
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.
If the level of our nonperforming or other problem assets increases, we may be required to make additional provisions for loan losses, which will negatively impact our earnings.
If the level of our nonperforming or other problem assets increases, we may be required to make additional provisions for credit losses, which will negatively impact our earnings.
Other changes to statutes, regulations, or regulatory policies, or supervisory guidance, including changes in 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 continue to increase, our costs and limit our ability to pursue business opportunities.
Other changes to statutes, regulations, or regulatory policies, or 30 Table of Contents supervisory guidance, including changes in 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 continue to increase, our costs and limit our ability to pursue business opportunities.
Our profitability depends upon our continued ability to successfully compete with 24 Table of Contents 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.
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.
This co ncentration 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.
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.
Although we endeavor to maintain our allowance for credit losses at a level adequate to absorb any inherent losses in the loan portfolio, the determination of the appropriate level of the allowance for credit 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.
Although we endeavor to maintain our allowance for credit losses at a level adequate to absorb any losses in the loan portfolio, the determination of the appropriate level of the allowance for credit losses is inherently highly subjective 24 Table of Contents 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.
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, 2022, we had $7.2 million of goodwill related to our acquisition of Colombo.
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, 2023, we had $7.2 million o f goodwill related to our acquisition of Colombo.
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.
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 28 Table of Contents driven products and services effectively or be successful in marketing these products and services to our customers.
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 None.
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 None. 31 Table of Contents
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 8.0% of total loans at December 31, 2022.
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 8.1% of total loans at December 31, 2023.
We may not achieve the 26 Table of Contents 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.
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.
We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. 23 Table of Contents Our allowance for credit losses may be inadequate to absorb losses inherent in the loan portfolio, which could have a material adverse effect on our business, financial condition and results of operations.
We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Our allowance for credit losses may be inadequate to absorb actual losses in the loan portfolio, which could have a material adverse effect on our business, financial condition and results of operations.
A substantial portion of our loans are secured b y various types of real estate in the Washington, D.C. metropolitan area and substantially all of our loans are to borrowers in that area.
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.
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 29 Table of Contents reputation.
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.
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, 2022, commercial real estate loans, as defined for regulatory purposes, represented 405% of our total risk-based 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.
These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business 30 Table of Contents activities, limit the 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 capital than GAAP.
These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the 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 capital than US generally accepted accounting principles ("GAAP").
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.
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.
Market interest rates increased in response over the course of the year. 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.
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.
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. Market Risks Our business and operations may be materially adversely affected by weak economic conditions.
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 Economy, Financial Markets, Interest Rates and Liquidity Our business and operations may be materially adversely affected by weak economic conditions.
Our deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of o ur 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.
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 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 maintain current customer deposits or attract additional deposits.
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.
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.
Increases to our nonperforming assets or other problem assets will have an adverse effect on our earnings. As of December 31, 2022, we had nonperforming loans and loans 90 days or more past due of $4.5 million, or 0.24% of total loans, net of deferred fees.
Increases to our nonperforming assets or other problem assets will have an adverse effect on our earnings. As of December 31, 2023, we had nonperforming loans and loans 90 days or more past due of $1.8 million, or 0.10% of total loans, net of deferred fees.
In 2022, 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 from 0 - 0.25% at the beginning of the year to 4.25 – 4.50% as of December 31, 2022.
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 four times in 2023 from 0 - 0.25% at the beginning of 2022 to 5.25 - 5.50% as of December 31, 2023.
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.
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.
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 credit losses in excess of our current allowance for credit losses, requiring us to make material additions to our allowance for credit losses, which could have a material adverse effect on our business, financial condition and results of operations.
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 credit losses in excess of our current allowance for credit losses, requiring us to make material additions to our allowance for credit losses.
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.
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.
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 19 Table of Contents products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.
Unfavorable market conditions 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 credit losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.
Commercial and industrial loans, excluding PPP, comprised 13.2%, of total loans at December 31, 2022. These categories of loans have historically carried a higher risk of default than other types of loans, such as single family residential mortgage loans.
Commercial and industrial loans, comprised 11.8% , of total loans at December 31, 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.
An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition. Our portfolio of loans to small and mid-sized community-based businesses may increase our credit risk.
An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for credit losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
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.
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.
In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.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.
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.These changes could adversely affect our capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics.
As these technologies are improved in the future, we may be required to make significant capital expenditures in order to 28 Table of Contents remain competitive, which may increase our overall expenses and have a material adverse effect on our business, financial condition and 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.
Additionally, the resolution of nonperforming assets, TDRs and other problem assets requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities. Our concentrations of loans may create a greater risk of loan defaults and losses.
Additionally, the resolution of nonperforming assets 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. 22 Table of Contents Our concentrations of loans may create a greater risk of loan defaults and losses.
In order to continue to grow successfully, we must also identify and retain experienced loan officers with local expertise and relationships. We expect that competition for experienced loan 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.
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.
At December 31, 2022, 86.3% 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 59.8% of our portfolio.
At December 31, 2023, 87.7% o f 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 59.7 % of our portfolio.
At that date, we had two loans considered troubled debt restructurings ("TDRs") totaling $830 thousand. If loans become 90 or more days past due and still accruing and 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 loans become 90 or more days past due and still accruing and move to nonaccrual, we will not record interest income on such loans, and may be required to reverse prior accruals, thereby adversely affecting our earnings.
At December 31, 2022, 13.2% of our total loans were outstanding to commercial and industrial customers. Of that, approximately 40.3% 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 $305.1 million to such borrowers.
At December 31, 2023, 11.8% of our total loans were outstanding to commercial and industrial customers. Of that, approximately 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 $311.4 million to such borrowers.
As a result of our organic growth over the p ast several years, as of December 31, 2022, approximately $1.05 billion, or 56.9%, of the loans in our loan portfolio (excluding PPP loans) were first originated during the past three years.
As a result of our organic growth over the past several years, as of December 31, 2023, approximately $1.06 billion, or 57.8%, of the loans in our loan portfolio were first originated during the past three years.
Third party relationships are subject to increasingly demanding 31 Table of Contents 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.
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.
The average age by loan type for loans originated in the past three years is: commercial real estate loans—1.30 years; commercial and industrial loans—1.46 years; commercial construction loans—0.89 years; consumer residential loans—1.14 years; and consumer nonresidential loans—1.48 years.
The average age by loan type for loans originated in the past three years is: commercial real estate loans—1.76 years; commercial and industrial loans—1.45 years; commercial construction loans—1.44 years; consumer residential loans—1.54 years; and consumer nonresidential loans—1.34 years.
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.
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. 20 Table of Contents 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.
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.
We outsource many of our major systems, such as data processing, deposit processing, loan origination, email and anti-money laundering monitoring systems. 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.
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. 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 failure to compete effectively in our market 25 Table of Contents 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.
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.
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.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. 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.
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.
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.
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. 23 Table of Contents Our portfolio of loans to small and mid-sized community-based businesses may increase our credit risk.
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 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.
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 may be adversely affected by the soundness of other financial institutions.
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.
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.
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. 19 Table of Contents 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.
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.
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.
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.
As of December 31, 2023, approximately 31.1% of our deposits were uninsured when excluding collateralized deposits, and we rely on these deposits for liquidity.Any such loss of funds could result in lower loan originations and decrease in liquidity, which could have a material adverse effect on our business, financial condition and results of operations.
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.
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.
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.
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.
Regulatory initiatives regarding bank capital requirements may require heightened capital. We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines.
Any such changes could have a material adverse effect on our business, financial condition and results of operations. Regulatory initiatives regarding bank capital requirements may require heightened capital. We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain.
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.
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.
In addition, any capital loans we make to the Bank are subordinate in right of repayment to deposit liabilities of the Bank. We are subject to 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.
Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial 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.
Commercial real estate loans tend to have larger balances than single family mortgage loans and other consumer loans. 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.
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.
FHLB borrowings and other current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations. 27 Table of Contents 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.
Operational Risks 27 Table of Contents 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.
Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some may only be partially repaid or may never be repaid at all. We may experience losses for reasons beyond our control, such as the impact of general economic conditions on customers and their businesses.
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.
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. 25 Table of Contents 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.
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. We may face risks with respect to future expansion or acquisition activity.
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.
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.
The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. Satisfying capital requirements may require us to limit our banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect our business, financial condition and results of operations.
Satisfying capital requirements may require us to limit our banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively 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.
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.
Economic conditions and a loss of confidence in financial institutions may increase our cost of capital and limit access to some sources of capital.
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.
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.
The federal banking agencies have issued guidance governing financial institutions that have concentrations in commercial real estate lending.
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.
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 rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations.
The Basel III rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the FDIA.
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.
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.
Removed
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.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings In 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's knowledge, threatened against us. Item 4. Mine Safety Disclosures None. 32 Table of Contents PART II
Biggest changeItem 3. Legal Proceedings In 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's knowledge, threatened against us. Item 4. Mine Safety Disclosures None. 33 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePeriod (a) Total Number of Shares Purchased (b) Average Price Paid per Share ($) (c) Total Number of Shares Purchased as Part of Publicly Announced Program (d) Maximum Number of Shares that May Yet Be Purchased Under the Program October 1 - October 31, 2022 — — — — November 1 - November 30, 2022 — — — — December 1 - December 31, 2022 37,454 14 37,454 1,313,621 Total 37,454 14 37,454 1,313,621 Item 6.
Biggest changePeriod (a) Total Number of Shares Purchased (b) Average Price Paid per Share ($) (c) Total Number of Shares Purchased as Part of Publicly Announced Program (d) Maximum Number of Shares that May Yet Be Purchased Under the Program October 1 - October 31, 2023 — — — — November 1 - November 30, 2023 — — — — December 1 - December 31, 2023 — — — 1,275,202 Total — — — 1,275,202 Item 6.
Item 5. Market for Registrant'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." As of March 15, 2023, there were 455 holders of record of our common stock and approximately 1,667 total beneficial shareholders.
Item 5. Market for Registrant'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." As of March 15, 2024, there were 432 holders of record of our common stock and approximately 1,644 total beneficial shareholders.
For the year ended 38 Table of Contents December 31, 2022, 37,454 shares of our common stock were repurchased at a total cost of $730 thousand under the program. All of these shares have been cancelled and returned to the status of authorized but unissued.
For the year ended 34 Table of Contents December 31, 2023, 115,750 shares of our common stock were repurchased at a total cost of $1.4 million under the program. All of these shares have been cancelled and returned to the status of authorized but unissued.
Repurchases On March 17, 2022, we publicly announced that the Board of Directors had adopted a program to repurchase up to 1,351,075 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2021, from April 1, 2022 to March 31, 2023.
Repurchases On March 16, 2023, we publicly announced that the Board of Directors had adopted a program to repurchase up to 1,300,000 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2022, which would expire on March 31, 2024.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAverage Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate Assets Interest‑earning assets: Loans(1): Commercial real estate $ 978,983 $ 42,646 4.36 % $ 832,138 $ 35,104 4.22 % Commercial and industrial 199,957 10,317 5.16 % 135,017 6,127 4.54 % Paycheck protection program 9,112 592 6.50 % 105,980 5,410 5.11 % Commercial construction 165,088 8,762 5.31 % 209,957 9,790 4.66 % Consumer residential 255,794 10,602 4.14 % 169,168 6,685 3.95 % Consumer nonresidential 9,143 705 7.71 % 11,569 858 7.41 % Total loans(1) 1,618,077 73,624 4.55 % 1,463,829 63,974 4.37 % Investment securities(2) 344,725 5,974 1.73 % 204,952 3,878 1.89 % Restricted stock 7,339 408 5.56 % 6,269 328 5.24 % Deposits at other financial institutions 74,477 685 0.92 % 197,987 260 0.13 % Total interest‑earning assets and interest income 2,044,618 80,691 3.95 % 1,873,037 68,440 3.65 % Noninterest‑earning assets: Cash and due from banks 873 18,556 Premises and equipment, net 1,410 1,578 Accrued interest and other assets 92,761 99,562 Allowance for loan losses (14,596) (14,513) Total assets $ 2,125,066 $ 1,978,220 Liabilities and Stockholders' Equity Interest ‑ bearing liabilities: Interest ‑ bearing deposits: Interest checking $ 724,881 $ 5,966 0.82 % $ 587,151 $ 3,224 0.55 % Savings and money markets 315,653 2,662 0.84 % 303,317 1,421 0.47 % Time deposits 203,719 2,908 1.43 % 230,668 2,783 1.21 % Wholesale deposits 61,478 932 1.52 % 37,657 173 0.46 % Total interest ‑ bearing deposits 1,305,731 12,468 0.95 % 1,158,793 7,601 0.66 % Other borrowed funds 89,834 2,970 3.31 % 62,878 2,880 4.58 % Total interest‑bearing liabilities and interest expense 1,395,565 15,438 1.11 % 1,221,671 10,481 0.86 % Noninterest‑bearing liabilities: Demand deposits 501,962 527,675 Other liabilities 25,059 27,988 Common stockholders' equity 202,480 200,886 Total liabilities and stockholders' equity $ 2,125,066 $ 1,978,220 Net interest income and net interest margin $ 65,253 3.19 % $ 57,959 3.09 % ________________________ (1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.
Biggest changeAverage Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities Years Ended December 31, 2023 and 2022 (Dollars in thousands) 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) Non-accrual loans are included in average balances and do not have a material effect on the average yield.
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.
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 our business.
(2) 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.
(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.
Loans that we have classified as nonperforming are a result of customer specific deterioration, mostly financial in nature, and not a result of economic, industry, or environmental causes that we might see as a pattern for possible future losses within our loan portfolio.
Loans that we have classified as nonperforming are a result of customer specific deterioration, mostly financial in nature, that 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.
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's evaluation of the counterparty.
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 our evaluation of the counterparty.
We review our balance sheet and interest rate sensitivity on an ongoing basis as part of our asset/liability risk management process. During February 2023, with the expectation that short-term interest rates would continue to increase during 2023, we modeled various scenarios to improve balance sheet efficiency, reduce our cost of funds, improve margin and our capital ratios.
We review our balance sheet and interest rate sensitivity on an ongoing basis as part of our asset/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 funds, improve margin and our capital ratios.
For December 31, 2022 and 2021, we had $30.0 million and $0 federal funds purchased, respectively. Capital Resources 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.
For December 31, 2023 and 2022, we had $0 and $30.0 million federal funds purchased, respectively. Capital Resources 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.
Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2022 and December 31, 2021.
Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2023 and 2022.
A bank or holding company may be excluded from qualifying community bank status base on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures and such other facts as the appropriate federal banking agencies determine to be appropriate. At January 1, 2020, we qualified for and adopted this simplified capital structure.
A bank 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. At January 1, 2020, we qualified and adopted this simplified capital structure.
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.
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.
Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.
Both the amount of the provision and the level of the allowance for credit 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.
As the Company is a bank holding company with less than $3 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, and (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.
As the Company is a bank holding company with less than $3.00 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, or (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.
Including the conservation buffer, we currently consider our minimum capital ratios to be as follows: 7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total capital.
Including the conservation buffer, we currently consider the 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following presents management's discussion and analysis of our consolidated financial condition at December 31, 2022 and 2021 and the results of our operations for the years ended December 31, 2022 and 2021.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following presents management's discussion and analysis of our consolidated financial condition at December 31, 2023 and 2022 and the results of our operations for the years ended December 31, 2023 and 2022.
The credit risk involved in issuing letters of credit is essentially the same as 61 Table of Contents 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.
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.
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, 2022 and 2021, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost.
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 at each of December 31, 2023 and 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.
For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we had specific reserves totaling $86 thousand and $186 thousand at December 31, 2022 and 2021, respectively.
For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we had specific reserves totaling $676 thousand and $86 thousand at December 31, 2023 and 2022, respectively.
Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to our CET1 capital, Tier 1 capital and total capital ratios.
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 the Bank’s CET1 capital, Tier 1 capital and total capital ratios.
Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economic and environmental factors in determining their allowance for loan losses. Since the Bank's inception in 2007, we have experienced minimal loss history within our loan portfolio.
Typically, financial institutions use their historical loss experience and trends in losses for each loan segment which are then adjusted for portfolio trends and economic and environmental factors in determining the ACL. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio.
Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit 39 Table of Contents our exposure to these risks by carefully underwriting and then monitoring our extensions of credit.
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.
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.
This situation may arise due to circumstances that we may be unable 58 Table of Contents 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.
Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance 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.
Credit losses are an inherent part of our business and, although we believe the methodologies for determining the ACL 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.
(2) The average yields for investment securities are reported on a fully taxable-equivalent basis at a rate of 21% for 2022 and 2021. 47 Table of Contents 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.
(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. 43 Table of Contents 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.
The allocation of the allowance for loan losses 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.
The allocation of the allowance for credit 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.
The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250 thousand and is calculated based on the same methodologies and assumptions used for purposes of the Bank's regulatory reporting requirements. The following table reports maturities of the estimated amount of uninsured certificates of deposit at December 31, 2022.
The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank's regulatory reporting requirements. 55 Table of Contents The following table reports maturities of the estimated amount of uninsured certificates of deposit at December 31, 2023.
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. 58 Table of Contents On January 1, 2020, the federal banking agencies adopted a CBLR, which is calculated by dividing tangible equity capital by average consolidated total assets.
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 “Community Bank Leverage Ratio", which is calculated by dividing tangible equity capital by average consolidated total assets.
Potential problem loans are defined as loans that are not included in the 90 day past due, nonaccrual or adversely classified or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories.
Potential problem loans are defined as loans that are not included in the 90 days or more past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes us 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.
See the 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, 2022 and 2021.
See the above table for a reconciliation of GAAP net income to core bank operating earnings (non-GAAP). 41 Table of Contents 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, 2023 and 2022.
Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.
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 investment securities portfolio prior to the recovery of the amortized cost as of the valuation date.
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, we completed our acquisition of Colombo.
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.
Av erage 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 2022 and 2021.
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 2023 and 2022.
At December 31, 2021, we owned $1.8 million in FHLB stock and $4.4 million in FRB stock. 56 Table of Contents The following table presents the weighted average yields of our investment portfolio for each of the maturity ranges at December 31, 2022 and 2021.
At December 31, 2022, we owned $4.4 million in FRB stock and $11.1 million in FHLB stock. 53 Table of Contents The following table presents the weighted average yields of our investment portfolio for each of the maturity ranges at December 31, 2023 and 2022.
See "Critical Accounting Policies" above for more information on our allowance for loan losses methodology. The following tables present additional information pertaining to the activity in and allocation of the allowance for loan losses by loan type and the percentage of the loan type to the total loan portfolio.
See “Critical Accounting Policies” above for more information on our allowance for credit losses methodology. The following tables present additional information pertaining to the activity in and allocation of the allowance for credit losses on loans by loan type and the percentage of the loan type to the total loan portfolio.
As of December 31, 2022 and 2021, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities that carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.
As of December 31, 2023 and 2022, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. In vestment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.
If a "qualified community bank," generally a depository institution or depository institution holding company with consolidated assets of less than $10 billion, opts into the CBLR framework and has a leverage ratio that exceeds the CBLR threshold, which was initially set at 9%, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements under Basel III, the capital ratio requirements for "well capitalized" status under Section 38 of the FDIA, and any other leverage or capital requirements to which it is subject.
If a “qualified community bank,” generally a depository institution or depository institution holding company with consolidated assets of less than $10.00 billion, opts into the CBLR framework and has a leverage ratio that 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 Federal Deposit Insurance Act, and any other leverage or capital requirements to which it is subject.
The Bank had FHLB advances outstanding of $235.0 million and $25.0 million for the years ended December 31, 2022 and 2021. Subordinated debt, net of unamortized issuance costs, totaled $19.6 million and $19.5 million at December 31, 2022 and 2021, respectively.
The Bank had FHLB advances outstanding of $85.0 million and $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, 2023 and 2022.
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.
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.
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, 2022 and 2021, we had $30.0 million and $0 federal funds purchased, respectively.
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.
Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $359.6 million at December 31, 2022, or 15% of total assets, a decrease from $598.7 million, or 27%, at December 31, 2021.
Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $232.1 million at December 31, 2023, or 11% of total assets, a decrease from $359.6 million, or 15%, at December 31, 2022.
The yield on interest-earning assets increased 30 basis points to 3.95% for the year ended December 31, 2022, compared to 3.65% for the same period of 2021, a result of the increased rate environment during 2022.
The yield on interest-earning assets increased 93 basis points to 4.88% for the year ended December 31, 2023, compared to 3.95% for the same period of 2022, a result of the increased rate environment during 2023.
Average interest-earning deposits at other financial institutions, consisting primarily of excess cash reserves maintained at the Federal Reserve, decreased $123.5 million to $74.5 million for the year ended December 31, 2022, compared to $198.0 million for the year ended December 31, 2021.
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.
Provision Expense and Allowance for Loan Losses Our policy is to maintain the allowance for loan losses at a level that represents our best estimate of inherent losses in the loan portfolio.
Provision Expense and Allowance for Credit Losses Our policy is to maintain the ACL at a level that represents our best estimate of expected losses in the loan portfolio as of the valuation date.
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.
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.
The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard.
We adopted the provisions of the CECL accounting standard as of 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.
Our effective tax rate for December 31, 2022 was 19.4%, compared to 22.2% for 2021. Our effective tax rates for 2022 and 2021 are less than our combined federal and state statutory rate of 22.5% because of discrete tax benefits recorded as a result of nonqualified option exercises during the aforementioned periods.
Our effective tax rates for 2023 and 2022 are less than our combined federal and state statutory rate of 22.5% because of discrete tax benefits recorded as a result of nonqualified option exercises during the aforementioned periods.
Investment securities with unrealized losses are a result of pricing changes due to recent rising rate conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.
As a result of the assessment performed as of December 31, 2023, the investment securities with unrealized losses are a result of pricing changes due to recent rising interest rate conditions in the current market environment and not as a result of credit deterioration. Contractual cash flows for agency-backed portfolios are guaranteed and funded by the U.S. government.
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. In addition to deposits, we have access to the different wholesale funding markets.
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 pri cing.
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.
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.
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.
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.
Years Ended December 31, Non‑GAAP Reconciliation (Dollars in thousands, except per share data) 2022 2021 Total stockholders' equity $ 202,382 $ 209,796 Less: goodwill and intangibles, net (7,790) (8,052) Tangible Common Equity $ 194,592 $ 201,744 Book value per common share $ 11.58 $ 12.23 Less: intangible book value per common share (0.44) (0.47) Tangible book value per common share $ 11.14 $ 11.76 Results of Operations—Years Ended December 31, 2022 and December 31, 2021 Overview We recorded record net income of $25.0 million, or $1.35 per diluted common share, for the year ended December 31, 2022, compared to net income of $21.9 million, or $1.20 per diluted common share for the year ended December 31, 2021.
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 40 Table of Contents Results of Operations—Years Ended December 31, 2023 and December 31, 2022 Overview We recorded net income of $3.8 million, or $0.21 per diluted common share, for the year ended December 31, 2023, compared to net income of $25.0 million, or $1.35 per diluted common share for the year ended December 31, 2022.
Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.19% at December 31, 2022, compared to 0.16% at December 31, 2021. • Total deposits decreased $53.6 million, or 3%, from December 31, 2021 to December 31, 2022.
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.
As noted below, regulatory capital levels for the bank meets those established for "well capitalized" institutions. While we are currently considered "well capitalized," we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.
While we are currently considered "well capitalized," we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.
Fee income from service charges on deposits and other fee income was $1.4 million for the year ended December 31, 2022 as compared $1.7 million for the same period of 2021 .
Fee income from loans 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 $1.5 million for the year ended December 31, 2023, compared to $1.4 million for the same period of 2022.
The return on average assets for the years ended December 31, 2022 and 2021 was 1.18% and 1.11%, respectively. The return on average equity for the years ended December 31, 2022 and 2021 was 12.34% and 10.92%, respectively.
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.
Reconciliation of Book Value (GAAP) to Tangible Book Value (non-GAAP) At December 31, 2022 and 2021 (Dollars in thousands, except per share data) 2022 2021 Total stockholders' equity (GAAP) $ 202,382 $ 209,796 Less: goodwill and intangibles, net (7,790) (8,052) Tangible Common Equity (non-GAAP) $ 194,592 $ 201,744 Book value per common share (GAAP) $ 11.58 $ 12.23 Less: intangible book value per common share (0.44) (0.47) Tangible book value per common share (non-GAAP) $ 11.14 $ 11.76 Liquidity Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers.
Includes capital conservation buffer. 57 Table of Contents Reconciliation of Book Value (GAAP) to Tangible Book Value (non-GAAP) At December 31, 2023 and 2022 (Dollars in thousands, except per share data) 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 Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers.
Investment Securities by Stated Maturity At December 31, 2022 and 2021 (Dollars in thousands) 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 % 2021 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 % 2.45 % Corporate bonds — 3.98 % 4.15 % — 4.12 % Mortgaged‑backed securities — — 2.21 % 1.53 % 1.57 % Total available‑for‑sale securities — 3.27 % 2.51 % 1.53 % 1.68 % Total investment securities — 3.27 % 2.51 % 1.53 % 1.68 % 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, 2022 and 2021: Average Balance (Dollars in thousands) 2022 2021 Noninterest-bearing demand $ 501,962 27.77 % $ 527,675 31.29 % Interest-bearing deposits Interest checking 724,881 40.10 % 587,151 34.82 % Savings and money markets 315,653 17.46 % 303,317 17.99 % Certificate of deposits, $100,000 to $249,999 51,490 2.85 % 58,453 3.47 % Certificate of deposits, $250,000 or more 152,229 8.42 % 172,215 10.21 % Other time deposits 61,478 3.39 % 37,657 2.22 % Total $ 1,807,693 100.00 % $ 1,686,468 100.00 % 57 Table of Contents Total deposits were $1.83 billion at December 31, 2022, a decrease of $53.6 million, or 3%, from $1.88 billion at December 31, 2021.
Investment Securities by Stated Yields At December 31, 2023 and 2022 (Dollars in thousands) 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 % 54 Table of Contents 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 increased $15.1 million, or 1%, to $1.85 billion at December 31, 2023 from $1.83 billion at December 31, 2022.
Allowance for Loan Losses We maintain the allowance for loan losses at a level that represents management's best estimate of known and inherent losses in our loan portfolio.
Allowance for Credit Losses - Loans & Unfunded Commitments We maintain the allowance for credit losses ("ACL") at a level that represents management’s best estimate of expected losses in our loan portfolio.
Both average volume and rate significantly impacted interest income during 2022, with volume contributing an additional 48 Table of Contents $7.9 million in interest income and rate contributing an additional $4.4 million in interest income when compared to the prior year.
Both average volume and rate significantly impacted interest income during 2023, with volume contributing an additional $8.7 million in interest income and rate contributing an additional $17.3 million in interest income when compared to the prior year.
In addition to net interest income, non-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"), and gains and losses on sales of investment securities available-for-sale.
In addition to net interest income, non-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"), and gains and losses on sales of investment securities available-for-sale. 35 Table of Contents Critical Accounting Policies General The accounting principles we apply under GAAP are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters.
Selected Financial Data (Dollars and shares in thousands, except per share data) Years Ended December 31, Income Statement Data: 2022 2021 Interest income $ 80,682 $ 68,428 Interest expense 15,438 10,481 Net interest income 65,244 57,947 Provision for (reversal of) loan losses 2,629 (500) Net interest income after provision for (reversal of) loan losses 62,615 58,447 Non‑interest income 2,834 4,302 Non‑interest expense 34,460 34,540 Net income before income taxes 30,989 28,209 Provision for income taxes 6,005 6,276 Net income $ 24,984 $ 21,933 Balance Sheet Data: Total assets $ 2,344,322 $ 2,202,924 Loans receivable, net of fees 1,840,434 1,503,849 Allowance for loan losses (16,040) (13,829) Total investment securities 278,333 358,038 Total deposits 1,830,162 1,883,769 Other borrowed funds 284,565 44,510 Total shareholders' equity 202,382 209,796 Common shares outstanding 17,476 13,727 Per Common Share Data (1) : Basic net income $ 1.43 $ 1.29 Fully diluted net income 1.35 1.20 Book value 11.58 12.23 Tangible book value (2) 11.14 11.76 Performance Ratios: Return on average assets 1.18 % 1.11 % Return on average equity 12.34 10.92 Net interest margin (3) 3.19 3.09 Efficiency ratio (4) 50.62 55.49 Non‑interest income to average assets 0.13 0.22 Non‑interest expense to average assets 1.62 1.75 Loans receivable, net of fees to total deposits 100.56 79.83 Asset Quality Ratios: Net charge‑offs (recoveries) to average loans receivable, net of fees 0.03 % 0.04 % Nonperforming loans to loans receivable, net of fees 0.24 0.23 Nonperforming assets to total assets 0.19 0.16 Allowance for loan losses to nonperforming loans 357.00 394.21 Allowance for loan losses to loans receivable, net of fees 0.87 0.92 Capital Ratios (Bank Only): Tier 1 risk‑based capital 13.28 % 13.54 % Total risk‑based capital 12.45 12.72 Common Equity Tier 1 capital 12.45 12.72 Leverage capital ratio 10.75 10.55 Other: Average shareholders' equity to average total assets 9.53 % 10.15 % Average loans receivable, net of fees to average total deposits 86.77 86.80 Average common shares outstanding (1) : Basic 17,431 17,062 Diluted 18,484 18,227 44 Table of Contents _________________________ (1) Amounts for all periods reflect the effect of a 5-for-4 stock split declared on December 15, 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 39 Table of Contents 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.
The significant decrease in average interest-earning deposits at other financial institutions was primarily a result of our deployment of excess liquidity during 2022 to fund loan growth. The yield on average interest-earning deposits increased 79 basis points to 0.92% 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 Bank'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.
The increase in average volume of loans receivable contributed $5.3 million to interest income while the increase in average rate of loans receivable contributed $4.3 million to interest income.
The increase in average rate of loans receivable contributed $14.7 million to interest income while the increase in average loan volume contributed $10.1 million to interest income.
Asset Quality Nonperforming assets, defined as nonaccrual loans, loans contractually past due 90 days or more as to principal or interest and still accruing, and OREO at December 31, 2022 were $4.5 million compared to $3.5 million at December 31, 2021.
Asset Quality Nonperforming 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 $4.5 million at December 31, 2023 and 2022, respectively, a decrease of $2.7 million, or 60%.
Supplemental Financial Data and Reconciliations to GAAP Financial Measures Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 GAAP Financial Measurements: Interest income: Loans $ 73,624 $ 63,974 Deposits at other financial institutions 685 260 Investment securities available‑for‑sale 5,959 3,860 Investment securities held‑to‑maturity 6 6 Restricted stock 408 328 Total interest income 80,682 68,428 Interest expense: Interest‑bearing deposits 12,468 7,601 Other borrowed funds 2,970 2,880 Total interest expense 15,438 10,481 Net interest income $ 65,244 $ 57,947 Non‑GAAP Financial Measurements: Add: Tax benefit on tax‑exempt interest income - securities 9 12 Total tax benefit on interest income $ 9 $ 12 Tax equivalent net interest income $ 65,253 $ 57,959 Net interest margin on a tax-equivalent basis 3.19 % 3.09 % Net interest income for the year ended December 31, 2022 was $65.3 million on a fully taxable-equivalent basis, compared to $58.0 million for the year ended December 31, 2021, an increase of $7.3 million, or 13%.
Supplemental Financial Data and Reconciliations to GAAP Financial Measures Years Ended December 31, 2023 and 2022 (Dollars in thousands) 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, 2023 was $54.4 million on a fully taxable-equivalent basis, compared to $65.3 million for the year ended December 31, 2022, a decrease of $10.9 million, or 17%.
Income from BOLI increased 21% to $1.2 million for the year ended December 31, 2022 as compared to $994 thousand for the year ended December 31, 2021 as we purchased $15 million in BOLI during the se cond quarter of 2022. 50 Table of Contents Noninterest Expense The following table reflects the components of non-interest expense for the years ended December 31, 2022 and 2021.
Income from BOLI increased 21% to $1.5 million for the year ended December 31, 2023 as compared to $1.2 million for the year ended December 31, 2022, primarily due to the purchase of $15 million in additional BOLI during the second quarter of 2022. 46 Table of Contents Noninterest Expense The following table reflects the components of noninterest expense for the years ended December 31, 2023 and 2022.
Certificates of Deposit Greater than $250,000 At December 31, 2022 (Dollars in thousands) 2022 Three months or less $ 38,589 Over three months through six months 45,366 Over six months through twelve months 51,820 Over twelve months 23,747 $ 159,522 Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $284.6 million at December 31, 2022, and $44.5 million at December 31, 2021.
Certificates of Deposit Greater than $250,000 At December 31, 2023 (Dollars in thousands) 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 Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $104.6 million at December 31, 2023, and $284.6 million at December 31, 2022.
The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchase credit-impaired loans, and fair value measurements.
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 credit losses - loans & reserve for unfunded commitments, allowance for credit losses - securities, and fair value measurements.
The return on average assets for the years ended December 31, 2022 and 2021 based on operating earnings (a non-GAAP metric) was 1.18% and 1.17%, respectively. The return on average equity for the years ended December 31, 2022 and 2021 45 Table of Contents based on operating earnings (a non-GAAP metric) was 12.39% and 11.53%, 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.
We recorded a provision for loan losses of $2.6 million for the year ended December 31, 2022 compared to a release of provision of $500 thousand for the year ended December 31, 2021. The allowance for loan losses at December 31, 2022 was $16.0 million compared to $13.8 million at December 31, 2021.
For the year ended December 31, 2023, subsequent to the aforementioned adoption, we recorded a provision for credit losses of $132 thousand for the year ended December 31, 2023 compared to $2.6 million for the year ended December 31, 2022. The allowance for credit losses at December 31, 2023 was $18.9 million compared to $16.0 million at December 31, 2022.
Average interest-earning assets increased by 9% to $2.04 billion at December 31, 2022 compared to $1.87 billion at December 31, 2021, which resulted in an increase in total interest income on a tax equivalent basis of $12.3 million, to $80.7 million for the year ended December 31, 2022 compared to $68.4 million for the year ended December 31, 2021.
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. 44 Table of Contents Average interest-earning assets increased by 7% to $2.19 billion at December 31, 2023 compared to $2.04 billion at December 31, 2022, which resulted in an increase in total interest income on a tax equivalent basis of $25.9 million, to $106.6 million for the year ended December 31, 2023 compared to $80.7 million for the year ended December 31, 2022.
The yield on average investment securities decreased 16 basis points to 1.73% for the year ended December 31, 2022, primarily as a result of purchasing securities at lower interest rates relative to the average yield of the securities portfolio.
The yield on average investment securities increased 14 basis points to 1.95% for the year ended December 31, 2023, primarily as a result of the sale of lower yielding securities relative to the average yield of the securities portfolio.
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements are: (i) 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%.
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%.
We take a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our loan loss allowance methodology incorporates increased reserve factors for certain loans that are adversely rated but not impaired as compared to the general portfolio.
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.
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.
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.
Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed.
At December 31, 2023, we had $22.5 million in loans identified as substandard, an increase of $18.4 million from December 31, 2022. Substandard rated loans 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.
Allowance for Loan Losses Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 Net (charge-offs) recoveries Percentage of net charge-offs (annualized) to average loans outstanding during the year Net (charge-offs) recoveries Percentage of net charge-offs (annualized) to average loans outstanding during the year Commercial real estate $ — — % $ (453) (0.03) % Commercial and industrial (396) (0.02) % (117) (0.01) % Consumer residential 1 — % 35 — % Consumer nonresidential (23) — % (94) (0.01) % Total $ (418) (0.03) % $ (629) (0.04) % Average loans outstanding during the period $ 1,618,077 $ 1,463,829 Allowance for loan losses to loans receivable, net of fees 0.87 % 0.92 % Allowance for loan losses to loans receivable, net of fees, excluding PPP 0.87 % 0.94 % 55 Table of Contents Allocation of the Allowance for Loan Losses At December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 Allocation % of Total* Allocation % of Total* Commercial real estate $ 10,777 59.77 % $ 8,995 60.11 % Commercial and industrial 2,623 13.21 % 1,827 11.55 % Paycheck protection program — 0.11 % — 1.90 % Commercial construction 1,499 8.04 % 2,009 12.45 % Consumer residential 1,044 18.45 % 781 13.31 % Consumer nonresidential 97 0.42 % 217 0.68 % Total allowance for loan losses $ 16,040 100.00 % $ 13,829 100.00 % ___________________ * Percentage of loan type to the total loan portfolio.
Allowance for Credit Losses on Loans Years Ended December 31, 2023 and 2022 (Dollars in thousands) 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 Credit Losses on Loans At December 31, 2023 and 2022 (Dollars in thousands) 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 % ___________________ 52 Table of Contents * Percentage of loan type to the total loan portfolio .
See "Asset Quality" section below for additional information on the credit quality of the loan portfolio. Noninterest Income The following table provides detail for non-interest income for the years ended December 31, 2022 and 2021.
We recorded net charge-offs of $375 thousand during the year ended December 31, 2023 and net charge-offs of $418 thousand for same period of 2022. See “Asset Quality” below for additional information on the credit quality of the loan portfolio. Noninterest Income The following table provides detail for non-interest income for the years ended December 31, 2023 and 2022.
Dis cussion and Analysis of Financial Condition Overview At December 31, 2022, total assets were $2.34 billion, an increase of 6%, or $141.4 million, from $2.20 billion at December 31, 2021. Total loans receivable, net of deferred fees and costs, increased 22%, or $336.6 million, to $1.84 billion at December 31, 2022, from $1.50 billion at December 31, 2021.
Dis cussion and Analysis of Financial Condition Overview At December 31, 2023, total assets were $2.2 billion, a decrease of 7%, or $153.8 million, from $2.34 billion at December 31, 2022. Total loans receivable, net of deferred fees and costs, decreased 1%, or $11.9 million, to $1.83 billion at December 31, 2023, from $1.84 billion at December 31, 2022.
In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held to investment loan portfolio.
On August 31, 2021, we announced 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 held to investment loan portfolio.
At December 31, 2022, we had $10.4 million in loans identified as special mention within the originated loan portfolio, an increase from $3.0 million as of December 31, 2021. Special mention rated loans are loans that have a potential weakness that deserves management's close attention; however, the borrower continues to pay in accordance with their contract.
At December 31, 2023, we had $6.2 million in loans identified as special mention, a decrease of $4.2 million from December 31, 2022. Special mention rated loans have a potential weakness that deserves our close attention; however, the borrower continues to pay in accordance with their contractual terms, unless modified and disclosed.

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