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FVCBankcorp, Inc. - Quarter Report: 2022 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2022

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-38647

FVCBankcorp, Inc.
(Exact name of registrant as specified in its charter)

Virginia47-5020283
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)


11325 Random Hills Road
Suite 240
Fairfax, Virginia22030
(Address of principal executive offices)(Zip Code)

(703) 436-3800
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueFVCBThe Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

13,970,623 shares of common stock, par value $0.01 per share, outstanding as of May 6, 2022




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FVCBankcorp, Inc.
INDEX TO FORM 10-Q
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FVCBankcorp, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2022 and December 31, 2021
(In thousands, except share data)
March 31, 2022December 31, 2021*
(Unaudited)
Assets
Cash and due from banks$16,869 $24,613 
Interest-bearing deposits at other financial institutions122,117 216,345 
Securities held-to-maturity (fair value of $0.3 million for both March 31, 2022 and December 31, 2021)
264 264 
Securities available-for-sale, at fair value330,337 357,774 
Restricted stock, at cost6,262 6,372 
Loans, net of allowance for loan losses of $13.8 million and $13.8 million at March 31, 2022 and December 31, 2021, respectively
1,498,712 1,490,020 
Premises and equipment, net1,504 1,584 
Accrued interest receivable8,089 8,074 
Prepaid expenses1,432 1,393 
Deferred tax assets, net13,193 8,629 
Goodwill and intangibles, net7,982 8,052 
Bank owned life insurance (BOLI)39,409 39,171 
Operating lease right-of-use assets9,862 10,167 
Other assets34,089 30,466 
Total assets$2,090,121 $2,202,924 
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing$545,856 $581,293 
Interest-bearing checking, savings and money market1,061,925 1,071,059 
Time deposits211,574 231,417 
Total deposits$1,819,355 $1,883,769 
FHLB advances$25,000 $25,000 
Subordinated notes, net of issuance costs19,524 19,510 
Accrued interest payable1,131 1,034 
Operating lease liabilities10,786 11,111 
Accrued expenses and other liabilities13,452 52,704 
Total liabilities$1,889,248 $1,993,128 
Commitments and Contingent Liabilities
Stockholders' Equity20222021
Preferred stock, $0.01 par value
Shares authorized1,000,0001,000,000
Shares issued and outstanding$— $— 
Common stock, $0.01 par value
Shares authorized20,000,00020,000,000
Shares issued and outstanding13,967,00913,727,045140 137 
Additional paid-in capital123,430 121,798 
Retained earnings96,517 89,904 
Accumulated other comprehensive (loss), net(19,214)(2,043)
Total stockholders' equity$200,873 $209,796 
Total liabilities and stockholders' equity$2,090,121 $2,202,924 
See Notes to Consolidated Financial Statements.
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*Derived from audited consolidated financial statements.
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FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Income
For the three months ended March 31, 2022 and 2021
(In thousands, except per share data)
(Unaudited)
For the three months ended
March 31,
20222021
Interest and Dividend Income
Interest and fees on loans$15,607 $15,933 
Interest and dividends on securities held-to-maturity
Interest and dividends on securities available-for-sale1,488 717 
Dividends on restricted stock82 82 
Interest on deposits at other financial institutions45 45 
Total interest and dividend income$17,223 $16,778 
Interest Expense
Interest on deposits$1,830 $2,001 
Interest on short-term debt85 83 
Interest on subordinated notes257 651 
Total interest expense$2,172 $2,735 
Net Interest Income$15,051 $14,043 
Provision for loan losses350 — 
Net interest income after provision for loan losses$14,701 $14,043 
Noninterest Income
Service charges on deposit accounts$234 $243 
BOLI income238 248 
Income from minority membership interest 912 — 
Other income240 300 
Total noninterest income$1,624 $791 
Noninterest Expenses
Salaries and employee benefits$4,978 $4,548 
Occupancy and equipment expense840 807 
Data processing and network administration542 563 
State franchise taxes509 504 
Audit, legal and consulting fees361 354 
Merger and acquisition expense125 — 
Loan related expenses47 106 
FDIC insurance180 210 
Marketing, business development and advertising88 49 
Director fees180 138 
Postage, courier and telephone51 46 
Internet banking143 133 
Core deposit intangible amortization70 80 
Other operating expenses328 344 
Total noninterest expenses$8,442 $7,882 
Net income before income tax expense$7,883 $6,952 
Income tax expense1,270 1,383 
Net income$6,613 $5,569 
Earnings per share, basic$0.48 $0.41 
Earnings per share, diluted$0.45 $0.38 
See Notes to Consolidated Financial Statements.
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FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended March 31, 2022 and 2021
(In thousands)
(Unaudited)

March 31,
20222021
Net income$6,613 $5,569 
Other comprehensive (loss):
Unrealized loss on securities available for sale, net of tax benefit of $4,700 for the three months ended March 31, 2022 and net of tax benefit of $296 for the three months ended March 31, 2021, respectively.
(17,679)(1,281)
Unrealized gain on interest rate swaps, net of tax expense of $135 for the three months ended March 31, 2022 and net of tax expense of $42 for the three months ended March 31, 2021, respectively.
508 156 
Total other comprehensive loss$(17,171)$(1,125)
Total comprehensive (loss) income$(10,558)$4,444 

See Notes to Consolidated Financial Statements.

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FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the three months ended March 31, 2022 and 2021
(In thousands)
(Unaudited)
20222021
Cash Flows From Operating Activities
Net income$6,613 $5,569 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation111 153 
Provision for loan losses350 — 
Net amortization of premium of securities171 89 
Net amortization of deferred loan costs and purchase premiums(635)(1,697)
Net accretion of acquisition accounting adjustments (70)(129)
Income from minority membership interest(912)— 
Amortization of subordinated debt issuance costs14 31 
Core deposits intangible amortization70 80 
Stock-based compensation expense204 166 
BOLI income(238)(248)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable, prepaid expenses and other assets(3,337)6,201 
Increase (decrease) in accrued interest payable, accrued expenses and other liabilities1,225 (4,372)
Net cash provided by operating activities$3,566 $5,843 
Cash Flows From Investing Activities
Decrease (increase) in interest-bearing deposits at other financial institutions $94,228 $(83,057)
Purchases of securities available-for-sale(46,160)(21,118)
Proceeds from maturities and calls of securities available-for-sale— 1,000 
Proceeds from redemptions of securities available-for-sale10,823 9,498 
Net redemption of restricted stock110 186 
Net (increase) decrease in loans(8,334)20,463 
Distribution received from minority owned investment1,040 — 
Purchases of premises and equipment, net(31)(19)
Net cash provided by (used in) investing activities$51,676 $(73,047)
Cash Flows From Financing Activities
Net (decrease) increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits$(44,571)$105,260 
Net decrease in time deposits(19,846)(43,117)
Common stock issuance1,431 819 
Net cash (used in) provided by financing activities$(62,986)$62,962 
Net decrease in cash and cash equivalents$(7,744)$(4,242)
Cash and cash equivalents, beginning of year24,613 20,835 
Cash and cash equivalents, end of period$16,869 $16,593 
See Notes to Consolidated Financial Statements.
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FVCBankcorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2022 and 2021
(In thousands)
(Unaudited)

SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total
Balance at December 31, 2020
13,511$135 $119,568 $67,971 $1,826 $189,500 
Net income— — 5,569 — 5,569 
Other comprehensive loss— — — (1,125)(1,125)
Common stock issuance for options exercised, net128818 — — 819 
Stock-based compensation expense— 166 — — 166 
Balance at March 31, 2021
13,639$136 $120,552 $73,540 $701 $194,929 
Balance at December 31, 2021
13,727$137 $121,798 $89,904 $(2,043)$209,796 
Net income— — 6,613 — 6,613 
Other comprehensive loss— — — (17,171)(17,171)
Common stock issuance for options exercised, net2121,428 — — 1,431 
Vesting of restricted stock grants28— — — — — 
Stock-based compensation expense— 204 — — 204 
Balance at March 31, 2022
13,967$140 $123,430 $96,517 $(19,214)$200,873 

See Notes to Consolidated Financial Statements.

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Notes to Unaudited Consolidated Financial Statements

Note 1.    Organization and Summary of Significant Accounting Policies
Organization
FVCBankcorp, Inc. (the Company), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the Bank). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.
The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C. and Baltimore metropolitan areas. The Bank commenced operations on November 27, 2007 and is a member of the Federal Reserve System (the Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC). It is subject to the regulations of the Board of Governors of the Federal Reserve and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.
On August 31, 2021, the Company announced that the Bank had made an investment in Atlantic Coast Mortgage, LLC (“ACM”) for $20.4 million. As a result of this investment, the Bank has obtained a 28.7% ownership interest in ACM, which is subject to an earnback option of up to 3.7% over a three year period..
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2021. Certain prior period amounts have been reclassified to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.
Significant Accounting Policies
The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission
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Notes to Unaudited Consolidated Financial Statements
(Continued)
(SEC), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has identified a third-party vendor to assist in the measurement of expected credit losses under this standard. The implementation committee has completed the data collection process, validated the data inputs, determined its allowance methodology and is prepared to beginning running the model parallel to the Company’s incurred loss model for the quarter ended March 31, 2022.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (ASC) 326, “Financial Instruments - Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company does not expect the adoption of ASU 2021-08 to have a material impact on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted
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Notes to Unaudited Consolidated Financial Statements
(Continued)
if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its (consolidated) financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its (consolidated) financial statements.


Note 2.    Securities
Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of March 31, 2022 and December 31, 2021, are as follows:

March 31, 2022
(In thousands)Amortized
Cost
Gross Unrealized GainsGross Unrealized (Losses)Fair Value
Held-to-maturity
Securities of state and local municipalities tax exempt$264 $$— $265 
Total Held-to-maturity Securities$264 $$— $265 
Available-for-sale
Securities of U.S. government and federal agencies$13,558 $— $(1,223)$12,335 
Securities of state and local municipalities tax exempt1,391 — 1,399 
Securities of state and local municipalities taxable570 — (21)549 
Corporate bonds20,218 81 (418)19,881 
SBA pass-through securities92 — (4)88 
Mortgage-backed securities307,010 120 (22,860)284,270 
Collateralized mortgage obligations12,442 10 (637)11,815 
Total Available-for-sale Securities$355,281 $219 $(25,163)$330,337 

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Notes to Unaudited Consolidated Financial Statements
(Continued)
December 31, 2021
(In thousands)
Amortized
Cost
Gross Unrealized GainsGross Unrealized (Losses)
Fair
Value
Held-to-maturity
Securities of state and local municipalities tax exempt$264 $$— $270 
Total Held-to-maturity Securities$264 $$— $270 
Available-for-sale
Securities of U.S. government and federal agencies$13,719 $— $(283)$13,436 
Securities of state and local municipalities tax exempt1,393 58 — 1,451 
Securities of state and local municipalities taxable607 — (11)596 
Corporate bonds13,970 259 (78)14,151 
SBA pass-through securities107 — 108 
Mortgage-backed securities316,313 1,352 (3,827)313,838 
Collateralized mortgage obligations14,230 113 (149)14,194 
Total Available-for-sale Securities$360,339 $1,783 $(4,348)$357,774 

The Company had $5.2 million and $5.8 million in securities pledged with the Federal Reserve Bank of Richmond (FRB) to collateralize certain municipal deposits at March 31, 2022 and December 31, 2021, respectively. The Company had $72.8 million in securities pledged with the Virginia Department of Treasury to collateralize certain municipal deposits at March 31, 2022. There were $79.7 million securities pledged to the Virginia Department of Treasury at December 31, 2021.
The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021, respectively. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period. Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position are as follows:

Less Than 12 Months12 Months or LongerTotal
(In thousands)
At March 31, 2022
Fair
Value
Unrealized LossesFair
Value
Unrealized LossesFair
Value
Unrealized Losses
Securities of U.S. government and federal agencies$12,335 $(1,223)$— $— $12,335 $(1,223)
Securities of state and local municipalities taxable549 (21)— — 549 (21)
Corporate bonds11,581 (418)— — 11,581 (418)
SBA pass-through securities88 (4)— — 88 (4)
Mortgage-backed securities246,978 (20,021)25,240 (2,839)272,218 (22,860)
Collateralized mortgage obligations7,466 (285)3,187 (352)10,653 (637)
Total$278,997 $(21,972)$28,427 $(3,191)$307,424 $(25,163)

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Less Than 12 Months12 Months or LongerTotal
At December 31, 2021Fair
Value
Unrealized LossesFair
Value
Unrealized LossesFair
Value
Unrealized Losses
Securities of U.S. government and federal agencies$13,275 $(283)$— $— $13,275 $(283)
Securities of state and local municipalities taxable595 (11)— — 595 (11)
Corporate bonds$3,922 $(78)$— $— $3,922 $(78)
Mortgage-backed securities216,278 (3,175)19,225 (652)235,503 (3,827)
Collateralized mortgage obligations3,362 (82)1,814 (67)5,176 (149)
Total$237,432 $(3,629)$21,039 $(719)$258,471 $(4,348)

Securities of U.S. government and federal agencies: The unrealized losses on three available-for-sale securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.
Securities of state and local municipalities taxable: The unrealized loss on one of the investments in securities of state and local municipalities was caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The investment carries an S&P investment grade rating of AAA.
Corporate bonds: The unrealized losses on the investments in corporate bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. One of these investments carries an S&P investment grade rating of BBB+, while one has a rating of BBB-. The remaining 13 investments do not carry a rating.
SBA pass-through securities: The unrealized losses on one available-for-sale security was caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.
Mortgage-backed securities: The unrealized losses on the Company’s investment in 89 mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.
Collateralized mortgage obligations (CMOs): The unrealized loss associated with 29 CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.
The amortized cost and fair value of securities as of March 31, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.
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Notes to Unaudited Consolidated Financial Statements
(Continued)
March 31, 2022
Held-to-maturityAvailable-for-sale
(In thousands)Amortized CostFair ValueAmortized CostFair Value
After 1 year through 5 years$— $— $3,391 $3,372 
After 5 years through 10 years264 265 48,263 46,539 
After 10 years— — 303,627 280,426 
Total$264 $265 $355,281 $330,337 

For the three months ended March 31, 2022 and 2021, proceeds from principal repayments of securities were $10.8 million and $9.5 million, respectively. During the three months ended March 31, 2022 and 2021, proceeds from calls and maturities of securities were $0 and $1.0 million, respectively. There were no gross realized gains or losses during the three months ended March 31, 2022 and 2021, respectively.
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Notes to Unaudited Consolidated Financial Statements
(Continued)
Note 3.    Loans and Allowance for Loan Losses
A summary of loan balances by type follows:

March 31, 2022December 31, 2021
(In thousands)OriginatedAcquiredTotalOriginatedAcquiredTotal
Commercial real estate$910,630 $17,150 $927,780 $887,310 $18,802 $906,112 
Commercial and industrial195,081 3,597 198,678 199,040 3,710 202,750 
Commercial construction178,680 803 179,483 186,572 1,043 187,615 
Consumer real estate181,123 21,729 202,852 176,682 23,922 200,604 
Consumer nonresidential6,826 25 6,851 10,277 27 10,304 
$1,472,340 $43,304 $1,515,644 $1,459,881 $47,504 $1,507,385 
Less:
Allowance for loan losses13,763 — 13,763 13,829 — 13,829 
Unearned income and (unamortized premiums), net3,169 — 3,169 3,536 — 3,536 
Loans, net$1,455,408 $43,304 $1,498,712 $1,442,516 $47,504 $1,490,020 

During 2018, as a result of the Company’s acquisition of Colombo Bank (Colombo), the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).
The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20. The outstanding principal balance and related carrying amount of acquired loans included in the consolidated balance sheets as of March 31, 2022 and December 31, 2021 are as follows:

(In thousands)March 31, 2022
Purchased credit impaired acquired loans evaluated individually for credit losses
Outstanding principal balance$194 
Carrying amount— 
Other acquired loans
Outstanding principal balance43,789 
Carrying amount43,304 
Total acquired loans
Outstanding principal balance43,983 
Carrying amount43,304 

(In thousands)December 31, 2021
Purchased credit impaired acquired loans evaluated individually for credit losses
Outstanding principal balance$207 
Carrying amount— 
Other acquired loans
Outstanding principal balance48,049 
Carrying amount47,504 
Total acquired loans
Outstanding principal balance48,256 
Carrying amount47,504 

15

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Notes to Unaudited Consolidated Financial Statements
(Continued)
The following table presents changes during the three months ended March 31, 2022 and the year ended December 31, 2021, respectively, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.

(In thousands)
Balance at January 1, 2022$
Accretion (17)
Reclassification of nonaccretable difference due to changes in expected cash flows11 
Other changes, net
Balance at March 31, 2022
$— 
(In thousands)
Balance at January 1, 2021$216 
Accretion(217)
Reclassification of nonaccretable difference due to changes in expected cash flows54 
Other changes, net(50)
Balance at December 31, 2021
$

An analysis of the allowance for loan losses for the three months ended March 31, 2022 and 2021, and for the year ended December 31, 2021, follows:
Allowance for Loan Losses
For the three months ended March 31, 2022
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Beginning Balance, January 1$8,995 $1,827 $2,009 $781 $217 $13,829 
Charge-offs— (396)— — (36)(432)
Recoveries— — — — 16 16 
Provision223 556 (237)(171)(21)350 
Ending Balance$9,218 $1,987 $1,772 $610 $176 $13,763 

Allowance for Loan Losses
For the three months ended March 31, 2021
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Beginning Balance, January 1$9,291 $2,546 $1,960 $690 $471 $14,958 
Charge-offs(451)(117)— — (63)(631)
Recoveries24 — — 67 94 
Provision214 (116)23 (41)(80)— 
Ending Balance$9,078 $2,313 $1,983 $652 $395 $14,421 



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Notes to Unaudited Consolidated Financial Statements
(Continued)
Allowance for Loan Losses
For the year ended December 31, 2021
(In thousands)
Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Beginning Balance, January 1$9,291$2,546$1,960$690$471$14,958
Charge-offs(477)(117)— (255)(849)
Recoveries2435161220
Provision157(602)49 56(160)(500)
Ending Balance$8,995$1,827$2,009$781$217$13,829
The following tables present the recorded investment in loans and impairment method as of March 31, 2022 and 2021, and at December 31, 2021, by portfolio segment:
Allowance for Loan Losses
At March 31, 2022
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Ending Balance      
Individually evaluated for impairment$— $135 $— $$— $138 
Purchased credit impaired— — — — — — 
Collectively evaluated for impairment9,218 1,852 1,772 607 176 13,625 
$9,218 $1,987 $1,772 $610 $176 $13,763 
Loans Receivable
At March 31, 2022
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Financing receivables:
Ending Balance      
Individually evaluated for impairment$11,357 $4,676 $105 $91 $— $16,229 
Purchased credit impaired— — — — — — 
Collectively evaluated for impairment916,423 194,002 179,378 202,761 6,851 1,499,415 
$927,780 $198,678 $179,483 $202,852 $6,851 $1,515,644 








17

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Allowance for Loan Losses
At March 31, 2021
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Ending Balance      
Individually evaluated for impairment$85 $1,263 $— $23 $— $1,371 
Purchased credit impaired— — — — — — 
Collectively evaluated for impairment8,993 1,050 1,983 629 395 13,050 
$9,078 $2,313 $1,983 $652 $395 $14,421 
Loans Receivable
At March 31, 2021
(In thousands)

Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Financing receivables:
Ending Balance      
Individually evaluated for impairment$11,976 $6,466 $— $469 $— $18,911 
Purchased credit impaired2,896 — — 59 — 2,955 
Collectively evaluated for impairment768,911 270,155 219,187 158,689 13,594 1,430,536 
$783,783 $276,621 $219,187 $159,217 $13,594 $1,452,402 
Allowance for Loan Losses
At December 31, 2021
(In thousands)
Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Allowance for credit losses:
Ending Balance      
Individually evaluated for impairment$— $181 $— $$— $186 
Purchased credit impaired— — — — — — 
Collectively evaluated for impairment8,995 1,646 2,009 776 217 13,643 
$8,995 $1,827 $2,009 $781 $217 $13,829 




18

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Notes to Unaudited Consolidated Financial Statements
(Continued)

Loans Receivable
At December 31, 2021
(In thousands)
Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Financing receivables:
Ending Balance      
Individually evaluated for impairment$11,915 $5,214 $1,557 $343 $— $19,029 
Purchased credit impaired— — — — — — 
Collectively evaluated for impairment894,197 197,536 186,058 200,261 10,304 1,488,356 
$906,112 $202,750 $187,615 $200,604 $10,304 $1,507,385 

Impaired loans by class excluding purchased credit impaired, at March 31, 2022 and December 31, 2021, are summarized as follows:

Impaired Loans – Originated Loan Portfolio
(In thousands)Recorded InvestmentUnpaid
Principal
Balance
Related
Allowance
Average
Recorded Investment
Interest
Income Recognized
March 31, 2022     
With an allowance recorded:
Commercial real estate$— $— $— $— $— 
Commercial and industrial1,678 1,688 135 1,688 23 
Commercial construction— — — — — 
Consumer real estate91 91 92 
Consumer nonresidential— — — — — 
$1,769 $1,779 $138 $1,780 $24 
March 31, 2022
With no related allowance:
Commercial real estate$11,357 $11,357 $— $11,359 $142 
Commercial and industrial2,998 2,998 — 3,415 53 
Commercial construction105 105 — 204 
Consumer real estate— — — — — 
Consumer nonresidential— — — — — 
$14,460 $14,460 $— $14,978 $199 





19

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Notes to Unaudited Consolidated Financial Statements
(Continued)


Impaired Loans – Originated Loan Portfolio
(In thousands)Recorded InvestmentUnpaid
Principal
Balance
Related
Allowance
Average
Recorded Investment
Interest
Income Recognized
December 31, 2021
With an allowance recorded:
Commercial real estate$$$$$
Commercial and industrial1,6781,6881811,71195
Commercial construction
Consumer real estate93935957
Consumer nonresidential
$1,771$1,781$186$1,806$102
December 31, 2021
With no related allowance:
Commercial real estate$11,915$11,915$$11,947$581
Commercial and industrial3,5363,5363,660238
Commercial construction1,5571,5961,597174
Consumer real estate25025025028
Consumer nonresidential
$17,258$17,297$$17,454$1,021
There were no impaired loans in the acquired loan portfolio at both March 31, 2022 and December 31, 2021, respectively. No additional funds are committed to be advanced in connection with the impaired loans. There were no nonaccrual loans excluded from the impaired loan disclosure.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
Pass — Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.
Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the enhanced possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful — Loans classified as doubtful include those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, improbable.
20

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Loss — Loans classified as loss include those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be achieved in the future, it is neither practical nor desirable to defer writing off these loans.
Based on the most recent analysis performed, the risk category of loans by class of loans was as follows as of March 31, 2022 and December 31, 2021:
As of March 31, 2022 – Originated Loan Portfolio
(In thousands)Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Grade:      
Pass$898,806 $190,005 $176,172 $180,965 $6,826 $1,452,774 
Special mention362 400 2,508 67 — 3,337 
Substandard11,462 4,676 — 91 — 16,229 
Doubtful— — — — — — 
Loss— — — — — — 
Total$910,630 $195,081 $178,680 $181,123 $6,826 $1,472,340 
As of March 31, 2022 – Acquired Loan Portfolio
(In thousands)Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Grade:      
Pass$15,672 $3,597 $803 $21,729 $25 $41,826 
Special mention1,478 — — — — 1,478 
Substandard— — — — — — 
Doubtful— — — — — — 
Loss— — — — — — 
Total$17,150 $3,597 $803 $21,729 $25 $43,304 
As of December 31, 2021 – Originated Loan Portfolio
(In thousands)Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Grade:      
Pass$875,395 $193,426 $182,497 $176,271 $10,277 $1,437,866 
Special mention— 400 2,518 68 — 2,986 
Substandard11,915 5,214 1,557 343 — 19,029 
Doubtful— — — — — — 
Loss— — — — — — 
Total$887,310 $199,040 $186,572 $176,682 $10,277 $1,459,881 
As of December 31, 2021 – Acquired Loan Portfolio
21

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Notes to Unaudited Consolidated Financial Statements
(Continued)
(In thousands)Commercial Real EstateCommercial and IndustrialCommercial ConstructionConsumer Real EstateConsumer NonresidentialTotal
Grade:      
Pass$18,802 $3,710 $1,043 $23,922 $27 $47,504 
Special mention— — — — — — 
Substandard— — — — — — 
Doubtful— — — — — — 
Loss— — — — — — 
Total$18,802 $3,710 $1,043 $23,922 $27 $47,504 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At March 31, 2022, the Company had $3.3 million in loans identified as special mention, an increase from $3.0 million from 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. Loans rated as special mention do not have a specific reserve and are considered well-secured.
At March 31, 2022, the Company had $16.2 million in loans identified as substandard, a decrease of $2.8 million from December 31, 2021. The decrease in substandard loans was primarily related to two loans totaling $1.8 million which were sold at a discount. 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 March 31, 2022, specific reserves on originated and acquired loans totaling $138 thousand has been allocated within the allowance for loan losses to supplement any shortfall of collateral.
Past due and nonaccrual loans presented by loan class were as follows at March 31, 2022 and December 31, 2021:
As of March 31, 2022 – Originated Loan Portfolio
(In thousands)30-59 days past due60-89 days past due90 days or more past dueTotal past dueCurrentTotal loans90 days past due and still accruingNonaccruals
Commercial real estate$— $— $1,808 $1,808 $908,822 $910,630 $— $1,808 
Commercial and industrial1,261 — 1,678 2,939 192,142 195,081 — 1,678 
Commercial construction2,944 — — 2,944 175,736 178,680 — — 
Consumer real estate67 — — 67 181,056 181,123 — — 
Consumer nonresidential17 — — 17 6,809 6,826 — — 
Total$4,289 $— $3,486 $7,775 $1,464,565 $1,472,340 $— $3,486 
As of March 31, 2022 – Acquired Loan Portfolio
(In thousands)30-59 days past due60-89 days past due90 or more past dueTotal past dueCurrentTotal loans90 days past due and still accruingNonaccruals
Commercial real estate$— $— $— $— $17,150 $17,150 $— $— 
Commercial and industrial— — — — 3,597 3,597 — — 
Commercial construction— — — — 803 803 — — 
Consumer real estate— — — — 21,729 21,729 — — 
Consumer nonresidential— — — — 25 25 — — 
Total$— $— $— $— $43,304 $43,304 $— $— 

22

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Notes to Unaudited Consolidated Financial Statements
(Continued)

As of December 31, 2021 – Originated Loan Portfolio
(In thousands)30-59 days past due60-89 days past due90 or more past dueTotal past dueCurrentTotal loans90 days past due and still accruingNonaccruals
Commercial real estate$— $— $— $— $887,310 $887,310 $— $— 
Commercial and industrial— — 1,678 1,678 197,362 199,040 — 1,678 
Commercial construction— — 1,557 1,557 185,015 186,572 — 1,557 
Consumer real estate— — 250 250 176,432 176,682 — 250 
Consumer nonresidential14 21 18 53 10,224 10,277 18 — 
Total$14 $21 $3,503 $3,538 $1,456,343 $1,459,881 $18 $3,485 

As of December 31, 2021 – Acquired Loan Portfolio
(In thousands)30-59 days past due60-89 days past due90 or more past dueTotal past dueCurrentTotal loans90 days past due and still accruingNonaccruals
Commercial real estate$— $— $— $— $18,802 $18,802 $— $— 
Commercial and industrial— — — — 3,710 3,710 — — 
Commercial construction— — — — 1,043 1,043 — — 
Consumer real estate234 — 239 23,683 23,922 — 
Consumer nonresidential— — 25 27 — — 
Total$236 $— $$241 $47,263 $47,504 $$— 
There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2022 and December 31, 2021, respectively.
There were overdrafts of $56 thousand and $58 thousand at March 31, 2022 and December 31, 2021, respectively, which have been reclassified from deposits to loans. At March 31, 2022 and December 31, 2021, loans with a carrying value of $265.6 million and $290.3 million, respectively, were pledged to the Federal Home Loan Bank of Atlanta (FHLB).
There were no defaults of TDRs during the twelve months since restructuring for the three months ended March 31, 2022 and 2021.
There were no loans designated as TDRs during the three months ended March 31, 2022. The following table presents loans designated as TDRs during the three months ended March 31, 2021:

For the three months ended March 31, 2021

Troubled Debt RestructuringsNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(Dollars in thousands)
Consumer real estate1$96 $96 
Total1$96 $96 

As of March 31, 2022 and December 31, 2021, the Company had a recorded investment in TDRs of $91 thousand and $92 thousand, respectively.
The concessions made in the TDRs were related to the reduction in the stated interest rate for the remaining life of the debt.

Note 4.    Derivative Financial Instruments
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Notes to Unaudited Consolidated Financial Statements
(Continued)
The Company enters into interest rate swap agreements (swap agreements) to facilitate the risk management strategies needed to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of March 31, 2022 and December 31, 2021. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of March 31, 2022, the Company had entered into 14 interest rate swap agreements which are collateralized with $0.4 million in cash. There were 19 interest rate swap agreements outstanding as of December 31, 2021 which were collateralized with $6.7 million in cash.
The notional amount and fair value of the Company’s derivative financial instruments as of March 31, 2022 and December 31, 2021 were as follows:

March 31, 2022
Notional AmountFair Value
(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps$80,338 $1,181 
Pay Fixed/Receive Variable Swaps80,338 (1,181)

December 31, 2021
Notional AmountFair Value
(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps$80,643 $6,052 
Pay Fixed/Receive Variable Swaps80,643 (6,052)

Interest Rate Risk Management—Cash Flow Hedging Instruments

The Company uses FHLB advances and other wholesale funding from time to time as a source of funds for use in the Company’s lending and investment activities and other general business purposes. This wholesale funding exposes the Company to increased interest rate risk as a result of the variability in cash flows (future interest payments). The Company believes it is prudent to reduce this interest rate risk. To meet this objective, the Company entered into interest rate swap agreements whereby the Company reduces the interest rate risk associated with the Company’s variable rate advances (or other wholesale funding) from the designation date and going through the maturity date.
At March 31, 2022 and December 31, 2021, the information pertaining to outstanding interest rate swap agreements used to hedge variability in cash flows (FHLB advances which are included in other borrowed funds on the consolidated balance sheet) and its wholesale deposits (which are included in total deposits on the consolidated balance sheet) was as follows:

24

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Notes to Unaudited Consolidated Financial Statements
(Continued)
(Dollars in thousands)March 31, 2022December 31, 2021
Notional amount$60,000 $60,000 
Weighted average pay rate0.87 %0.87 %
Weighted average receive rate0.84 %0.21 %
Weighted average maturity in years0.85 years1.10 years
Unrealized gain (loss) relating to interest rate swaps$566 $(77)

These agreements provided for the Company to receive payments determined by a specific index (three month LIBOR) in exchange for making payments at a fixed rate. At March 31, 2022 and December 31, 2021, the unrealized loss relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with the interest payments on FHLB advances and wholesale deposits are reported in other comprehensive (loss) income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the advance affects earnings. The Company measures cash flow hedging relationships for effectiveness on a monthly basis, and at March 31, 2022 and December 31, 2021, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.


Note 5.    Financial Instruments with Off-Balance Sheet Risk
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
At March 31, 2022 and December 31, 2021, the following financial instruments were outstanding, which contract amounts represent credit risk:

(In thousands)March 31, 2022December 31, 2021
Commitments to grant loans$100,631 $90,591 
Unused commitments to fund loans and lines of credit185,543 183,145 
Commercial and standby letters of credit9,294 8,930 
Interest rate lock commitments92,776 — 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
25

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Notes to Unaudited Consolidated Financial Statements
(Continued)
facilities to customers. The Company generally holds collateral supporting those commitments, if deemed necessary.
The Company enters into rate lock commitments to finance residential mortgage loans with its customers. These commitments offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
The Company maintains its cash accounts with the FRB and correspondent banks. The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $16.0 million and $32.8 million at March 31, 2022 and December 31, 2021, respectively.

Note 6.    Stock-Based Compensation Plan
The Company’s Amended and Restated 2008 Option Plan (the Plan), which is stockholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock. In June 2018, the stockholders approved an amendment to Plan to extend the term and increase the number of shares authorized for issuance under the Plan by 200,000 shares. The Company has granted stock options and restricted stock units under the Plan.
The maximum number of shares with respect to which awards may be made is 2,529,296 shares of common stock, subject to adjustment for certain corporate events. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest annually over four years of continuous service and have ten years contractual terms. At March 31, 2022, 47,392 shares were available to grant under the Plan.
No options were granted during the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, there were 4,772 shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant. There were no shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant during the three months ended March 31, 2021, respectively.
A summary of option activity under the Plan as of March 31, 2022 and changes during the three months ended is presented below:

OptionsNumber
of
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average Contractual Remaining
Term (Years)
Aggregate Intrinsic
Value (1)
Outstanding at January 1, 20221,544,893$8.31 2.46
Granted— 
Exercised(216,492)7.07 
Forfeited or expired(97)8.56 
Outstanding and Exercisable at March 31, 2022
1,328,304$8.51 2.55$16,280,460 
(1)The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2022. This amount changes based on changes in the market value of the Company’s common stock.
As of March 31, 2022, all outstanding stock options granted under the Plan are fully vested and amortized. There was $204 thousand income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements for the three months ended March 31, 2022. The total income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements was $125 thousand for the three months ended March 31, 2021.
Restricted stock units relating to 3,000 shares were granted during the three months ended March 31, 2022. There were 116,488 restricted stock units granted during the three months ended March 31, 2021.
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Notes to Unaudited Consolidated Financial Statements
(Continued)
A summary of the Company’s restricted stock unit grant activity as of March 31, 2022 is shown below.

Number of
Shares
Weighted Average Grant Date
Fair Value
Nonvested at January 1, 2022151,403$17.92 
Granted3,00020.83
Vested(28,244)17.49
Forfeited(2,363)18.63
Balance at March 31, 2022
123,796$18.08 

The compensation cost that has been charged to income for the Plan was $204 thousand and $166 thousand thousand for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was $1.9 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the Plan. The cost is expected to be recognized over a weighted-average period of 28 months.

Note 7.    Fair Value Measurements
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date (exit price). Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 —Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 —Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 —Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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Notes to Unaudited Consolidated Financial Statements
(Continued)
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).
Cash flow hedges: The Company has interest rate swap derivatives that are designated as cash flow hedges and are recorded at fair value using published yield curve rates from a national valuation service. These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

Fair Value Measurements at
March 31, 2022 Using
(In thousands)
Balance as of March 31, 2022
Quoted Prices
in Active
Markets for Identical
Assets
Significant
Other
Observable
Inputs
 Significant Unobservable Inputs
Description(Level 1)(Level 2)(Level 3)
Assets    
Available-for-sale    
Securities of U.S. government and federal agencies$12,335 $— $12,335 $— 
Securities of state and local municipalities tax exempt1,399 — 1,399 — 
Securities of state and local municipalities taxable549 — 549 — 
Corporate bonds19,881 — 19,881 — 
SBA pass-through securities88 — 88 — 
Mortgage-backed securities284,270 — 284,270 — 
Collateralized mortgage obligations11,815 — 11,815 — 
Total Available-for-Sale Securities$330,337 $— $330,337 $— 

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Fair Value Measurements at
December 31, 2021 Using
(In thousands)
Balance as of December 31, 2021
 Quoted Prices
in Active
Markets for Identical
Assets
Significant
Other
Observable
Inputs
Significant Unobservable Inputs
Description(Level 1)(Level 2)(Level 3)
Assets    
Available-for-sale    
Securities of U.S. government and federal agencies$13,436 $— $13,436 $— 
Securities of state and local municipalities tax exempt1,451 — 1,451 — 
Securities of state and local municipalities taxable596 — 596 — 
Corporate bonds14,151 — 14,151 — 
SBA pass-through securities108 — 108 — 
Mortgage-backed securities313,838 — 313,838 — 
Collateralized mortgage obligations14,194 — 14,194 — 
Total Available-for-Sale Securities$357,774 $— $357,774 $— 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the present value of future cash flows, observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021:

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Fair Value Measurements Using
(In thousands)
Balance as of March 31, 2022
Quoted Prices
in Active
Markets for Identical
Assets
Significant
Other
Observable
Inputs
Significant Unobservable Inputs
Description(Level 1)(Level 2)(Level 3)
Assets    
Impaired loans
Commercial and industrial$1,543 $— $— $1,543 
Consumer residential88 — — 88 
Total Impaired loans$1,631 $— $— $1,631 

Fair Value Measurements Using
(In thousands)
Balance as of December 31, 2021
Quoted Prices
in Active
Markets for Identical
Assets
Significant
Other
Observable
Inputs
Significant Unobservable Inputs
Description(Level 1)(Level 2)(Level 3)
Assets    
Impaired loans
Commercial and industrial$1,497 $— $— $1,497 
Consumer residential88 — — 88 
Total Impaired loans$1,585 $— $— $1,585 

The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2022 and December 31, 2021:

Quantitative information about Level 3 Fair Value Measurements for March 31, 2022
(In thousands)
AssetsFair ValueValuation Technique(s)Unobservable inputRange
 (Avg.)
Impaired loans
Commercial and industrial$1,543 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %
Consumer residential88 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %
Total impaired loans$1,631 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %

Quantitative information about Level 3 Fair Value Measurements for December 31, 2021
(In thousands)
AssetsFair ValueValuation Technique(s)Unobservable inputRange(Avg.)
Impaired loans
Commercial and industrial$1,497 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %
Consumer residential88 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %
Total impaired loans$1,585 Discounted appraised valueMarketability/Selling costs
8% - 8%
8.00 %

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Notes to Unaudited Consolidated Financial Statements
(Continued)
The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2022 and December 31, 2021. Fair values for March 31, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

Fair Value Measurements as of March 31, 2022, using
Carrying
Amount
Quoted Prices in Active Markets for Identical AssetsSignificant
Other Observable Inputs
Significant Unobservable Inputs
(In thousands)Level 1Level 2Level 3
Financial assets:    
Cash and due from banks$16,869 $16,869 $— $— 
Interest-bearing deposits at other institutions122,117 122,117 — — 
Securities held-to-maturity264 — 265 — 
Securities available-for-sale330,337 — 330,337 — 
Restricted stock6,262 — 6,262 — 
Loans, net1,498,712 — — 1,451,864 
Derivative assets - interest rate swaps1,181 — 1,181 — 
Derivative assets - cash flow hedge611 — 611 — 
Bank owned life insurance39,409 — 39,409 — 
Accrued interest receivable8,089 — 8,089 — 
Financial liabilities:
Checking, savings and money market accounts$1,607,781 $— $1,607,781 $— 
Time deposits211,574 — 212,638 — 
FHLB advances25,000 — 25,000 — 
Subordinated notes19,524 — 17,905 — 
Accrued interest payable1,131 — 1,131 — 
Derivative liabilties - interest rate swaps1,181 — 1,181 — 
Derivative liabilties - cash flow hedge45 — 45 — 
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Notes to Unaudited Consolidated Financial Statements
(Continued)
Fair Value Measurements as of December 31, 2021, using
Carrying
Amount
Quoted Prices in Active Markets for Identical AssetsSignificant
Other Observable Inputs
Significant Unobservable Inputs
(In thousands)Level 1Level 2Level 3
Financial assets:
Cash and due from banks$24,613 $24,613 $— $— 
Interest-bearing deposits at other institutions216,345 216,345 — — 
Securities held-to-maturity264 — 270 — 
Securities available-for-sale357,774 — 357,774 — 
Restricted stock6,372 — 6,372 — 
Loans, net1,490,020 — — 1,493,185 
Derivative assets - interest rate swaps6,052 — 6,052 — 
Bank owned life insurance39,171 — 39,171 — 
Accrued interest receivable8,074 — 8,074 — 
Financial liabilities:
Checking, savings and money market accounts$1,652,352 $— $1,652,352 $— 
Time deposits231,417 — 232,837 — 
FHLB advances 25,000 — 25,000 — 
Subordinated notes19,510 — 18,133 — 
Accrued interest payable1,034 — 1,034 — 
Derivative liabilties - interest rate swaps6,052 — 6,052 — 
Derivative liabilties - cash flow hedge77 — 77 — 
Note 8.    Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of stock which then shared in the earnings of the Company. Holders of the Company’s restricted stock units do not have voting rights during the vesting period and therefore, restricted stock units are not included in the computation of basic earnings per share. Weighted average shares – diluted includes the potential dilution of stock options and restricted stock units as of March 31, 2022. The weighted average shares – diluted as of March 31, 2021 includes only the potential dilution of stock options.
The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common stockholders. There were no anti-dilutive shares for each of the periods ended March 31, 2022 and March 31, 2021.

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Notes to Unaudited Consolidated Financial Statements
(Continued)
Three Months Ended March 31,
(In thousands, except per share data)20222021
Net income$6,613 $5,569 
Weighted average number of shares 13,83313,578
Effect of dilutive securities, restricted stock units and options881958
Weighted average diluted shares 14,71414,536
Basic EPS$0.48 $0.41 
Diluted EPS$0.45 $0.38 

Note 9.    Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (AOCI) for the three months ended March 31, 2022 and 2021 are shown in the following table. The Company has two components, which are available-for-sale securities and cash flow hedges, for the periods presented.

(In thousands)
Three Months Ended March 31, 2022Available-for-Sale SecuritiesCash Flow HedgesTotal
Balance, beginning of period $(1,983)$(60)$(2,043)
Net unrealized (losses) gains during the period(17,679)508 (17,171)
Other comprehensive (loss) income, net of tax(17,679)508 (17,171)
Balance, end of period $(19,662)$448 $(19,214)



(In thousands)
Three Months Ended March 31, 2021Available-for-Sale SecuritiesCash Flow HedgesTotal
Balance, beginning of period$2,421 $(595)$1,826 
Net unrealized (losses) gains during the period(1,281)156 (1,125)
Other comprehensive (loss) income, net of tax(1,281)156 (1,125)
Balance, end of period$1,140 $(439)$701 


Note 10.    Subordinated Notes
On June 20, 2016, the Company issued $25 million of fixed-to-floating rate subordinated notes due June 30, 2026, in a private placement to accredited investors. Interest was payable at 6.00% per annum, from and including June 20, 2016 to, but excluding, June 30, 2021, semi-annually in arrears. From and including June 30, 2021 to the maturity date or early redemption date, the interest rate was to reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.
The Company had the option, on any scheduled interest payment date, to redeem the subordinated notes, in whole or in part, upon not fewer than 30 nor greater than 60 days’ notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. In August 2021, the Company provided a redemption notice to each holder of
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Notes to Unaudited Consolidated Financial Statements
(Continued)
the subordinated notes that the notes would be redeemed on September 30, 2021 or such later date as the holder returned its note to the Company. $23.8 million of principal was redeemed and paid during the year ended December 31, 2021. The remaining note holders redeemed their notes with a principal balance of $1.2 million in February 2022. The notes stopped accruing interest effective as of September 30, 2021 redemption date.

On October 13, 2020, the Company completed its private placement of $20.0 million of its 4.875% Fixed to Floating Subordinated Notes due 2030 (the Notes) to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes.

Note 11. Revenue Recognition
The Company recognizes revenue in accordance with ASU 2014-09 ‘‘Revenue from Contracts with Customers’’ (Topic 606) and all subsequent ASUs that modified Topic 606 in recognizing revenue. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, gain on sale of securities, bank-owned life insurance income, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and personal checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges and are included in other income on the Company’s consolidated statements of income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. This income is reflected in other income on the Company’s consolidated statements of income.
Other income
Other noninterest income consists of loan swap fees, insurance commissions, and other miscellaneous revenue streams not meeting the criteria above. When the Company enters into an interest rate swap agreement, the Company may receive an additional one-time payment fee which is recognized as income when received. The Company receives monthly recurring commissions based on a percentage of premiums issued and revenue is recognized when received. Any residual miscellaneous fees are recognized as they occur, and therefore, the Company determined this consistent practice satisfies the obligation for performance.
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Notes to Unaudited Consolidated Financial Statements
(Continued)
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,
(In thousands)20222021
Noninterest Income
In-scope of Topic 606  
Service Charges on Deposit Accounts$234 $243 
Fees, Exchange, and Other Service Charges91 78 
Other income65 160 
Noninterest Income (in-scope of Topic 606)390 481 
Noninterest Income (out-scope of Topic 606)1,234 310 
Total Noninterest Income$1,624 $791 

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2022 and 2021, the Company did not have any significant contract balances.
Contract Acquisition Costs
Under Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company did not capitalize any contract acquisition cost during the three months ended March 31, 2022 or 2021.

Note 12. Supplemental Cash Flow Information

Below is additional information regarding the Company’s cash flows for the three months ended March 31, 2022 and 2021.

For the Three Months Ended March 31,
(In thousands) 2022 2021
Supplemental Disclosure of Cash Flow Information:  
Cash paid for:  
Interest on deposits and borrowed funds$2,072 $2,048 
Income taxes— — 
Noncash investing and financing activities:
Unrealized (loss) gain on securities available-for-sale(22,379)(1,577)
Unrealized gain (loss) on interest rate swaps643 198 




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Item 2.    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 March 31, 2022 and December 31, 2021 and the results of our operations for the three months ended March 31, 2022 and 2021. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Results of operations for the three month period ended March 31, 2022 are not necessarily indicative of the results of operations for the balance of 2022, or for any other period. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q, as well as other periodic reports filed with the U.S. Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of FVCBankcorp, Inc. and our subsidiary (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements.
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
risks, uncertainties and other factors relating to the COVID-19 pandemic, including the length of time that the pandemic continues; the imposition of any restrictions on business operations and/or travel; the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments; the inability of employees to work due to illness, quarantine, or government mandates; and the effectiveness and acceptance of vaccines against COVID-19 and its variants;

general business and economic conditions nationally or in the markets that the Company serves could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, and consumer and business confidence, which could lead to decreases in demand for loans, deposits, and other financial services that the Company provides and increases in loan delinquencies and defaults;

the risk of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;
changes in the Company’s liquidity requirements could be adversely affected by changes in its assets and liabilities;

changes in the assumptions underlying the establishment of reserves for possible loan losses;
changes in market conditions, specifically declines in the commercial and residential real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions we do business with;
risks inherent in making loans such as repayment risks and fluctuating collateral values;
the Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates used to value the securities in the portfolio;
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declines in the Company's common stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to record a noncash impairment charge to earnings in future periods;
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
geopolitical conditions, including acts or threats of terrorism, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;
our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;
changes in consumer spending and savings habits;
technological and social media changes;
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), inflation, interest rate, market and monetary fluctuations;
changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
the impact of changes in laws, regulations and policies affecting the real estate industry;
the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setting bodies;
the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
the willingness of users to substitute competitors’ products and services for our products and services;
the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
changes in the level of our nonperforming assets and charge-offs;
our involvement, from time to time, in legal proceedings and examination and remedial actions by regulators; and
potential exposure to fraud, negligence, computer theft and cyber-crime.
The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2021, including those discussed in the section entitled “Risk Factors”. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.
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Overview
We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank (the “Bank”), was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.
On 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 ownership interest is subject to an earnback option of up to 3.7% over a three year period. 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 for investment loan portfolio.

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.
Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. As discussed further in “Quantitative and Qualitative Disclosures About Market Risk” below, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterest 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.
Critical Accounting Policies
General
The accounting principles we apply under U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.
The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, and fair value measurements.
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. We are not required to implement the provisions of the current expected credit losses accounting standard (“CECL”) until January 1, 2023, and are continuing to account for the allowance for loan losses under the incurred loss model. 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. Unusual and infrequently occurring events, such as weather-related disasters and health-related events, such as the COVID-19 pandemic and associated efforts to restrict the spread of the disease, may impact our assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience, ability and depth of management,
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national and local economic trends and conditions, concentrations of credit, competition, and loan review results to support estimates.
The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments. For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on loan segments, which are largely based on the type of collateral underlying each loan. For purposes of this analysis, we categorize loans into one of five categories: commercial and industrial, commercial real estate, commercial construction, consumer residential, and consumer nonresidential loans. 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 the allowance for loan losses. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular qualitative loan portfolio characteristics and environmental factors. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.
Our peer group is defined by selecting commercial banking institutions of similar size within Virginia, Maryland and the District of Columbia. This is known as our custom peer group. The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 22 banks for our custom peer group which are within $1 billion to $3 billion in total assets, the majority of whom are geographically concentrated in the Washington, D.C. metropolitan area in which we operate, as this area has experienced more stable economic conditions than many other areas of the country. These baseline peer group loss rates are then adjusted based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk. Our peer loss rates are updated on a quarterly basis.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. We evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the fair value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan.
Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan 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. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.


Fair Value Measurements
We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

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LIBOR and Other Benchmark Rates
We have certain loans, interest rate swap agreements, and investment securities whose interest rate is indexed to London Interbank Offered Rate (“LIBOR”). In 2017, the Financial Conduct Authority (the authority that regulates the calculation of LIBOR) announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023. In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny.

Central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (“IBOR”) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (“ARRs”) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.

    To facilitate an orderly transition from IBORs and other benchmark rates to ARRs, we have established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. To mitigate the risks associated with the expected discontinuation of LIBOR, we have ceased originating LIBOR-linked loans, implemented fallback language for LIBOR-linked commercial loans, adhered to the International Swaps and Derivatives Association 2020 Fallbacks Protocol for interest rate swap agreements, and have updated our systems to accommodate loans linked to the Secured Overnight Financing Rate (“SOFR”). In accordance with regulatory guidance, we ceased entering into new LIBOR transactions at the end of 2021 and have selected SOFR as the rate that best represents an alternative to LIBOR. Uncertainty as to the adoption, market acceptance or availability of SOFR or other alternative reference rates may adversely affect the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.
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Results of Operations— Three Months Ended March 31, 2022 and 2021
Overview
We recorded net income of $6.6 million, or $0.45 per diluted common share, for the three months ended March 31, 2022, compared to net income of $5.6 million, or $0.38 per diluted common share, for the three months ended March 31, 2021, an increase of $1.0 million, or 18%. Net interest income increased $1.0 million to $15.1 million for the three months ended March 31, 2022, compared to $14.0 million for the three months ended March 31, 2021. A $350 thousand provision for loan losses was recorded for the three months ended March 31, 2022, compared to no provision being recorded for the same period of 2021. Noninterest income was $1.6 million compared to $791 thousand for the three months ended March 31, 2022 and 2021, respectively. Noninterest expense was $8.4 million for the three months ended March 31, 2022 compared to $7.9 million for the same three month period of 2021.

The annualized return on average assets for the three months ended March 31, 2022 and 2021 was 1.30% and 1.19%, respectively. The annualized return on average equity for the three months ended March 31, 2022 and 2021 was 12.63% and 11.53%, respectively.

Operating earnings, which exclude merger-related expenses, net of tax, for the three months ended March 31, 2022 and 2021 were $6.7 million and $5.6 million, respectively, an increase of $1.1 million, or 20%. Diluted operating earnings per share, for the three months ended March 31, 2022 and 2021 were $0.46 and $0.38, respectively. Operating earnings annualized return on average assets for the three months ended March 31, 2022 and 2021 was 1.32% and 1.19%, respectively. Operating earnings annualized return on average equity for the three months ended March 31, 2022 and 2021
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was 12.81% and 11.53%, respectively. The Company believes that operating earnings is a financial measure that is more reflective of the Company’s operating performance than net income. Operating earnings is determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation of non-GAAP financial measures to their most comparable financial measures in accordance with GAAP can be found in the table below.


Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands, except per share data)

20222021
Net income (as reported)$6,613 $5,569 
Add: merger and acquisition expense125 — 
Less: provision for income taxes associated with impairment and merger and acquisition expense(28)— 
Non-GAAP Operating Earnings, excluding above items$6,710 $5,569 
Earnings per share - basic (GAAP net income)0.48 0.41 
Earnings per share - Non-GAAP expenses including provision for income taxes0.01 — 
Earnings per share - basic (non-GAAP net income)$0.49 $0.41 
Earnings per share - diluted (GAAP net income)$0.45 $0.38 
Earnings per share - Non-GAAP expenses including provision for income taxes0.01 — 
Earnings per share - diluted (non-GAAP net income)$0.46 $0.38 
Return on average assets (GAAP net income)1.30 %1.19 %
Non-GAAP expenses including provision for income taxes0.02 %— %
Return on average assets (non‑GAAP net income)1.32 %1.19 %
Return on average equity (GAAP net income)12.63 %11.53 %
Non-GAAP expenses including provision for income taxes0.18 %— %
Return on average equity (non‑GAAP net income)12.81 %11.53 %
Net Interest Income/Margin
Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 2022 and 2021.

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)
20222021
Average BalanceInterest Income/ExpenseAverage Yield/
Rate
Average BalanceInterest Income/Expense
Average Yield/
Rate
Assets
Interest-earning assets:      
Loans (1):      
Commercial real estate$914,106 $9,428 4.13 %$782,639 $8,396 4.29 %
Commercial and industrial175,881 1,844 4.19 %111,360 1,344 4.83 %
Paycheck protection program19,421 285 5.87 %162,066 1,832 4.52 %
Commercial construction180,388 2,149 4.76 %220,835 2,427 4.40 %
Consumer residential175,207 1,733 3.96 %165,211 1,676 4.06 %
Consumer nonresidential9,335 168 7.18 %14,199 258 7.27 %
Total loans (1)1,474,338 15,607 4.23 %1,456,310 15,933 4.38 %
Investment securities (2)351,318 1,491 1.70 %122,585 724 2.36 %
Restricted stock6,157 82 5.32 %6,403 82 5.12 %
Deposits at other financial institutions and federal funds sold108,224 45 0.17 %182,891 45 0.10 %
Total interest-earning assets and interest income1,940,037 17,225 3.55 %1,768,189 16,784 3.80 %
Noninterest-earning assets:      
Cash and due from banks10,824  15,346   
Premises and equipment, net1,563  1,610   
Accrued interest and other assets99,522  96,226   
Allowance for loan losses(13,852) (14,894)  
Total assets$2,038,094  $1,866,477   
Liabilities and Stockholders' Equity      
Interest - bearing liabilities:      
Interest - bearing deposits:      
Interest checking$696,460 $997 0.58 %$523,712 $717 0.55 %
Savings and money markets315,695 348 0.45 %278,774 324 0.47 %
Time deposits184,605 442 0.97 %246,486 917 1.51 %
Wholesale deposits35,000 43 0.50 %45,778 43 0.38 %
Total interest - bearing deposits1,231,760 1,830 0.60 %1,094,750 2,001 0.74 %
Other borrowed funds44,515 342 3.12 %69,096 734 4.31 %
Total interest-bearing liabilities and interest expense1,276,275 2,172 0.69 %1,163,846 2,735 0.95 %
Noninterest-bearing liabilities:      
Demand deposits526,239  479,831   
Other liabilities26,098  29,625   
Common stockholders' equity209,482  193,175   
Total liabilities and stockholders' equity$2,038,094  $1,866,477   
Net interest income and net interest margin$15,053 3.15 %$14,049 3.22 %
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(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $848 thousand and $1.9 million for the three months ended March 31, 2022 and 2021, respectively.
(2)The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2022 and 2021.

The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” below for further information.
The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the three months ended March 31, 2022.
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Rate and Volume Analysis
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)

2022 Compared to 2021
Average
Volume
Average
Rate
Increase
(Decrease)
Interest income:   
Loans (1):   
Commercial real estate$1,410 $(378)$1,032 
Commercial and industrial779 (279)500 
Paycheck protection program(1,612)65 (1,547)
Commercial construction(445)167 (278)
Consumer residential101 (44)57 
Consumer nonresidential(88)(2)(90)
Total loans (1)145 (471)(326)
Investment securities (2)1,351 (584)767 
Restricted stock(3)— 
Deposits at other financial institutions and federal funds sold(21)21 — 
Total interest income1,472 (1,031)441 
Interest expense:   
Interest - bearing deposits:   
Interest checking237 42 279 
Savings and money markets42 (18)24 
Time deposits(230)(245)(475)
Wholesale deposits(10)10 — 
Total interest - bearing deposits39 (211)(172)
Other borrowed funds(253)(138)(391)
Total interest expense(214)(349)(563)
Net interest income$1,686 $(682)$1,004 

(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented.
(2)The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 21% for both 2022 and 2021.

Net interest income for the three months ended March 31, 2022 was $15.1 million, compared to $14.0 million for the three months ended March 31, 2021, an increase of $1.0 million, or 7.0%. The increase in net interest income was a result of two factors growth in average earning assets offset by a decrease in the average rate received on interest-earning assets, and a decrease in average rates paid on interest-bearing deposits during 2022 compared to 2021, reducing interest expense by $563 thousand. In addition increase of $171.8 million in average interest-earning assets was primarily related to growth in the investment securities portfolio, which contributed to an increase in interest income of $767 thousand. The yield on interest-earning assets decreased 25 basis points to 3.55% for the three months ended March 31, 2022, compared to 3.80% for the same period of 2021. The average yield of the loan portfolio for the three months ended March 31, 2022
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and 2021 was 4.23% and 4.38%, respectively, with the decrease in the yield on loans primarily due to the decrease in PPP loan forgiveness during the three months ended March 31, 2022 as compared to the same period of 2021. Cost of interest-bearing deposits decreased 14 basis points to 0.60% for the three months ended March 31, 2022, compared to 0.74% for the same period of 2021, which was primarily attributed to the repricing of our time deposits to lower interest rates.

Our net interest margin, on a tax equivalent basis, for the three months ended March 31, 2022 and 2021 was 3.15% and 3.22%, respectively. The decrease in our net interest margin was primarily a result of a decrease in the yields earned on our interest-earning assets during 2022 as compared to 2021, a result of the decreased rate environment. 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 2022 and 2021.
Net interest income, on a tax equivalent basis, is a non-GAAP financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.
Supplemental Financial Data and Reconciliations to GAAP Financial Measures
For the Three Ended March 31, 2022 and 2021
(Dollars in thousands)

20222021
GAAP Financial Measurements:  
Interest income:  
Loans$15,607 $15,933 
Deposits at other financial institutions and federal funds sold45 45 
Investment securities available‑for‑sale1,488 717 
Investment securities held‑to‑maturity
Restricted stock82 82 
Total interest income17,223 16,778 
Interest expense:  
Interest‑bearing deposits1,830 2,001 
Other borrowed funds342 734 
Total interest expense2,172 2,735 
Net interest income$15,051 $14,043 
Non‑GAAP Financial Measurements:  
Add: Tax benefit on tax‑exempt interest income - securities
Total tax benefit on tax-exempt interest income$$
Tax equivalent net interest income$15,053 $14,049 

Average interest-earning assets increased $171.8 million, or 9.7%, to $1.94 billion for the three months ended March 31, 2022 compared to $1.77 billion for the three months ended March 31, 2021. The increase in our earning assets was primarily driven by an increase in the average volume of investment securities, which contributed an additional $767 thousand in interest income, net of the impact of the lower interest rate environment. The excess liquidity is a result of PPP loan forgiveness and the increase in deposits accumulated over the past year.

Total average interest-bearing deposits increased $137.0 million to $1.23 billion for the three months ended March 31, 2022 compared to $1.09 billion for the three months ended March 31, 2021. Average noninterest-bearing deposits increased $46.4 million to $526.2 million for the three months ended March 31, 2022 compared to $479.8 million for the
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same period in 2021. The largest increase in average interest-bearing customer deposit balances was in our interest checking, which increased $172.7 million compared to 2021. As customers move balances to non-maturity deposit products, average balances for time deposits decreased $61.9 million as compared to 2021. Average wholesale deposits decreased $10.8 million to $35.0 million for the first quarter of 2022 compared to $45.8 million for the first quarter of 2021, as we have been able to reduce our reliance on wholesale funding due to other core sources of liquidity. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, decreased 119 basis points to 3.12% for the three months ended March 31, 2022, a result of redeeming $25 million in subordinated debt during the third quarter of 2021.

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. Both the amount of the provision 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. We are not required to implement the provisions of CECL until January 1, 2023, and as such we are continuing to account for the allowance for loan losses under the incurred loss model.
We recorded a provision for loan losses of $350 thousand for the three months ended March 31, 2022 compared to no provision for loan losses being recorded for the same period of 2021. The increase in provision for loan losses is primarily related to an increase in loans outstanding at March 31, 2022 compared to the same period of 2021. In addition, the Company recorded net loan charge-offs of $415 thousand during the first quarter of 2022. Specific reserves decreased to $138 thousand for the three months ended March 31, 2022, compared to $186 thousand at December 31, 2021.
See “Asset Quality” below for additional information on the credit quality of the loan portfolio. The allowance for loan losses was $13.8 million for each of March 31, 2022 and December 31, 2021. Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs and excluding PPP loans, was 0.92% at March 31, 2022 , compared to 0.94% at December 31, 2021.
Noninterest Income
The following table provides detail for non-interest income for the three months ended March 31, 2022 and 2021.
Non-Interest Income
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)

Change from Prior Year
20222021AmountPercent
Service charges on deposit accounts$234 $243 $(9)(3.7)%
Fees on loans84 20 64 320.0 %
BOLI income238 248 (10)(4.0)%
Income from minority membership interest912 — 912 100.0 %
Other fee income156 280 (124)(44.3)%
Total non‑interest income$1,624 $791 $833 105.3 %

Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM, and income from our BOLI policies, and continues to supplement our operating results. Noninterest income for the three months ended March 31, 2022 and 2021 was $1.6 million and $791 thousand, respectively. The increase in noninterest income is primarily attributable to the Bank’s income associated with its investment in ACM, recording $912 thousand during the first quarter of 2022. Fee income from fees on loans was $84 thousand for the quarter ended March 31, 2022, compared to $20 thousand for the first quarter of 2021. Service charges on deposits, and other fee income totaled $390 thousand for the first quarter of 2022, a decrease of $133 thousand from the year ago quarter, primarily resulting from an increase in commission bonuses earned on the Company’s long standing
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investment in Bankers’ Insurance during the first quarter of 2021. Income from BOLI decreased $10 thousand to $238 thousand for the three months ended March 31, 2022 from $248 thousand for the three months ended March 31, 2021.

Noninterest Expense
The following table reflects the components of non-interest expense for the three months ended March 31, 2022 and 2021.
Non-Interest Expense
For The Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)
Change from Prior Year
20222021AmountPercent
Salaries and employee benefits$4,978 $4,548 $430 9.5 %
Occupancy and equipment expense840 807 33 4.1 %
Data processing and network administration542 563 (21)(3.7)%
State franchise taxes509 504 1.0 %
Audit, legal and consulting fees361 354 2.0 %
Merger and acquisition expense125 — 125 100.0 %
Loan related expenses47 106 (59)(55.7)%
FDIC insurance180 210 (30)(14.3)%
Marketing, business development and advertising88 49 39 79.6 %
Director fees180 138 42 30.4 %
Postage, courier and telephone51 46 10.9 %
Internet banking143 133 10 7.5 %
Dues, memberships & publications48 41 17.1 %
Bank insurance109 101 7.9 %
Printing and supplies32 23 39.1 %
Bank charges28 32 (4)(12.5)%
State assessments31 53 (22)(41.5)%
Core deposit intangible amortization70 80 (10)(12.5)%
Other operating expenses80 94 (14)(14.9)%
Total non‑interest expense$8,442 $7,882 $560 7.1 %

Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was $8.4 million and $7.9 million for the three months ended March 31, 2022 and 2021, respectively, an increase of $560 thousand, or 7%.
The increase in noninterest expense was primarily related to salaries and benefits expense, which increased $430 thousand to $5.0 million for the three months ended March 31, 2022 compared to $4.5 million for the same period in 2021. This increase was primarily related to additions to business development staff that occurred after the first quarter of 2021 and associated accruals for incentive compensation during the first quarter of 2022 compared to the year ago quarter. All other increases in noninterest expense for the quarter ended March 31, 2022 as compared to the same period of 2021, are primarily related to merger-related expenses of $125 thousand and supporting the larger organization as a result of continued organic growth.

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Income Taxes
We recorded a provision for income tax expense of $1.3 million for the three months ended March 31, 2022, compared to $1.4 million for the three months ended March 31, 2021. Our effective tax rate for the three months ended March 31, 2022 was 16.1%, compared to 19.9% for the same period of 2021. The effective tax rates for the first quarter of 2022 and 2021 was less than our combined federal and state statutory rate of 22.5% primarily because of discrete tax benefits recorded as a result of exercises of nonqualified stock options during during 2022 and 2021. In addition, during the first quarter of 2022, the Company recorded a favorable adjustment of $197 thousand to income tax expense as merger-related expenses that were previously capitalized for tax purposes are now deductible.

Discussion and Analysis of Financial Condition
Overview
At March 31, 2022, total assets were $2.09 billion, a decrease of $112.8 million, or 5.1%, compared to $2.20 billion at December 31, 2021. Total loans receivable, net of deferred fees and costs, was $1.51 billion at March 31, 2022, compared to $1.50 billion at December 31, 2021. Total investment securities decreased $27.4 million, or 7.7%, compared to $358.0 million at December 31, 2021. Total deposits decreased $64.4 million, or 3.4%, compared to $1.88 billion at December 31, 2021. From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. At each of March 31, 2022 and December 31, 2021, we had FHLB advances totaling $25.0 million. At each of March 31, 2022 and December 31, 2021, we had subordinated debt totaling $19.5 million.
Loans Receivable, Net
Total loans receivable, net of deferred fees and costs, were $1.51 billion at March 31, 2022, compared to $1.50 billion at December 31, 2021. Loans receivable, net of deferred fees, excluding PPP loans totaling $1.50 billion at March 31, 2022, an increase of $23.1 million, or 6.3% annualized. At March 31, 2022, loans outstanding under the warehouse lending facility to ACM totaled $59.3 million, a decrease of $12.7 million, or 18%, from $72.0 million at December 31, 2021. Loans originated during the first quarter of 2022 totaled $117.8 million, of which $92.1 million were funded.
PPP loans net of fees totaled $13.7 million at March 31, 2022, a decrease from $28.1 million at December 31, 2021 and $163.5 million at March 31, 2021. Loans forgiven during the first quarter of 2022 totaled $14.4 million, or 51% of PPP loans outstanding at December 31, 2021. Net deferred fees associated with PPP loans totaled $314 thousand at March 31, 2022, and are being recognized in interest income over the remaining lives of the PPP loans, or sooner upon PPP loan forgiveness or repayment.
Commercial real estate loans totaled $927.8 million at March 31, 2022, compared to $906.1 million at December 31, 2021, an increase of $21.7 million, or 2.4%. Owner-occupied commercial real estate loans were $199.2 million at March 31, 2022 compared to $191.8 million at December 31, 2021. Nonowner-occupied commercial real estate loans were $728.6 million at March 31, 2022 compared to $714.3 million at December 31, 2021. Construction loans totaled $179.5 million at March 31, 2022, 11.8% of total loans receivable. Of the $179.5 million in construction loans, $48.9 million are collateralized by land and only $4.9 million are lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio). Our commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We plan to manage this portion of our portfolio in a disciplined manner. We have comprehensive policies to monitor, measure, and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices.
The following table presents the composition of our loans receivable portfolio at March 31, 2022 and at December 31, 2021.
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Loans Receivable
At March 31, 2022 and December 31, 2021
(Dollars in thousands)

March 31, 2022December 31, 2021
Commercial real estate$927,780 $906,112
Commercial and industrial184,679 174,051
Paycheck protection program13,999 28,699
Commercial construction179,483 187,615
Consumer real estate202,852 200,604
Consumer nonresidential6,851 10,304 
Gross loans1,515,644 1,507,385 
Less:  
Allowance for loan losses13,763 13,829 
Unearned income and (unamortized premiums)3,169 3,536 
Loans receivable, net$1,498,712 $1,490,020 

Asset Quality
Nonperforming loans, defined as nonaccrual loans, loans past due 90 days or more as to principal or interest and still accruing were $3.5 million at each of March 31, 2022 and December 31, 2021. Our ratio of nonperforming loans to total assets was 0.17% at March 31, 2022 compared to 0.16% at December 31, 2021. We had one loan classified as a TDR at March 31, 2022 and December 31, 2021, which totaled $91 thousand and $92 thousand, respectively.
Nonperforming loans, which are primarily commercial real estate and commercial and industrial loans, were $3.5 million at March 31, 2022. 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. 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 have specific reserves totaling $138 thousand and $186 thousand at March 31, 2022 and December 31, 2021, respectively. Because these loans are individually evaluated for impairment, nonperforming loans are excluded from the general reserve allocation.
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At March 31, 2022, we had $4.8 million in loans identified as special mention, an increase from $3.0 million from 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. The increase from December 31, 2021 was primarily related to two loans being downgraded totaling $1.9 million . Loans rated as special mention do not have a specific reserve and are considered well-secured.
At March 31, 2022, we had $16.2 million in loans identified as substandard, a decrease of $2.8 million from December 31, 2021. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At March 31, 2022, specific reserves on originated and acquired loans totaling $138 thousand has been allocated within the allowance for loan losses to supplement any shortfall of collateral.
We recorded annualized net charge-offs to average loans receivable of 0.11% for the three months ended March 31, 2022, compared to annualized net charge-offs to average loans receivable of 0.15% for the three months ended March 31, 2021. The following tables provide additional information on our asset quality for the periods presented.
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Nonperforming Assets
At March 31, 2022 and December 31, 2021
(Dollars in thousands)

March 31, 2022December 31, 2021
Nonperforming assets:
Nonaccrual loans$3,486 $3,485 
Loans contractually past‑due 90 days or more and still accruing— 23 
Total nonperforming loans (NPLs)$3,486 $3,508 
Other real estate owned— — 
Total nonperforming assets (NPAs)$3,486 $3,508 
Performing troubled debt restructurings$91 $92 
NPLs/Total Assets0.17 %0.16 %
NPAs/Total Assets0.17 %0.16 %
NPAs and TDRs/Total Assets0.17 %0.16 %
Allowance for loan losses/NPLs394.81 %394.21 %

At March 31, 2022 and December 31, 2021, there were no performing loans considered potential problem loans. 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 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. 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 are closely and proactively monitoring the effects of the pandemic on our loan and deposit customers and are focused on assessing risks within the loan portfolio and working with customers to minimize losses. We consider pandemic impacted loans to include commercial real estate loans made to hotels, churches, and certain retail and special purpose asset classes. During our assessment of the allowance for loan losses, we addressed the credit risks associated with these pandemic impacted segments and those loans that have requested payment deferrals.
We believe that as a result of our conservative underwriting discipline at loan origination coupled with active dialogue we have with our borrowers, we have the ability and necessary flexibility to assist our customers through this pandemic.
We had no OREO property at each of March 31, 2022 and December 31, 2021.
Unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. At March 31, 2022, our commercial real estate portfolio (including construction lending) was 73.1% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.
See “Critical Accounting Policies” above for more information on our allowance for 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. 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.
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Allowance for Loan Losses
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)
20222021
Net (charge-offs) recoveriesPercentage of net charge-offs (annualized) to average loans outstanding during the year Net (charge-offs) recoveriesPercentage of net charge-offs (annualized) to average loans outstanding during the year
Commercial real estate$— — %$(427)(0.12)%
Commercial and industrial(396)(0.10)%(117)(0.03)%
Consumer residential— — %— %
Consumer nonresidential(19)(0.01)%— %
Total$(415)(0.11)%$(537)(0.15)%
Average loans outstanding during the period$1,474,338 $1,456,310 
Allowance for loan losses to loans receivable, net of fees0.91 %1.00 %
Allowance for loan losses to loans receivable, net of fees, excluding PPP0.92 %1.12 %






Allocation of the Allowance for Loan Losses
At March 31, 2022 and December 31, 2021
(Dollars in thousands)

March 31,December 31,
20222021
Allocation% of Total* Allocation% of Total*
Commercial real estate$9,218 61.21 %$8,995 60.11 %
Commercial and industrial1,987 12.19 %1,827 11.55 %
Paycheck protection program— 0.92 %— 1.90 %
Commercial construction1,772 11.84 %2,009 12.45 %
Consumer real estate610 13.39 %781 13.31 %
Consumer nonresidential176 0.45 %217 0.68 %
 
Total allowance for loan losses$13,763 100.00 %$13,829 100.00 %
*Percentage of loan type to the total loan portfolio.

Investment Securities
Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and certificates of deposit. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity for each of March 31, 2022 and
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December 31, 2021 totaled $264 thousand, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of our investment securities available-for-sale was $330.3 million at March 31, 2022, a decrease of $27.4 million, or 7.7%, from $357.8 million at December 31, 2021, primarily due to the change in the market value of the portfolio during the quarter. The Company has been investing in fixed income securities funded through its increase in deposits and PPP loan forgiveness to deploy excess liquidity and optimize net interest margin.
As of March 31, 2022 and December 31, 2021, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. All of our mortgage-backed securities are guaranteed by either the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Investment securities that were pledged to secure public deposits totaled $78.0 million and $85.6 million at March 31, 2022 and December 31, 2021, respectively.
We complete reviews for other-than-temporary impairment at least quarterly. At March 31, 2022 and December 31, 2021, only investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.
No other-than-temporary impairment has been recognized for the securities in our investment portfolio as of March 31, 2022 and December 31, 2021.
We hold restricted investments in equities of the FRB and FHLB. At March 31, 2022, we owned $2.0 million in FHLB stock and $4.1 million in FRB stock. At December 31, 2021, we owned $1.8 million in FHLB stock and $4.4 million in FRB stock.




The following table presents the weighted average yields of our investment portfolio for each of the maturity ranges at March 31, 2022 and December 31, 2021.
Investment Securities by Stated Yields
At March 31, 2022 and December 31, 2021
(Dollars in thousands)

At March 31, 2022
Within One YearOne to Five YearsFive to Ten YearsOver Ten YearsTotal
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 %— — %
Securities of state and local municipalities— 2.25 %— %2.92 %2.44 %
Corporate bonds— 4.12 %3.94 %4.50 %3.98 %
Mortgaged‑backed securities— — 2.28 %1.56 %1.60 %
Total available‑for‑sale securities— 3.35 %2.65 %1.57 %1.74 %
Total investment securities— 3.35 %2.65 %1.57 %1.74 %

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At December 31, 2021
Within One YearOne to Five YearsFive to Ten YearsOver Ten YearsTotal
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 at March 31, 2022 and December 31, 2021.












Average Balance
For the Three Months Ended March 31, 2022 and 2021
(Dollars in thousands)
March 31, 2022March 31, 2021
Noninterest bearing demand$526,239 29.93 %$479,831 30.47 %
Interest-bearing deposits
Interest checking696,460 39.62 %523,712 33.26 %
Savings and money markets315,695 17.96 %278,774 17.70 %
Certificates of deposits, $100,000 to $249,99946,108 2.62 %64,191 4.08 %
Certificates of deposits, $250,000 or more138,497 7.88 %182,295 11.58 %
Other time deposits35,000 1.99 %45,778 2.91 %
Total$1,757,999 100.00 %$1,574,581 100.00 %


Total deposits were $1.82 billion at March 31, 2022, a decrease of $64.4 million, or 3.4%, from $1.88 billion at December 31, 2021. Noninterest-bearing deposits totaled $545.9 million at March 31, 2022, comprising 30.0% of total deposits and decreased $34.4 million, or 6.1%, compared to December 31, 2021. The decrease in deposits is primarily due to the withdrawal of short-term transactional deposits from select core customers that were reported during the fourth quarter of 2021. As expected, the transactional deposits were withdrawn during the first quarter of 2022.
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Wholesale deposits were $35.0 million at March 31, 2022 and December 31, 2021. 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 Federal Deposit Insurance Corporation (“FDIC”) insurance protection. When a customer places a large deposit with us for IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At March 31, 2022 and December 31, 2021, we had $181.2 million and $186.0 million, respectively, in either CDARS reciprocal or ICS reciprocal products.
As of March 31, 2022, the estimated amount of total uninsured deposits were $828.3 million. 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.
The following table reports maturities of the estimated amount of uninsured certificates of deposit at March 31, 2022.
Certificates of Deposit Greater than $250,000
At March 31, 2022
(Dollars in thousands)

March 31, 2022
Three months or less$24,886 
Over three months through six months15,187 
Over six months through twelve months28,757 
Over twelve months12,409 
$81,239 

Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $44.5 million at March 31, 2022 and December 31, 2021. Subordinated debt for each of March 31, 2022 and December 31, 2021 totaled $19.5 million. For each of March 31, 2022 and December 31, 2021, FHLB advances totaled $25.0 million.


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.
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements for the Bank are: (i) a common equity Tier 1 (“CET1”), capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to the Bank’s CET1 capital, Tier 1 capital and total capital ratios. 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. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below 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. 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
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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. 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, however, there can be no assurance that satisfaction of the CBLR will provide adequate capital for our operations and growth, or an adequate cushion against increased levels of nonperforming assets or weakened economic conditions.
Shareholders’ equity at March 31, 2022 was $200.9 million, a decrease of $8.9 million, compared to $209.8 million at December 31, 2021. The decrease in shareholders’ equity was primarily attributable to a decrease of $17.2 million in other comprehensive income, primarily related to the decrease in the market value of our available-for-sale investment securities portfolio, offset by net income recorded for the first quarter of 2022 totaling $6.6 million and common stock issued as a result of option exercises totaling $1.4 million for the three months ended March 31, 2022.
Total shareholders’ equity to total assets for March 31, 2022 and December 31, 2021 was 9.6% and 9.52%, respectively. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) at March 31, 2022 and December 31, 2021 was $13.81 and $14.70, respectively. The Bank’s CBLR at March 31, 2022 and December 31, 2021 was 10.96% and 10.53%, respectively. Accordingly, we were considered “well capitalized” for regulatory purposes at March 31, 2022 and December 31, 2021.
As noted above, regulatory capital levels for the Bank meet 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.
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, 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. The Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that the Federal Reserve will continue this practice.
The following tables show the minimum capital requirements and our capital position at March 31, 2022 and December 31, 2021 for the Bank.
Capital Components
At March 31, 2022 and December 31, 2021
(Dollars in thousands)
Actual
For Capital
Adequacy Purposes
AmountRatio Amount
Ratio
At March 31, 2022    
Leverage capital ratio$221,633 10.96 %$182,970 
>
9.000 %
At December 31, 2021    
Leverage capital ratio$214,442 10.55 %$172,732 
>
8.500 %
Tangible Book Value
At March 31, 2022 and December 31, 2021
(Dollars in thousands, except per share data)
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March 31, 2022December 31, 2021
Total stockholders’ equity$200,873 $209,796 
Less: goodwill and intangibles, net(7,982)(8,052)
Tangible Common Equity$192,891 $201,744 
Book value per common share$14.38 $15.28 
Less: intangible book value per common share(0.57)(0.58)
Tangible book value per common share$13.81 $14.70 

Liquidity
Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing.
In addition to deposits, we have access to the different wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the IntraFi Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. We also have one-way authority with IntraFi for both their CDARs and ICS products which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.
Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.
We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.
Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $469.3 million at March 31, 2022, or 22.5% of total assets, a decrease from $598.7 million, or 27.2%, at December 31, 2021. We held investments that are classified as held-to-maturity in the amount of $264 thousand at March 31, 2022. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at March 31, 2022 was approximately $417.2 million. Borrowing capacity with the FRB was approximately $75.0 million at March 31, 2022. These facilities are subject to the FHLB and the FRB approving disbursement to us. We also have unsecured federal funds purchased lines of $265.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.
Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk
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We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on management’s evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which we have committed.
Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to the business of the Company.
At March 31, 2022 and December 31, 2021, unused commitments to fund loans and lines of credit totaled $185.6 million and $183.1 million, respectively. Commercial and standby letters of credit totaled $9.3 million and $8.9 million at March 31, 2022 and December 31, 2021, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, we are exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay loans and depositors’ ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR. Our goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through an asset and liability committee (“ALCO”). ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management.
We employ an independent consulting firm to model our interest rate sensitivity. We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and
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the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.
Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Bank’s interest rate risk position over a historical time frame for comparison purposes.
At March 31, 2022, our asset/liability position was asset sensitive based on our interest rate sensitivity model in the one-year time frame and asset sensitive in the the two-year time frame. Our net interest income would increase by 1.5% in an up 100 basis point scenario and would increase by 5.4% in an up 400 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would increase by 7.7% in an up 100 basis point scenario and would increase by 28.2% in an up 400 basis point scenario. At March 31, 2022 and December 31, 2021, all interest rate risk stress tests measures were within our board policy established limits in each of the increased rate scenarios.
Additional information on our interest rate sensitivity for a static balance sheet over a one-year time horizon as of March 31, 2022 and December 31, 2021 can be found below.

Interest Rate Risk to Earnings (Net Interest Income)
March 31, 2022December 31, 2021
Change in interest
rates (basis points)
Percentage change in
net interest income
Change in interest
rates (basis points)
Percentage change in
net interest income
+4005.39 %+4008.57%
+3004.22 %+3006.47%
+2002.91 %+2004.24%
+1001.47 %+1001.99%
— 
−100(3.89 %)−100(0.49)%
−200(8.49 %)−200(2.85)%
Economic value of equity (“EVE”) measures the period end market value of assets less the market value of liabilities and the change in this value as rates change. It models simultaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.
The interest rate risk to capital at March 31, 2022 and December 31, 2021 is shown below and reflects that our market value of capital is in a liability position in which an increase in short-term interest rates is expected to generate lower market values of capital. At March 31, 2022 and December 31, 2021, all EVE stress tests measures were within our board policy established limits.

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Interest Rate Risk to Capital
March 31, 2022December 31, 2021
Change in interest
rates (basis points)
Percentage change in
economic value of equity
Change in interest
rates (basis points)
Percentage change in
economic value of equity
+400(4.81)%+400(3.77)%
+300(3.19)%+300(2.46)%
+200(1.55)%+200(1.08)%
+100(0.49)%+100(0.37)%
0— 0— 
−100(1.98)%−100(3.58)%
−200(8.34)%−200(6.59)%

Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act). As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.
The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel, and an internal audit program to monitor its effectiveness. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION

Item 1. 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 except as noted above are, to management’s knowledge, threatened against us.

Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)Not applicable.
(c)On March 17, 2022, we publicly announced that the Board of Directors had renewed the share repurchase program (the "Repurchase Program") that was initiated in 2020 and extended in 2021. Under the renewed Repurchase Program, we may purchase up to 1,080,860 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2021. The Repurchase Program will expire on March 31, 2023, subject to earlier termination of the program by the Board of Directors.
No shares were purchased during the three months ended March 31, 2022.

Item 3. Defaults Upon Senior Securities
(a)None.
(b)None.

Item 4. Mine Safety Disclosures
None.

Item 5. Other Information
(a)None.
(b)None.



Item 6. Exhibits
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31.1
31.2
32.1
32.2
101The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.
104The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline Extensible Business Reporting Language (included with Exhibit 101).




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

FVCBankcorp, Inc.
(Registrant)
Date: May 12, 2022/s/ David W. Pijor
David W. Pijor
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2022/s/ Jennifer L. Deacon
Jennifer L. Deacon
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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