FVCBankcorp, Inc. (FVCB) FY 2024 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of our consolidated financial condition at December 31, 2024 and 2023 and the results of our operations for the years ended December 31, 2024 and 2023. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management's expectations.

Overview

We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank, was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.

On August 31, 2021, we announced that the Bank made an investment in ACM for $20.4 million to obtain a 28% ownership interest in ACM. The Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held for investment loan portfolio.

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. 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 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 credit losses on our loan portfolio.

Allowance for Credit Losses - Loans

We maintain the allowance for credit losses ("ACL") at a level that represents management’s best estimate of expected losses in our loan portfolio.

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Accounting Standards Codification ("ASC") 326 requires that an estimate of expected credit losses be immediately recognized and reevaluated over the contractual life of the financial asset. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loan portfolio. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually, is segmented based on call report code and processed through a non-discounted cash flow valuation model. In particular, loan-level probability of default ("PD") and severity (also referred to as loss given default ("LGD")) is applied to derive a baseline expected loss as of the valuation date. These expected default and severity rates, which are regression-derived and based on peer historical loan-level performance data, are calibrated to incorporate our reasonable and supportable forecast of future losses as well as any necessary qualitative adjustments.

Typically, financial institutions use their historical loss experience and trends in losses for each loan segment which are then adjusted for portfolio trends and economic and environmental factors in determining the ACL. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. Due to the fact that limited internal loss history exists to generate statistical significance, we determined it was most prudent to rely on peer data when deriving our best estimate of PD and LGD. As part of our estimation process, we will continue to assess the reasonableness of the data, assumptions, and model methodology utilized to derive our allowance for credit losses.

For each of the modeled loan segments, we generate cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on internal loan-level historical data. For our cash flow model, we utilize national unemployment for reasonable and supportable forecasting of expected default. To further adjust the ACL for expected losses not already within the quantitative component of the calculation, we may consider qualitative factors as prescribed in ASC 326.

While our methodology in establishing the ACL attributes portions of a combined reserve to multiple elements, we believe that the combined allowance for credit losses (which is inclusive of the reserve for unfunded commitments) represents the most appropriate coverage metric for loss absorption purposes.

The determination of the appropriate level of the ACL on loans inherently involves a high degree of subjectivity and requires us to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside our control, may indicate the need for an increase or decrease in the ACL on loans. While we make every effort to utilize the best information available in making our assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Our methodology utilized in the estimation of the ACL, which is performed at least quarterly, is designed to be dynamic and responsive to changes in our loan portfolio credit quality, composition, and forecasted economic conditions. The review of the reasonableness and appropriateness of the ACL is reviewed by the ACL Committee for approval as of the valuation date. Additionally, information is provided to the Board of Directors on a quarterly basis along with our consolidated financial statements.

Credit losses are an inherent part of our business and, although we believe the methodologies for determining the ACL and the current level of the allowance 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.

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Financial Overview

For the years ended December 31, 2024 and 2023, we continued our focus on organic growth, capitalizing on new customer relationships we obtained through centers of influence and portfolio cultivation.

•Total assets increased to $2.20 billion compared to $2.19 billion at December 31, 2024 and 2023, respectively, an increase of $8.4 million.

•Total loans, net of deferred fees, increased $41.7 million, or 2%, from December 31, 2023 to December 31, 2024. Asset quality remains sound with nonperforming loans and loans past due 90 days or more as a percentage of total assets of 0.58% at December 31, 2024, compared to 0.08% at December 31, 2023.

•Total deposits increased $25.3 million or 1%, from December 31, 2023 to December 31, 2024. Noninterest-bearing deposits were $365.7 million at December 31, 2024, or 19.5% of total deposits. At December 31, 2024, core deposits, which exclude wholesale deposits, increased $20.7 million from December 31, 2023, or 1%.

•Net income was $15.1 million for the year ended December 31, 2024 compared to $3.8 million for 2023. During 2024, we surrendered $48.0 million in BOLI policies, which resulted in a nonrecurring increase of $2.4 million to our tax provisioning related to the loss of the tax favored status of prior appreciation. For the year ended December 31, 2023, net income included after-tax losses totaling $12.2 million related to the sale of $101.7 million in book value available-for-sale investment securities and nonrecurring noninterest expense totaling $457 thousand related to office space reductions and severance costs. Commercial bank operating earnings (non-GAAP), which excludes the securities sales and other nonrecurring items discussed more fully below under "Results of Operations", for the year ended December 31, 2024 and 2023 was $17.4 million and $16.3 million, respectively. For a reconciliation of this non-GAAP information which excludes the effect of these non-recurring items, please refer to the table below.

•Net interest income increased $1.2 million, or 2%, to $55.6 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. Interest income on loans increased $8.3 million and interest expense on deposits increased $5.9 million for 2024 compared to 2023. Net interest margin for 2024 was 2.62% compared to 2.49% for 2023, an increase of 13 basis points, or 5%.

•The provision for credit losses totaled $6 thousand in 2024, compared to a provision for credit losses totaling $132 thousand in 2023. The decrease in the provision for credit losses in 2024 was the result of the decline in our real estate concentration qualitative factor, which reduced the qualitative portion of the ACL during 2024.

•Noninterest income for 2024 increased to $2.5 million compared to loss of $13.4 million for 2023. This increase was primarily driven by the loss related to the sales of available-for-sale securities during 2023.

•Noninterest expense was $35.8 million and $36.7 million for the years ended December 31, 2024 and 2023, respectively, a decrease of $842 thousand, or 2%. This decrease was primarily a result of a decrease in salaries and benefits expense through reduced staffing associated with process improvements through our investment in technology.

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Reconciliation of Net Income (GAAP) to Commercial Bank Operating Earnings (Non-GAAP)

Years Ended December 31, 2024 and 2023

(Dollars in thousands, except per share data)

Below shows selected financial data for the periods ended December 31, 2024 and 2023.

Selected Financial Data

(Dollars and shares in thousands, except per share data)

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______________________

(1)Non-GAAP: Tangible book value is calculated as total stockholders' equity, less goodwill and other intangible assets, divided by common shares outstanding.

(2)Net interest margin is calculated as net interest income divided by total average earning assets.

(3)Efficiency ratio is calculated as total noninterest expense divided by the total of net interest income and noninterest income.

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Results of Operations— Years Ended December 31, 2024 and December 31, 2023

Overview

We recorded net income of $15.1 million, or $0.82 per diluted common share, for the year ended December 31, 2024, compared to net income of $3.8 million, or $0.21 per diluted common share for the year ended December 31, 2023. Net income for 2024 includes the surrender of certain BOLI policies with an aggregate cash surrender value of $48.0 million. Upon the surrender, we received a cash payout and were required to accrue additional income tax on the appreciation of those policies which had previously been treated as tax-exempt income. This resulted in additional statutory income tax expense of $1.6 million and tax penalties of $722 thousand. The tax penalties related to the surrender of the BOLI were recorded in income tax expense. The net proceeds of the BOLI surrender were reinvested in our loan portoflio. For the year ended December 31, 2023, net income included after-tax losses totaling $12.2 million related to the sale of $102.5 million in book value available-for-sale investment securities. Commercial bank operating earnings (non-GAAP), which exclude the taxes associated with the BOLI surrender, securities losses, and other nonrecurring expense items that were recorded during 2024 and 2023, were $17.4 million and $16.3 million, respectively. Diluted commercial bank operating earnings per share (non-GAAP) for the year ended December 31, 2024 and 2023 were $0.95 and $0.90, respectively.

Net interest income increased $1.2 million to $55.6 million for the year ended December 31, 2024, compared to $54.4 million for the year ended December 31, 2023. For the year ended December 31, 2024, we recorded a provision for credit losses of $6 thousand compared to $132 thousand for the year ended December 31, 2023. We reported noninterest income of $2.5 million for the year ended December 31, 2024, compared to a loss of $13.4 million for 2023, which was primarily driven by the losses recorded on the sale of available-for-sale securities totaling $15.6 million for the year ended December 31, 2023.

Noninterest expense was $35.8 million and $36.7 million for the years ended December 31, 2024 and 2023, respectively, a decrease of $842 thousand, or 2%. The decrease in noninterest expense was primarily a result of a decrease in salaries and benefits expense, which decreased $1.9 million, a result of reduced staffing and process improvements through technology investments. Included in noninterest expense for the year ended December 31, 2023 was $457 thousand related to office space reductions and severance costs.

The return on average assets for the years ended December 31, 2024 and 2023 was 0.69% and 0.17%, respectively. The return on average equity for the years ended December 31, 2024 and 2023 was 6.64% and 1.82%, respectively. The return on average assets for the years ended December 31, 2024 and 2023 based on commercial bank operating earnings (non-GAAP) was 0.80% and 0.72%, respectively. The return on average equity for the years ended December 31, 2024 and 2023 based on commercial bank operating earnings (non-GAAP) was 7.69% and 7.78%, respectively. See the above table for a reconciliation of GAAP net income to commercial bank operating earnings (non-GAAP).

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Net Interest Income/Margin

The following table presents average balance information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2024 and 2023.

Average Balances and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

Years Ended December 31, 2024 and 2023

(Dollars in thousands)

________________________

(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $1.9 million and $2.1 million for the year ended December 31, 2024 and 2023, respectively.

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(2)The average balances for investment securities includes restricted stock.

The following table shows the effect of variations in the volume and mix of our assets and liabilities, as well as the changes in interest rates had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the years ended December 31, 2024 and 2023.

Rate and Volume Analysis

Years Ended December 31, 2024 and 2023

(Dollars in thousands)

_________________________

(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on non-accruing loans was not material for the years presented.

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Net interest income for the year ended December 31, 2024 was $55.6 million compared to $54.4 million for the year ended December 31, 2023, an increase of $1.2 million, or 2%. The increase in net interest income is primarily due to an increase in loan interest income, as we have actively managed our maturing commercial real estate loan portfolio and further diversified our loan mix toward commercial & industrial loans, which generally earn higher yields, along with the repricing of our variable rate loan portfolio and new loan originations. Additionally, our yield on earning assets increased partially as a result of the balance sheet repositionings we completed during 2023.

Our net interest margin for the years ended December 31, 2024 and 2023 was 2.62% and 2.49%, respectively. The increase in our net interest margin was primarily a result of the increased rate environment, which improved our yields on earning assets during 2024. The yield on interest-earning assets increased 46 basis points to 5.34% for the year ended December 31, 2024, compared to 4.88% for the same period of 2023, a result of the increased rate environment during 2024 and our balance sheet repositionings from 2023. Our cost of funds increased 44 basis points to 3.00% for the year ended December 31, 2024, from 2.56% for the year ended December 31, 2023, which was primarily attributable to the repricing of our interest-bearing deposits to higher interest rates during 2024. Cost of deposits (which includes noninterest-bearing deposits) was 2.92% for the year ended December 31, 2024 compared to 2.47% for the same period of 2023. Cost of other borrowed funds increased 60 basis points to 4.37% for the year ended December 31, 2024 compared to 3.77% for the year ended December 31, 2023.

Average interest-earning assets decreased $64.2 million, or 3%, to $2.12 billion at December 31, 2024 compared to $2.19 billion at December 31, 2023. This decrease was primarily related to the sales of investment securities available-for-sale that were completed during 2023, decreasing the average balances of our investment securities by $79.0 million. Total interest income increased $6.7 million, or 6%, to $113.3 million for the year ended December 31, 2024 compared to $106.6 million for the year ended December 31, 2023. Average rate significantly improved interest income during 2024, as rate contributed $5.9 million in interest income.

Average loans receivable increased $21.2 million to $1.87 billion for the year ended December 31, 2024, compared to $1.85 billion for the year ended December 31, 2023. The yield on average loans increased 39 basis points to 5.71% for the year ended December 31, 2024. The increase in the average rate of loans receivable contributed $5.6 million to interest income while the increase in average loan volume contributed $2.7 million to interest income. 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 2024 and 2023.

Average investment securities decreased $79.0 million to $208.4 million for the year ended December 31, 2024, compared to $287.5 million for the year ended December 31, 2023. The decrease in average investment securities was primarily a result of repositioning the investment portfolio with the sale of $102.5 million in book value available-for-sale investment securities during 2023. The yield on average investment securities increased 14 basis points to 2.09% for the year ended December 31, 2024, primarily as a result of the sale of lower yielding securities in 2023 relative to the average yield of the securities portfolio.

Average interest-earning deposits at other financial institutions, consisting primarily of excess cash reserves maintained at the Federal Reserve, decreased $6.3 million to $44.4 million for the year ended December 31, 2024, compared to $50.7 million for the year ended December 31, 2023. The yield on average interest-earning deposits decreased 4 basis points to 5.17% for the year ended December 31, 2024, primarily as a result of the Federal Reserve's Federal Open Market Committee ("FOMC") decision to begin decreasing its targeted federal funds rate in September 2024.

Total average interest-bearing liabilities decreased $56.6 million to $1.55 billion at December 31, 2024 compared to $1.61 billion at December 31, 2023. Conversely, interest expense increased $5.5 million to $57.7 million for the year ended December 31, 2024 compared to $52.2 million for the year ended December 31, 2023. The increase in the average rate significantly impacted interest expense during 2024, as average volume decreased interest expense $3.2 million while average rate increases contributed $8.7 million in interest expense.

Total average interest-bearing deposits decreased $34.5 million to $1.45 billion at December 31, 2024 compared to $1.49 billion at December 31, 2023. Interest expense on deposits increased $5.9 million to $53.2 million for the year ended December 31, 2024 compared to $47.3 million for the year ended December 31, 2023, primarily a result of the increase in the cost of interest-bearing deposits, which increased 48 basis points to 3.66% for the year ended December 31, 2024, compared to 3.18% for the year ended December 31, 2023. Average noninterest-bearing deposits decreased $57.3

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million, or 13%, to $368.6 million at December 31, 2024, compared to $425.9 million at December 31, 2023. Competition for deposits along with higher interest rates resulted in customers' movement of excess funds from noninterest-bearing into interest-bearing deposit products. Average interest checking deposits decreased $10.2 million to $571.4 million as of December 31, 2024 compared to $581.7 million as of December 31, 2023. Average savings and money market deposits increased $89.6 million to $344.3 million as of December 31, 2024 compared to $254.7 million as of December 31, 2023. Average time deposits decreased $74.0 million to $275.3 million as of December 31, 2024 compared to $349.3 million at December 31, 2023, as time deposits that were originated during 2023 with a weighted average rate of 4.81% matured during 2024. Average wholesale deposits decreased $39.8 million to $263.7 million as of December 31, 2024 compared to $303.5 million as of December 31, 2023.

Average other borrowed funds decreased $22.2 million to $79.9 million for the year ended December 31, 2024, compared to $102.1 million for the year ended December 31, 2023. Interest expense on other borrowed funds decreased $352 thousand for the year ended December 31, 2024 to $3.5 million compared to $3.8 million for the same period of 2023.

Provision Expense and Allowance for Credit Losses

Our policy is to maintain the ACL at a level that represents our best estimate of expected losses in the loan portfolio as of the valuation date. Both the amount of the provision and the level of the allowance for credit losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.

We recorded provision for credit losses totaling $6 thousand and $132 thousand for the years ended December 31, 2024 and 2023, respectively. The allowance for credit losses was $18.1 million and $18.9 million at December 31, 2024 and 2023, respectively. Our allowance for credit losses on loans as a percent of total loans, net of deferred fees and costs, was 0.97% and 1.03% at December 31, 2024 and 2023, respectively.

We lend to well-established and relationship-driven borrowers which has contributed to our track record of low historical credit losses. We continue to maintain our disciplined credit guidelines during the current rate environment. We proactively monitor the impact of interest rates on our adjustable loans as the industry navigates through this economic cycle of increased inflation and higher interest rates. Nonperforming loans at December 31, 2024 totaled $12.9 million, or 0.58% of total assets, compared to $1.8 million, or 0.08%, of total assets at December 31, 2023. We had no other real estate owned at December 31, 2024 and 2023, respectively. We recorded net charge-offs of $839 thousand and $375 thousand for the years ended December 31, 2024 and December 31, 2023, respectively.

See “Asset Quality” below for additional information on the credit quality of the loan portfolio.

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Noninterest Income

The following table provides detail for noninterest income for the years ended December 31, 2024 and 2023.

Noninterest Income

Years Ended December 31,2024 and 2023

(Dollars in thousands)

Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM and other investments, income from our BOLI policies, and other fee income, and continues to supplement our operating results. For the year ended December 31, 2024, we recorded noninterest income of $2.5 million compared to a loss of $13.4 million for same period of 2023.

We recorded income from our minority membership interest in ACM totaling $376 thousand for the year ended December 31, 2024, compared to a loss of $1.1 million for same period of 2023.

Fee income from loans was $185 thousand for the year ended December 31, 2024, compared to $388 thousand for the same period of 2023, a result of decreased loan swap fee income. Service charges on deposits were $1.1 million for the year ended December 31, 2024, compared to $1.0 million for the same period of 2023, an increase of $98 thousand, or 10%. Income from BOLI decreased to $397 thousand for the year ended December 31, 2024 compared to $1.5 million for same period of 2023, the decrease being a result of surrendering our BOLI policies during the first quarter of 2024.

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Noninterest Expense

The following table reflects the components of noninterest expense for the years ended December 31, 2024 and 2023.

Noninterest Expense

Years Ended December 31, 2024 and 2023

(Dollars in thousands)

Noninterest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Noninterest expense was $35.8 million and $36.7 million for the years ended December 31, 2024 and 2023, respectively.

Salaries and benefits expense decreased $1.9 million to $18.8 million for the year ended December 31, 2024 compared to $20.6 million for the same period in 2023, which was primarily related to reduced staffing as a result of process improvements from technology investments. Occupancy expense decreased $330 thousand for the year ended December 31, 2024 compared to the same period of 2023, which was primarily related to the office space reduction initiatives that were completed during the fourth quarter of 2023. These decreases were partially offset by an increase in internet banking and software expense of $485 thousand to $3.0 million for the year ended December 31, 2024, compared to $2.5 million for the same period of 2023, a result of the implementation of enhanced customer software solutions during 2023. Lastly, loan related expenses increased $909 thousand during 2024 compared to the prior year, as we received a recovery of legal expenses in 2023 associated with a previous watchlist credit.

Income Taxes

For the year ended December 31, 2024 and 2023, the provision for income taxes was $7.2 million and $410 thousand, respectively. The provision for income taxes for the year ended December 31, 2024 includes additional statutory income tax expense of $1.6 million and tax penalties of $722 thousand related to the above mentioned surrender of our BOLI policies. Our effective tax rate, excluding the additional income taxes and penalties associated with our BOLI surrender, for December 31, 2024 was 22.0%. For the year ended December 31, 2023, our effective tax rate was 9.7%, which was reduced as a result of the losses recorded on the sale of investment securities available-for-sale during 2023.

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Discussion and Analysis of Financial Condition

Overview

At December 31, 2024, total assets were $2.20 billion, an increase of $8.4 million, from $2.19 billion at December 31, 2023. Investment securities were $156.7 million at December 31, 2024, a decrease of $15.1 million, from $171.9 million at December 31, 2023. Total deposits increased $25.3 million, or 1%, to $1.87 billion at December 31, 2024, from $1.85 billion at December 31, 2023. From time to time, we may utilize funding sources such as federal funds purchased and FHLB advances as an additional funding source for the Bank. We had no federal funds purchased at December 31, 2024 and December 31, 2023. The Bank had FHLB advances outstanding of $50.0 million and $85.0 million at December 31, 2024 and December 31, 2023, respectively. Subordinated debt, net of unamortized issuance costs, totaled $18.7 million and $19.6 million at December 31, 2024 and December 31, 2023, respectively.

We review our balance sheet and interest rate sensitivity on an ongoing basis as part of our asset/liability risk management process. During 2024, with the expectation that short-term interest rates would continue to remain elevated, we modeled various scenarios to improve balance sheet efficiency, reduce our cost of funds, improve margin and our capital ratios. As a result, we surrendered $48.0 million of our BOLI. These policies yielded a 2.74% return (3.34% on a tax-equivalent basis). This transaction resulted in a nonrecurring increase of $2.4 million to our tax provisioning related to the loss of the tax favored status of prior appreciation. The projected earn-back period was approximately one year. We used these proceeds to pay down our high cost funding and fund new loan growth.

Loans Receivable, Net

Loans receivable, net of deferred fees, were $1.87 billion at December 31, 2024 and $1.83 billion at December 31, 2023, an increase of $41.7 million, or 2%.

Commercial real estate loans totaled $1.04 billion and $1.09 billion at December 31, 2024 and 2023, and were approximately 56% and 60% of the total loans receivable at such dates, respectively. Owner-occupied commercial real estate loans were $187.8 million at December 31, 2024 compared to $212.9 million at December 31, 2023. Nonowner-occupied commercial real estate loans were $850.1 million at December 31, 2024 compared to $878.7 million at December 31, 2023. Commercial construction loans totaled $162.4 million at December 31, 2024, compared to $148.0 million at December 31, 2023 and comprised of 9% and 8% of total loans receivable at such dates, respectively. Our regulatory commercial real estate concentration (which includes nonowner-occupied real estate and construction loans) was 371% of our total risk-based capital at December 31, 2024. Our commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We 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. Additional information on the stratification of these portfolio segments can be found below under "Asset Quality".

Commercial and industrial loans increased $116.8 million to $336.7 million at December 31, 2024, an increase of 53%, from $219.9 million at December 31, 2023. Consumer residential loans decreased $38.0 million to $325.3 million at December 31, 2024, from $363.3 million at December 31, 2023. The decrease in residential loans was primarily a result of principal repayments during 2024.

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The following table sets forth the repricing characteristics and sensitivity to interest rate changes to the outstanding principal balance of our loan portfolio at December 31, 2024.

Loan Maturities and Interest Rate Sensitivity

At December 31, 2024

(Dollars in thousands)

________________________

*Payments due by period are based on the repricing characteristics and not contractual maturities.

Asset Quality

Nonperforming loans, defined as nonaccrual loans and loans contractually past due 90 days or more as to principal or interest and still accruing, were $12.9 million and $1.8 million at December 31, 2024 and 2023, respectively, an increase of $11.0 million. The increase in nonperforming loans at December 31, 2024 is primarily a result of one commercial real estate loan placed on nonaccrual during the fourth quarter of 2024, totaling $10.3 million. 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 individually evaluate each loan, generally through the performance of a collateral analysis to determine the amount of allowance required. As a result of the analysis completed, we had a reserve for individually assessed loans totaling $468 thousand and $676 thousand at December 31, 2024 and 2023, respectively. Our ratio of nonperforming loans to total assets was 0.58% and 0.08% at December 31, 2024 and 2023, respectively. We had no other real estate owned and there were no loan modifications for borrowers who were experiencing financial difficulty during the quarter ended December 31, 2024.

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At December 31, 2024, we had $3.3 million in loans identified as special mention, a decrease of $3.0 million from December 31, 2023. Special mention rated loans have a potential weakness that deserves our close attention; however, the borrower continues to pay in accordance with their contractual terms, unless modified and disclosed. The decrease from December 31, 2023 was driven by several loans that were upgraded from special mention or paid off during 2024. Loans rated as special mention are generally considered to be well-secured, and are not individually evaluated.

At December 31, 2024, we had $11.2 million in loans identified as substandard, a decrease of $11.2 million from December 31, 2023. Substandard rated loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At December 31, 2024, reserves for individually assessed loans totaling $468 thousand were allocated within the allowance for credit losses to supplement any shortfall of collateral. At December 31, 2024, we downgraded a non-owner occupied commercial real estate loan to substandard and placed it on nonaccrual as a result of its past due status and recent poor payment history.

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At December 31, 2023, we downgraded an owner-occupied commercial real estate loan totaling $19.9 million to substandard due to concerns regarding the financial condition of this borrower’s parent company. During the third quarter ended September 30, 2024, the parent company closed on long term financing, strengthening its overall financial condition. As a result, we upgraded this loan to a pass rating.

We recorded net charge-offs of $840 thousand and $375 thousand for the years ended December 31, 2024, and 2023, respectively. Net charge-offs to average loans were 0.04% and 0.02% for the years ended December 31, 2024 and 2023, respectively. The increase in net charge-offs for the year ended December 31, 2024 is a result of two loan relationships that were individually evaluated and for which reserves had been established for the shortfall of the related collateral. Each loan relationship had specific circumstances that are not indicative of any systemic issues within the Company’s loan portfolio.

The following tables provide additional information on our asset quality at the dates presented.

Nonperforming Loans and Assets

At December 31, 2024 and 2023

(Dollars in thousands)

We closely and proactively monitor the effects of recent market activity. As mentioned above, our commercial real estate loan portfolio totaled $1.04 billion, or 56% of total loans, at December 31, 2024 and $1.09 billion, or 60% of total loans, at December 31, 2023. The commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We manage this portion of the portfolio in a disciplined manner, and have comprehensive policies to monitor, measure, and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring, and administrative practices. Included in commercial real estate are loans secured by office properties totaling $123.8 million, or 7% of total loans, which are primarily located in the Virginia and Maryland suburbs of our market area, with only $2.3 million, or 0.12% of total loans, located in Washington, D.C. Loans secured by retail properties total $251.0 million, or 13% of total loans, at December 31, 2024. Loans secured by multi-family commercial properties totaled $162.8 million, or 9% of total loans, at December 31, 2024.

The following table provides further stratification of these and additional classes of commercial real estate and construction loans at December 31, 2024 (dollars in thousands).

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(1).Loan-to-value is based on collateral valuation at origination date against current bank owned principal.

(2).Minimum debt service coverage policy is 1.30x for owner occupied and 1.25x for non-owner occupied at origination.

The loans shown in the above table exhibit strong credit quality, with one classified delinqency at December 31, 2024 totaling $10.2 million, which has a specific reserve of $468 thousand. During our assessment of the allowance for credit losses on loans, we addressed the credit risks associated with these portfolio segments and believe that as a result of our conservative underwriting discipline at loan origination and our ongoing loan monitoring procedures, we have appropriately reserved for possible credit concerns in the event of a downturn in economic activity.

At December 31, 2024 and 2023, 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 us to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. 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

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risk management. Additionally, our allowance for credit losses on loans estimation methodology adjusts expected losses to calibrate the likelihood of a default event to occur through the use of risk ratings.

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, allowance for credit losses, and provision for credit 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. 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 credit losses methodology.

The following tables present additional information pertaining to the activity in and allocation of the allowance for credit losses on loans by loan type and the percentage of the loan type to the total loan portfolio for the periods and at the dates presented. The allocation of the allowance for credit losses on loans to a category of loans is not necessarily indicative of future losses or charge-offs, and does not restrict the use of the allowance to any specific category of loans.

Allowance for Credit Losses on Loans

Years Ended December 31, 2024 and 2023

(Dollars in thousands)

Allocation of the Allowance for Credit Losses on Loans

At December 31, 2024 and 2023

(Dollars in thousands)

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*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 and investment securities held-to-maturity. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management, or regulatory capital management. Investment securities held-to-maturity at December 31, 2024 and 2023 totaled $265 thousand and $264 thousand, respectively, 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 $156.5 million at December 31, 2024, a decrease of $15.1 million, or 9%, from $170.6 million at December 31, 2023, primarily due to principal repayments and maturities of $15.6 million offset by new purchases for $1.8 million, and a decrease in the market value of the investment securities portfolio totaling $1.3 million at December 31, 2024.

As of December 31, 2024 and 2023, 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. The effective duration of the investment securities portfolio continues to be slightly over five years, which is within the industry average. Investment securities that were pledged to secure public deposits totaled $55.3 million and $7.2 million at December 31, 2024 and 2023, respectively. There were no investment securities that were pledged to secure FRB borrowings at December 31, 2024 and December 31, 2023, respectively.

In accordance with ASC 326, we complete periodic assessments on at least a quarterly basis to determine if credit deterioration exists within our investment securities portfolio and if an allowance for credit losses would be required as of a valuation date. As a result of the assessment performed as of December 31, 2024, the investment securities with unrealized losses are a result of pricing changes due to recent rising interest rate conditions in the current market environment and not as a result of credit deterioration. Contractual cash flows for agency-backed portfolios are guaranteed and funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our investment securities portfolio prior to the recovery of the amortized cost as of the valuation date. As such, no impairment was recognized for our investment securities portfolio as of December 31, 2024.

We hold restricted investments in equities of the FRB and FHLB. At December 31, 2024, we owned $4.1 million in FRB stock and $4.0 million in FHLB stock. At December 31, 2023, we owned $3.6 million in FRB stock and $5.8 million in FHLB stock.

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The following table presents the weighted average yields of our investment portfolio for each of the maturity ranges at December 31, 2024 and 2023.

Investment Securities by Stated Yields

At December 31, 2024 and 2023

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Deposits and Other Borrowed Funds

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31, 2024 and 2023.

Average Deposit Balances

Years Ended December 31, 2024 and 2023

Total deposits increased $25.3 million, or 1%, to $1.87 billion at December 31, 2024 from $1.85 billion at December 31, 2023. Noninterest-bearing deposits were $365.7 million at December 31, 2024, or 19.5% of total deposits. At December 31, 2024, core deposits, which exclude wholesale deposits, increased $20.7 million from December 31, 2023. Interest checking increased $47.3 million, or 8%, to $623.8 million at December 31, 2024 compared to $576.5 million at December 31, 2023. Savings and money market deposits increased $62.6 million, or 20%, to $383.1 million at December 31, 2024 compared to $320.5 million at December 31, 2023. Time deposits decreased $58.2 million, or 19%, to $248.2 million at December 31, 2024 from $306.3 million at December 31, 2023, as time deposits that were originated during 2023 with a weighted average rate of 4.81% matured during 2024.

Wholesale deposits were $249.9 million at December 31, 2024 compared to $245.3 million at December 31, 2023, an increase of $4.6 million, or 2%. Wholesale deposits are partially fixed at a weighted average rate of 3.40% as we have executed $200.0 million in pay-fixed/receive-floating interest rate swaps to reduce funding costs. In addition, we are a member of the IntraFi Network (“IntraFi”), which gives us the ability to offer Certificates of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) products to our customers who seek to maximize FDIC insurance protection. When a customer places a large deposit with us for IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At December 31, 2024 and 2023, we had $269.7 million and $254.1 million, respectively, in CDARS reciprocal and ICS reciprocal products.

As of December 31, 2024, the estimated amount of total uninsured deposits (excluding collateralized deposits) was $763.1 million, or 40.8%, of total deposits. 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. When excluding collateralized deposits, our estimate of uninsured deposits decreases to $584.0 million, or 31.2% of total deposits at December 31, 2024.

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The following table reports maturities of the estimated amount of uninsured certificates of deposit at December 31, 2024.

Certificates of Deposit Greater than $250,000

At December 31, 2024

(Dollars in thousands)

Other borrowed funds, which are comprised only of FHLB advances, were $50.0 million at December 31, 2024 compared to $85.0 million at December 31, 2023, a decrease of $35.0 million, or 41%. Subordinated debt, net of unamortized issuance costs, totaled $18.7 million and $19.6 million at December 31, 2024 and 2023, respectively. At December 31, 2024 and December 31, 2023, we did not have any federal funds purchased. Our FHLB advances have pay-fixed/receive-floating interest rate swaps to reduce our funding costs, and as such, the weighted average rate of these FHLB advances are 3.60% and 3.21% at December 31, 2024 and 2023, respectively.

Total wholesale funding (which includes wholesale deposits and FHLB advances) decreased $30.4 million, or 9%, during 2024 to $299.9 million from $330.3 million at December 31, 2023.

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 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 minimum plus the conservation buffer will face constraints on dividends, equity repurchases, and compensation.

We believe that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2024 and December 31, 2023.

Shareholders' equity at December 31, 2024 was $235.4 million, an increase of $18.2 million, compared to $217.1 million at December 31, 2023. Net income recorded for the year ended December 31, 2024 contributed $15.1 million to the increase in shareholders' equity. Accumulated other comprehensive loss decreased $894 thousand for the year ended December 31, 2024, primarily due to gains recognized from other comprehensive income related to our cash flow hedges.

Total shareholders' equity to total assets for December 31, 2024 and December 31, 2023 was 10.7% and 9.9%, respectively. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) at December 31, 2024 and December 31, 2023 was $12.52 and $11.77, respectively.

As noted above, regulatory capital levels for the Bank meets those established for "well capitalized" institutions. While we are currently considered "well capitalized," we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.

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As the Company is a bank holding company with less than $3.00 billion in assets, and which does not (i) conduct significant off-balance sheet activities, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act, it is not currently subject to risk-based capital requirements adopted by the Federal Reserve, pursuant to the small bank holding company policy statement. The Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that the Federal Reserve will continue this practice.

The following tables shows the minimum capital requirements and the Bank's capital position at December 31, 2024 and December 31, 2023.

Bank Capital Components

At December 31, 2024 and December 31, 2023

(Dollars in thousands)

________________________

(1).Includes capital conservation buffer.

Reconciliation of Book Value (GAAP) to Tangible Book Value (non-GAAP)

At December 31, 2024 and December 31, 2023

(Dollars in thousands, except per share data)

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

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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. As of December 31, 2024, estimated uninsured deposits (excluding collateralized deposits) for the Bank were 31.2% of total deposits and were 31.1% at December 31, 2023.

In addition to deposits, we have access to the various 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 the Bank which exceed FDIC insurance limits. As part of our membership with the IntraFi Network, we have one-way authority 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.

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $247.4 million at December 31, 2024, or 11% of total assets, an increase from $232.1 million, or 11% of total assets, at December 31, 2023. At December 31, 2024 and 2023, investment securities available-for-sale that were pledged as collateral for municipal deposits totaled $55.1 million and $7.2 million, respectively.

Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.

Secondary Liquidity Available and In Use

At December 31, 2024

(Dollars in thousands)

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(1) The Bank has pledged a portion of the commercial real estate and residential loan portfolio to the FHLB to secure the line of credit. The Bank has obtained a letter of credit of $80 million to secure public funds.

(2) The Bank has pledged a portion of the commercial and industrial loan portfolio to the FRB to secure the line of the credit.

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.

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

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

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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 our 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 our business.

At December 31, 2024 and 2023, unused commitments to fund loans and lines of credit totaled $196.7 million and $252.5 million, respectively. Commercial and standby letters of credit totaled $25.2 million at December 31, 2024 and $26.0 million at December 31, 2023.