BHRB filing — read by section

Item 1. Financial Statements

Item 1. Financial Statements 
 Burke & Herbert Financial Services Corp. Consolidated Financial Statements: 
 
 Page 
 Consolidated Balance Sheets as of September 30, 2023 (Unaudited), and December 31, 2022 
 2 
 
 Consolidated Statements of Income for the Three and Nin e Months Ended September 30, 2023, and September 30, 2022 (Unaudited) 
 3 
 
 Consolidated Statements of Comprehensive Income (Loss) for the Three and Nin e Months Ended September 30, 2023, and September 30, 2022 (Unaudited) 
 4 
 
 Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023, and September 30, 2022 (Unaudited) 
 5 
 
 Consolidated Statements of Cash Flows for the Ni ne Months Ended September 30, 2023, and September 30, 2022 (Unaudited) 
 7 
 
 Notes to the Consolidated Financial Statements (Unaudited) 
 9 
 

 1 

 
 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Balance Sheets 
 (In thousands, except share and per share data) 

 
 September 30, 
2023
(Unaudited) December 31, 2022
(Audited) 
 Assets 
 Cash and due from banks $ 9,063 $ 9,124 
 Interest-earning deposits with banks 32,801 41,171 
 Cash and cash equivalents 41,864 50,295 
 Securities available-for-sale, at fair value 1,224,395 1,371,757 
 Restricted stock, at cost 7,247 16,443 
 Loans held-for-sale, at fair value 3,011 — 
 Loans 2,070,616 1,887,221 
 Allowance for credit losses ( 26,111 ) ( 21,039 ) 
 Net loans 2,044,505 1,866,182 
 Premises and equipment, net 57,514 53,170 
 Accrued interest receivable 15,597 15,481 
 Company-owned life insurance 94,213 92,487 
 Other assets 96,842 97,083 
 Total Assets 
 $ 3,585,188 $ 3,562,898 
 
 Liabilities and Shareholders’ Equity 
 Liabilities 
 Non-interest-bearing deposits $ 853,385 $ 960,692 
 Interest-bearing deposits 2,132,233 1,959,708 
 Total deposits 2,985,618 2,920,400 
 Borrowed funds 299,000 343,100 
 Accrued interest and other liabilities 29,751 25,945 
 Total Liabilities 
 3,314,369 3,289,445 
 
 Commitments and contingent liabilities (see Note 10) 
 
 Shareholders’ Equity 
 Preferred Stock, $ 1.00 par value per share; 2,000,000 shares authorized; no shares issued or outstanding 
 — — 
 Common Stock 4,000 4,000 
 $ 0.50 par value; 20,000,000 shares authorized and 8,000,000 issued at September 30, 2023, and December 31, 2022; 7,428,710 shares outstanding at September 30, 2023, and 7,425,760 shares outstanding at December 31, 2022 
 
 Additional paid-in capital 13,818 12,282 
 Retained earnings 426,744 424,391 
 Accumulated other comprehensive income (loss) ( 146,159 ) ( 139,495 ) 
 Treasury stock ( 27,584 ) ( 27,725 ) 
 571,290 shares, at cost, at September 30, 2023, and 574,240 shares, at cost, at December 31, 2022 
 
 Total Shareholders’ Equity 
 270,819 273,453 
 Total Liabilities and Shareholders’ Equity 
 $ 3,585,188 $ 3,562,898 

 
 
 See Notes to Consolidated Financial Statements. 
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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Income 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 Interest income 
 Loans, including fees $ 26,425 $ 18,618 $ 74,485 $ 52,486 
 Taxable securities 8,909 8,171 28,130 20,101 
 Tax-exempt securities 1,376 2,334 4,243 7,224 
 Other interest income 562 142 1,858 248 
 Total interest income 37,272 29,265 108,716 80,059 
 Interest expense 
 Deposits 11,277 954 26,708 1,723 
 Borrowed funds 3,078 1,614 10,495 2,506 
 Other interest expense 28 17 58 48 
 Total interest expense 14,383 2,585 37,261 4,277 
 Net interest income 
 22,889 26,680 71,455 75,782 
 
 Provision for (recapture of) credit losses 235 ( 2,388 ) 964 ( 7,564 ) 
 Net interest income after credit loss expense 22,654 29,068 70,491 83,346 
 
 Non-interest income 
 Fiduciary and wealth management 1,354 1,328 3,996 3,995 
 Service charges and fees 1,583 1,736 4,959 5,130 
 Net gains (losses) on securities ( 1 ) ( 41 ) ( 112 ) 63 
 Income from company-owned life insurance 589 555 1,720 1,634 
 Other non-interest income 764 683 2,565 2,050 
 Total non-interest income 4,289 4,261 13,128 12,872 
 
 Non-interest expense 
 Salaries and wages 9,867 10,094 29,283 29,240 
 Pensions and other employee benefits 2,242 2,017 7,116 5,957 
 Occupancy 1,462 1,151 4,464 4,306 
 Equipment rentals, depreciation and maintenance 1,435 1,534 4,231 4,296 
 Other operating 7,417 5,156 19,042 15,686 
 Total non-interest expense 22,423 19,952 64,136 59,485 
 
 Income before income taxes 4,520 13,377 19,483 36,733 
 Income tax expense 
 464 2,240 1,869 6,073 
 
 Net income 
 $ 4,056 $ 11,137 $ 17,614 $ 30,660 
 Earnings per common share: 
 Basic $ 0.55 $ 1.50 $ 2.37 $ 4.13 
 Diluted 0.55 1.49 2.35 4.11 
 

 See Notes to Consolidated Financial Statements. 
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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Comprehensive Income (Loss) 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 Net income $ 4,056 $ 11,137 $ 17,614 $ 30,660 
 Other comprehensive income (loss), net of tax: 
 Unrealized gains (losses) on securities: 
 Unrealized gain (loss) arising during period, net of tax of $ 5,392 and $ 11,375 for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of $ 2,212 and $ 40,638 for the nine months ended September 30, 2023, and September 30, 2022, respectively 
 ( 20,285 ) ( 42,793 ) ( 8,322 ) ( 152,878 ) 
 Reclassification adjustment for loss (gain) on securities, net of tax of $ — and ($ 9 ) for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 23 ) and $ 13 for the nine months ended September 30, 2023 and September 30, 2022, respectively 
 — 33 88 ( 49 ) 
 Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $ 9 and $ — for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 224 ) and $ — for the nine months ended September 30, 2023, and September 30, 2022, respectively 
 ( 32 ) — 842 — 
 Unrealized gain (loss) on cash flow hedge: 
 Unrealized holding gain (loss) on cash flow hedge, net of tax of $ 10 and $ 174 for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of $ 71 and $ 404 for the nine months ended September 30, 2023, and September 30, 2022, respectively 
 ( 38 ) ( 654 ) ( 267 ) ( 1,519 ) 
 Reclassification adjustment for losses (gains) included in net income, net of tax ($ 99 ) and ($ 15 ) for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 264 ) and $ 23 for the nine months ended September 30, 2023, and September 30, 2022, respectively 
 373 58 995 ( 86 ) 
 Total other comprehensive income (loss) ( 19,982 ) ( 43,356 ) ( 6,664 ) ( 154,532 ) 
 Comprehensive income (loss) 
 $ ( 15,926 ) $ ( 32,219 ) $ 10,950 $ ( 123,872 ) 
 

 
 
 See Notes to Consolidated Financial Statements. 
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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Changes in Shareholders’ Equity 
 For the Three Months Ended September 30, 2023 and 2022 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Common Stock Additional Paid-in
Capital Retained
Earnings Comprehensive
Income (Loss) Treasury
Stock Shareholders’
Equity 
 Shares Outstanding Amount 
 Balance June 30, 2023 7,428,710 $ 4,000 $ 13,208 $ 426,625 $ ( 126,177 ) $ ( 27,584 ) $ 290,072 
 Net income 4,056 4,056 
 Other comprehensive income (loss) ( 19,982 ) ( 19,982 ) 
 (Purchase) sale of treasury stock, net — 
 Cash dividends, declared ( 3,937 ) ( 3,937 ) 
 Share-based compensation expense, net 610 610 
 Balance September 30, 2023 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819 
 
 Balance June 30, 2022 7,425,760 $ 4,000 $ 11,313 $ 407,772 $ ( 104,221 ) $ ( 27,726 ) $ 291,138 
 Net income 11,137 11,137 
 Other comprehensive income (loss) ( 43,356 ) ( 43,356 ) 
 (Purchase) sale of treasury stock, net — 
 Cash dividends, declared ( 3,936 ) ( 3,936 ) 
 Share-based compensation expense, net 488 488 
 Balance September 30, 2022 7,425,760 $ 4,000 $ 11,801 $ 414,973 $ ( 147,577 ) $ ( 27,726 ) $ 255,471 

 See Notes to Consolidated Financial Statements. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Changes in Shareholders’ Equity 
 For the Nine Months Ended September 30, 2023 and 2022 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Common Stock Additional Paid-in
Capital Retained
Earnings Comprehensive
Income (Loss) Treasury
Stock Shareholders’
Equity 
 Shares Outstanding Amount 
 Balance December 31, 2022 7,425,760 $ 4,000 $ 12,282 $ 424,391 $ ( 139,495 ) $ ( 27,725 ) $ 273,453 
 Cumulative effect adjustment due to the adoption of CECL, net of tax ( 3,439 ) ( 3,439 ) 
 Net income 17,614 17,614 
 Other comprehensive income (loss) ( 6,664 ) ( 6,664 ) 
 (Purchase) sale of treasury stock, net 2,950 141 141 
 Cash dividends, declared ( 11,809 ) ( 11,809 ) 
 Share-based compensation expense, net 1,536 ( 13 ) 1,523 
 Balance September 30, 2023 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819 
 
 Balance December 31, 2021 7,423,760 $ 4,000 $ 10,374 $ 396,120 $ 6,955 $ ( 27,822 ) $ 389,627 
 Net income 30,660 30,660 
 Other comprehensive income (loss) ( 154,532 ) ( 154,532 ) 
 (Purchase) sale of treasury stock, net 2,000 96 96 
 Cash dividends, declared ( 11,807 ) ( 11,807 ) 
 Share-based compensation expense, net 1,427 1,427 
 Balance September 30, 2022 7,425,760 $ 4,000 $ 11,801 $ 414,973 $ ( 147,577 ) $ ( 27,726 ) $ 255,471 

 See Notes to Consolidated Financial Statements. 
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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Cash Flows 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Nine Months Ended September 30, 
 2023 2022 
 Cash Flows from Operating Activities 
 Net Income $ 17,614 $ 30,660 
 Adjustments to reconcile net income to net cash provided by operating activities: 
 Depreciation and amortization of fixed assets 2,050 2,259 
 Amortization of housing tax credits 4,194 4,610 
 Realized loss (gain) on sales of available-for-sale securities 112 ( 63 ) 
 Provision for (recapture of) credit losses 964 ( 7,564 ) 
 Income from company-owned life insurance ( 1,720 ) ( 1,634 ) 
 Deferred tax (benefit) ( 2,101 ) 755 
 Loss on disposal of fixed assets — 24 
 Accretion of securities ( 1,210 ) ( 1,099 ) 
 Amortization of securities 6,922 8,646 
 Share-based compensation expense 1,798 1,492 
 Repayment of operating lease liabilities ( 2,393 ) ( 1,700 ) 
 (Gain) on loans held-for-sale ( 79 ) ( 58 ) 
 Proceeds from sale of loans held-for-sale 7,243 9,526 
 Change in fair value of loans held-for-sale 6 23 
 Originations of loans held-for-sale ( 10,181 ) ( 2,300 ) 
 (Increase) in accrued interest receivable ( 117 ) ( 78 ) 
 Decrease in other assets 2,904 2,022 
 Increase in accrued interest payable and other liabilities 6,329 3,129 
 Net cash flows provided by operating activities $ 32,335 $ 48,650 
 
 Cash Flows from Investing Activities 
 Proceeds from maturities, prepayments, and calls of securities available-for-sale, net 76,053 164,574 
 Proceeds from sale of securities available-for-sale, net 77,780 142,475 
 Purchases of securities available-for-sale, net ( 23,321 ) ( 355,542 ) 
 Sales of restricted stock 27,447 15,038 
 Purchases of restricted stock ( 18,250 ) ( 13,932 ) 
 Purchases of property and equipment, net of disposals ( 6,394 ) ( 21,965 ) 
 (Purchase of) company-owned life insurance ( 6 ) ( 6 ) 
 (Increase) in loans made to customers, net ( 183,395 ) ( 15,958 ) 
 Net cash flows (used in) investing activities $ ( 50,086 ) $ ( 85,316 ) 
 
 Cash Flows from Financing Activities 
 Net increase (decrease) in non-interest-bearing accounts ( 107,307 ) 49,867 
 Net increase (decrease) in interest-bearing accounts 172,525 ( 5,624 ) 
 (Decrease) in other short-term borrowings ( 44,100 ) ( 32,000 ) 
 Repayment of finance lease liabilities ( 130 ) ( 113 ) 
 Cash dividends paid ( 11,809 ) ( 11,807 ) 
 Sale of treasury stock 141 96 
 Net cash flows provided by financing activities $ 9,320 $ 419 
 Increase in cash and cash equivalents ( 8,431 ) ( 36,247 ) 
 Cash and cash equivalents 
 Beginning of period 50,295 77,363 
 End of period $ 41,864 $ 41,116 
 

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 Table of Contents 
 Burke & Herbert Financial Services Corp. 
 Consolidated Statements of Cash Flows 
 (In thousands, except share and per share data) 
 (Unaudited) 

 
 Supplemental Disclosures of Cash Flow Information 
 Cash payments for: 
 Interest paid to depositors $ 25,454 $ 1,480 
 Interest paid on other borrowed funds 6,860 1,995 
 Interest paid on finance lease 58 48 
 Income taxes 445 550 
 Change in unrealized gains on available-for-sale securities ( 10,422 ) ( 193,580 ) 
 Lease liability arising from obtaining right-of-use assets 1,214 758 
 Transfers from portfolio loans to loans held-for-sale — 19,594 
 Financing of sale from loan held-for-sale — 9,000 

 See Notes to Consolidated Financial Statements. 
 
 
 
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 Table of Contents 

 Note 1— Nature of Business Activities and Significant Accounting Policies 
 Nature of operations 
 Burke & Herbert Financial Services Corp. (“Burke & Herbert”) was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for Burke & Herbert Bank & Trust Company (“the Bank”), together referred to as the “Company”. The Company commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. In September 2023, the Company elected to be a financial holding company. As a financial holding company, the Company is subject to regulation and supervision by the Federal Reserve. The Company has no material operations and owns 100 % of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Virginia BFI”). 
 The Bank’s primary market area includes northern Virginia, and it has 23 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland. The Company’s branch locations accept business and consumer deposits from a diverse customer base. The Company’s deposit products include checking, savings, and term certificate accounts. The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate. 
 
 
 Pending Merger with Summit Financial Group, Inc. 
 
 
 On August 24, 2023, the Company and Summit Financial Group, Inc. (“Summit”), entered into an Agreement and Plan of Reorganization and Plan of Merger pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the continuing corporation (the “merger”). Immediately following the merger, Summit Community Bank, Inc., a West Virginia banking corporation (“SCB”) and a wholly-owned direct subsidiary of Summit, will merge with and into Burke & Herbert Bank & Trust Company, a Virginia banking corporation and a wholly-owned direct subsidiary of Burke & Herbert, with the Bank as the continuing bank (the “bank merger,” and together with the merger, the “mergers”). In the merger, Summit shareholders will receive 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they own (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares. In addition, each share of Summit series 2021 preferred stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive one share of a newly created series of Burke & Herbert preferred stock having rights, preferences, privileges and voting powers and limitations and restrictions thereof that are not materially less or more favorable to the holders of the Summit series 2021 preferred stock. Completion of the mergers is subject to receipt of the requisite approvals of the Company’s and Summit’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions. 
 
 
 Basis of Presentation 
 The accompanying consolidated financial statements include Burke & Herbert Financial Services Corp. and its wholly owned subsidiary Burke & Herbert Bank & Trust Company and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). The accounting and reporting policies of the Company conform to GAAP and reflect practices of the banking industry. They do not include all of the information and notes required by GAAP for complete financial statements. As such, these unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2022, included in the Company’s Registration Statement on Form 10 filed with the SEC on February 28, 2023, as amended on April 4, 2023, April 20, 2023, and April 21, 2023, and as declared as effective by the SEC on April 21, 2023. 
 The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the 
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 Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 

 reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 
 In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for any other interim period or for the full year. All amounts and disclosures included in this quarterly report as of December 31, 2022, were derived from the Company’s audited consolidated financial statements. Certain items in the prior period have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or on shareholders’ equity. 
 Adoption of new accounting standards 
 Derivatives and Hedging 
 On March 28, 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method . The purpose of this updated guidance is to further align risk management objectives with hedge accounting results on the application of the last-of-layer method, which was first introduced in ASU 2017-02, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022. ASU 2022-01 requires a modified retrospective transition method for basis adjustments in which the entity will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company adopted this ASU on January 1, 2023; therefore, there was no impact to the consolidated financial statements. 
 Allowance for Credit Losses 
 On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments (“ASC 326”), as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, as well as future forecasts including reasonable and supportable forecasts and other forecast periods. CECL generally applies to financial assets measured at amortized cost and some off-balance sheet credit exposures, such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented as the net amount expected to be collected. 
 In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. 
 The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The adoption of the new CECL standard resulted in a cumulative-effect adjustment that increased the allowance for credit losses for loans by $ 4.1 million and increased the allowance for unfunded commitments by $ 274.8 thousand. Retained earnings, net of deferred taxes, decreased by $ 3.4 million. Results for reporting periods beginning after January 1, 2023, 
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 Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 

 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with the incurred loss model under the previously applicable GAAP. 
 The following table illustrates the impact of the adoption of CECL, and the transition away from the incurred loss method, on January 1, 2023. The impact to the allowance for credit losses (“ACL”) is presented at the loan segment level (in thousands): 
 
 January 1, 2023 
 Reserves under Incurred Loss Model Reserves under CECL Model Impact of CECL Adoption 
 Financial Assets: 
 Commercial real estate $ 15,477 $ 18,163 $ 2,686 
 Owner-occupied commercial real estate 635 629 ( 6 ) 
 Acquisition, construction & development 2,082 1,442 ( 640 ) 
 Commercial & industrial 438 675 237 
 Single family residential (1-4 units) 2,379 4,040 1,661 
 Consumer non-real estate and other 28 215 187 
 Unallocated reserve — — — 
 Allowance for credit losses on loans $ 21,039 $ 25,164 $ 4,125 
 Financial Liabilities: 
 Allowance for credit losses on off-balance sheet credit exposure $ — $ 275 $ 275 

 The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. The Company did not record an ACL for securities upon adoption. 
 The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on non-accrual status, which generally occurs when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. 
 On January 1, 2023, the Company adopted ASU 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 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 (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively, and it did not have a material impact on the financial statements. 
 Allowance for credit losses - available-for-sale debt securities 
 Management evaluates all available-for-sale (“AFS”) debt securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The Company first assesses whether it intends to sell or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. 
 For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If 
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 Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 

 the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. 
 Changes in the ACL are recorded as credit loss expense (or recapture). Losses are charged against the allowance when management believes the uncollectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no ACL related to the AFS security portfolio. Refer to Note 2 - Securities in Notes to the Consolidated Financial Statements. 
 Allowance for credit losses - loans 
 The ACL represents an amount, which, in management’s judgment, reflects expected credit losses in the loan portfolio at the balance sheet date. The estimate for expected credit losses is based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience as related to credit contractual term information. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recapture of) credit losses, which is recorded in the Consolidated Statements of Income. 
 The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively evaluated loans and individually evaluated loans. In addition, the ACL also includes a qualitative component which adjusts the CECL model for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan portfolio. 
 The Company is using a remaining useful life or weighted average remaining maturity (“WARM”) methodology to estimate its current expected credit losses. For purposes of calculating reserves in collectively evaluated loans, the ACL calculation segments the Company’s loan portfolio using federal call codes to group loans which share similar risk characteristics. In order to generate reasonable and supportable forecasts of loss rates over a two-year period, the ACL calculation utilizes macroeconomic variable loss drivers, which may include aggregate macroeconomic indicators pertaining to such items as equity market conditions or interest rates, as well as other variables that are portfolio-specific, such as those that pertain to the commercial real estate or residential loan portfolios. A straight-line reversion technique is used for the following four quarters, and in following quarters, the ACL calculation reverts to historical average loss rates. 
 
 
 Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond information used to calculate reasonable and supportable, reversion and post-reversion period forecasts on collectively evaluated loans. As the reasonable and supportable and reversion period forecasts reflect the use of the macroeconomic variable loss drivers, management may consider that an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions, including those that utilize supplemental information relative to the macroeconomic variable loss drivers. Qualitative risk factors considered by management include the following: 
 
 
 • Nature and volume of loans; 
 • Concentrations of credit; 
 • Delinquency trends; 
 • Experience, ability, and depth of management and lending staff; and 
 • Quality of loan review system. 
 Loans that do not share similar risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on non-accrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans collectively evaluated. A specific reserve analysis is applied to the individually evaluated loans, which considers collateral value, an observable 
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 Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 

 market price, or the present value of the expected future cash flows. A specific reserve may be assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loan. 
 Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of the collateral. A loan is considered collateral-dependent when the Company determines foreclosure is probable or the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. Collateral could be in the form of real estate, equipment, or business assets. An ACL may result for a collateral-dependent loan if the fair value of the underlying collateral, as of the reporting date, adjusted for expected costs to repair or sell, was less than the amortized cost basis of the loan. If repayment of the loan is instead dependent only on the operation, rather than the sale of the collateral, the measure of the ACL does not incorporate estimated costs to sell. For loans analyzed on the basis of projected future principal and interest cash flows, the Company will discount the expected cash flows at the effective interest rate of the loan, and an ACL would result if the present value of the expected cash flows was less than the amortized cost basis of the loan. When the discounted cash flow method is used to determine the ACL, management does not adjust the effective interest rate used to discount cash flows to incorporate expected prepayments. 
 Allowance for credit losses on off-balance sheet credit exposures 
 On a quarterly basis, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted through the provision for credit losses on the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life by loan segment at each balance sheet date under the CECL model using the same methodology as the loan portfolio. The ACL for unfunded commitments is included in accrued interest and other liabilities on the Company’s Consolidated Balance Sheets. 
 Accrued Interest Receivable 
 The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACL and elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $ 8.3 million on loans and totaled $ 7.6 million on AFS securities at September 30, 2023, and is included in accrued interest receivable on the Company’s Consolidated Balance Sheets. 
 
 Note 2— Securities 
 The carrying amount of AFS securities and their approximate fair values at September 30, 2023, and December 31, 2022, are summarized as follows (in thousands): 
 
 September 30, 2023 
 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ 197,310 $ — $ 24,328 $ 172,982 
 Obligations of states and municipalities 536,885 7 107,413 429,479 
 Residential mortgage backed - agency 47,494 — 5,658 41,836 
 Residential mortgage backed - non-agency 307,763 4 25,659 282,108 
 Commercial mortgage backed - agency 36,874 20 1,355 35,539 
 Commercial mortgage backed - non-agency 181,844 — 8,500 173,344 
 Asset-backed 82,811 11 1,650 81,172 
 Other 9,500 — 1,565 7,935 
 Total $ 1,400,481 $ 42 $ 176,128 $ 1,224,395 

 13 

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 Note 2— Securities (continued) 

 
 December 31, 2022 
 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ 198,154 $ — $ 23,161 $ 174,993 
 Obligations of states and municipalities 550,590 12 96,695 453,907 
 Residential mortgage backed - agency 57,883 14 4,836 53,061 
 Residential mortgage backed - non-agency 365,983 2 26,690 339,295 
 Commercial mortgage backed - agency 61,810 75 1,952 59,933 
 Commercial mortgage backed - non-agency 191,709 10 8,420 183,299 
 Asset-backed 101,791 49 3,214 98,626 
 Other 9,500 — 857 8,643 
 Total $ 1,537,420 $ 162 $ 165,825 $ 1,371,757 

 
 At September 30, 2023, and December 31, 2022, AFS securities with amortized costs of $ 831.0 million and $ 637.1 million, respectively, and with estimated fair values of $ 709.3 million and $ 552.5 million, respectively, were pledged to serve as collateral for secured borrowings, derivative exposures, or to secure public deposits as required or permitted by law. 
 The gross realized gains, realized losses, and proceeds from the sales of securities for the nine months ended September 30, 2023, and September 30, 2022, were as follows (in thousands): 
 
 September 30, 2023 September 30, 2022 
 Gross realized gains $ 772 $ 1,117 
 Gross realized losses ( 884 ) ( 1,054 ) 
 Proceeds from sales of securities 77,780 142,475 

 The tax benefit (provision) related to these net realized gains and losses for September 30, 2023, and September 30, 2022, was $ 23.5 thousand, and ($ 13.2 ) thousand, respectively. 
 The maturities of AFS securities at September 30, 2023, were as follows (in thousands): (Expected maturities of securities not due at a single maturity date are based on average life at estimated prepayment speed. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay some obligations with or without call or prepayment penalties). 
 
 September 30, 2023 
 Amortized Cost 
 One Year or Less One to Five Years Five to Ten Years After Ten Years Total 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ 29,802 $ 78,123 $ 89,385 $ — $ 197,310 
 Obligations of states and municipalities 370 15,989 234,600 285,926 536,885 
 Residential mortgage backed - agency 42 808 46,644 — 47,494 
 Residential mortgage backed - non-agency 72,280 137,888 95,182 2,413 307,763 
 Commercial mortgage backed - agency 165 19,531 17,178 — 36,874 
 Commercial mortgage backed - non-agency 13,613 163,088 5,143 — 181,844 
 Asset-backed 8,247 41,248 33,316 — 82,811 
 Other — — 9,500 — 9,500 
 Total $ 124,519 $ 456,675 $ 530,948 $ 288,339 $ 1,400,481 

 
 14 

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 Note 2— Securities (continued) 

 
 September 30, 2023 
 Fair Value 
 One Year or Less One to Five Years Five to Ten Years After Ten Years Total 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ 29,203 $ 67,674 $ 76,105 $ — $ 172,982 
 Obligations of states and municipalities 370 14,290 195,558 219,261 429,479 
 Residential mortgage backed - agency 42 778 41,016 — 41,836 
 Residential mortgage backed - non-agency 69,814 129,486 80,461 2,347 282,108 
 Commercial mortgage backed - agency 165 18,990 16,384 — 35,539 
 Commercial mortgage backed - non-agency 13,220 156,187 3,937 — 173,344 
 Asset-backed 8,178 40,695 32,299 — 81,172 
 Other — — 7,935 — 7,935 
 Total $ 120,992 $ 428,100 $ 453,695 $ 221,608 $ 1,224,395 

 
 At September 30, 2023, and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in any amount greater than 10% of shareholders’ equity. 
 The following table shows the gross unrealized losses and fair value of the Company’s securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023, and December 31, 2022. 
 AFS securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands): 
 
 September 30, 2023 
 Less Than Twelve Months More Than Twelve Months 
 Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ — $ — $ 172,982 $ 24,328 $ 24,328 
 Obligations of states and municipalities 1,708 125 424,139 107,288 107,413 
 Residential mortgage backed - agency 37 1 41,798 5,657 5,658 
 Residential mortgage backed - non-agency 12,875 542 268,477 25,117 25,659 
 Commercial mortgage backed - agency 249 2 34,725 1,353 1,355 
 Commercial mortgage backed - non-agency 13,671 103 158,968 8,397 8,500 
 Asset-backed 13,080 47 58,198 1,603 1,650 
 Other 6,252 1,249 1,683 316 1,565 
 Total $ 47,872 $ 2,069 $ 1,160,970 $ 174,059 $ 176,128 

 15 

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 Note 2— Securities (continued) 

 
 December 31, 2022 
 Less Than Twelve Months More Than Twelve Months 
 Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses 
 Securities Available-for-Sale 
 U.S. Treasuries and government agencies $ 28,399 $ 1,131 $ 146,594 $ 22,030 $ 23,161 
 Obligations of states and municipalities 128,373 12,378 320,287 84,317 96,695 
 Residential mortgage backed - agency 7,258 26 41,975 4,810 4,836 
 Residential mortgage backed - non-agency 204,866 11,822 134,056 14,868 26,690 
 Commercial mortgage backed - agency 23,026 562 34,847 1,390 1,952 
 Commercial mortgage backed - non-agency 144,193 6,171 23,374 2,249 8,420 
 Asset-backed 43,472 815 50,088 2,399 3,214 
 Other 6,877 623 1,766 234 857 
 Total $ 586,464 $ 33,528 $ 752,987 $ 132,297 $ 165,825 

 
 The Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. 
 This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the CECL standard, and declines due to non-credit factors are recorded in accumulated other comprehensive income (“AOCI”), net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in accumulated other comprehensive income, net of taxes, in the consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach. 
 The Company did not record an ACL on the AFS securities at September 30, 2023. The Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. The Company had 403 securities in an unrealized loss position as of September 30, 2023. The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at September 30, 2023, and concluded no impairment existed based on a combination of factors, which included: (1) the securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the par value of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis. As such, there was no ACL on AFS securities at September 30, 2023. 
 Securities of U.S. Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities 
 At September 30, 2023, the unrealized losses associated with 12 U.S. Treasuries and Government Agency securities, 16 Residential Mortgage Backed – Agency securities, and 17 Commercial Mortgage Backed – Agency securities were generally driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided 
 16 

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 Note 2— Securities (continued) 

 by the U.S. government. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023. 
 Securities of U.S. States and Municipalities 
 At September 30, 2023, the unrealized losses associated with 203 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities. These securities are investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our ongoing impairment analysis but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023. 
 Residential & Commercial Mortgage Backed – Non-Agency Securities 
 At September 30, 2023, the unrealized losses associated with 96 Residential Mortgage Backed – Non-Agency securities and 33 Commercial Mortgage Backed – Non-Agency securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023. 
 Asset-Backed Securities 
 At September 30, 2023, the unrealized losses associated with 23 Asset-Backed securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses. We assess for credit impairment by estimating the present value of expected cash flows. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023. 
 Other Securities 
 At September 30, 2023, the unrealized losses associated with 3 securities were primarily driven by interest rates and not the credit quality of the securities. These investments were underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. Based on our assessment of the expected credit losses, we expect to recover the entire amortized cost basis of the securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023. 
 Restricted stock, at cost 
 The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $ 7.2 million and $ 16.4 million at September 30, 2023, and December 31, 2022, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be impaired at September 30, 2023, and no impairment has been recognized. FHLB stock is included in a separate line item Restricted stock, at cost on the Consolidated Balance Sheets and is not part of the Company’s AFS securities portfolio. The Company’s Restricted stock line item on the Consolidated Balance Sheets also includes an investment in Community Bankers’ Bank, totaling $ 50 thousand at both September 30, 2023, and December 31, 2022, which is carried at cost and is not impaired at September 30, 2023. 
 
 Note 3— Loans 
 The Company’s loan portfolio segments, as reported in the tables below, include (i) commercial real estate (ii) owner-occupied commercial real estate (iii) acquisition, construction & development (iv) commercial & industrial (v) single family residential (1-4 units) and (vi) consumer non-real estate and other. The risks associated with lending activities differ 
 17 

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 Note 3— Loans (continued) 
 
 

 among the various loan segments and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. 
 • Commercial real estate loans carry risk associated with either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. Other risk factors include the credit-worthiness of the sponsor and the value of the collateral. 
 • Owner-occupied commercial real estate loans carry risk associated with the operations of the business that occupies the property and the value of the collateral. 
 • Acquisition, construction & development loans carry risk associated with the credit-worthiness of the borrower, project completion within budget, sale after completion, and the value of the collateral. 
 • Commercial & industrial loans carry the risk associated with the operations of the business and the value of the collateral, if any. 
 • Single family residential (1-4 units) loans for consumer purposes carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral. Single family residential (1-4 units) loans for investment purpose carry risk associated with the continued credit-worthiness of the borrower, the value of the collateral, and either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. 
 • Consumer non-real estate and other loans carry risk associated with the credit-worthiness of the borrower and the value of the collateral, if any. 
 Loan balances at September 30, 2023, and December 31, 2022, by portfolio segment were as follows (in thousands): 
 
 September 30, 2023 December 31, 2022 
 Commercial real estate $ 1,260,653 $ 1,109,315 
 Owner-occupied commercial real estate 123,496 127,114 
 Acquisition, construction & development 96,535 94,450 
 Commercial & industrial 61,571 53,514 
 Single family residential (1-4 units) 525,558 499,362 
 Consumer non-real estate and other 2,803 3,466 
 Loans, gross 2,070,616 1,887,221 
 Allowance for credit losses ( 26,111 ) ( 21,039 ) 
 Loans, net $ 2,044,505 $ 1,866,182 

 Net deferred loan fees included in the above loan categories totaled $ 3.5 million and $ 3.3 million at September 30, 2023, and December 31, 2022, respectively. The Company holds $ 3.8 million and $ 7.9 million in Paycheck Protection Program loans, net of deferred fees and costs as of September 30, 2023, and December 31, 2022, respectively. 
 
 Note 4— Allowance for Credit Losses 
 On January 1, 2023, the Company adopted the CECL methodology as required under ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standards update refer to Note 1 - Nature of Business Activities and Significant Accounting Policies in these Notes to Consolidated Financial Statements. All information presented as of September 30, 2023, is in accordance with ASC 326. All other information presented prior to January 1, 2023, is in accordance with previous applicable GAAP. 
 The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the Consolidated Statement of Income. Management calculates the quantitative portion of collectively evaluated loans for all 
 18 

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 Note 4— Allowance for Credit Losses (continued) 

 loan categories using the WARM method. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics. 
 Loans that do not share similar risk characteristics are evaluated on an individual loan basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on non-accrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are collectively evaluated on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price, or the present value of the expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the carrying value of the loan. 
 Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the information that is used to calculate a reasonable and supportable forecast and a reversion period forecast on collectively evaluated loans. Management may consider an additional or reduced reserve as warranted through qualitative risk factors based on the current and expected conditions, as measured in supplemental information relative to the macroeconomic variable loss drivers used to calculate a reasonable and supportable forecast and a reversion period forecast. These qualitative risk factors considered by management are largely comparable to legacy factors prior to the adoption of CECL. 
 19 

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 Note 4— Allowance for Credit Losses (continued) 

 The following tables presents the activity in the ACL, including the impact of the adoption of CECL, for the three months and nine months ended September 30, 2023, and the activity for the allowance for loan losses for the three months and nine months ended September 30, 2022 (in thousands). 
 
 Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total 
 Three months ended 
 September 30, 2023 
 Balance, beginning of period $ 18,639 $ 719 $ 1,319 $ 612 $ 4,520 $ 110 $ — $ 25,919 
 Provision for (recapture of) credit losses 969 66 446 ( 95 ) ( 1,135 ) ( 51 ) — 200 
 Charge-offs — — — — — ( 13 ) — ( 13 ) 
 Recoveries 4 — — — 1 — — 5 
 Balance, end of period $ 19,612 $ 785 $ 1,765 $ 517 $ 3,386 $ 46 $ — $ 26,111 
 
 September 30, 2022 
 Balance, beginning of period $ 15,548 $ 724 $ 3,607 $ 214 $ 1,519 $ 19 $ 1,731 $ 23,362 
 Provision for (recapture of) loan losses ( 1,782 ) ( 111 ) 830 82 264 60 ( 1,731 ) ( 2,388 ) 
 Charge-offs — — — — — ( 54 ) — ( 54 ) 
 Recoveries 27 — — — 2 4 — 33 
 Balance, end of period $ 13,793 $ 613 $ 4,437 $ 296 $ 1,785 $ 29 $ — $ 20,953 

 
 Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total 
 Nine months ended 
 September 30, 2023 
 Beginning balance, prior to adoption of CECL $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039 
 Impact of the adoption of CECL 2,686 ( 6 ) ( 640 ) 237 1,661 187 — 4,125 
 Provision for (recapture of) credit losses 1,414 156 323 ( 129 ) ( 661 ) ( 70 ) — 1,033 
 Charge-offs — — — ( 29 ) — ( 105 ) — ( 134 ) 
 Recoveries 35 — — — 7 6 — 48 
 Balance, end of period $ 19,612 $ 785 $ 1,765 $ 517 $ 3,386 $ 46 $ — $ 26,111 
 
 September 30, 2022 
 Balance, beginning of period $ 25,112 $ 611 $ 2,189 $ 165 $ 2,434 $ 18 $ 1,180 $ 31,709 
 Provision for (recapture of) loan losses ( 8,071 ) 2 2,248 151 ( 815 ) 101 ( 1,180 ) ( 7,564 ) 
 Charge-offs ( 3,282 ) — — ( 20 ) — ( 109 ) — ( 3,411 ) 
 Recoveries 34 — — — 166 19 — 219 
 Balance, end of period $ 13,793 $ 613 $ 4,437 $ 296 $ 1,785 $ 29 $ — $ 20,953 

 20 

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 Note 4— Allowance for Credit Losses (continued) 

 The information presented in the table below is not required for periods after the adoption of CECL. The following table summarizes the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method (individually or collectively evaluated for impairment) as of December 31, 2022 (in thousands): 
 
 Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total 
 December 31, 2022 
 Allowance for loan losses 
 Individually evaluated for impairment $ 41 $ 102 $ — $ — $ 96 $ — $ — $ 239 
 Collectively evaluated for impairment 15,436 533 2,082 438 2,283 28 — 20,800 
 Total ending allowance balance $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039 
 
 Loan balance: 
 Individually evaluated for impairment $ 331 $ 2,580 $ — $ — $ 6,158 $ — $ — $ 9,069 
 Collectively evaluated for impairment 1,108,984 124,534 94,450 53,514 493,204 3,466 — 1,878,152 
 Total ending loan balance $ 1,109,315 $ 127,114 $ 94,450 $ 53,514 $ 499,362 $ 3,466 $ — $ 1,887,221 

 Prior to the adoption of CECL, loans were considered impaired when, based on current information and events as of the measurement date, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans included loans on non-accrual status and accruing TDRs. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of the global cash flow sufficient to pay all debt obligations, and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. 
 The following table presents information related to impaired loans (in thousands) by portfolio segment as of December 31, 2022: 
 
 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (1) 
 
 December 31, 2022 
 With no related allowance recorded: 
 Commercial real estate $ — $ — $ — $ — $ — 
 Owner-occupied commercial real estate 1,184 1,394 — 1,291 97 
 Acquisition, construction & development — — — — — 
 Commercial & industrial — — — — — 
 Single family residential (1-4 units) 5,151 5,576 — 5,131 213 
 Consumer non-real estate and other — — — — — 
 Subtotal $ 6,335 $ 6,970 $ — $ 6,422 $ 310 
 
 With an allowance recorded: 
 Commercial real estate $ 331 $ 331 $ 41 $ 350 $ 23 
 Owner-occupied commercial real estate 1,397 1,397 102 1,420 74 
 Acquisition, construction & development — — — — — 
 Commercial & industrial — — — — — 
 Single family residential (1-4 units) 1,007 1,141 96 1,033 57 
 Consumer non-real estate and other — — — — — 
 Subtotal $ 2,735 $ 2,869 $ 239 $ 2,803 $ 154 

 (1) Cash basis interest income recognized approximates interest income recognized shown as of the twelve months ended December 31, 2022. 
 
 
 
 
 21 

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 Note 4— Allowance for Credit Losses (continued) 

 The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. The following table presents the aging of the recorded investment in past due loans as of September 30, 2023, and December 31, 2022, by portfolio segment (in thousands): 
 
 September 30, 2023 
 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Loans Total Loans 90 Days Past Due & Still Accruing Non-accrual loans 
 Commercial real estate $ — $ — $ 6 $ 6 $ 1,260,647 $ 1,260,653 $ — $ — 
 Owner-occupied commercial real estate — — 667 667 122,829 123,496 — 1,028 
 Acquisition, construction & development — — — — 96,535 96,535 — — 
 Commercial & industrial — — — — 61,571 61,571 — — 
 Single family residential (1-4 units) — 39 59 98 525,460 525,558 — 1,828 
 Consumer non-real estate and other 3 3 — 6 2,797 2,803 — — 
 Total $ 3 $ 42 $ 732 $ 777 $ 2,069,839 $ 2,070,616 $ — $ 2,856 
 
 December 31, 2022 
 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Loans Total Loans 90 Days Past Due & Still Accruing Non-accrual loans 
 Commercial real estate $ — $ — $ — $ — $ 1,109,315 $ 1,109,315 $ — $ — 
 Owner-occupied commercial real estate — — — — 127,114 127,114 — 1,184 
 Acquisition, construction & development — — — — 94,450 94,450 — — 
 Commercial & industrial — — — — 53,514 53,514 — — 
 Single family residential (1-4 units) 1,403 154 546 2,103 497,259 499,362 — 4,313 
 Consumer non-real estate and other — 4 — 4 3,462 3,466 — — 
 Total $ 1,403 $ 158 $ 546 $ 2,107 $ 1,885,114 $ 1,887,221 $ — $ 5,497 

 Credit Quality Indicators 
 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, credit documentation, public information, current economic information, and other factors. The Company analyzes loans individually by classifying the loans by credit risk. The Company internally grades all commercial loans at the time of origination. In addition, the Company performs an annual review on the top twenty-five non-homogenous commercial loan relationships as measured by total Company exposure to each borrower. The Company uses the following definitions for credit risk classifications: 
 Pass : These include satisfactory loans that have acceptable levels of risk. 
 Special Mention : Loans classified as special mention have a potential credit 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 have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of debt. Loans classified as substandard are inadequately protected by sound net worth, payment capacity of the borrower, or of the collateral pledged. If weaknesses go uncorrected, there is potential for partial loss of principal and/or interest. 
 Doubtful : Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and unlikely. 
 Loss : Loans classified as a loss are considered to be uncollectible and cannot be justified to continue as viable assets. While there may be the possibility of some recovery in the future, it is not practical or desirable to defer writing off these loans at the present time. 
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 Note 4— Allowance for Credit Losses (continued) 

 The Company has a portfolio of smaller homogenous loans that are not individually risk rated that are included within the single family residential and consumer non-real estate and other loan classes. Generally, these loan classes are rated as “Pass” unless these loans are on non-accrual and are then classified as substandard. 
 The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2023 (in thousands): 
 
 Term Loans 
 2023 2022 2021 2020 2019 Prior Revolving Loans Total 
 Commercial real estate 
 Pass $ 156,332 $ 256,044 $ 166,943 $ 23,638 $ 70,916 $ 412,169 $ 34,974 $ 1,121,016 
 Special Mention — 12,235 35,449 — 10,431 1,830 — 59,945 
 Substandard — 15,480 12,847 — 1,716 49,649 — 79,692 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 156,332 $ 283,759 $ 215,239 $ 23,638 $ 83,063 $ 463,648 $ 34,974 $ 1,260,653 
 
 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Owner-occupied commercial real estate 
 Pass $ 4,688 $ 29,017 $ 9,516 $ 14,340 $ 12,848 $ 43,182 $ 4,585 $ 118,176 
 Special Mention — — — — — 331 — 331 
 Substandard — 536 — — — 4,453 — 4,989 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 4,688 $ 29,553 $ 9,516 $ 14,340 $ 12,848 $ 47,966 $ 4,585 $ 123,496 
 
 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Acquisition, construction & development 
 Pass $ 4,871 $ 27,645 $ 15,510 $ — $ 760 $ 23,951 $ 1,705 $ 74,442 
 Special Mention — — — — — — — — 
 Substandard — — — — — 22,093 — 22,093 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 4,871 $ 27,645 $ 15,510 $ — $ 760 $ 46,044 $ 1,705 $ 96,535 
 
 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 
 Commercial & industrial 
 Pass $ 23,329 $ 16,379 $ 5,068 $ 466 $ 24 $ 1,467 $ 13,948 $ 60,681 
 Special Mention — — 890 — — — — 890 
 Substandard — — — — — — — — 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 23,329 $ 16,379 $ 5,958 $ 466 $ 24 $ 1,467 $ 13,948 $ 61,571 
 
 Year to date gross charge-offs $ — $ — $ — $ 29 $ — $ — $ — $ 29 
 
 Single family residential (1-4 units) 
 Pass $ 69,336 $ 123,047 $ 60,748 $ 32,408 $ 41,256 $ 142,985 $ 53,951 $ 523,731 
 Special Mention — — — — — — — — 
 Substandard — — 291 246 — 1,290 — 1,827 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 69,336 $ 123,047 $ 61,039 $ 32,654 $ 41,256 $ 144,275 $ 53,951 $ 525,558 
 
 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 
 

 23 

 Table of Contents 
 Note 4— Allowance for Credit Losses (continued) 

 
 Consumer non-real estate and other 
 Pass $ 425 $ 247 $ 145 $ 190 $ 411 $ 337 $ 1,048 $ 2,803 
 Special Mention — — — — — — — — 
 Substandard — — — — — — — — 
 Doubtful — — — — — — — — 
 Loss — — — — — — — — 
 Total $ 425 $ 247 $ 145 $ 190 $ 411 $ 337 $ 1,048 $ 2,803 
 
 Year to date gross charge-offs $ 105 $ — $ — $ — $ — $ — $ — $ 105 

 The value of outstanding loans by credit quality indicators as of December 31, 2022 were as follows (in thousands): 
 
 Pass Special Mention Substandard Doubtful Loss Total 
 December 31, 2022 
 Commercial real estate $ 1,011,025 $ 62,907 $ 35,383 $ — $ — $ 1,109,315 
 Owner-occupied commercial real estate 121,621 1,963 3,530 — — 127,114 
 Acquisition, construction & development 68,220 836 25,394 — — 94,450 
 Commercial & industrial 53,273 — 241 — — 53,514 
 Single family residential (1-4 units) 494,994 55 4,313 — — 499,362 
 Consumer non-real estate and other 3,466 — — — — 3,466 
 Total $ 1,752,599 $ 65,761 $ 68,861 $ — $ — $ 1,887,221 

 The following tables present information about collateral-dependent loans that were individually evaluated for purposes of determining the ACL as of September 30, 2023 (in thousands): 
 
 Collateral-Dependent Loans 
 With Allowance With No Related Allowance Total 
 Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance 
 September 30, 2023 
 Commercial real estate $ — $ — $ — $ — $ — 
 Owner-occupied commercial real estate — — 1,028 1,028 — 
 Acquisition, construction & development — — — — — 
 Commercial & industrial — — — — — 
 Single family residential (1-4 units) — — 2,631 2,631 — 
 Consumer non-real estate and other — — — — — 
 Total $ — $ — $ 3,659 $ 3,659 $ — 

 On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis. ASU 2022-02 eliminates the TDR accounting model and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty, and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables — Nonrefundable Fees and Other Costs, and subjects entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. Upon adoption of CECL, the Company loans classified as TDRs were individually evaluated for the ACL, and the measurement was done either using the collateral-dependent or the discounted cash flow method. 
 The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction, or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. For the three and nine months ended September 30, 2023, the Company did not extend any 
 24 

 Table of Contents 
 Note 4— Allowance for Credit Losses (continued) 

 modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan. 
 The Company did not extend any modifications that were defined as TDRs during the year ended December 31, 2022. 
 
 Note 5— Deposits 
 The aggregate amount of time deposits, each with a minimum denomination of $250,000, was approximately $ 65.5 million and $ 32.6 million on September 30, 2023, and December 31, 2022, respectively. Brokered time deposits totaled $ 389.0 million and $ 100.3 million as of September 30, 2023, and December 31, 2022, respectively. Time deposits through the Certificate of Deposit Account Registry Service program totaled $ 21.8 million at September 30, 2023, compared to $ 11.7 million at December 31, 2022. 
 At September 30, 2023, the scheduled maturities of time deposits for the remaining three months ending December 31, 2023 and the following five years were as follows (in thousands): 
 
 As of September 30, 2023 
 Remaining three months ending, December 31, 2023 $ 59,683 
 2024 269,103 
 2025 135,389 
 2026 83,185 
 2027 49,432 
 2028 78,046 
 Total $ 674,838 

 At September 30, 2023, and December 31, 2022, amounts included in time deposits for individual retirement accounts totaled $ 30.9 million and $ 36.9 million, respectively. 
 Overdrafts of $ 197 thousand and $ 503 thousand were reclassified to loans as of September 30, 2023, and the year ended December 31, 2022, respectively. 
 
 Note 6— Advances and Other Borrowings 
 The Company had borrowings of $ 299.0 million and $ 343.1 million at September 30, 2023, and December 31, 2022, respectively. At September 30, 2023, the interest rate on this debt ranged from 4.38 % to 5.57 %. At December 31, 2022, the interest rate on this debt ranged from 4.13 % to 4.57 %. The average balance outstanding during the nine months ending September 30, 2023, and the year ending December 31, 2022, was $ 302.1 million and $ 269.5 million, respectively. The Company’s short-term borrowings from time to time may consist of advances from the FHLB of Atlanta, unsecured lines from Correspondent Banks, and secured lines from the Federal Reserve Discount Window. 
 The Company has available lines of credit with the FHLB of Atlanta and unsecured federal funds lines of credit from correspondent banking relationships. Through these sources, the Company has unused capacity of $ 883.5 million in remaining borrowing capacity as of September 30, 2023. The advances on credit lines are secured by both securities and loans. The lendable collateral value of securities and loans pledged against available lines of credit as of September 30, 2023, and December 31, 2022, was $ 778.0 million and $ 698.1 million, respectively. As of September 30, 2023, all of the Company’s borrowings will mature within one calendar year. 
 The contractual maturities of these borrowings as of September 30, 2023, are as follows (in thousands): 
 
 Due in 2023 $ 49,000 
 Due in 2024 250,000 
 Total $ 299,000 

 
 
 
 
 25 

 
 Table of Contents 

 Note 7— Leased Property 
 Lessor Arrangements 
 The Company enters into operating leases with customers to lease vacant space in certain owned premises that is not being used by the Company. These operating leases are typically payable in monthly installments with terms ranging from around two years to around twelve years and may contain renewal options. 
 The components of lease income, which was included in non-interest expense on the Consolidated Statements of Income, were as follows (in thousands): 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 Operating lease income $ 576 $ 233 $ 1,726 $ 319 
 Total lease income $ 576 $ 233 $ 1,726 $ 319 

 The remaining maturities of operating lease receivables as of September 30, 2023, are as follows (in thousands): 
 
 Operating Leases 
 Remaining three months ending December 31, 2023 $ 575 
 2024 2,302 
 2025 2,265 
 2026 1,657 
 2027 1,356 
 Thereafter 3,783 
 Total lease receivables $ 11,938 

 Lessee Arrangements 
 The Company has entered into leases for branches and office space. The leases are evaluated for whether the lease will be classified as either a finance or operating lease. Certain leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. Including renewal options, the terms of the Company’s leases range from less than one year to around thirteen years . The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. 
 Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. These cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. 
 26 

 Table of Contents 
 Note 7— Leased Property (continued) 

 Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands): 
 
 Balance Sheet Classification September 30, 2023 December 31, 2022 
 Right-of-use assets: 
 Operating leases Other assets $ 4,846 $ 7,255 
 Finance leases Other assets 3,661 2,620 
 Total right-of-use assets $ 8,507 $ 9,875 
 Lease liabilities: 
 Operating leases Other liabilities $ 5,075 $ 7,592 
 Finance leases Other liabilities 3,829 2,745 
 Total lease liabilities $ 8,904 $ 10,337 

 The components of total lease cost were as follows (in thousands): 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 Finance lease cost 
 Right-of-use asset amortization $ 71 $ 51 $ 173 $ 153 
 Interest expense 28 16 58 48 
 Operating lease cost 770 638 2,437 1,833 
 Total lease cost $ 869 $ 705 $ 2,668 $ 2,034 

 The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of September 30, 2023, are as follows (in thousands): 
 
 Operating Leases Finance Leases 
 Remaining three months ending December 31, 2023 $ 785 $ 81 
 2024 2,305 327 
 2025 849 334 
 2026 415 341 
 2027 366 347 
 Thereafter 626 3,347 
 Total undiscounted lease payments 5,346 4,777 
 Less: discount ( 271 ) ( 948 ) 
 
 Net lease liabilities $ 5,075 $ 3,829 

 27 

 Table of Contents 
 Note 7— Leased Property (continued) 

 The following table presents additional information about the Company’s leases as of September 30, 2023, and December 31, 2022. 
 
 Supplemental lease information (dollars in thousands) September 30, 2023 December 31, 2022 
 Finance lease weighted average remaining lease term (years) 12.87 12.76 
 Finance lease weighted average discount rate 2.93 % 2.22 % 
 Operating lease weighted average remaining lease term (years) 3.12 3.26 
 Operating lease weighted average discount rate 3.02 % 3.19 % 
 
 Nine Months Ended September 30, 
 Cash paid for amounts included in the measurement of lease liabilities 2023 2022 
 Operating cash flows from operating leases $ 2,545 $ 1,871 
 Operating cash flows from finance leases 58 48 
 Financing cash flows from finance leases 130 113 
 Right-of-use assets obtained in exchange for new finance lease liabilities 1,214 — 
 Right-of-use assets obtained in exchange for new operating lease liabilities — 502 

 
 Note 8— Regulatory Capital Matters 
 Banks and financial holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, “prompt corrective action” regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (“Basel III rules”), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on AFS securities is not included in computing regulatory capital. Management believes as of September 30, 2023, the Company and the Bank meet all capital adequacy requirements to which they are subject. 
 “Prompt corrective action” regulations provide five classifications: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”, although these terms are not used to represent overall financial condition. If “adequately capitalized”, regulatory approval is required to accept brokered deposits. If “undercapitalized”, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of September 30, 2023, and December 31, 2022, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for “prompt corrective action”. 
 The following table presents the actual and required capital amounts and ratios for the Company and the Bank at September 30, 2023, and December 31, 2022 (in thousands except for ratios). 
 28 

 Table of Contents 
 Note 8— Regulatory Capital Matters (continued) 

 
 Actual Minimum Required for Capital Adequacy Purposes (includes applicable Capital Conservation Buffer) To Be Well Capitalized Under Prompt Corrective Action Regulations 
 Amount Ratio Amount Ratio Amount Ratio 
 As of September 30, 2023 
 Total Capital to risk weighted assets 
 Consolidated $ 443,293 17.48 % $ 266,306 ≥ 10.5 % 
 $ 253,625 ≥ 10.0 % 
 
 Burke & Herbert Bank & Trust 441,597 17.39 266,587 ≥ 10.5 
 253,893 ≥ 10.0 
 
 Tier 1 (Core) Capital to risk weighted assets 
 Consolidated 416,977 16.44 215,581 ≥ 8.5 
 202,900 ≥ 8.0 
 
 Burke & Herbert Bank & Trust 415,281 16.36 215,809 ≥ 8.5 
 203,114 ≥ 8.0 
 
 Common Tier 1 (CET 1) to risk-weighted assets 
 Consolidated 416,977 16.44 177,537 ≥ 7.0 
 164,856 ≥ 6.5 
 
 Burke & Herbert Bank & Trust 415,281 16.36 177,725 ≥ 7.0 
 165,030 ≥ 6.5 
 
 Tier 1 (Core) Capital to average assets 
 Consolidated 416,977 11.32 147,333 ≥ 4.0 
 184,166 ≥ 5.0 
 
 Burke & Herbert Bank & Trust 415,281 11.27 147,417 ≥ 4.0 
 184,271 ≥ 5.0 
 
 
 As of December 31, 2022 
 Total Capital to risk weighted assets 
 Consolidated $ 433,958 18.88 % $ 241,325 ≥ 10.5 % 
 $ 229,834 ≥ 10.0 % 
 
 Burke & Herbert Bank & Trust 432,290 18.81 241,368 ≥ 10.5 
 229,874 ≥ 10.0 
 
 Tier 1 (Core) Capital to risk weighted assets 
 Consolidated 412,946 17.97 195,358 ≥ 8.5 
 186,867 ≥ 8.0 
 
 Burke & Herbert Bank & Trust 411,251 17.89 195,393 ≥ 8.5 
 183,900 ≥ 8.0 
 
 Common Tier 1 (CET 1) to risk-weighted assets 
 Consolidated 412,946 17.97 160,883 ≥ 7.0 
 149,392 ≥ 6.5 
 
 Burke & Herbert Bank & Trust 411,251 17.89 160,912 ≥ 7.0 
 149,418 ≥ 6.5 
 
 Tier 1 (Core) Capital to average assets 
 Consolidated 412,946 11.34 145,605 ≥ 4.0 
 182,007 ≥ 5.0 
 
 Burke & Herbert Bank & Trust 411,251 11.30 145,605 ≥ 4.0 
 182,007 ≥ 5.0 
 

 
 The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of September 30, 2023, approximately $ 175.0 million of retained earnings was available for dividend declaration without regulatory approval. 
 
 Note 9— Derivatives 
 The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. 
 Cash flow hedges of interest rate risk 
 The Company’s objective in using interest rate derivatives is to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. During 2023, such derivatives were used to hedge the variable cash flows associated with variable-rate assets. 
 
 
 29 

 Table of Contents 
 Note 9— Derivatives (continued) 

 For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate asset. During the next 12 months, the Company estimates that an additional $ 1.1 million will be reclassified as a reduction to interest income. 
 
 
 Derivatives not designated as hedges 
 The Company enters into interest rate swaps with its loan customers to facilitate their financing requests. Upon entering into swaps with our loan customers, the Company will enter into corresponding offsetting derivatives with third parties. These derivatives represent economic hedges and do not qualify as hedges for accounting. These back-to-back interest rate swaps are reported at fair value in “other assets” and “other liabilities” in the Company’s Consolidated Balance Sheets. Changes in the fair value of interest rate swaps are recorded in other non-interest expense and sum to zero because of offsetting terms of swaps with borrowers and swaps with dealer counterparties. 
 The table below presents the fair value of the Company’s derivative financial instruments, which includes accrued interest, as well as their classification on the Consolidated Balance Sheets as of September 30, 2023, and December 31, 2022 (in thousands): 
 
 September 30, 2023 
 Balance Sheet Location Notional Amount Fair Value 
 Derivatives designated as hedges: 
 Interest rate swaps related to cash flow hedges Other liabilities $ 50,000 $ 1,446 
 
 
 Derivatives not designated as hedges: 
 Interest rate swaps related to customer loans Other assets $ 72,836 $ 2,732 
 Interest rate swaps related to customer loans Other liabilities 72,836 2,732 

 
 December 31, 2022 
 Balance Sheet Location Notional Amount Fair Value 
 Derivatives designated as hedges: 
 Interest rate swaps related to cash flow hedges Other liabilities $ 50,000 $ 2,254 
 
 
 Derivatives not designated as hedges: 
 Interest rate swaps related to customer loans Other assets $ 34,674 $ 1,311 
 Interest rate swaps related to customer loans Other liabilities 34,674 1,311 

 The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended September 30, 2023, and September 30, 2022, as follows (in thousands): 
 
 
 
 Derivatives in Cash Flow
Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023 
 Amount of Gain or (Loss) Recognized in OCI on Derivative 
 Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component 
 Interest Rate Products $ ( 48 ) $ ( 48 ) $ — Interest Income $ ( 473 ) $ ( 473 ) $ — 
 Total $ ( 48 ) $ ( 48 ) $ — $ ( 473 ) $ ( 473 ) $ — 

 30 

 Table of Contents 
 Note 9— Derivatives (continued) 

 
 Derivatives in Cash Flow
Hedging Relationships September 30, 2022 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2022 
 Amount of Gain or (Loss) Recognized in OCI on Derivative 
 Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component 
 Interest Rate Products $ ( 828 ) $ ( 828 ) $ — Interest Income $ ( 74 ) $ ( 74 ) $ — 
 Total $ ( 828 ) $ ( 828 ) $ — $ ( 74 ) $ ( 74 ) $ — 

 The table below presents the effect of cash flow hedge accounting on AOCI for the nine months ended September 30, 2023, and September 30, 2022, as follows (in thousands): 
 
 
 
 Derivatives in Cash Flow
Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023 
 Amount of Gain or (Loss) Recognized in OCI on Derivative 
 Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component 
 Interest Rate Products $ ( 337 ) $ ( 337 ) $ — Interest Income $ ( 1,259 ) $ ( 1,259 ) $ — 
 Total $ ( 337 ) $ ( 337 ) $ — $ ( 1,259 ) $ ( 1,259 ) $ — 

 
 
 
 Derivatives in Cash Flow
Hedging Relationships September 30, 2022 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2022 
 Amount of Gain or (Loss) Recognized in OCI on Derivative 
 Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component 
 Interest Rate Products $ ( 1,924 ) $ ( 1,924 ) $ — Interest Income $ 108 $ 108 $ — 
 Total $ ( 1,924 ) $ ( 1,924 ) $ — $ 108 $ 108 $ — 

 
 
 The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2023, and September 30, 2022. 
 31 

 Table of Contents 
 Note 9— Derivatives (continued) 

 
 Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships 
 Three months ended 
 September 30, 2023 September 30, 2022 
 Interest Income Interest Expense Interest Income Interest Expense 
 Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded. $ ( 433 ) $ — $ ( 74 ) $ — 
 The effects of fair value and cash flow hedging: 
 Gain or (loss) on fair value hedging relationships in Subtopic 815-20 
 Interest contracts 
 Hedged items (1) 
 40 — — — 
 Derivatives designated as hedging instruments — — — — 
 Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 
 Interest contracts 
 Amount of gain or (loss) reclassified from AOCI into income ( 473 ) — ( 74 ) — 
 Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring — — — — 
 Amount of gain or (loss) reclassified from AOCI into income - included component ( 473 ) — ( 74 ) — 
 Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — — 

 
 Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships 
 Nine months ended 
 
 September 30, 2023 September 30, 2022 
 Interest Income Interest Expense Interest Income Interest Expense 
 Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded. $ ( 1,549 ) $ — $ 108 $ — 
 The effects of fair value and cash flow hedging: 
 Gain or (loss) on fair value hedging relationships in Subtopic 815-20 
 Interest contracts 
 Hedged items (1) 
 ( 1,066 ) — — — 
 Derivatives designated as hedging instruments 776 — — — 
 Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 
 Interest contracts 
 Amount of gain or (loss) reclassified from AOCI into income ( 1,259 ) — 108 — 
 Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring — — — — 
 Amount of gain or (loss) reclassified from AOCI into income - included component ( 1,259 ) — 108 — 
 Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — — 

 (1) The Company voluntary discontinued a fair value hedging relationship and these amounts include the gain or (loss) and the hedging adjustment on a voluntary discontinued hedging relationship. The Company has allocated the basis adjustment to the remaining individual assets in the closed portfolio and will amortize the basis adjustment over a period consistent with amortization of other discounts or premiums on the assets. 
 
 
 32 

 Table of Contents 
 Note 9— Derivatives (continued) 

 Credit-risk-related Contingent Features 
 As of September 30, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to these agreements, was $ 1.4 million. As of September 30, 2023, the Company has posted the full amount of collateral related to these agreements. 
 
 
 
 Note 10— Commitments and Contingencies 
 Interest rate lock commitments 
 Commitments to fund consumer mortgage loans (interest rate lock commitments) to be sold into the secondary market are defined as derivatives under GAAP. The Company enters into best effort forward commitments for the future delivery of mortgage loans to third-party investors. The Company has elected the fair value option (“FVO”) on both the best-efforts forward commitments and the consumer mortgage loans held-for-sale in order to economically hedge the effect of changes in interest rates resulting from the commitment to fund the loans. 
 Interest Rate lock commitments are not designated as hedging instruments, and therefore, changes in the fair value of these free-standing derivative instruments are reported as non-interest income. 
 Credit extension commitments 
 The Company’s financial statements do not reflect various financial instruments which arise in the normal course of business and which involve elements of credit risk, interest rate risk, and liquidity risk. These financial instruments include commitments to extend credit, commercial letters of credit, and revolving lines of credit. 
 Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of our commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. 
 A summary of the contractual amounts of the Company’s financial instruments outstanding at September 30, 2023, and December 31, 2022, is as follows (in thousands): 
 
 September 30, 2023 December 31, 2022 
 Commitments to extend credit $ 269,097 $ 291,265 
 Commercial letters of credit 10,443 8,539 

 Commitments to extend credit and commercial letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Company’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Consolidated Balance Sheets. Many of these instruments have fixed maturity dates, and many of them will expire without being drawn upon; accordingly, they do not generally present any significant liquidity risk to the Company. 
 Allowance for credit losses - off-balance-sheet credit exposures 
 The Company recorded a provision for credit losses on unfunded commitments of $ 35.0 thousand for the three months ended September 30, 2023, and a recapture of credit losses on unfunded commitments of $ 69.8 thousand for the nine months ended September 30, 2023. The ACL on off-balance-sheet credit totaled $ 205.0 thousand at September 30, 2023, and is included in accrued interest and other liabilities on the accompanying Consolidated Balance Sheets. 
 Litigation 
 The Company is a party to litigation, claims, and proceedings arising in the normal course of business that are ordinary and routine to the nature of the Company’s business and operations. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from any currently pending or threatened litigation, claims, or proceedings will not be material to the Company’s financial position. 
 33 

 
 Table of Contents 

 Note 11— Fair Value Measurements 
 Determination of Fair Value 
 Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: 
 Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. 
 Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 
 Level 3 – Significant unobservable inputs that reflect our own assumptions that market participants would use in pricing an asset or liability. 
 In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 
 The Company used the following methods and significant assumptions to estimate fair value: 
 Investment securities 
 The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). 
 Derivatives 
 The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company has contracted with a third-party vendor to provide valuations for interest rate swaps using standard swap valuation techniques. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities. The Company recognizes interest rate lock commitments at fair value. Fair value of interest rate lock commitments is based on the price of underlying loans obtained from an investor for loans that will be delivered on a best effort basis (Level 2). 
 Loans held-for-sale, at fair value 
 The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. 
 34 

 Table of Contents 
 Note 11— Fair Value Measurements (continued) 

 Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): 
 
 Fair Value Measurements at September 30, 2023 Using: 
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Financial assets 
 Investment Securities 
 U.S. Treasuries and government agencies $ 172,982 $ — $ — $ 172,982 
 Obligations of states and municipalities — 429,479 — 429,479 
 Residential mortgage backed - agency — 41,836 — 41,836 
 Residential mortgage backed - non-agency — 282,108 — 282,108 
 Commercial mortgage backed - agency — 35,539 — 35,539 
 Commercial mortgage backed - non-agency — 173,344 — 173,344 
 Asset-backed — 81,172 — 81,172 
 Other — 7,935 — 7,935 
 Total investment securities available-for-sale $ 172,982 $ 1,051,413 $ — $ 1,224,395 
 
 Loans held-for-sale, at fair value $ — $ 3,011 $ — $ 3,011 
 
 Derivatives $ — $ 2,732 $ — $ 2,732 
 
 Financial liabilities 
 Derivatives $ — $ 4,178 $ — $ 4,178 

 
 Fair Value Measurements at December 31, 2022 Using: 
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Financial assets 
 Investment Securities 
 U.S. Treasuries and government agencies $ 174,993 $ — $ — $ 174,993 
 Obligations of states and municipalities — 453,907 — 453,907 
 Residential mortgage backed - agency — 53,061 — 53,061 
 Residential mortgage backed - non-agency — 339,295 — 339,295 
 Commercial mortgage backed - agency — 59,933 — 59,933 
 Commercial mortgage backed - non-agency — 183,299 — 183,299 
 Asset-backed — 98,626 — 98,626 
 Other — 8,643 — 8,643 
 Total investment securities available-for-sale $ 174,993 $ 1,196,764 $ — $ 1,371,757 
 
 Loans held-for-sale, at fair value $ — $ — $ — $ — 
 
 Derivatives $ — $ 1,311 $ — $ 1,311 
 
 Financial liabilities 
 Derivatives $ — $ 3,565 $ — $ 3,565 

 The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a non-recurring basis in the financial statements: 
 Individually evaluated loans 
 Upon the adoption of CECL, loans individually evaluated for credit expected losses included non-accrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools and have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a non-recurring basis. Any fair 
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 Table of Contents 
 Note 11— Fair Value Measurements (continued) 

 value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income. Prior to adoption of CECL and ASU 2022-02, which eliminated the TDR accounting model, loans were designated as impaired when, in the judgment of management and based on current information and events, it was probable that all amounts due, according to the contractual terms of the loan agreement, would not be collected. 
 The measurement of loss associated with impaired loans can be based on either the observable market price of the loan, the present value of the expected future cash flows, or the fair value of the collateral. Generally, the fair value of impaired loans will be determined by the present value of the expected future cash flows or if collateral-dependent based on recent real estate appraisals. For collateral-dependent, the fair value is measured based on the value of the collateral securing the loans, less estimated costs of disposal. 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. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income and will result in a Level 3 fair value classification. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. 
 Other real estate owned 
 Assets acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. 
 Assets that were measured at fair value on a non-recurring basis during the period are summarized below (in thousands): 
 
 Fair Value Measurements at September 30, 2023 Using: 
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Individually evaluated loans: 
 Commercial real estate $ — $ — $ 301 $ 301 
 Owner-occupied commercial real estate — — 1,337 1,337 
 Acquisition, construction & development — — — — 
 Commercial & industrial — — — — 
 Single family residential — — 1,838 1,838 
 Consumer non-real estate and other — — — — 
 Other real estate owned — — — — 

 36 

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 Note 11— Fair Value Measurements (continued) 

 
 Fair Value Measurements at December 31, 2022 Using: 
 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Individually evaluated loans: 
 Commercial real estate $ — $ — $ 290 $ 290 
 Owner-occupied commercial real estate — — 1,295 1,295 
 Acquisition, construction & development — — — — 
 Commercial & industrial — — — — 
 Single family residential — — 911 911 
 Consumer non-real estate and other — — — — 
 Other real estate owned — — — — 

 
 The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at September 30, 2023, and December 31, 2022 (in thousands except for percentages): 
 
 Description Fair Value Valuation Techniques Unobservable Inputs Range Weighted Average 
 September 30, 2023 
 Impaired loans $ 3,476 Discounted cash flow analysis Market rate for borrower 3.6 % - 8.5 % 
 5.3 % 
 
 December 31, 2022 
 Impaired loans $ 2,496 Discounted cash flow analysis Market rate for borrower 4.5 % - 6.0 % 
 5.2 % 

 Fair value of financial instruments 
 The carrying amounts and estimated fair values of financial instruments not carried at fair value, at September 30, 2023, and December 31, 2022, were as follows (in thousands): 
 
 Fair Value Measurements at September 30, 2023 Using: 
 Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Financial Assets 
 Cash and due from banks $ 9,063 $ 9,063 $ — $ — $ 9,063 
 Interest-earning deposits with banks 32,801 32,801 — — 32,801 
 Loans, net 2,044,505 — — 1,882,989 1,882,989 
 Accrued interest 15,597 — 15,597 — 15,597 
 
 Financial Liabilities 
 Non-interest-bearing $ 853,385 $ — $ 853,385 $ — $ 853,385 
 Interest-bearing 2,132,233 — 2,132,233 — 2,132,233 
 Other borrowed funds 299,000 — 298,133 — 298,133 
 Accrued interest 6,348 — 6,348 — 6,348 

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 Note 11— Fair Value Measurements (continued) 

 
 Fair Value Measurements at December 31, 2022 Using: 
 Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 
 (Level 1) (Level 2) (Level 3) Total 
 Financial Assets 
 Cash and due from banks $ 9,124 $ 9,124 $ — $ — $ 9,124 
 Interest-bearing deposits with banks 41,171 41,171 — — 41,171 
 Loans, net 1,866,182 — — 1,768,903 1,768,903 
 Accrued interest 15,481 — 15,481 — 15,481 
 
 Financial Liabilities 
 Non-interest-bearing $ 960,692 $ — $ 960,692 $ — $ 960,692 
 Interest-bearing 1,959,708 — 1,951,227 — 1,951,227 
 Other borrowed funds 343,100 — 342,904 — 342,904 
 Accrued interest 1,452 — 1,452 — 1,452 

 
 
 Note 12— Accumulated Other Comprehensive Income (Loss) 
 The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2023, and September 30, 2022 (in thousands): 
 
 Three months ended September 30, 2023 
 
 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income 
 Beginning Balance $ ( 1,196 ) $ ( 117,950 ) $ ( 7,031 ) $ ( 126,177 ) 
 Net unrealized gains (losses) ( 38 ) ( 20,285 ) — ( 20,323 ) 
 Less: net realized (gains) losses reclassified to earnings 373 ( 32 ) — 341 
 Net change in pension plan benefits — — — — 
 Ending Balance $ ( 861 ) $ ( 138,267 ) $ ( 7,031 ) $ ( 146,159 ) 
 
 Three months ended September 30, 2022 
 
 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income 
 Beginning Balance $ ( 1,009 ) $ ( 97,192 ) $ ( 6,020 ) $ ( 104,221 ) 
 Net unrealized gains (losses) ( 654 ) ( 42,793 ) — ( 43,447 ) 
 Less: net realized (gains) losses reclassified to earnings 58 33 — 91 
 Net change in pension plan benefits — — — — 
 Ending Balance $ ( 1,605 ) $ ( 139,952 ) $ ( 6,020 ) $ ( 147,577 ) 
 

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 Note 12— Accumulated Other Comprehensive Income (Loss) (continued) 

 
 Nine months ended September 30, 2023 
 
 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income 
 Beginning Balance $ ( 1,589 ) $ ( 130,875 ) $ ( 7,031 ) $ ( 139,495 ) 
 Net unrealized gains (losses) ( 267 ) ( 8,322 ) — ( 8,589 ) 
 Less: net realized (gains) losses reclassified to earnings 995 930 — 1,925 
 Net change in pension plan benefits — — — — 
 Ending Balance $ ( 861 ) $ ( 138,267 ) $ ( 7,031 ) $ ( 146,159 ) 
 
 Nine months ended September 30, 2022 
 
 Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income 
 Beginning Balance $ — $ 12,975 $ ( 6,020 ) $ 6,955 
 Net unrealized gains (losses) ( 1,519 ) ( 152,878 ) — ( 154,397 ) 
 Less: net realized (gains) losses reclassified to earnings ( 86 ) ( 49 ) — ( 135 ) 
 Net change in pension plan benefits — — — — 
 Ending Balance $ ( 1,605 ) $ ( 139,952 ) $ ( 6,020 ) $ ( 147,577 ) 

 
 The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023, and September 30, 2022 (in thousands). 
 
 Details about Accumulated Other Comprehensive Income Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statements of Income 
 Three months ended Nine months ended 
 
 September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 
 Cash flow hedges: 
 Interest rate contracts $ ( 472 ) $ ( 73 ) $ ( 1,259 ) $ 109 Interest income 
 Tax effect 99 15 264 ( 23 ) Income tax expense (benefit) 
 Net of tax $ ( 373 ) $ ( 58 ) $ ( 995 ) $ 86 
 
 Available-for-sale securities: 
 Realized gains (losses) on securities $ — $ ( 42 ) $ ( 111 ) $ 62 Net gains/(losses) on securities 
 Realized gains (losses) on basis adjustment for fair value hedges 40 — ( 1,066 ) — Interest income 
 Tax effect ( 8 ) 9 247 ( 13 ) Income tax expense (benefit) 
 Net of tax $ 32 $ ( 33 ) $ ( 930 ) $ 49 
 
 Total reclassifications, net of tax $ ( 341 ) $ ( 91 ) $ ( 1,925 ) $ 135 Net income 

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 Note 13— Other Operating Expense 
 Other operating expense from the Consolidated Statements of Income for the three and nine months ended September 30, 2023, and September 30, 2022, is as follows (in thousands): 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 FDIC assessment $ 463 $ 294 $ 1,496 $ 974 
 Historic tax credit amortization 632 632 1,895 1,895 
 IT related 532 562 1,489 1,478 
 Consultant fees 1,322 216 2,300 726 
 Network expense 474 456 1,386 1,268 
 Directors' fees 556 453 1,400 1,490 
 Audit expense 167 244 687 511 
 Legal expense 920 ( 3 ) 1,553 584 
 Virginia franchise tax 671 637 1,931 1,837 
 Marketing expense 116 230 454 864 
 Other 1,564 1,435 4,451 4,059 
 Total $ 7,417 $ 5,156 $ 19,042 $ 15,686 

 The Company incurred merger-related expenses of $ 1.7 million for the nine months ended September 30, 2023 including $ 1.6 million which were incurred during the three months ended September 30, 2023. These expenses are included in the consultant fees and legal expense line items detailed in other operating expenses. 
 
 Note 14— Share-Based Compensation 
 The Company has a share-based incentive plan described below that allows it to offer a variety of equity compensation awards subject to approval. Total compensation cost that has been charged against income for the share-based awards granted was $ 610.1 thousand and $ 492.7 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively. The total income tax benefit was $ 128.1 thousand and $ 103.5 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively. 
 Total compensation cost that has been charged against income for the share-based awards granted was $ 1.8 million and $ 1.5 million for the nine months ended September 30, 2023, and September 30, 2022, respectively. The total income tax benefit was $ 377.6 thousand and $ 313.3 thousand for the nine months ended September 30, 2023, and September 30, 2022, respectively. 
 2019 Stock Incentive Plan 
 In 2019, the Company’s Stock Incentive Plan (“2019 SIP”) was approved by the Bank’s Board of Directors. The 2019 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2019 SIP authorized 240,000 units to be issued, and the Company has a practice of using shares held as treasury stock to satisfy these share-based awards. Each unit represents a contingent right to receive one common share or an equivalent amount of cash, or a combination of the two, at the discretion of the Company. Currently, we have a sufficient number of treasury shares to satisfy outstanding equity awards. 
 Under the 2019 SIP, the Company has issued restricted stock unit (“RSU”) awards that are both time-based and performance-based. Each RSU award will indicate the number of shares, the conditions (e.g., service, performance, and/or a combination), and the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the award at grant date. A total of 24,705 and 13,160 shares were issued during the nine months ended September 30, 2023, and September 30, 2022, respectively. 
 For time-based RSUs, the fair value was determined by using the closing stock price on the date prior to the grant date. These RSUs vest over three to five years . 
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 Note 14— Share-Based Compensation (continued) 

 The Board, from time to time, approves performance-based RSU awards that may be earned between a three to five year performance period. Whether units are earned at the end of the performance period will be determined based on the achievement of a market capitalization target over the performance period. If the condition is not achieved, the grant recipient will receive 50 % of the units upon fulfilling the required service time. If the performance condition is achieved, the grant recipient will receive 100 % of the units granted. The market capitalization target will be determined by the Board. 
 
 
 The fair value for performance-based RSU awards was determined by using a Monte Carlo simulation analysis to estimate the achievement of the market capitalization target determined by the Board. The Monte Carlo simulation analysis required the following inputs: (1) expected term, (2) expected volatility, (3) risk-free rate, and (4) dividend yield. The expected term was based on the stated performance period. Management used the expected volatility from a peer group. The risk-free interest rate is based on the U.S. Treasury yield curve over the performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. 
 
 
 The following is a summary of the Company’s RSU awards: 
 
 Non-vested Shares Shares Weighted-Average Grant-Date Fair Value 
 Non-vested at December 31, 2022 122,440 $ 48.00 
 Granted 24,705 67.81 
 Vested ( 4,560 ) 54.07 
 Forfeited — — 
 Non-vested at September 30, 2023 142,585 $ 51.24 

 As of September 30, 2023, there was $ 3.5 million of total unrecognized compensation costs related to non-vested shares granted under the 2019 SIP. The cost is expected to be recognized over a weighted average period of 1.63 years. 
 2023 Stock Incentive Plan 
 In 2023, a new stock incentive plan (“2023 SIP”) was approved by the Board of directors and shareholders. Upon the plan’s shareholder approval date of March 30, 2023, no further share-based awards will be issued under the 2019 SIP. The plan provides for the issuance of share-based awards to directors and employees of the Company. The 2023 SIP authorized the issuance of 250,000 shares, subject to an annual increase in available shares. As of September 30, 2023, no share-based awards have been issued under the 2023 SIP. 
 
 Note 15— Earnings Per Share 
 Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential impact of contingently issuable shares. 
 The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares dilutive potential Common Stock. Dilutive potential Common Stock has no effect on income available to common shareholders. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 2023 2022 2023 2022 
 Net income (in thousands) $ 4,056 $ 11,137 $ 17,614 $ 30,660 
 
 Weighted average number of shares 7,428,710 7,425,760 7,427,817 7,424,862 
 Options effect of dilutive shares 70,568 41,933 78,692 33,707 
 Weighted average dilutive shares 7,499,278 7,467,693 7,506,509 7,458,569 
 
 Basic EPS $ 0.55 $ 1.50 $ 2.37 $ 4.13 
 Diluted EPS 0.55 1.49 2.35 4.11 

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 Note 15— Earnings Per Share (continued) 

 Stock awards equivalent to 1,368 and zero shares of Common Stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2023, and September 30, 2022, respectively, because they were antidilutive. Stock awards equivalent to zero and zero shares of Common Stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2023, and September 30, 2022, respectively, because they were antidilutive. 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Burke & Herbert Financial Services Corp. 10-Q

Item 1. Financial Statements
