Burke & Herbert Financial Services Corp. 10-K

Item 8. Financial Statements and Supplementary Data Burke & Herbert Financial Services Corp. Audited Consolidated Financial Statements: Page Report of Independent Registered Public Accounting Firm (PCAOB No.: 173 ) 90 Consolidated Balance Sheets as of December 31, 2023 , and 2022 91 Consolidated Statements of Income for the Years Ended December 31, 2023 , 2022 , and 2021 92 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023 , 2022 , and 2021 93 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2023 , 2022 , and 2021 94 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 , 2022 , and 2021 95 Notes to the Consolidated Financial Statements 97 89 Table of Contents Crowe LLP Independent Member Crowe Global REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Burke & Herbert Financial Services Corp. Alexandria, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Burke & Herbert Financial Services Corp. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principal As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No.326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Crowe LLP We have served as the Company's auditor since 2021. Washington, D.C. March 22, 2024 90 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Balance Sheets December 31, 2023, and 2022 (In thousands, except share and per share data) 2023 2022 Assets Cash and due from banks $ 8,896 $ 9,124 Interest-bearing deposits with banks 35,602 41,171 Cash and cash equivalents 44,498 50,295 Securities available-for-sale, at fair value 1,248,439 1,371,757 Restricted stock, at cost 5,964 16,443 Loans held-for-sale, at fair value 1,497 — Loans 2,087,756 1,887,221 Allowance for credit losses ( 25,301 ) ( 21,039 ) Net loans 2,062,455 1,866,182 Premises and equipment, net 61,128 53,170 Accrued interest receivable 15,895 15,481 Company-owned life insurance 94,159 92,487 Other assets 83,544 97,083 Total Assets $ 3,617,579 $ 3,562,898 Liabilities and Shareholders' Equity Liabilities Non-interest-bearing deposits $ 830,320 $ 960,692 Interest-bearing deposits 2,171,561 1,959,708 Total deposits 3,001,881 2,920,400 Borrowed funds 272,000 343,100 Accrued interest and other liabilities 28,948 25,945 Total Liabilities 3,302,829 3,289,445 Commitments and contingent liabilities (see Note 14) 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 December 31, 2023, and December 31, 2022; 7,428,710 shares outstanding at December 31, 2023, and 7,425,760 shares outstanding at December 31, 2022 Additional paid-in capital 14,495 12,282 Retained earnings 427,333 424,391 Accumulated other comprehensive income (loss) ( 103,494 ) ( 139,495 ) Treasury stock ( 27,584 ) ( 27,725 ) 571,290 shares, at cost, at December 31, 2023, and 574,240 shares, at cost, at December 31, 2022 Total Shareholders' Equity 314,750 273,453 Total Liabilities and Shareholders' Equity $ 3,617,579 $ 3,562,898 See Notes to Consolidated Financial Statements. 91 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Income Years Ended December 31, 2023, 2022, and 2021 (In thousands, except share and per share data) 2023 2022 2021 Interest income Loans, including fees $ 101,800 $ 73,640 $ 73,170 Taxable securities 37,179 29,616 17,537 Tax-exempt securities 5,615 8,940 9,907 Other interest income 2,302 437 206 Total interest income 146,896 112,633 100,820 Interest expense Deposits 39,195 3,742 2,746 Borrowed funds 13,856 5,136 1,432 Other interest expense 86 63 39 Total interest expense 53,137 8,941 4,217 Net interest income 93,759 103,692 96,603 Credit loss expense - loans and available-for-sale securities 235 ( 7,466 ) ( 1,002 ) Credit loss expense - off-balance sheet credit exposures ( 21 ) — — Total provision for (recapture of) credit losses 214 ( 7,466 ) ( 1,002 ) Net interest income after credit loss expense 93,545 111,158 97,605 Non-interest income Fiduciary and wealth management 5,354 5,309 5,162 Service charges and fees 6,670 6,855 6,328 Net gains (losses) on securities ( 112 ) ( 454 ) ( 4 ) Income from company-owned life insurance 2,844 2,656 2,325 Other non-interest income 3,196 2,721 3,440 Total non-interest income 17,952 17,087 17,251 Non-interest expense Salaries and wages 39,247 39,438 37,099 Pensions and other employee benefits 9,401 7,700 7,621 Occupancy 6,035 5,621 6,444 Equipment rentals, depreciation and maintenance 5,770 5,768 5,481 Other operating 25,983 17,419 17,769 Total non-interest expense 86,436 75,946 74,414 Income before income taxes 25,061 52,299 40,442 Income tax expense 2,369 8,286 4,277 Net income $ 22,692 $ 44,013 $ 36,165 Earnings per common share: Basic $ 3.05 $ 5.93 $ 4.87 Diluted 3.02 5.89 4.87 See Notes to Consolidated Financial Statements. 92 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2023, 2022, and 2021 (In thousands, except share and per share data) 2023 2022 2021 Net income $ 22,692 $ 44,013 $ 36,165 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities: Unrealized gain (loss) arising during period, net of tax of $( 8,697 ) for 2023, $ 38,333 for 2022, and $ 4,236 for 2021 32,718 ( 144,209 ) ( 15,933 ) Reclassification adjustment for loss (gain) on securities, net of tax of $( 24 ) for 2023, $( 95 ) for 2022, and ($ 1 ) for 2021 88 359 3 Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $( 215 ) for 2023, $ — for 2022, and $ — for 2021 810 — — Defined benefit pension plans: Changes in pension plan benefits, net of tax of $( 342 ) for 2023, $ 263 for 2022, and ($ 81 ) for 2021 1,286 ( 1,011 ) 305 Unrealized gain (loss) on cash flow hedge Unrealized holding gain (loss) on cash flow hedge, net of tax of $ 75 for 2023, $ 457 for 2022, and $ — for 2021 ( 283 ) ( 1,721 ) — Reclassification adjustment for losses (gains) included in net income, net of tax of ($ 367 ) for 2023, $( 35 ) for 2022, and $ — for 2021 1,382 132 — Total other comprehensive income (loss) 36,001 ( 146,450 ) ( 15,625 ) Comprehensive income (loss) $ 58,693 $ ( 102,437 ) $ 20,540 See Notes to Consolidated Financial Statements. 93 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2023, 2022, and 2021 (In thousands, except share and per share data) Common Stock Paid-in Capital Retained Earnings Comprehensive Income (Loss) Treasury Stock Shareholders’ Equity Shares Outstanding Amount Balance December 31, 2020 7,448,080 $ 4,000 $ 10,178 $ 374,826 $ 22,580 $ ( 26,707 ) $ 384,877 Net income — — — 36,165 — — 36,165 Other comprehensive income (loss) — — — — ( 15,625 ) — ( 15,625 ) (Purchase) sale of treasury stock, net ( 24,320 ) — — — — ( 1,115 ) ( 1,115 ) Cash dividends, declared — — — ( 14,871 ) — — ( 14,871 ) Share-based compensation expense, net — — 196 — — — 196 Balance December 31, 2021 7,423,760 $ 4,000 $ 10,374 $ 396,120 $ 6,955 $ ( 27,822 ) $ 389,627 Net income — — — 44,013 — — 44,013 Other comprehensive income (loss) — — — — ( 146,450 ) — ( 146,450 ) (Purchase) sale of treasury stock, net 2,000 — — — — 97 97 Cash dividends, declared — — — ( 15,742 ) — — ( 15,742 ) Share-based compensation expense, net — — 1,908 — — — 1,908 Balance December 31, 2022 7,425,760 $ 4,000 $ 12,282 $ 424,391 $ ( 139,495 ) $ ( 27,725 ) $ 273,453 Net income — — — 22,692 — — 22,692 CECL adjustment — — — ( 3,439 ) — — ( 3,439 ) Other comprehensive income (loss) — — — — 36,001 — 36,001 (Purchase) sale of treasury stock, net 2,950 — — — — 141 141 Cash dividends, paid and accrued (1) — — — ( 16,298 ) — — ( 16,298 ) Share-based compensation expense, net — — 2,213 ( 13 ) — — 2,200 Balance December 31, 2023 7,428,710 $ 4,000 $ 14,495 $ 427,333 $ ( 103,494 ) $ ( 27,584 ) $ 314,750 (1) Cash dividends, paid and accrued for the year ending December 31, 2023, include dividends paid of $ 15,747 thousand and $ 551 thousand of dividends accrued on share-based compensation but unpaid as of December 31, 2023. See Notes to Consolidated Financial Statements. 94 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows Years Ended December 31, 2023, 2022, and 2021 (In thousands, except share and per share data) 2023 2022 2021 Cash Flows from Operating Activities Net Income $ 22,692 $ 44,013 $ 36,165 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets 2,872 3,053 3,205 Amortization of housing tax credits 5,591 6,147 6,778 Realized loss on sales of available-for-sale securities 112 454 4 Provision for (recapture of) credit losses 214 ( 7,466 ) ( 1,002 ) Income from company-owned life insurance ( 2,844 ) ( 2,656 ) ( 2,325 ) Deferred tax expense (benefit) ( 1,453 ) 1,397 ( 1,659 ) (Gain) loss on disposal of fixed assets 37 ( 4,533 ) ( 1,063 ) Accretion of securities ( 1,615 ) ( 1,622 ) ( 1,380 ) Amortization of securities 9,161 11,117 9,870 Share-based compensation expense 2,464 2,000 283 Repayment of operating lease liabilities ( 3,137 ) ( 2,330 ) ( 2,076 ) (Gain) on loans held-for-sale ( 138 ) ( 58 ) ( 194 ) Proceeds from sales of loans held-for-sale 14,205 9,585 50,194 Change in fair value of loans held-for-sale ( 28 ) 23 ( 23 ) Originations of loans held-for-sale ( 15,536 ) ( 2,300 ) ( 42,969 ) (Increase) in accrued interest receivable ( 414 ) ( 228 ) ( 1,469 ) Decrease in other assets 3,851 501 2,581 Increase in accrued interest payable and other liabilities 6,475 3,960 32 Net cash flows provided by operating activities $ 42,509 $ 61,057 $ 54,952 Cash Flows from Investing Activities Proceeds from maturities, prepayments, and calls of securities available-for-sale, net 112,025 213,596 194,578 Proceeds from sales of securities available-for-sale, net 77,780 195,907 700 Purchases of securities available-for-sale, net ( 33,221 ) ( 367,615 ) ( 669,951 ) Sales of restricted stock 29,880 22,718 1,988 Purchases of restricted stock ( 19,402 ) ( 27,081 ) ( 1,875 ) Proceeds from sales of property and equipment 3,383 8,260 2,561 Purchases of property and equipment, net of disposals ( 14,249 ) ( 23,075 ) ( 1,083 ) Proceeds from company-owned life insurance 1,171 1,231 240 (Increase) decrease in loans made to customers, net ( 200,535 ) ( 151,352 ) 88,716 Net cash flows (used in) investing activities $ ( 43,168 ) $ ( 127,411 ) $ ( 384,126 ) Cash Flows from Financing Activities Net increase (decrease) in non-interest-bearing accounts ( 130,372 ) 29,845 78,838 Net increase (decrease) in interest-bearing accounts 211,853 ( 42,862 ) 65,133 Increase (decrease) in other short-term borrowings ( 71,100 ) 68,100 50,000 Repayment of finance lease liabilities ( 119 ) ( 152 ) ( 152 ) Proceeds from employee stock purchase program 206 — — 95 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows Years Ended December 31, 2023, 2022, and 2021 (In thousands, except share and per share data) Cash dividends paid ( 15,747 ) ( 15,742 ) ( 14,871 ) Treasury stock transactions 141 97 ( 1,115 ) Net cash flows provided by (used in) financing activities $ ( 5,138 ) $ 39,286 $ 177,833 (Decrease) in cash and cash equivalents ( 5,797 ) ( 27,068 ) ( 151,341 ) Cash and cash equivalents Beginning of year 50,295 77,363 228,704 End of year $ 44,498 $ 50,295 $ 77,363 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 37,573 $ 3,411 $ 2,856 Interest paid on other borrowed funds 7,975 4,324 1,430 Interest paid on finance lease 86 63 39 Income taxes 1,570 950 1,347 Change in unrealized gains on available-for-sale securities 41,415 ( 182,088 ) ( 20,165 ) Change in pension plan benefits 1,628 ( 1,280 ) 386 Lease liability arising from obtaining right-of-use assets 1,214 1,558 2,221 Premises & equipment transferred to property held-for-sale — 3,449 2,697 Transfers from portfolio loans to loans held-for-sale — 19,594 — Financing of sale from loans held-for-sale — 9,000 — See Notes to Consolidated Financial Statements. 96 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies Nature of operations and principles of consolidation The consolidated financial statements include Burke & Herbert Financial Services Corp. (“Burke & Herbert”) and its wholly-owned subsidiary Burke & Herbert Bank & Trust Company (“the Bank”), together referred to as “the Company.” Intercompany transactions and balances are eliminated in consolidation. Burke & Herbert Financial Services Corp. was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for the Bank. Burke & Herbert 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 Burke & Herbert. In September 2023, Burke & Herbert elected to be a financial holding company. As a financial holding company, Burke & Herbert is subject to regulation and supervision by the Federal Reserve. Burke & Herbert 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 (the “merger agreement”) 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 the Bank, 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. On December 6th, the requisite approvals of the Company’s and Summit’s stockholders were received, and the completion of the merger remains subject to the receipt of all required regulatory approvals and the fulfillment of other customary closing conditions. Subsequent events The Company has evaluated subsequent events for recognition and disclosure through March 22, 2024, which is the date the financial statements were available to be issued. Use of estimates To prepare financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management makes estimates and assumptions based on available information that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 97 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, cash equivalents, and cash flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks, including cash items in process of clearing with maturities fewer than 90 days. Cash flows from customer loans, federal funds purchased, securities sold under agreements to repurchase, and deposits are reported on a net basis. Restriction on cash No reserve balances were required at December 31, 2023, and December 31, 2022. There was no reserve requirement with the Federal Reserve as of December 31, 2023, or December 31, 2022. Debt securities Management determines the appropriate classification of debt securities at the time of purchase. Debt securities that the Company has both the positive intent and ability to hold to maturity are classified as held to maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts. Debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are reported at fair value. Unrealized gains and losses on investments classified as available-for-sale have been accounted for as a separate component of accumulated other comprehensive income or loss, net of the related deferred tax effect. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are recognized in interest income over the terms of the securities. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. Allowance for credit losses (“ACL”) - 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 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 98 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 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 uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS debt securities totaled $ 7.5 million at December 31, 2023, and is excluded from the estimate of credit losses. Equity securities Equity securities are carried at fair value with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical, or a similar, investment. Due to the nature of, and restrictions placed upon, certain equity securities have been classified as restricted stock and are carried at cost. These equity securities are not subject to the classifications above. Loan commitments and related financial instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loans held-for-sale Loans held-for-sale are those loans the Company has the intent to sell in the foreseeable future. The Company has elected to use the fair value accounting option (“FVO”) for loans held-for-sale. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the fair value of the loans. All sales are made without recourse and are sold with servicing released. Mortgage banking derivatives The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (interest rate lock commitments). Interest rate lock commitments on mortgage loans to be held-for-sale are accounted for as free-standing derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates through the use of best-efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to significant losses, nor will it realize significant gains related to rate lock commitments due to changes in interest rates. The Company has elected to use the FVO for best effort forward sales commitments. Derivatives At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as respective fair values changes. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives not designated or that do not qualify for hedge accounting are reported currently in earnings as non-interest income. 99 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Accrued settlements on derivatives not designated or that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still probable of occurring, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings. The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each dealer counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business. Loans Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances, adjusted for partial charge-offs, the allowance for credit losses, and any deferred fees and costs on originated loans. Accrued interest receivable totaled $ 8.8 million on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct original costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. For all loan portfolio segments, the accrual of interest income is discontinued at the time the loan becomes 90 days delinquent, unless the loan is well-secured and in process of collection. Loans also are placed on non-accrual if collection of principal or interest is considered impaired. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest income accrued, but not received, for loans placed on non-accrual is reversed against interest income. Interest income received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. For all portfolio segments, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, a history of on-time payments has again been established, and future payments are reasonably assured. 100 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) Concentration of credit risk Substantially all of the Company’s loans and commitments have been granted to customers in the Company’s market area; therefore, the Company’s exposure to credit risk is significantly affected by changes in the market area’s economy. Our customers are general depositors of the Company from the same market area. Some investments in state and municipal securities also involve governmental entities within the Company’s market area. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Allowance for credit losses - loans The allowance for credit losses, in management’s judgement, reflects expected credit losses in the loan portfolio as of 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; and • Delinquency trends. 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 market price, or the present value of the expected future cash flows. A 101 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) 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 - 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. Premises and equipment Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives up to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method (or accelerated) method with useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Company-owned life insurance The Company has purchased life insurance policies on certain employees. Company-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Transfers of financial assets Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other real estate owned (OREO) Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations periodically are performed by management and the foreclosed assets held-for-sale are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of transfer to foreclosed assets is charged 102 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) to the allowance for credit losses. All subsequent gains on sale, losses on sale, and additional write-downs are included in net gains/(losses) on other real estate owned. Revenue and expenses from the operations of foreclosed assets are included in other non-interest income and other operating expenses. Income taxes The Company accounts for income taxes in accordance with income tax accounting guidance. The Company has adopted the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially, and subsequently, measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Pension plan The Company has a non-contributory defined benefit pension plan that was frozen to new participants on June 1, 2005. The Company’s funding policy for the defined benefit plan is to make annual contributions to the Plan in amounts that are determined based on actuarial valuations and recommendations and which meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Authoritative accounting literature requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement plan, the benefit obligation is the accumulated postretirement benefit obligation. Authoritative accounting literature also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet. The guidance also requires additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arises from delayed recognition of the gains or losses, prior service costs or credits, and a transition asset or obligation. 401(k) plan & other plans The Company also has a defined contribution plan (The Investment and Savings Plan) with a salary deferral provision, which covers all employees in the month following their date of hire if they have reached the age of 18. The 401(k) expense is the amount of the matching contributions. For the deferred compensation and supplemental retirement plan, the expense allocates the benefits over the years of service. 103 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) Earnings per Common Share Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Company’s capital structure includes a share-based incentive plan, and an employee stock purchase plan, which may be dilutive to earnings per share (“EPS”). Diluted EPS is calculated by assuming dilution of common shares and adjusting common shares for compensation cost attributable to the share-based compensation plan and employee stock purchase plan. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. Trust assets and fees Assets of the trust department, other than trust cash on deposit at the Company, are not included in these financial statements because they are not assets of the Company. Trust fees are recognized in income using the accrual method. Loss contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are currently any such matters that will have a material effect on the financial statements. Comprehensive income (loss) Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of tax. Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, unrealized gains and losses on cash flow hedges, and changes in the funded status of the pension plan, which are also recognized as separate components of equity. Leases Leases are classified as operating or finance leases at the lease commencement date. The Company leases certain locations for its operations. The Company records leases on the balance sheet in the form of a lease liability for the present value of future minimum payments under the lease terms and a right-of-use asset equal to the lease liability adjusted for items such as deferred or prepaid rent, lease incentives, and any impairment of the right-of-use asset. The discount rate used in determining the lease liability is based upon incremental borrowing rates the Company could obtain for similar loans as of the date of commencement or renewal. The Company does not record short-term leases with an initial lease term of one year or less on the consolidated balance sheets. At lease inception, the Company determines the lease term by considering the non-cancelable lease term and all optional renewal periods that the Company is reasonably certain to renew. The lease term is also used to calculate straight-line lease expense. Leasehold improvements are amortized over the shorter of the useful life and the estimated lease term. The Company’s leases do not contain residual value guarantees or material variable lease payments that will impact the Company’s ability to pay dividends or cause the Company to incur additional material expenses. Operating lease expense consists of a single lease cost allocated over the remaining lease term on a straight-line basis, variable lease expense, and any impairment of the right-of-use asset. Lease expense is included in occupancy expense on the Company’s consolidated statements of income. The Company’s variable lease expense includes rent escalators that are based on market conditions defined in the lease agreements. The amortization of the right-of-use asset arising from finance leases is expensed through occupancy expense and the interest on the related lease liability is expensed through other interest expense on the Company’s consolidated statements of income. Fair value of financial instruments Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, 104 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Share-based compensation Compensation cost is recognized for restricted stock units (“RSUs”) issued to employees, based on the fair value of these awards at the date of grant. The Company RSUs awards are all classified as equity under U.S. GAAP. Compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur for all share-based compensation plans. Operating segment reporting The Company operates in one segment – Community Banking and the financial performance of this one segment is used to make resource allocations and performance decisions. While the chief decision-maker monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Individual operating results are not reviewed by senior management to make resource allocation or performance decisions. Therefore, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Reclassifications Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholder’s equity. Adoption of New Accounting Standards 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 credit loss methodology that is referred to as the current expected credit loss 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 that 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 105 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) beginning after January 1, 2023, 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 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 0 0 0 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 Accounting Standard Update (“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. In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method . ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate-prepayable financial assets of one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to the changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting 106 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. ASU 2022-01 was effective January 1, 2023. Newly Issued not yet Adopted Accounting Standards In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative . This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. We do not expect the adoption of ASU 2023-06 to have a material impact on our consolidated financial statements. In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . These amendments permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The ASU is effective for public business entities for fiscal years beginning after December 15, 2024, including interim periods with those fiscal years. Early adoption is permitted for all entities in any interim period. The amendments in this ASU must be applied on either a modified retrospective or a retrospective basis (except for LIHTC investments not accounted for using the proportional amortization method). A reporting entity that has LIHTC investments that are no longer permitted to use (1) the cost method guidance in paragraph 323-740-25-2A, (2) the equity method example in paragraphs 323-740-55-8 through 55-9, or (3) the delayed equity contribution guidance in paragraphs 323-740-25-3 must either use its general transition method (modified retrospective or retrospective) or apply a prospective approach. We do not expect the adoption of ASU 2023-02 to have a material impact on our consolidated financial statements. In June 2022, the FASB issued ASU 2022-03, Fair Value Measurements (Topic 820): Fair Value Measurements of Equity Securities Subject to Contractual Sale Restrictions . ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require some additional disclosures for equity securities that are subject to contractual sale restrictions. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. The amendments in this ASU should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. We do not expect the adoption of ASU 2022-03 to have a material impact on our consolidated financial statements. 107 Table of Contents Note 2— Securities The carrying amount of securities and their approximate fair values at December 31, 2023, and December 31, 2022, are summarized as follows (in thousands): December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 197,026 $ — $ 17,955 $ 179,071 Obligations of states and municipalities 535,229 21 72,047 463,203 Residential mortgage backed — agency 47,074 — 4,836 42,238 Residential mortgage backed — non-agency 284,826 17 18,812 266,031 Commercial mortgage backed — agency 36,151 28 1,294 34,885 Commercial mortgage backed — non-agency 183,454 — 6,393 177,061 Asset-backed 79,315 23 1,402 77,936 Other 9,500 — 1,486 8,014 Total $ 1,372,575 $ 89 $ 124,225 $ 1,248,439 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 December 31, 2023, and December 31, 2022, securities with amortized costs of $ 826.5 million and $ 637.1 million, respectively, and with estimated fair values of $ 742.5 million and $ 552.5 million, respectively, were pledged to collateralize whole-sale funding, secure public deposits, and for other purposes required or permitted by law. The gross realized gains, realized losses, and proceeds from the sales of securities for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, were as follows (in thousands): 2023 2022 2021 Gross realized gains $ 772 $ 1,512 $ — Gross realized losses ( 884 ) ( 1,966 ) ( 4 ) Proceeds from sales of securities 77,780 195,907 700 The tax benefit (provision) related to these net realized gains and losses for 2023, 2022, and 2021 was $ 23.5 thousand, $ 95.3 thousand, and $ 0.8 thousand, respectively. The maturities of securities available-for-sale at December 31, 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. 108 Table of Contents Note 2— Securities (continued) 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). December 31, 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 $ 29,894 $ 141,775 $ 25,357 $ — $ 197,026 Obligations of states and municipalities — 25,891 359,940 149,398 535,229 Residential mortgage backed - agency 42 11,078 35,954 — 47,074 Residential mortgage backed - non-agency 91,412 91,836 92,752 8,826 284,826 Commercial mortgage backed - agency 134 23,713 12,304 — 36,151 Commercial mortgage backed - non-agency 44,762 133,553 5,139 — 183,454 Asset-backed 8,445 34,470 36,400 — 79,315 Other — — 9,500 — 9,500 Total $ 174,689 $ 462,316 $ 577,346 $ 158,224 $ 1,372,575 December 31, 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 $ 29,588 $ 127,212 $ 22,271 $ — $ 179,071 Obligations of states and municipalities — 24,269 321,827 117,107 463,203 Residential mortgage backed - agency 42 10,656 31,540 — 42,238 Residential mortgage backed - non-agency 89,310 87,333 81,304 8,084 266,031 Commercial mortgage backed - agency 134 22,941 11,810 — 34,885 Commercial mortgage backed - non-agency 43,898 128,962 4,201 — 177,061 Asset-backed 8,349 34,129 35,458 — 77,936 Other — — 8,014 — 8,014 Total $ 171,321 $ 435,502 $ 516,425 $ 125,191 $ 1,248,439 At year-end 2023 and 2022, there were no holdings of securities of any one issuer, other than 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 December 31, 2023, and December 31, 2022. 109 Table of Contents Note 2— Securities (continued) Available-for-sale securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands): December 31, 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 $ — $ — $ 179,071 $ 17,955 $ 17,955 Obligations of states and municipalities 501 14 458,113 72,033 72,047 Residential mortgage backed - agency 36 — 42,203 4,836 4,836 Residential mortgage backed - non-agency 632 2 263,184 18,810 18,812 Commercial mortgage backed - agency — — 34,080 1,294 1,294 Commercial mortgage backed - non-agency 23,437 254 153,625 6,139 6,393 Asset-backed 3,721 9 56,106 1,393 1,402 Other — — 8,014 1,486 1,486 Total $ 28,327 $ 279 $ 1,194,396 $ 123,946 $ 124,225 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 110 Table of Contents Note 2— Securities (continued) 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 (“OTTI”) approach. The Company did not record an ACL on the AFS securities at December 31, 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 392 securities in an unrealized loss position as of December 31, 2023. The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at December 31, 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 December 31, 2023. On January 1, 2023, the Company adopted the CECL methodology as required under ASC 326. Under the CECL methodology an ACL is required for impaired available-for-sale securities. As of the previous two year ends, the Company was relying on ASC 320-10 which required the Company to assess if OTTI existed with respect to its security portfolio. As of December 31, 2022, the Company had no cumulative OTTI. There were no OTTI charges in earnings as a result of credit losses on investments in the years ended December 31, 2022, or December 31, 2021. Securities of U.S. Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities At December 31, 2023, the unrealized losses associated with 12 U.S. Treasuries and Government Agency securities, 16 Residential Mortgage Backed – Agency securities, and 15 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 by the U.S. government. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at December 31, 2023. Securities of U.S. States and Municipalities At December 31, 2023, the unrealized losses associated with 201 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities. These investments 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 December 31, 2023. 111 Table of Contents Note 2— Securities (continued) Residential & Commercial Mortgage Backed – Non-Agency Securities At December 31, 2023, the unrealized losses associated with 90 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 December 31, 2023. Asset-Backed Securities At December 31, 2023, the unrealized losses associated with 22 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 December 31, 2023. Other Securities At December 31, 2023, the unrealized losses associated with 3 securities were primarily driven by interest rates and not the credit quality of the securities. These investments are 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 December 31, 2023. Restricted stock, at cost The Company’s investment in FHLB stock totaled $ 5.9 million and $ 16.4 million at December 31, 2023, and 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 December 31, 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 investment 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 December 31, 2023, and December 31, 2022, which is carried at cost and is not impaired at December 31, 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 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. 112 Table of Contents Note 3— Loans (continued) • 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. Loans at year-end by portfolio segment were as follows (in thousands): 2023 2022 Commercial real estate $ 1,309,084 $ 1,109,315 Owner-occupied commercial real estate 131,381 127,114 Acquisition, construction & development 49,091 94,450 Commercial & industrial 67,847 53,514 Single family residential (1-4 units) 527,980 499,362 Consumer non-real estate and other 2,373 3,466 Loans, gross 2,087,756 1,887,221 Allowance for credit losses ( 25,301 ) ( 21,039 ) Loans, net $ 2,062,455 $ 1,866,182 Net deferred loan fees included in the above loan categories totaled $ 3.5 million and $ 3.3 million at December 31, 2023, and December 31, 2022, respectively. The Company holds $ 3.0 million and $ 7.9 million in Paycheck Protection Program loans, net of deferred fees and costs as of December 31, 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 December 31, 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 Statements of Income. Management calculates the quantitative portion of collectively evaluated loans for all 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 113 Table of Contents Note 4— Allowance for Credit Losses (continued) 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. The following tables present the activity in the ACL, including the impact of the adoption of CECL, for the year ended December 31, 2023, and the activity for the allowance for loan losses for the years ended December 31, 2022, and December 31, 2021 (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, 2023 Beginning balance, prior to adoption of CECL $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039 Impact of adoption CECL 2,686 ( 6 ) ( 640 ) 237 1,661 187 — 4,125 Provision for (recapture of) credit losses 2,432 154 ( 1,074 ) ( 1 ) ( 1,295 ) 19 — 235 Charge-offs — — — ( 29 ) — ( 165 ) — ( 194 ) Recoveries 38 — — — 52 6 — 96 Balance, end of period $ 20,633 $ 783 $ 368 $ 645 $ 2,797 $ 75 $ — $ 25,301 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 Balance, beginning of period $ 25,112 $ 611 $ 2,189 $ 165 $ 2,434 $ 18 $ 1,180 $ 31,709 Provision for (recapture of) loan losses ( 6,391 ) 24 ( 107 ) 293 ( 239 ) 134 ( 1,180 ) ( 7,466 ) Charge-offs ( 3,282 ) — — ( 20 ) — ( 148 ) — ( 3,450 ) Recoveries 38 — — — 184 24 — 246 Balance, end of period $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039 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, 2021 Balance, beginning of period $ 23,356 $ 1,196 $ 3,075 $ 73 $ 3,757 $ 60 $ 1,180 $ 32,697 Provision for (recapture of) loan losses 1,870 ( 602 ) ( 886 ) 72 ( 1,490 ) 34 — ( 1,002 ) Charge-offs ( 127 ) — — — ( 16 ) ( 99 ) — ( 242 ) Recoveries 13 17 — 20 183 23 — 256 Balance, end of period $ 25,112 $ 611 $ 2,189 $ 165 $ 2,434 $ 18 $ 1,180 $ 31,709 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 114 Table of Contents Note 4— Allowance for Credit Losses (continued) 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 (in thousands). 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 $ 154 115 Table of Contents Note 4— Allowance for Credit Losses (continued) (1) Cash basis interest income recognized approximates interest income recognized shown as of the twelve months ended December 31, 2022. 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 December 31, 2023, and December 31, 2022, by portfolio segment (in thousands). December 31, 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 $ 10,496 $ — $ — $ 10,496 $ 1,298,588 $ 1,309,084 $ — $ — Owner-occupied commercial real estate — — 790 790 130,591 131,381 — 1,000 Acquisition, construction & development — — — — 49,091 49,091 — — Commercial & industrial 195 364 — 559 67,288 67,847 — — Single family residential (1-4 units) 1,657 289 1,532 3,478 524,502 527,980 — 2,744 Consumer non-real estate and other 3 — — 3 2,370 2,373 — — Total $ 12,351 $ 653 $ 2,322 $ 15,326 $ 2,072,430 $ 2,087,756 $ — $ 3,744 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. 116 Table of Contents Note 4— Allowance for Credit Losses (continued) 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. 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 December 31, 2023 (in thousands). Term Loans 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial real estate Pass $ 195,857 $ 261,817 $ 166,253 $ 22,791 $ 75,170 $ 416,774 $ 36,761 $ 1,175,423 Special Mention — 12,235 35,449 — 4,876 — — 52,560 Substandard — 15,420 12,847 — 2,209 50,625 — 81,101 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 195,857 $ 289,472 $ 214,549 $ 22,791 $ 82,255 $ 467,399 $ 36,761 $ 1,309,084 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Owner-occupied commercial real estate Pass $ 9,309 $ 31,725 $ 11,229 $ 14,103 $ 10,279 $ 43,616 $ 6,184 $ 126,445 Special Mention — — — — — — — — Substandard — 532 — — — 4,404 — 4,936 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 9,309 $ 32,257 $ 11,229 $ 14,103 $ 10,279 $ 48,020 $ 6,184 $ 131,381 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Acquisition, construction & development Pass $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 29,111 $ 15,204 $ 4,344 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,025 Special Mention — — — — — — — — Substandard — — 822 — — — — 822 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 29,111 $ 15,204 $ 5,166 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,847 Year to date gross charge-offs $ — $ — $ — $ 29 $ — $ — $ — $ 29 117 Table of Contents Note 4— Allowance for Credit Losses (continued) Single family residential (1-4 units) Pass $ 78,222 $ 122,067 $ 60,202 $ 32,158 $ 40,938 $ 137,376 $ 54,273 $ 525,236 Special Mention — — — — — — — — Substandard — — 291 243 — 2,171 39 2,744 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 78,222 $ 122,067 $ 60,493 $ 32,401 $ 40,938 $ 139,547 $ 54,312 $ 527,980 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer non-real estate and other Pass $ 334 $ 150 $ 43 $ 151 $ 386 $ 325 $ 984 $ 2,373 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 334 $ 150 $ 43 $ 151 $ 386 $ 325 $ 984 $ 2,373 Year to date gross charge-offs $ — $ 165 $ — $ — $ — $ — $ — $ 165 Totals $ 321,368 $ 483,436 $ 305,178 $ 69,608 $ 134,601 $ 656,867 $ 116,698 $ 2,087,756 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 December 31, 2023 (in thousands). Collateral Dependent Loans With Allowance With No Related Allowance Total Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance December 31, 2023 Commercial real estate $ — $ — $ — $ — $ — Owner-occupied commercial real estate — — 1,000 1,000 — Acquisition, construction & development — — — — — Commercial & industrial — — — — — Single family residential (1-4 units) — — 2,744 2,744 — Consumer non-real estate and other — — — — — Total $ — $ — $ 3,744 $ 3,744 $ — 118 Table of Contents Note 4— Allowance for Credit Losses (continued) 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 year ended December 31, 2023, the Company did not extend any 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 years ended December 31, 2022, or December 31, 2021. Note 5— Premises and Equipment Premises and equipment are included in the Balance Sheet at December 31, 2023, and December 31, 2022, were as follows (in thousands): 2023 2022 Cost: Land $ 14,626 $ 14,626 Premises 64,181 56,999 Furniture and equipment 17,505 18,705 96,312 90,330 Less: Accumulated depreciation ( 35,184 ) ( 37,160 ) Total $ 61,128 $ 53,170 Depreciation and amortization (e.g. leasehold improvements) expense for the years ended December 31, 2023, December 31, 2022, and December 31, 2021 was $ 2.9 million , $ 3.1 million, and $ 3.2 million , respectively. In 2023, 2022, and 2021, the Company sold premises that resulted in a loss of $ — million , and gains of $ 4.5 million , and $ 1.1 million, respectively, that is captured in other operating expenses on the Consolidated Statements of Income. Note 6— Deposits The aggregate amount of time deposits that meet or exceed the FDIC Insurance limit of $250,000, was approximately $ 92.3 million and $ 32.6 million on December 31, 2023, and December 31, 2022, respectively. Brokered time deposits, which are fully insured, totaled $ 389.0 million and $ 100.3 million at December 31, 2023, and December 31, 2022, respectively. Time deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program totaled $ 24.2 million at December 31, 2023, compared to $ 11.7 million at December 31, 2022. 119 Table of Contents Note 6— Deposits (continued) At December 31, 2023, the scheduled maturities of time deposits, including brokered time deposits, for the next five years were as follows (in thousands): Years ending December 31, 2024 $ 384,207 2025 140,532 2026 83,546 2027 49,354 2028 78,420 Total $ 736,059 At December 31, 2023, and December 31, 2022, amounts included in time deposits for individual retirement accounts totaled $ 28.5 million and $ 36.9 million, respectively. Overdrafts of $ 110 thousand and $ 503 thousand were reclassified to loans as of the year ended December 31, 2023, and December 31, 2022, respectively. Note 7— Advances and Other Borrowings The Company had borrowings of $ 272.0 million and $ 343.1 million at December 31, 2023, and December 31, 2022, respectively. At December 31, 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 weighted average interest rate at December 31, 2023, and December 31, 2022, was 4.75 % and 4.42 %, respectively. The average balance outstanding during 2023 and 2022 was $ 293.9 million and $ 269.5 million, respectively. The Company has a finance lease liability that is not included in these balances - See Note 11 — Leased Property for a discussion of this liability that is included in the accrued interest and other liabilities line in the Consolidated Balance Sheets. 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 borrowing capacity of $ 987.0 million as of December 31, 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 December 31, 2023, and December 31, 2022, was $ 797.8 million and $ 698.1 million, respectively. As of December 31, 2023, all of the Company’s borrowings will mature within one calendar year. The contractual maturities of these borrowings as of December 31, 2023, are as follows (in thousands): Due in 2024 $ 272 Due in 2025 — Total $ 272 120 Table of Contents Note 8— Income Taxes The components of applicable income tax expense (benefit) for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, were as follows (in thousands): 2023 2022 2021 Current Expense: Federal $ 3,592 $ 5,501 $ 5,564 State 230 1,388 372 $ 3,822 $ 6,889 $ 5,936 Deferred Expense: Federal $ ( 1,422 ) $ 1,318 $ ( 1,401 ) State ( 31 ) 79 ( 258 ) $ ( 1,453 ) $ 1,397 $ ( 1,659 ) Total $ 2,369 $ 8,286 $ 4,277 Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating losses and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carry-forwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets. The Company follows accounting guidance related to accounting for uncertainty in income taxes. Under the “more likely than not” threshold guidelines, the Company’s uncertain tax position reserve was $ 167 thousand and $ 291 thousand as of December 31, 2023, and December 31, 2022, respectively. The Company’s policy is to account for interest and penalties as a component of income tax expense. The Company is no longer subject to examination by federal, state, and local taxing authorities for years before January 1, 2020. 121 Table of Contents Note 8— Income Taxes (continued) The following reconciles the amount of reported income tax expense in the financial statements to taxes that would be computed by applying the federal statutory tax rates to income before taxes (in thousands): 2023 2022 2021 Expected taxes using statutory rates $ 5,263 $ 10,983 $ 8,493 Benefit of tax-exempt municipal interest income, net of non-deductible interest ( 363 ) ( 1,694 ) ( 1,993 ) Nontaxable income from company-owned life insurance ( 604 ) ( 570 ) ( 502 ) Low income tax credits, net of amortization ( 1,840 ) ( 1,840 ) ( 1,843 ) State taxes, net of federal benefit 157 1,159 294 Merger-related 382 — — Other adjustment, net ( 626 ) 248 ( 172 ) Total $ 2,369 $ 8,286 $ 4,277 Deferred income taxes reflect the impact of “temporary differences” between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. The net deferred tax amounts in the accompanying Consolidated Balance Sheets include the following components (in thousands): 2023 2022 Deferred tax assets: Provision for credit losses $ 5,600 $ 4,597 Lease liability 2,008 2,259 Compensation and other accruals 2,011 1,847 Partnership investments 2,264 1,982 Unrealized losses on securities available-for-sale 26,069 34,789 Tax credit carryforward 8,690 7,634 Unrealized losses on interest rate swaps — 422 Total deferred tax asset $ 46,642 $ 53,530 Deferred tax liabilities: Tax over book depreciation $ ( 2,073 ) $ ( 1,618 ) Pension accrual ( 434 ) ( 456 ) Unrealized gains on interest rate swaps ( 85 ) — Right of use asset ( 1,906 ) ( 2,158 ) Total deferred tax liability $ ( 4,498 ) $ ( 4,232 ) Net deferred tax asset $ 42,144 $ 49,298 Note 9— Defined Benefit Pension Plan The Company provides pension benefits for eligible employees through a defined benefit pension plan. Employees hired prior to June 1, 2005 participate in the retirement plan on a non-contributing basis and were fully vested after five years of service. 122 Table of Contents Note 9— Defined Benefit Pension Plan (continued) The following tables set forth the Plan’s status and related disclosures (in thousands): 2023 2022 Changes in benefit obligation: Benefit obligation at beginning of year $ 30,225 $ 42,297 Service cost 469 786 Interest cost 1,471 1,141 Actuarial (gain) loss 775 ( 12,549 ) Distributions ( 1,440 ) ( 1,450 ) Benefit obligation at end of year $ 31,500 $ 30,225 Change in plan assets: Fair value of plan assets at beginning of year $ 31,968 $ 46,017 Adjustment to beginning of year fair value — — Actual return on plan assets 2,653 ( 12,599 ) Employer contribution — — Distributions ( 1,440 ) ( 1,450 ) Fair value of plan assets at end of year $ 33,181 $ 31,968 Funded status recognized as accrued pension cost $ 1,681 $ 1,743 Amounts recognized in accumulated other comprehensive (income) loss: Net loss $ 7,273 $ 8,901 Deferred income tax benefit ( 1,527 ) ( 1,869 ) Total amount recognized $ 5,746 $ 7,032 Accumulated benefit obligation $ 29,372 $ 28,184 At December 31, 2023, December 31, 2022, and December 31, 2021, the assumptions used to determine the pension benefit obligation were as follows: 2023 2022 2021 Discount rate 4.80 % 5.00 % 2.76 % Rate of compensation increase 3.00 3.00 3.50 123 Table of Contents Note 9— Defined Benefit Pension Plan (continued) Components of net periodic benefit cost and other amounts recognized in other comprehensive income (in thousands): 2023 2022 2021 Components of net periodic pension cost: Service cost $ 469 $ 786 $ 998 Interest cost 1,471 1,141 1,042 Expected return on plan assets ( 879 ) ( 1,539 ) ( 1,612 ) Amortization of prior service costs — — — Amortization of net loss 630 309 393 Net periodic pension costs $ 1,691 $ 697 $ 821 Other changes recognized in other comprehensive (income) loss Net loss $ ( 998 ) $ 1,589 $ 7 Amortization of net loss ( 630 ) ( 309 ) ( 393 ) Deferred tax expense (benefit) 342 ( 269 ) 81 Total recognized in accumulated other comprehensive (income) loss $ ( 1,286 ) $ 1,011 $ ( 305 ) Total recognized in net periodic pension costs and other comprehensive loss $ 405 $ 1,708 $ 516 For the years ended December 31, 2023, December 31, 2022, and December 31, 2021, the assumptions used to determine net periodic pension cost were as follows: 2023 2022 2021 Discount rate 4.80 % 5.00 % 2.76 % Expected long-term rate of return on plan assets 3.75 3.75 3.75 Annual salary increase 3.00 3.00 3.50 The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the long-term capital market assumptions. The overall return for each asset class was developed by combining a long-term inflation component and the associated expected real rates. The development of the capital market assumptions utilized a variety of methodologies, including, but not limited to, historical analysis, stock valuation models, such as dividend discount models, and earnings yield models, expected economic growth outlook, and market yields analysis. The Company’s pension plan asset allocations at December 31, 2023, and December 31, 2022, were as follows: 2023 2022 Equity securities 9.6 % 10.0 % Debt securities & cash equivalents 90.4 % 90.0 % Total 100.0 % 100.0 % 124 Table of Contents Note 9— Defined Benefit Pension Plan (continued) As of December 31, 2023, and December 31, 2022, the fair value of plan assets was as follows (in thousands): December 31, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets at Fair Value Cash and cash equivalents $ 122 $ — $ — $ 122 Equity securities — 3,209 — 3,209 Debt securities — 29,859 — 29,859 Total pension assets $ 122 $ 33,068 $ — $ 33,190 December 31, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets at Fair Value Cash and cash equivalents $ 102 $ — $ — $ 102 Equity securities — 3,181 — 3,181 Debt securities — 28,749 — 28,749 Total pension assets $ 102 $ 31,930 $ — $ 32,032 Assets are valued using a combination of methods including quoted prices for similar assets in active or non-active markets. The fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return. Investments are selected by officers experienced in financial matters and risk management, and implementation of approved investment strategies is monitored on a regular basis. Both actively and passively managed investment strategies are considered, and funds are allocated across asset classes to develop an efficient investment structure. It is the responsibility of the trustee to consider costs in administering the portfolio, while maintaining high quality investments. Costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs, and other administrative costs which may be charged to the trust. The Company does not expect to contribute to its pension plan in 2024. Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows (in thousands): Years ending December 31, 2024 $ 1,421 2025 1,406 2026 1,452 2027 1,536 2028 1,691 Following 5 years $ 9,413 Note 10— Other Post-Retirement Plans Investment and Savings Plan The Company has an investment and savings plan for its employees. In the month following date of hire, an employee is eligible to participate in the investment and savings plan if they are at least 18 years old. A participant may elect to defer up to 90 % of their annual compensation, not to exceed limitations established by the Internal Revenue Code. On behalf of each participant who makes the election, the Company contributes an amount up to 125 Table of Contents Note 10— Other Post-Retirement Plans (continued) 3.5 % of the amount contributed by the participant. The Company’s contributions in 2023, 2022, and 2021 totaled $ 1.04 million, $ 1.02 million, and $ 1.02 million, respectively, which were included within pensions and other employee benefits on the Consolidated Statements of Income. Other Retirement Plans The Company has a deferred compensation plan for some of its directors and senior officers that provides benefits payable at age 65. The deferred compensation is to be paid to the individual or beneficiary over a period of 15 years. Amounts deferred are invested in increasing whole life insurance policies on the participants’ lives with the Company as owner and beneficiary. Amounts recognized for the increase in the cash surrender value of the policies are offset against the expense. The Company recognized net income of $ 33 thousand in 2023, $ 61 thousand in 2022, and $ 57 thousand in 2021, related to this deferred compensation plan. In 2010, the Company adopted a Supplemental Executive Retirement Plan for a number of its executive officers. The plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation to its participants. The benefits of the plan vest incrementally based on years of service. Plan expenses for the years ending December 31, 2023, December 31, 2022, and December 31, 2021, amounted to $ 522 thousand, $ 290 thousand, and $ 459 thousand, respectively. In 2021, the Company formed a new deferred compensation plan (2021 Deferred Compensation Plan) for current directors and senior officers. The plan is funded with director fees and salary reductions which are placed in a trust account invested by the Company. The trust investments consist of equity investments, fixed income investments, and cash. The trust account balance totaled $ 818 thousand and $ 496 thousand at December 31, 2023, and December 31, 2022, respectively. This balance is included within other assets and is directly offset within other liabilities. Amounts contributed to the trust and recorded as expense for the Company totaled $ 341 thousand and $ 212 thousand, respectively, in 2023 and 2022. Note 11— 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 for the year ending (in thousands): 2023 2022 2021 Operating lease income $ 2,301 $ 1,309 $ 181 Total lease income $ 2,301 $ 1,309 $ 181 The remaining maturities of operating lease receivables as of December 31, 2023, are as follows (in thousands): Operating Leases 2024 $ 2,302 2025 2,265 2026 1,657 2027 1,356 2028 1,333 Thereafter 2,450 Total lease receivables $ 11,363 126 Table of Contents Note 11— Leased Property (continued) 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 Company’s leases range from less than one year to around fifteen 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. In the fourth quarter of 2022 the Company sold two buildings in separate transactions and entered into sale-leaseback agreements to lease back the properties for up to one year . The lease terms were at market with third-parties and resulted in $ 655 thousand of operating lease expense in 2023. The sale of the two buildings resulted in a realized gain of $ 3.7 million that was recognized in the fourth quarter of 2022. Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands): Balance Sheet Classification 2023 2022 Right-of-use assets: Operating leases Other assets $ 5,110 $ 7,255 Finance leases Other assets 3,590 2,620 Total right-of-use assets $ 8,700 $ 9,875 Lease liabilities: Operating leases Other liabilities $ 5,327 $ 7,592 Finance Leases Other liabilities 3,840 2,745 Total lease liabilities $ 9,167 $ 10,337 The components of total lease cost were as follows for the period ending (in thousands): 2023 2022 2021 Finance lease cost Right-of-use asset amortization $ 244 $ 204 $ 207 Interest expense 86 63 39 Operating lease cost 3,210 2,495 2,517 Total lease cost $ 3,540 $ 2,762 $ 2,763 127 Table of Contents Note 11— Leased Property (continued) The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of December 31, 2023, are as follows (in thousands): Operating Leases Finance Leases 2024 $ 2,418 $ 327 2025 1,075 334 2026 622 341 2027 572 347 2028 548 354 Thereafter 475 2,993 Total undiscounted lease payments 5,710 4,696 Less: discount ( 383 ) ( 856 ) Net lease liabilities $ 5,327 $ 3,840 The following table presents additional information about the Company’s leases as of December 31, 2023, and December 31, 2022. Supplemental lease information (dollars in thousands) 2023 2022 Finance lease weighted average remaining lease term (years) 12.66 12.76 Finance lease weighted average discount rate 2.96 % 2.22 % Operating lease weighted average remaining lease term (years) 3.71 3.26 Operating lease weighted average discount rate 3.33 % 3.19 % Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,330 $ 2,557 Operating cash flows from finance leases 86 63 Financing cash flows from finance leases 119 152 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 — 1,558 Note 12— Regulatory Capital Matters Banks and bank 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 December 31, 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 December 31, 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.” 128 Table of Contents Note 12— Regulatory Capital Matters (continued) The table below presents the actual and required capital amounts and ratios for the Company and the Bank at December 31, 2023, and December 31, 2022 (in thousands). 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 December 31, 2023 Total Capital to risk-weighted assets Consolidated $ 443,799 17.88 % $ 260,694 ≥ 10.5 % $ 248,280 ≥ 10.0 % Burke & Herbert Bank & Trust 442,414 17.82 260,626 ≥ 10.5 248,215 ≥ 10.0 Tier 1 (Core) Capital to risk-weighted assets Consolidated 418,244 16.85 211,038 ≥ 8.5 198,624 ≥ 8.0 Burke & Herbert Bank & Trust 416,859 16.79 210,983 ≥ 8.5 198,572 ≥ 8.0 Common Tier 1 (CET 1) to risk-weighted assets Consolidated 418,244 16.85 173,796 ≥ 7.0 161,382 ≥ 6.5 Burke & Herbert Bank & Trust 416,859 16.79 173,751 ≥ 7.0 161,340 ≥ 6.5 Tier 1 (Core) Capital to average assets Consolidated 418,244 11.31 147,965 ≥ 4.0 184,957 ≥ 5.0 Burke & Herbert Bank & Trust 416,859 11.27 147,986 ≥ 4.0 184,982 ≥ 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 December 31, 2023, approximately $ 181.8 million of retained earnings was available for dividend declaration without regulatory approval. Note 13— 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. 129 Table of Contents Note 13— Derivatives (continued) Cash flow hedges of interest rate risk The Company’s objectives in using interest rate derivatives are to add stability to net 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 risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Other 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. During 2023, such derivatives were used to hedge the variable cash flows associated with variable-rate debt and assets. 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 expense or interest income in the same period(s) during which the hedged transaction affects earnings. During 2024, the Company estimates that an additional $ 0.6 million will be reclassified as a reduction to interest income, and an additional $ 1.2 million will be reclassified as a reduction to interest expense. The Company is hedging its exposure to the variability in future cash flow for forecasted transactions over a maximum period of 4 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments). 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 December 31, 2023, and December 31, 2022 (in thousands): December 31, 2023 Balance Sheet Location Notional Amount Fair Value Derivatives designated as hedges: Interest rate swaps related to cash flow hedges Other assets $ 100,000 $ 65 Interest rate swaps related to cash flow hedges Other liabilities 150,000 1,047 Derivatives not designated as hedges: Interest rate swaps related to customer loans Other assets $ 72,572 $ 998 Interest rate swaps related to customer loans Other liabilities 72,572 998 130 Table of Contents Note 13— Derivatives (continued) 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 years ended December 31, 2023, December 31, 2022, and December 31, 2021 (in thousands): December 31, 2023 December 31, 2023 Derivatives in Cash Flow Hedging Relationships 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 Location of Gain or (Loss) Reclassified from AOCI into Income 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 $ ( 329 ) $ ( 329 ) $ — Interest Income $ ( 1,749 ) $ ( 1,749 ) $ — Interest Rate Products ( 29 ) ( 29 ) — Interest Expense — — — Total $ ( 358 ) $ ( 358 ) $ — $ ( 1,749 ) $ ( 1,749 ) $ — December 31, 2022 December 31, 2022 Derivatives in Cash Flow Hedging Relationships 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 Location of Gain or (Loss) Reclassified from AOCI into Income 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 $ ( 2,178 ) $ ( 2,178 ) $ — Interest Income $ ( 167 ) $ ( 167 ) $ — Total $ ( 2,178 ) $ ( 2,178 ) $ — $ ( 167 ) $ ( 167 ) $ — December 31, 2021 December 31, 2021 Derivatives in Cash Flow Hedging Relationships 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 Location of Gain or (Loss) Reclassified from AOCI into Income 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 $ — $ — $ — Interest Income $ — $ — $ — Total $ — $ — $ — $ — $ — $ — 131 Table of Contents Note 13— Derivatives (continued) The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income as of December 31, 2023, and December 31, 2022 (in thousands). Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships December 31, 2023 December 31, 2022 December 31, 2021 Interest Income Interest Expense 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. $ ( 895 ) $ — $ ( 167 ) $ — $ — $ — The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts Hedging items (1) $ ( 1,025 ) — — — — — Derivatives designated as hedging instruments 1,879 — — — — — Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 Interest contracts Amount of gain or (loss) reclassified from AOCI into income $ ( 1,749 ) — $ ( 167 ) — — — 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 ( 1,749 ) — ( 167 ) — — — Amount of Gain or (Loss) Reclassified from AOCI into Income - Excluded Component — — — — — — (1) The Company voluntarily 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 the amortization of other discounts or premiums on the hedged assets. Credit-risk-related Contingent Features As of December 31, 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 $ 982 thousand. As of December 31, 2023, the Company has posted the full amount of collateral related to these agreements. Note 14— 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. The net gains (losses) relating to the free-standing derivative instruments (interest rate lock commitments) were $ 8 thousand, $( 13 ) thousand, and $ 13 thousand, at December 31, 2023, December 31, 2022, and December 31, 2021, respectively. The notional amount of the mortgage loan pipeline that resulted in an interest rate lock commitments at December 31, 2023, December 31, 2022, and December 31, 2021, was $ 3.4 million, zero , and 132 Table of Contents Note 14— Commitments and Contingencies (continued) $ 926 thousand, respectively. 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 (e.g. revolving lines of credit) and commercial letters 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 December 31, 2023, and December 31, 2022, is as follows (in thousands): 2023 2022 Commitments to extend credit $ 278,923 $ 291,265 Commercial letters of credit 10,718 8,539 Commitments to extend credit and commercial letters of credit both include exposure to some credit loss in the event of non-performance 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 recapture of credit losses on unfunded commitments of $ 21 thousand for the year ended December 31, 2023. The ACL on off-balance-sheet credit exposures totaled $ 254 thousand at December 31, 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. Note 15— Transactions with Related Parties Loans to directors and principal officers, including their immediate families and affiliated companies in which they have a direct or indirect material interest, are considered to be related parties. Aggregate loan balances with related parties were as follows (in thousands): 2023 Balance, beginning $ 96,397 New loans 32,055 Repayments ( 4,038 ) Balance, ending $ 124,414 None of the loans are past due, on non-accrual status, or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 2023, or December 31, 2022. 133 Table of Contents Note 15— Transactions with Related Parties (continued) Deposits from related parties at years ended December 31, 2023, and December 31, 2022, were $ 103.6 million and $ 109.1 million. Note 16— 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. 134 Table of Contents Note 16— Fair Value Measurements (continued) Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurements at December 31, 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 $ 179,071 $ — $ — $ 179,071 Obligations of state and municipalities — 463,203 — 463,203 Residential mortgage backed - agency — 42,238 — 42,238 Residential mortgage backed - non-agency — 266,031 — 266,031 Commercial mortgage backed - agency — 34,885 — 34,885 Commercial mortgage backed - non-agency — 177,061 — 177,061 Asset backed — 77,936 — 77,936 Other — 8,014 — 8,014 Total investment securities available-for-sale $ 179,071 $ 1,069,368 $ — $ 1,248,439 Loans held-for-sale, at fair value $ — $ 1,497 $ — $ 1,497 Derivatives $ — $ 1,063 $ — $ 1,063 Financial liabilities Derivatives $ — $ 2,045 $ — $ 2,045 135 Table of Contents Note 16— 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 Financial assets Investment Securities U.S. Treasuries and government agencies $ 174,993 $ — $ — $ 174,993 Obligations of state 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 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 136 Table of Contents Note 16— Fair Value Measurements (continued) 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 December 31, 2023 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Impaired Loans: Commercial real estate $ — $ — $ 286 $ 286 Owner-occupied commercial real estate — — 1,315 1,315 Acquisition, construction & development — — — — Commercial & industrial — — — — Single family residential — — 1,816 1,816 Consumer non-real estate and other — — — — Other real estate owned — — — — 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 Impaired 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 — — — — 137 Table of Contents Note 16— Fair Value Measurements (continued) The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at December 31, 2023, and December 31, 2022 (in thousands except for percentages): Description Fair Value Valuation Techniques Unobservable Inputs Range Weighted Average December 31, 2023 Individually evaluated loans $ 3,417 Income, Market, & Discounted cash flow analysis External appraised values; management assumptions regarding market trends, market rate for borrower, or other relevant factors 3.6 % - 9 % 5.4 % December 31, 2022 Individually evaluated loans $ 2,496 Income, Market, & Discounted cash flow analysis External appraised values; management assumptions regarding market trends, market rate for borrower, or other relevant factors 4.5 % - 6 % 5.2 % Fair value of financial instruments The carrying amounts and estimated fair values of financial instruments not carried at fair value, at December 31, 2023, and December 31, 2022, were as follows (in thousands): Fair Value Measurements at December 31, 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 $ 8,896 $ 8,896 $ — $ — $ 8,896 Interest-bearing deposits with banks 35,602 35,602 — — 35,602 Loans, net 2,062,455 — — 1,897,459 1,897,459 Accrued interest 15,895 — 15,895 — 15,895 Financial liabilities Non-interest-bearing $ 830,320 $ — $ 830,320 $ — $ 830,320 Interest-bearing 2,171,561 — 2,167,218 — 2,167,218 Other borrowed funds 272,000 — 271,716 — 271,716 Accrued interest 8,954 — 8,954 — 8,954 138 Table of Contents Note 16— 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 17— Common Stock Transactions In 2023, the Company reissued 2,950 shares of treasury stock to satisfy the vesting of RSUs. No other purchase or sale of the Company’s Common Stock occurred in 2023. On November 15, 2022, the Company effected a forty -for-one stock split of its Common Stock by issuing thirty-nine additional shares of Common Stock for each outstanding share of Common Stock of record as of November 9, 2022. All share and earnings per share information have been retroactively adjusted to reflect the stock split within the financial statements and notes to the financial statements. In 2022, the Company reissued 2,000 shares of treasury stock to satisfy the vesting of RSUs. No other purchase or sale of the Company’s Common Stock occurred in 2022. In 2021, the Company purchased shares of its own Common Stock on the open market in arms-length transactions. It acquired 90,040 shares at an aggregate cost of $ 4.4 million at prices ranging from $ 45.25 to $ 50.00 per share. Additionally, in early August 2021, the Company sold 64,000 shares to certain of its directors, pursuant to a private placement exemption from registration for aggregate consideration of $ 3.2 million and reissued 1,720 shares of treasury stock to satisfy the vesting of RSUs. During 2023, 2022, and 2021, the Company declared and paid cash dividends of $ 2.12 , $ 2.12 , and $ 2.00 per share, respectively. 139 Table of Contents Note 18— Accumulated Other Comprehensive Income (Loss) The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ending December 31, 2023, December 31, 2022, and December 31, 2021 (in thousands): December 31, 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) ( 283 ) 32,718 — 32,435 Less: net realized (gains) losses reclassified to earnings 1,382 898 — 2,280 Net change in pension plan benefits — — 1,286 1,286 Ending Balance $ ( 490 ) $ ( 97,259 ) $ ( 5,745 ) $ ( 103,494 ) December 31, 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) ( 1,721 ) ( 144,209 ) — ( 145,930 ) Less: net realized (gains) losses reclassified to earnings 132 359 — 491 Net change in pension plan benefits — — ( 1,011 ) ( 1,011 ) Ending Balance $ ( 1,589 ) $ ( 130,875 ) $ ( 7,031 ) $ ( 139,495 ) December 31, 2021 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 $ — $ 28,905 $ ( 6,325 ) $ 22,580 Net unrealized gains (losses) — ( 15,933 ) — ( 15,933 ) Less: net realized (gains) losses reclassified to earnings — 3 — 3 Net change in pension plan benefits — — 305 305 Ending Balance $ — $ 12,975 $ ( 6,020 ) $ 6,955 140 Table of Contents Note 18— Accumulated Other Comprehensive Income (Loss) (continued) The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ending December 31, 2023, December 31, 2022, and December 31, 2021 (in thousands). Details about Accumulated Other Comprehensive Income Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statements of Income 2023 2022 2021 Cash flow hedges: Interest rate contracts $ ( 1,749 ) $ ( 167 ) $ — Interest income Tax effect 367 35 — Income tax expense (benefit) Net of Tax $ ( 1,382 ) $ ( 132 ) $ — Available-for-sale securities: Realized gains (losses) on securities $ ( 112 ) $ ( 454 ) $ ( 4 ) Net gains/(losses) on securities Realized gains (losses) on basis adjustment for fair value hedges ( 1,025 ) — — Interest income Tax effect 239 95 1 Income tax expense (benefit) Net of Tax $ ( 898 ) $ ( 359 ) $ ( 3 ) Defined benefit pension plan: Amortization of actuarial gain / (loss) $ ( 1,628 ) $ 1,280 $ ( 386 ) Pension and other employee benefits Tax effect 342 ( 269 ) 81 Income tax expense (benefit) Net of Tax $ ( 1,286 ) $ 1,011 $ ( 305 ) Total reclassifications, net of tax $ ( 3,566 ) $ 520 $ ( 308 ) Net income Note: The Defined benefit pension plan items are included in the computation of net periodic pension cost. See Note 9 — Defined Benefit Pension Plan , for additional information. 141 Table of Contents Note 19— Parent Company Financial Information The following tables summarize condensed financial statements for Burke & Herbert Financial Services Corp., which commenced operations as a holding company on October 1, 2022, as of and for the years ended December 31, 2023, and December 31, 2022 (in thousands): Parent Company Only Condensed Balance Sheet 2023 2022 Assets Cash $ 284 $ 2,000 Investment in subsidiary 313,364 271,757 Other assets 1,653 209 Total Assets $ 315,301 $ 273,966 Liabilities Other liabilities $ 551 $ 513 Total Liabilities 551 513 Total Shareholders’ Equity 314,750 273,453 Total Liabilities and Shareholders’ Equity $ 315,301 $ 273,966 Parent Company Only Condensed Statement of Income 2023 2022 Income Dividends from bank subsidiary $ 18,997 $ 5,936 Total Income 18,997 5,936 Expense Salaries and employee benefit 2,052 426 Other operating expenses 4,826 568 Total Expense 6,878 994 Income (loss) before income tax benefit and equity in undistributed income of subsidiaries 12,119 4,942 Income tax benefit 1,445 209 Income (loss) before equity in undistributed income of subsidiaries 13,564 5,151 Equity in undistributed earnings of subsidiary 9,128 38,862 Net Income $ 22,692 $ 44,013 142 Table of Contents Note 19— Parent Company Financial Information (continued) Parent Company Only Condensed Statement of Cash Flows 2023 2022 Cash Flows from Operating Activities Net income $ 22,692 $ 44,013 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries ( 9,128 ) ( 38,862 ) Share-based compensation 2,464 481 Deferred income taxes ( 539 ) ( 105 ) Net change in other assets ( 899 ) 513 Net change in other liabilities ( 906 ) ( 104 ) Net cash flows provided by operating activities $ 13,684 $ 5,936 Cash Flows from Investing Activities — — Net cash (used in) provided by investing activities $ — $ — Cash Flows from Financing Activities Proceeds from employee stock purchase program 206 — Dividends paid ( 15,747 ) ( 3,936 ) Treasury stock transactions 141 — Net cash (used in) financing activities $ ( 15,400 ) $ ( 3,936 ) Increase in cash and cash equivalents $ ( 1,716 ) $ 2,000 Cash and cash equivalents Beginning of the year $ 2,000 $ — End of the year 284 2,000 143 Table of Contents Note 20— Other Operating Expense Other operating expense from the Statements of Income for years ended December 31, 2023, December 31, 2022, and December 31, 2021, is as follows (in thousands): 2023 2022 2021 FDIC & other regulatory assessment $ 1,957 $ 958 $ 920 Historic tax credit amortization 2,526 2,526 2,717 IT related 2,058 1,980 1,306 Consultant fees 3,082 1,708 1,548 Network expense 1,810 1,693 1,592 Directors' fees 1,918 1,941 1,093 Audit expense 1,124 705 302 Legal expense 2,245 986 275 Virginia franchise tax 2,601 2,492 2,366 Marketing expense 672 1,295 1,086 Debit card expenses 776 596 795 (Gain)/loss on sale of buildings 37 ( 4,533 ) ( 1,063 ) Other 5,177 5,072 4,832 Total $ 25,983 $ 17,419 $ 17,769 The Company incurred merger-related expenses of $ 3.0 million for the year ended December 31, 2023. The substantial majority of the merger-related expenses are included in the consultant fees and legal expense line items detailed in other operating expenses. Note 21— Qualified Affordable Housing Project and Historic Tax Investments The Company invests in qualified affordable housing projects. At December 31, 2023, and December 31, 2022, the balance of the investment for qualified affordable housing projects was $ 18.0 million and $ 23.5 million, respectively. These balances are reflected in the other assets line on the Consolidated Balance Sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $ 0.7 million and $ 0.8 million at December 31, 2023, and December 31, 2022, respectively. The Company expects to fulfill the majority of these commitments by 2024. During the year ended December 31, 2023, December 31, 2022, and December 31, 2021, the Company recognized amortization expense of $ 5.6 million, $ 6.1 million, and $ 6.8 million, respectively, which $ 3.1 million, $ 3.6 million, and $ 4.1 million, respectively, qualified for the proportional amortization method and was included in income tax expense on the Consolidated Statements of Income. During the year ended December 31, 2023, December 31, 2022, and December 31, 2021, $ 2.5 million, $ 2.5 million, and $ 2.7 million, respectively, was included in other non-interest expense on the Consolidated Statements of Income related to historic tax credit investments that do not qualify for the proportional amortization method. Note 22— Revenue from Contracts with Customers All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. ASC 606 is applicable to non-interest revenue streams, such as trust and wealth management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. 144 Table of Contents Note 22— Revenue from Contracts with Customers (continued) The following table presents the components of non-interest income for the years ended December 31, 2023, December 31, 2022, and December 31, 2021 (in thousands): 2023 2022 2021 Service charges and fees (1) Debit card fees $ 4,175 $ 4,454 $ 4,413 Deposit related fees 2,409 2,308 1,792 Other fees 86 93 123 Fiduciary and wealth management (1) Trust fees 3,074 3,176 3,297 Advisory fees 1,866 1,575 1,342 Other fees 414 558 523 Net gains (losses) on securities (2) ( 112 ) ( 454 ) ( 4 ) Income from life insurance (2) 2,844 2,656 2,325 Other non-interest income (1) FHLB dividend (2) 643 484 409 Merchant & credit card fees 748 801 730 Safety deposit fees 359 394 411 Servicing release premium 138 58 1,303 Wire fees 350 358 372 Customer loan swap fees 414 — — Other non-interest (3) 544 626 215 Total non-interest income $ 17,952 $ 17,087 $ 17,251 __________________ (1) Income within the scope of ASC 606 - Revenue Recognition (2) Income excluded from the scope of ASC 606 - Revenue Recognition (3) Includes income that arises from the Company electing the FVO as stated that is not within the scope of ASC 606. A description of the Company’s revenue streams accounted for under ASC 606 follows: Income from fiduciary & wealth management activities Fiduciary and wealth management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied at a point in time (i.e., as incurred), and that allows the Company to recognize the related revenue associated with that transaction. Payment is received shortly after services are rendered. Annuity and insurance income primarily consists of commissions received on annuity product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailer fees on annuity sales. The majority of the trailer fees relates to variable annuity products and are calculated based on a percentage of market value at period end. Revenue is not recognized until the annuity’s market value can be determined. Other non-interest income consists of other recurring revenue streams, such as commissions from sales of mutual funds and other investments, investment advisor fees from the Company’s wealth management product, 145 Table of Contents Note 22— Revenue from Contracts with Customers (continued) safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are payable on the trade date and are received in the following month, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product are earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. Service charges and fees Service charges and fees on deposit accounts consist of monthly service fees, check orders, and other deposit account related fees. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied at a point in time, and the related revenue recognized. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. Debit card fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. Merchant services income mainly consists of fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation is largely satisfied, and the related revenue is recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Note 23— 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 expense that has been charged against income for the share-based awards granted was $ 2.4 million, $ 2.0 million, and $ 283 thousand for 2023, 2022, and 2021, respectively. The total income tax benefit was $ 506 thousand, $ 421 thousand, and $ 59 thousand for 2023, 2022, and 2021, 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 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 25,705 , 13,160 , and 106,040 shares were issued in 2023, 2022, and 2021, 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 . 146 Table of Contents Note 23— 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. 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 December 31, 2023, one share-based award of 1,000 shares has been issued under the 2023 SIP. The following is a summary of all the Company’s RSU awards issued under both the 2019 SIP and 2023 SIP: Non-vested Shares Shares Weighted-Average Grant-Date Fair Value Non-vested at January 1, 2023 122,440 $ 48.00 Granted 25,705 67.02 Vested ( 4,560 ) 54.07 Forfeited — — Non-vested at December 31, 2023 143,585 $ 51.21 As of December 31, 2023, there was $ 2.9 million of total unrecognized compensation costs related to non-vested shares granted under the 2019 SIP and 2023 SIP. The cost is expected to be recognized over a weighted average period of 1.44 years. There were 89,135 shares remaining to be issued from the 2019 SIP which were rolled into the 2023 SIP as of the approval date of the 2023 SIP at March 30, 2023. 2023 Employee Stock Purchase Plan In 2023, a new employee stock purchase plan (“2023 ESPP”) was approved by the Board of directors and shareholders. Upon the plan’s shareholder approval date of March 30, 2023, the 2023 ESPP reserved 250,000 shares of common stock for issuance to employees. Whole shares are sold to participants in the plan at 85 % of the lower of the stock price at the beginning or end of each semi-annual offering period that began on September 1, 2023. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 15 % of their annual salary. At December 31, 2023, no shares have been purchased. The Company recognized $ 64 thousand of expense captured in salaries and wages line item on the Consolidated Statements of Income for the year ended December 31, 2023. Note 24— 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 Company uses the treasury stock method as described by ASC 260 - Earnings Per Share for each dilutive instrument when computing diluted earnings per share. 147 Table of Contents Note 24— Earnings Per Share (continued) 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. 2023 2022 2021 Net income (in thousands) $ 22,692 $ 44,013 $ 36,165 Weighted average number of shares 7,428,042 7,425,088 7,424,405 Options effect of dilutive shares 78,813 42,629 5,659 Weighted average dilutive shares 7,506,855 7,467,717 7,430,064 Basic EPS $ 3.05 $ 5.93 $ 4.87 Diluted EPS 3.02 5.89 4.87 Stock awards equivalent to 503 , zero , and 462 shares of Common Stock were not considered in computing diluted earnings per common share for 2023, 2022, and 2021, respectively, because they were antidilutive. Note 25— Subsequent Events The Company has evaluated subsequent events through the filing of this Form 10-K, and determined that there have been no material events that have occurred that would require adjustments to our disclosures in the consolidated financial statements. 148 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 149 Table of Contents