What changed in this filing

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Item 1. Financial Statements

2024-05-10 compared with 2023-11-09 · 335 added, 459 removed, 854 unchanged (48% of the section changed)

2 unchanged sentences

Consolidated Financial Statements:

Consolidated Balance Sheets as of September 30, 2023 (Unaudited), and December 31, 2022

Consolidated Statements of Income for the Three and Nin e Months Ended September 30, 2023, and September 30, 2022 (Unaudited)

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nin e Months Ended September 30, 2023, and September 30, 2022 (Unaudited)

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023, and September 30, 2022 (Unaudited)

Consolidated Statements of Cash Flows for the Ni ne Months Ended September 30, 2023, and September 30, 2022 (Unaudited)

Consolidated Balance Sheets as of March 31, 2024 (Unaudited), and December 31, 202 3

Consolidated Statements of Income for the Three Months Ended March 31, 202 4 , and March 31, 202 3 (Unaudited)

Consolidated Statements of Comprehensive Income (Loss) for the Three Ended March 31 , 2024 , and March 31, 2023 (Unaudited)

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 20 2 4 , and March 31, 202 3 (Unaudited)

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 202 4 , and March 31 , 202 3 (Unaudited)

Notes to the Consolidated Financial Statements (Unaudited)

2 unchanged sentences

(In thousands, except share and per share data)

September 30,

(Unaudited) December 31, 2022

March 31, 2024

December 31, 2023

Cash and due from banks $ 9,152 $ 8,896

27 unchanged sentences

$ 0.50 par value;

20,000,000 shares authorized and 8,000,000 issued at September 30, 2023, and December 31, 2022;

7,428,710 shares outstanding at September 30, 2023, and 7,425,760 shares outstanding at December 31, 2022

20,000,000 shares authorized and 8,011,315 issued at March 31, 2024, and 8,000,000 issued at December 31, 2023;

7,440,025 shares outstanding at March 31, 2024, and 7,428,710 shares outstanding at December 31, 2023

Additional paid-in capital 15,308 14,495

2 unchanged sentences

Treasury stock ( 27,584 ) ( 27,584 )

571,290 shares, at cost, at September 30, 2023, and 574,240 shares, at cost, at December 31, 2022

571,290 shares, at cost, at March 31, 2024, and 571,290 shares, at cost, at December 31, 2023

Total Shareholders’ Equity

6 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Interest income

11 unchanged sentences

22,131 24,774

Provision for (recapture of) credit losses 235 ( 2,388 ) 964 ( 7,564 )

Credit loss expense - loans and available-for-sale securities ( 670 ) 523

Credit loss expense - off-balance sheet credit exposures — ( 8 )

Total provision for (recapture of) credit losses ( 670 ) 515

Net interest income after credit loss expense 22,801 24,259

16 unchanged sentences

$ 5,212 $ 7,524

$ 4,056 $ 11,137 $ 17,614 $ 30,660

Earnings per common share:

5 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Net income $ 5,212 $ 7,524

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on securities:

Unrealized gain (loss) arising during period, net of tax of $ 5,392 and $ 11,375 for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of $ 2,212 and $ 40,638 for the nine months ended September 30, 2023, and September 30, 2022, respectively

( 20,285 ) ( 42,793 ) ( 8,322 ) ( 152,878 )

Reclassification adjustment for loss (gain) on securities, net of tax of $ — and ($ 9 ) for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 23 ) and $ 13 for the nine months ended September 30, 2023 and September 30, 2022, respectively

Unrealized gain (loss) on securities:

Unrealized gain (loss) arising during period, net of tax of $ 117 and ($ 4,577 ) for the three months ended March 31, 2024, and March 31, 2023, respectively

( 441 ) 17,218

Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $ 9 and $ — for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 224 ) and $ — for the nine months ended September 30, 2023, and September 30, 2022, respectively

Reclassification adjustment for loss (gain) on securities, net of tax of $ — and $ — for the three months ended March 31, 2024, and March 31, 2023, respectively

Reclassification adjustment for loss (gain) on fair value hedge, net of tax of $ 8 and $ 496 for the three months ended March 31, 2024, and March 31, 2023, respectively

( 32 ) ( 1,866 )

Unrealized gain (loss) on cash flow hedge:

Unrealized holding gain (loss) on cash flow hedge, net of tax of $ 10 and $ 174 for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of $ 71 and $ 404 for the nine months ended September 30, 2023, and September 30, 2022, respectively

( 38 ) ( 654 ) ( 267 ) ( 1,519 )

Reclassification adjustment for losses (gains) included in net income, net of tax ($ 99 ) and ($ 15 ) for the three months ended September 30, 2023, and September 30, 2022, respectively, net of tax of ($ 264 ) and $ 23 for the nine months ended September 30, 2023, and September 30, 2022, respectively

373 58 995 ( 86 )

Unrealized holding gain (loss) on cash flow hedge, net of tax of ($ 707 ) and ($ 13 ) for the three months ended March 31, 2024, and March 31, 2023, respectively

Reclassification adjustment for loss (gain) included in net income, net of tax ($ 94 ) and ($ 76 ) for the three months ended March 31, 2024, and March 31, 2023, respectively

Total other comprehensive income (loss) 2,540 15,686

4 unchanged sentences

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended September 30, 2023 and 2022

(In thousands, except share and per share data)

Common Stock Additional Paid-in

Capital Retained

Earnings Comprehensive

Income (Loss) Treasury

Stock Shareholders’

Shares Outstanding Amount

Balance June 30, 2023 7,428,710 $ 4,000 $ 13,208 $ 426,625 $ ( 126,177 ) $ ( 27,584 ) $ 290,072

Net income 4,056 4,056

Other comprehensive income (loss) ( 19,982 ) ( 19,982 )

(Purchase) sale of treasury stock, net —

Cash dividends, declared ( 3,937 ) ( 3,937 )

Share-based compensation expense, net 610 610

Balance September 30, 2023 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819

Balance June 30, 2022 7,425,760 $ 4,000 $ 11,313 $ 407,772 $ ( 104,221 ) $ ( 27,726 ) $ 291,138

Net income 11,137 11,137

Other comprehensive income (loss) ( 43,356 ) ( 43,356 )

(Purchase) sale of treasury stock, net —

Cash dividends, declared ( 3,936 ) ( 3,936 )

Share-based compensation expense, net 488 488

Balance September 30, 2022 7,425,760 $ 4,000 $ 11,801 $ 414,973 $ ( 147,577 ) $ ( 27,726 ) $ 255,471

See Notes to Consolidated Financial Statements.

Burke & Herbert Financial Services Corp.

Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2023 and 2022

For the Three Months Ended March 31, 2024, and March 31, 2023

(In thousands, except share and per share data)

6 unchanged sentences

Balance December 31, 2023 7,428,710 $ 4,000 $ 14,495 $ 427,333 $ ( 103,494 ) $ ( 27,584 ) $ 314,750

Cumulative effect adjustment due to the adoption of CECL, net of tax ( 3,439 ) ( 3,439 )

Net income — — — 5,212 — — 5,212

1 unchanged sentence

(Purchase) sale of treasury stock, net — — — — — — —

Cash dividends, declared ( 11,809 ) ( 11,809 )

Cash dividends, declared - $ 0.53 per share

— — — ( 3,939 ) — — ( 3,939 )

Share-based compensation expense, net 11 6 813 ( 74 ) — — 745

Balance September 30, 2023 7,428,710 $ 4,000 $ 13,818 $ 426,744 $ ( 146,159 ) $ ( 27,584 ) $ 270,819

Balance March 31, 2024 7,440,025 $ 4,006 $ 15,308 $ 428,532 $ ( 100,954 ) $ ( 27,584 ) $ 319,308

Balance December 31, 2022 7,425,760 $ 4,000 $ 12,282 $ 424,391 $ ( 139,495 ) $ ( 27,725 ) $ 273,453

Cumulative effect adjustment due to the adoption of CECL, net of tax — — — ( 3,439 ) — — ( 3,439 )

Net income — — — 7,524 — — 7,524

1 unchanged sentence

(Purchase) sale of treasury stock, net 2,080 — — — — 99 99

Cash dividends, declared ( 11,807 ) ( 11,807 )

Cash dividends, declared - $ 0.53 per share

— — — ( 3,936 ) — — ( 3,936 )

Share-based compensation expense, net — — 404 ( 8 ) — — 396

Balance September 30, 2022 7,425,760 $ 4,000 $ 11,801 $ 414,973 $ ( 147,577 ) $ ( 27,726 ) $ 255,471

Balance March 31, 2023 7,427,840 $ 4,000 $ 12,686 $ 424,532 $ ( 123,809 ) $ ( 27,626 ) $ 289,783

See Notes to Consolidated Financial Statements.

2 unchanged sentences

(In thousands, except share and per share data)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows from Operating Activities

16 unchanged sentences

Originations of loans held-for-sale ( 6,340 ) ( 1,010 )

(Increase) in accrued interest receivable ( 117 ) ( 78 )

Decrease in other assets 2,904 2,022

Increase in accrued interest payable and other liabilities 6,329 3,129

(Increase) decrease in accrued interest receivable ( 433 ) 323

(Increase) decrease in other assets 1,006 ( 1,235 )

Increase (decrease) in accrued interest payable and other liabilities ( 1,543 ) 2,216

Net cash flows provided by operating activities $ 7,089 $ 10,926

6 unchanged sentences

Purchases of property and equipment, net of disposals ( 1,503 ) ( 2,671 )

(Purchase of) company-owned life insurance ( 6 ) ( 6 )

Proceeds from (purchase of) company-owned life insurance 1,130 ( 6 )

(Increase) in loans made to customers, net ( 30,425 ) ( 64,517 )

1 unchanged sentence

Cash Flows from Financing Activities

Net increase (decrease) in non-interest-bearing accounts ( 107,307 ) 49,867

Net (decrease) in non-interest-bearing accounts ( 7,553 ) ( 53,969 )

Net increase (decrease) in interest-bearing accounts ( 4,215 ) 165,960

(Decrease) in other short-term borrowings ( 44,100 ) ( 32,000 )

Increase (decrease) in other short-term borrowings 88,000 ( 21,400 )

Repayment of finance lease liabilities ( 53 ) ( 39 )

Cash dividends paid ( 3,939 ) ( 3,936 )

Proceeds from employee stock purchase program 48 —

Issuance of common stock 819 —

Burke & Herbert Financial Services Corp.

Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

Sale of treasury stock — 99

4 unchanged sentences

End of period $ 54,077 $ 116,939

Burke & Herbert Financial Services Corp.

Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

Supplemental Disclosures of Cash Flow Information

24 unchanged sentences

The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate.

Pending Merger with Summit Financial Group, Inc.

On August 24, 2023, the Company and Summit Financial Group, Inc.

(“Summit”), entered into an Agreement and Plan of Reorganization and Plan of Merger pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the continuing corporation (the “merger”).

Immediately following the merger, Summit Community Bank, Inc., a West Virginia banking corporation (“SCB”) and a wholly-owned direct subsidiary of Summit, will merge with and into Burke & Herbert Bank & Trust Company, a Virginia banking corporation and a wholly-owned direct subsidiary of Burke & Herbert, with the Bank as the continuing bank (the “bank merger,” and together with the merger, the “mergers”).

In the merger, Summit shareholders will receive 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they own (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares.

In addition, each share of Summit series 2021 preferred stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive one share of a newly created series of Burke & Herbert preferred stock having rights, preferences, privileges and voting powers and limitations and restrictions thereof that are not materially less or more favorable to the holders of the Summit series 2021 preferred stock.

Completion of the mergers is subject to receipt of the requisite approvals of the Company’s and Summit’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions.

Merger with Summit Financial Group, Inc.

Effective on May 3, 2024 (the “Closing Date”), Burke & Herbert, completed its previously announced merger with Summit Financial Group, Inc., a West Virginia corporation (“Summit”), pursuant to the Agreement and Plan of Reorganization and accompanying Plan of Merger dated August 24, 2023, between Burke & Herbert and Summit (the “Merger Agreement”).

Below is a description of the nature of the event as of the merger closing date, but at this time management is not able to estimate its financial statement impact.

Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert, with Burke & Herbert continuing as the surviving corporation (the “Merger”), and (ii) immediately following the Merger, Summit Community Bank, Inc., a West Virginia chartered bank and a wholly-owned subsidiary of Summit (“SCB”), merged with and into Burke & Herbert Bank & Trust Company, a Virginia chartered bank and a wholly-owned subsidiary of Burke & Herbert (“Burke & Herbert Bank”), with Burke & Herbert Bank as the surviving bank (the “Bank Merger”).

In the merger, holders of Summit common stock outstanding at the effective time of the Merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares.

The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert Common Stock.

Additionally, each share of Summit’s 6.0 % Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series 2021 (the “Summit Series 2021 Preferred Stock”) issued and outstanding was converted into the right to receive a share of a newly created series of preferred stock of Burke & Herbert, the Burke & Herbert Series 2021 Preferred Stock (the “Burke & Herbert Series 2021 Preferred Stock”).

Basis of Presentation

4 unchanged sentences

They do not include all of the information and notes required by GAAP for complete financial statements.

As such, these unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2022, included in the Company’s Registration Statement on Form 10 filed with the SEC on February 28, 2023, as amended on April 4, 2023, April 20, 2023, and April 21, 2023, and as declared as effective by the SEC on April 21, 2023.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.

5 unchanged sentences

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for any other interim period or for the full year.

The results of operations for the three months ended March 31, 2024, are not necessarily indicative of the results to be expected for any other interim period or for the full year.

All amounts and disclosures included in this quarterly report as of December 31, 2023, were derived from the Company’s audited consolidated financial statements.

1 unchanged sentence

These reclassifications had no effect on prior year net income or on shareholders’ equity.

Adoption of new accounting standards

Derivatives and Hedging

On March 28, 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-01, Derivatives and Hedging (Topic 815):

Fair Value Hedging - Portfolio Layer Method .

The purpose of this updated guidance is to further align risk management objectives with hedge accounting results on the application of the last-of-layer method, which was first introduced in ASU 2017-02, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities.

ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022.

ASU 2022-01 requires a modified retrospective transition method for basis adjustments in which the entity will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption.

The Company adopted this ASU on January 1, 2023;

therefore, there was no impact to the consolidated financial statements.

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) :

Measurement of Credit Losses on Financial Instruments (“ASC 326”), as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The CECL methodology requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, as well as future forecasts including reasonable and supportable forecasts and other forecast periods.

CECL generally applies to financial assets measured at amortized cost and some off-balance sheet credit exposures, such as unfunded commitments to extend credit.

Financial assets measured at amortized cost are presented as the net amount expected to be collected.

In addition, CECL made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.

The adoption of the new CECL standard resulted in a cumulative-effect adjustment that increased the allowance for credit losses for loans by $ 4.1 million and increased the allowance for unfunded commitments by $ 274.8 thousand.

Retained earnings, net of deferred taxes, decreased by $ 3.4 million.

Results for reporting periods beginning after January 1, 2023,

Note 1— Nature of Business Activities and Significant Accounting Policies (continued)

are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with the incurred loss model under the previously applicable GAAP.

The following table illustrates the impact of the adoption of CECL, and the transition away from the incurred loss method, on January 1, 2023.

The impact to the allowance for credit losses (“ACL”) is presented at the loan segment level (in thousands):

January 1, 2023

Reserves under Incurred Loss Model Reserves under CECL Model Impact of CECL Adoption

Financial Assets:

Commercial real estate $ 15,477 $ 18,163 $ 2,686

Owner-occupied commercial real estate 635 629 ( 6 )

Acquisition, construction & development 2,082 1,442 ( 640 )

Commercial & industrial 438 675 237

Single family residential (1-4 units) 2,379 4,040 1,661

Consumer non-real estate and other 28 215 187

Unallocated reserve — — —

Allowance for credit losses on loans $ 21,039 $ 25,164 $ 4,125

Financial Liabilities:

Allowance for credit losses on off-balance sheet credit exposure $ — $ 275 $ 275

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities.

The Company did not record an ACL for securities upon adoption.

The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on non-accrual status, which generally occurs when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful.

The Company has concluded that this policy results in the timely reversal of uncollectible interest.

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures .

ASU 2022-02 addresses areas identified by the FASB as part of its implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model.

The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

The Company adopted the standard prospectively, and it did not have a material impact on the financial statements.

Allowance for credit losses - available-for-sale debt securities

Management evaluates all available-for-sale (“AFS”) debt securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

The Company first assesses whether it intends to sell or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

Note 1— Nature of Business Activities and Significant Accounting Policies (continued)

the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

Changes in the ACL are recorded as credit loss expense (or recapture).

Losses are charged against the allowance when management believes the uncollectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

At September 30, 2023, there was no ACL related to the AFS security portfolio.

Refer to Note 2 - Securities in Notes to the Consolidated Financial Statements.

Allowance for credit losses - loans

The ACL represents an amount, which, in management’s judgment, reflects expected credit losses in the loan portfolio at the balance sheet date.

The estimate for expected credit losses is based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience as related to credit contractual term information.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recapture of) credit losses, which is recorded in the Consolidated Statements of Income.

The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans:

collectively evaluated loans and individually evaluated loans.

In addition, the ACL also includes a qualitative component which adjusts the CECL model for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan portfolio.

The Company is using a remaining useful life or weighted average remaining maturity (“WARM”) methodology to estimate its current expected credit losses.

For purposes of calculating reserves in collectively evaluated loans, the ACL calculation segments the Company’s loan portfolio using federal call codes to group loans which share similar risk characteristics.

In order to generate reasonable and supportable forecasts of loss rates over a two-year period, the ACL calculation utilizes macroeconomic variable loss drivers, which may include aggregate macroeconomic indicators pertaining to such items as equity market conditions or interest rates, as well as other variables that are portfolio-specific, such as those that pertain to the commercial real estate or residential loan portfolios.

A straight-line reversion technique is used for the following four quarters, and in following quarters, the ACL calculation reverts to historical average loss rates.

Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond information used to calculate reasonable and supportable, reversion and post-reversion period forecasts on collectively evaluated loans.

As the reasonable and supportable and reversion period forecasts reflect the use of the macroeconomic variable loss drivers, management may consider that an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions, including those that utilize supplemental information relative to the macroeconomic variable loss drivers.

Qualitative risk factors considered by management include the following:

• Nature and volume of loans;

• Concentrations of credit;

• Delinquency trends;

• Experience, ability, and depth of management and lending staff;

• Quality of loan review system.

Loans that do not share similar risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation for the ACL.

Loans identified to be individually evaluated under CECL include loans on non-accrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans collectively evaluated.

A specific reserve analysis is applied to the individually evaluated loans, which considers collateral value, an observable

Note 1— Nature of Business Activities and Significant Accounting Policies (continued)

market price, or the present value of the expected future cash flows.

A specific reserve may be assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loan.

Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of the collateral.

A loan is considered collateral-dependent when the Company determines foreclosure is probable or the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral.

Collateral could be in the form of real estate, equipment, or business assets.

An ACL may result for a collateral-dependent loan if the fair value of the underlying collateral, as of the reporting date, adjusted for expected costs to repair or sell, was less than the amortized cost basis of the loan.

If repayment of the loan is instead dependent only on the operation, rather than the sale of the collateral, the measure of the ACL does not incorporate estimated costs to sell.

For loans analyzed on the basis of projected future principal and interest cash flows, the Company will discount the expected cash flows at the effective interest rate of the loan, and an ACL would result if the present value of the expected cash flows was less than the amortized cost basis of the loan.

When the discounted cash flow method is used to determine the ACL, management does not adjust the effective interest rate used to discount cash flows to incorporate expected prepayments.

Allowance for credit losses on off-balance sheet credit exposures

On a quarterly basis, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The ACL on off-balance sheet credit exposures is adjusted through the provision for credit losses on the Consolidated Statements of Income.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life by loan segment at each balance sheet date under the CECL model using the same methodology as the loan portfolio.

The ACL for unfunded commitments is included in accrued interest and other liabilities on the Company’s Consolidated Balance Sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACL and elected the policy to write-off accrued interest receivable directly through the reversal of interest income.

Accrued interest receivable totaled $ 8.3 million on loans and totaled $ 7.6 million on AFS securities at September 30, 2023, and is included in accrued interest receivable on the Company’s Consolidated Balance Sheets.

Recently adopted accounting standards

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“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 allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

The ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement 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 ASU was effective for us January 1, 2024, and did not have a material impact on our consolidated financial statements.

Pending adoption of new accounting standards

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) :

Improvements to Income Tax Disclosures.

The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis.

Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received).

Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign.

This ASU is effective for annual periods beginning after December 15, 2024.

Early adoption is permitted.

The amendments should be applied on a prospective basis;

however, retrospective application is permitted.

We do not expect the adoption of ASU 2023-09 to have a material impact on our consolidated financial statements.

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 the date on which the SEC removes that related disclosure from its rules.

For all other entities, the amendments 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.

Note 2— Securities

The carrying amount of AFS securities and their approximate fair values at September 30, 2023, and December 31, 2022, are summarized as follows (in thousands):

September 30, 2023

The carrying amount of available-for-sale (“AFS”) securities and their approximate fair values at March 31, 2024, and December 31, 2023, are summarized as follows (in thousands):

March 31, 2024

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

9 unchanged sentences

Total $ 1,400,215 $ 241 $ 124,936 $ 1,275,520

Note 2— Securities (continued)

December 31, 2023

10 unchanged sentences

Total $ 1,372,575 $ 89 $ 124,225 $ 1,248,439

At September 30, 2023, and December 31, 2022, AFS securities with amortized costs of $ 831.0 million and $ 637.1 million, respectively, and with estimated fair values of $ 709.3 million and $ 552.5 million, respectively, were pledged to serve as collateral for secured borrowings, derivative exposures, or to secure public deposits as required or permitted by law.

The gross realized gains, realized losses, and proceeds from the sales of securities for the nine months ended September 30, 2023, and September 30, 2022, were as follows (in thousands):

September 30, 2023 September 30, 2022

At March 31, 2024, and December 31, 2023, AFS securities with amortized costs of $ 827.5 million and $ 826.5 million, respectively, and with estimated fair values of $ 740.2 million and $ 742.5 million, respectively, were pledged to serve as collateral for secured borrowings, derivative exposures, or to secure public deposits as required or permitted by law.

The gross realized gains, realized losses, and proceeds from the sales of securities for the three months ended March 31, 2024, and March 31, 2023, were as follows (in thousands):

March 31, 2024 March 31, 2023

Gross realized gains $ — $ —

1 unchanged sentence

Proceeds from sales of securities 1,281 —

The tax benefit (provision) related to these net realized gains and losses for September 30, 2023, and September 30, 2022, was $ 23.5 thousand, and ($ 13.2 ) thousand, respectively.

The maturities of AFS securities at September 30, 2023, were as follows (in thousands):

The tax benefit (provision) related to these net realized gains and losses for March 31, 2024, and March 31, 2023, was $ — , and $ — , respectively.

The maturities of AFS securities at March 31, 2024, were as follows (in thousands):

(Expected maturities of securities not due at a single maturity date are based on average life at estimated prepayment speed.

Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay some obligations with or without call or prepayment penalties).

September 30, 2023

Note 2— Securities (continued)

March 31, 2024

Amortized Cost

10 unchanged sentences

Total $ 192,401 $ 483,382 $ 556,305 $ 168,127 $ 1,400,215

Note 2— Securities (continued)

September 30, 2023

March 31, 2024

One Year or Less One to Five Years Five to Ten Years After Ten Years Total

9 unchanged sentences

Total $ 189,879 $ 456,305 $ 495,585 $ 133,751 $ 1,275,520

At September 30, 2023, and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S.

At March 31, 2024, and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S.

Government and its agencies, in any amount greater than 10% of shareholders’ equity.

The following table shows the gross unrealized losses and fair value of the Company’s securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023, and December 31, 2022.

Note 2— Securities (continued)

AFS securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands):

September 30, 2023

March 31, 2024

Less Than Twelve Months More Than Twelve Months

10 unchanged sentences

Total $ 90,553 $ 855 $ 1,139,664 $ 124,081 $ 124,936

Note 2— Securities (continued)

December 31, 2023

16 unchanged sentences

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.

This includes, but is not limited to, an evaluation of the type of security 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 the present value of the cash flows expected to be collected is less than the amortized cost, an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the current expected credit loss (“CECL”) standard, and declines due to non-credit factors are recorded in accumulated other comprehensive income

Note 2— Securities (continued)

(“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.

1 unchanged sentence

Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach.

The Company did not record an ACL on the AFS securities at September 30, 2023.

The Company did not record an ACL on the AFS securities at March 31, 2024.

The Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit.

The Company had 403 securities in an unrealized loss position as of September 30, 2023.

The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at September 30, 2023, and concluded no impairment existed based on a combination of factors, which included:

The Company had 391 securities in an unrealized loss position as of March 31, 2024.

The Company has evaluated AFS securities in an unrealized loss position for credit-related impairment at March 31, 2024, and concluded no impairment existed based on a combination of factors, which included:

(1) the securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the par value of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis.

As such, there was no ACL on AFS securities at September 30, 2023.

As such, there was no ACL on AFS securities at March 31, 2024.

Securities of U.S.

Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities

At September 30, 2023, the unrealized losses associated with 12 U.S.

Treasuries and Government Agency securities, 16 Residential Mortgage Backed – Agency securities, and 17 Commercial Mortgage Backed – Agency securities were generally driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided

Note 2— Securities (continued)

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.

At March 31, 2024, the unrealized losses associated with 12 U.S.

Treasuries and Government Agency securities, 16 Residential Mortgage Backed – Agency securities, and 14 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.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024.

Securities of U.S.

States and Municipalities

At September 30, 2023, the unrealized losses associated with 203 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities.

At March 31, 2024, the unrealized losses associated with 202 State and Municipal securities were primarily caused by changes in interest rates and not the credit quality of the securities.

These securities are investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision.

1 unchanged sentence

As a result, we expect to recover the entire amortized cost basis of these securities.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024.

Residential & Commercial Mortgage Backed – Non-Agency Securities

At September 30, 2023, the unrealized losses associated with 96 Residential Mortgage Backed – Non-Agency securities and 33 Commercial Mortgage Backed – Non-Agency securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses.

At March 31, 2024, the unrealized losses associated with 90 Residential Mortgage Backed – Non-Agency securities and 32 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.

1 unchanged sentence

Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024.

Asset-Backed Securities

At September 30, 2023, the unrealized losses associated with 23 Asset-Backed securities were generally driven by changes in interest rates, credit spreads, and projected collateral losses.

At March 31, 2024, the unrealized losses associated with 21 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.

1 unchanged sentence

Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024.

Note 2— Securities (continued)

Other Securities

At September 30, 2023, the unrealized losses associated with 3 securities were primarily driven by interest rates and not the credit quality of the securities.

At March 31, 2024, the unrealized losses associated with 4 securities were primarily driven by interest rates and not the credit quality of the securities.

These investments were underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision.

Based on our assessment of the expected credit losses, we expect to recover the entire amortized cost basis of the securities.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.

Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024.

Restricted stock, at cost

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $ 7.2 million and $ 16.4 million at September 30, 2023, and December 31, 2022, respectively.

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $ 16.3 million and $ 5.9 million at March 31, 2024, and December 31, 2023, respectively.

FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLB or member institutions.

Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

The Company does not consider this investment to be impaired at September 30, 2023, and no impairment has been recognized.

The Company does not consider this investment to be impaired at March 31, 2024, and no impairment has been recognized.

FHLB stock is included in a separate line item Restricted stock, at cost on the Consolidated Balance Sheets and is not part of the Company’s AFS securities portfolio.

The Company’s Restricted stock line item on the Consolidated Balance Sheets also includes an investment in Community Bankers’ Bank, totaling $ 50 thousand at both September 30, 2023, and December 31, 2022, which is carried at cost and is not impaired at September 30, 2023.

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 March 31, 2024, and December 31, 2023, which is carried at cost and is not impaired at March 31, 2024.

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

Note 3— Loans (continued)

among the various loan segments and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions.

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.

6 unchanged sentences

• Consumer non-real estate and other loans carry risk associated with the credit-worthiness of the borrower and the value of the collateral, if any.

Loan balances at September 30, 2023, and December 31, 2022, by portfolio segment were as follows (in thousands):

September 30, 2023 December 31, 2022

Note 3— Loans (continued)

Loan balances at March 31, 2024, and December 31, 2023, by portfolio segment were as follows (in thousands):

March 31, 2024 December 31, 2023

Commercial real estate $ 1,305,152 $ 1,309,084

7 unchanged sentences

Loans, net $ 2,093,549 $ 2,062,455

Net deferred loan fees included in the above loan categories totaled $ 3.5 million and $ 3.3 million at September 30, 2023, and December 31, 2022, respectively.

The Company holds $ 3.8 million and $ 7.9 million in Paycheck Protection Program loans, net of deferred fees and costs as of September 30, 2023, and December 31, 2022, respectively.

Net deferred loan fees included in the above loan categories totaled $ 3.3 million and $ 3.5 million at March 31, 2024, and December 31, 2023, respectively.

The Company holds $ 1.3 million and $ 3.0 million in Paycheck Protection Program loans, net of deferred fees and costs as of March 31, 2024, and December 31, 2023, respectively.

Note 4— Allowance for Credit Losses

On January 1, 2023, the Company adopted the CECL methodology as required under ASC 326.

On January 1, 2023, the Company adopted the CECL methodology as required under Accounting Standards Codification (“ASC”) 326.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables.

For further discussion on the Company’s accounting policies and policy elections related to the accounting standards update refer to Note 1 - Nature of Business Activities and Significant Accounting Policies in these Notes to Consolidated Financial Statements.

All information presented as of September 30, 2023, is in accordance with ASC 326.

All other information presented prior to January 1, 2023, is in accordance with previous applicable GAAP.

All information presented as of March 31, 2024, is in accordance with ASC 326.

The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the Consolidated Statement of Income.

Management calculates the quantitative portion of collectively evaluated loans for all

Note 4— Allowance for Credit Losses (continued)

loan categories using the WARM method.

Management calculates the quantitative portion of collectively evaluated loans for all loan categories using the weighted average remaining maturity (“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.

4 unchanged sentences

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.

Note 4— Allowance for Credit Losses (continued)

The following tables presents the activity in the ACL, including the impact of the adoption of CECL, for the three months and nine months ended September 30, 2023, and the activity for the allowance for loan losses for the three months and nine months ended September 30, 2022 (in thousands).

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 three months ended March 31, 2024, and for the three months ended March 31, 2023 (in thousands).

Commercial real estate Owner-occupied commercial real estate Acquisition, construction & development Commercial & industrial Single family residential (1-4 units) Consumer non-real estate and other Unallocated Total

Three months ended

September 30, 2023

March 31, 2024

Balance, beginning of period $ 20,633 $ 783 $ 368 $ 645 $ 2,797 $ 75 $ — $ 25,301

Provision for (recapture of) credit losses

( 1,659 ) ( 1 ) 306 179 474 31 — ( 670 )

Charge-offs — — — — — ( 30 ) — ( 30 )

1 unchanged sentence

Balance, end of period $ 18,977 $ 782 $ 674 $ 824 $ 3,272 $ 77 $ — $ 24,606

September 30, 2022

March 31, 2023

Balance, beginning of period $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039

Provision for (recapture of) loan losses ( 1,782 ) ( 111 ) 830 82 264 60 ( 1,731 ) ( 2,388 )

Charge-offs — — — — — ( 54 ) — ( 54 )

Recoveries 27 — — — 2 4 — 33

Balance, end of period $ 13,793 $ 613 $ 4,437 $ 296 $ 1,785 $ 29 $ — $ 20,953

Nine months ended

September 30, 2023

Beginning balance, prior to adoption of CECL $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039

Impact of the adoption of CECL 2,686 ( 6 ) ( 640 ) 237 1,661 187 — 4,125

Provision for (recapture of) credit losses 1,414 156 323 ( 129 ) ( 661 ) ( 70 ) — 1,033

Charge-offs — — — ( 29 ) — ( 105 ) — ( 134 )

Recoveries 35 — — — 7 6 — 48

Balance, end of period $ 19,612 $ 785 $ 1,765 $ 517 $ 3,386 $ 46 $ — $ 26,111

September 30, 2022

Balance, beginning of period $ 25,112 $ 611 $ 2,189 $ 165 $ 2,434 $ 18 $ 1,180 $ 31,709

Provision for (recapture of) loan losses

218 ( 73 ) 410 25 ( 13 ) ( 44 ) — 523

Charge-offs — — — — — ( 17 ) — ( 17 )

2 unchanged sentences

Note 4— Allowance for Credit Losses (continued)

The information presented in the table below is not required for periods after the adoption of CECL.

The following table summarizes the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method (individually or collectively evaluated for impairment) as of December 31, 2022 (in thousands):

December 31, 2022

Allowance for loan losses

Individually evaluated for impairment $ 41 $ 102 $ — $ — $ 96 $ — $ — $ 239

Collectively evaluated for impairment 15,436 533 2,082 438 2,283 28 — 20,800

Total ending allowance balance $ 15,477 $ 635 $ 2,082 $ 438 $ 2,379 $ 28 $ — $ 21,039

Loan balance:

Individually evaluated for impairment $ 331 $ 2,580 $ — $ — $ 6,158 $ — $ — $ 9,069

Collectively evaluated for impairment 1,108,984 124,534 94,450 53,514 493,204 3,466 — 1,878,152

Total ending loan balance $ 1,109,315 $ 127,114 $ 94,450 $ 53,514 $ 499,362 $ 3,466 $ — $ 1,887,221

Prior to the adoption of CECL, loans were considered impaired when, based on current information and events as of the measurement date, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements.

Impaired loans included loans on non-accrual status and accruing TDRs.

When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of the global cash flow sufficient to pay all debt obligations, and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

The following table presents information related to impaired loans (in thousands) by portfolio segment as of December 31, 2022:

Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (1)

December 31, 2022

With no related allowance recorded:

Commercial real estate $ — $ — $ — $ — $ —

Owner-occupied commercial real estate 1,184 1,394 — 1,291 97

Acquisition, construction & development — — — — —

Commercial & industrial — — — — —

Single family residential (1-4 units) 5,151 5,576 — 5,131 213

Consumer non-real estate and other — — — — —

Subtotal $ 6,335 $ 6,970 $ — $ 6,422 $ 310

With an allowance recorded:

Commercial real estate $ 331 $ 331 $ 41 $ 350 $ 23

Owner-occupied commercial real estate 1,397 1,397 102 1,420 74

Acquisition, construction & development — — — — —

Commercial & industrial — — — — —

Single family residential (1-4 units) 1,007 1,141 96 1,033 57

Consumer non-real estate and other — — — — —

Subtotal $ 2,735 $ 2,869 $ 239 $ 2,803 $ 154

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

Note 4— Allowance for Credit Losses (continued)

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

The following table presents the aging of the recorded investment in past due loans as of September 30, 2023, and December 31, 2022, by portfolio segment (in thousands):

September 30, 2023

The following table presents the aging of the recorded investment in past due loans as of March 31, 2024, and December 31, 2023, by portfolio segment (in thousands):

March 31, 2024

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

15 unchanged sentences

Total $ 12,351 $ 653 $ 2,322 $ 15,326 $ 2,072,430 $ 2,087,756 $ — $ 3,744

The amount of interest income recognized on nonaccrual loans during the periods presented is immaterial.

Credit Quality Indicators

13 unchanged sentences

If weaknesses go uncorrected, there is potential for partial loss of principal and/or interest.

Note 4— Allowance for Credit Losses (continued)

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.

1 unchanged sentence

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.

Note 4— Allowance for Credit Losses (continued)

The Company has a portfolio of smaller homogenous loans that are not individually risk rated that are included within the single family residential and consumer non-real estate and other loan classes.

Generally, these loan classes are rated as “Pass” unless these loans are on non-accrual and are then classified as substandard.

The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2023 (in thousands):

The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

2024 2023 2022 2021 2020 Prior Revolving Loans Total

26 unchanged sentences

Special Mention — — — — — — — —

Note 4— Allowance for Credit Losses (continued)

Substandard — — — 503 — — — 503

11 unchanged sentences

Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ —

Note 4— Allowance for Credit Losses (continued)

Consumer non-real estate and other

6 unchanged sentences

Year to date gross charge-offs $ 30 $ — $ — $ — $ — $ — $ — $ 30

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

Note 4— Allowance for Credit Losses (continued)

December 31, 2023

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

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 — — — — — — — —

Note 4— Allowance for Credit Losses (continued)

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

The following tables present information about collateral-dependent loans that were individually evaluated for purposes of determining the ACL as of September 30, 2023 (in thousands):

Collateral-Dependent Loans

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 following tables present information about collateral-dependent loans that were individually evaluated for purposes of determining the ACL as of March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

With Allowance With No Related Allowance Total

Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance

September 30, 2023

March 31, 2024

Commercial real estate $ — $ — $ — $ — $ —

5 unchanged sentences

Total $ 613 $ 265 $ 3,702 $ 4,315 $ 265

December 31, 2023

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 $ —

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.

ASU 2022-02 eliminates the troubled debt restructuring (“TDR”) accounting model and requires that the Company evaluate, based on the accounting for

Note 4— Allowance for Credit Losses (continued)

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.

1 unchanged sentence

The Company may also provide multiple types of modifications on an individual loan.

For the three and nine months ended September 30, 2023, the Company did not extend any

Note 4— Allowance for Credit Losses (continued)

modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.

The Company did not extend any modifications that were defined as TDRs during the year ended December 31, 2022.

For the three months ended March 31, 2024, and 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.

Note 5— Deposits

The aggregate amount of time deposits, each with a minimum denomination of $250,000, was approximately $ 65.5 million and $ 32.6 million on September 30, 2023, and December 31, 2022, respectively.

Brokered time deposits totaled $ 389.0 million and $ 100.3 million as of September 30, 2023, and December 31, 2022, respectively.

Time deposits through the Certificate of Deposit Account Registry Service program totaled $ 21.8 million at September 30, 2023, compared to $ 11.7 million at December 31, 2022.

At September 30, 2023, the scheduled maturities of time deposits for the remaining three months ending December 31, 2023 and the following five years were as follows (in thousands):

As of September 30, 2023

Remaining three months ending, December 31, 2023 $ 59,683

The aggregate amount of time deposits that meet or exceed the FDIC Insurance Limit of $250,000, was approximately $ 108.0 million and $ 92.3 million on March 31, 2024, and December 31, 2023, respectively.

Brokered time deposits, which are fully insured, totaled $ 370.8 million and $ 389.0 million as of March 31, 2024, and December 31, 2023, respectively.

Time deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program totaled $ 24.3 million at March 31, 2024, compared to $ 24.2 million at December 31, 2023.

At March 31, 2024, the scheduled maturities of time deposits for the remaining nine months ending December 31, 2024, and the following five years were as follows (in thousands):

As of March 31, 2024

Remaining nine months ending, December 31, 2024 $ 383,222

Total $ 754,869

At September 30, 2023, and December 31, 2022, amounts included in time deposits for individual retirement accounts totaled $ 30.9 million and $ 36.9 million, respectively.

Overdrafts of $ 197 thousand and $ 503 thousand were reclassified to loans as of September 30, 2023, and the year ended December 31, 2022, respectively.

At March 31, 2024, and December 31, 2023, amounts included in time deposits for individual retirement accounts totaled $ 27.4 million and $ 28.5 million, respectively.

Overdrafts of $ 117 thousand and $ 110 thousand were reclassified to loans as of March 31, 2024, and the year ended December 31, 2023, respectively.

Note 6— Advances and Other Borrowings

The Company had borrowings of $ 299.0 million and $ 343.1 million at September 30, 2023, and December 31, 2022, respectively.

At September 30, 2023, the interest rate on this debt ranged from 4.38 % to 5.57 %.

The Company had borrowings of $ 360.0 million and $ 272.0 million at March 31, 2024, and December 31, 2023, respectively.

At March 31, 2024, the interest rate on this debt ranged from 4.78 % to 5.58 %.

At December 31, 2023, the interest rate on this debt ranged from 4.38 % to 5.57 %.

The average balance outstanding during the nine months ending September 30, 2023, and the year ending December 31, 2022, was $ 302.1 million and $ 269.5 million, respectively.

The average balance outstanding during the three months ending March 31, 2024, and the year ending December 31, 2023, was $ 303.6 million and $ 293.9 million, respectively.

The Company has a finance lease liability that is not included in these balances - see Note 7 - Leased Pro perty 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 capacity of $ 883.5 million in remaining borrowing capacity as of September 30, 2023.

Through these sources, the Company had total borrowing capacity of $ 994.2 million with an unused capacity of $ 704.2 million as of March 31, 2024.

The advances on credit lines are secured by both securities and loans.

The lendable collateral value of securities and loans pledged against available lines of credit as of September 30, 2023, and December 31, 2022, was $ 778.0 million and $ 698.1 million, respectively.

As of September 30, 2023, all of the Company’s borrowings will mature within one calendar year.

The contractual maturities of these borrowings as of September 30, 2023, are as follows (in thousands):

The lendable collateral value of securities and loans pledged against available lines of credit as of March 31, 2024, and December 31, 2023, was $ 805.9 million and $ 797.8 million, respectively.

As of March 31, 2024, all of the Company’s borrowings will mature within one calendar year.

Note 6— Federal Home Loan Bank Advances and Other Short-Term Borrowings

The contractual maturities of these borrowings, which all occur within one year of the reporting date, are as follows as of March 31, 2024, (in thousands):

Due in 2024 $ 340,000

4 unchanged sentences

The Company enters into operating leases with customers to lease vacant space in certain owned premises that is not being used by the Company.

These operating leases are typically payable in monthly installments with terms ranging from around two years to around twelve years and may contain renewal options.

The components of lease income, which was included in non-interest expense on the Consolidated Statements of Income, were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

These operating leases are typically payable in monthly installments with terms ranging from around two years to around eleven years and may contain renewal options.

The components of lease income, which is included in non-interest expense on the Consolidated Statements of Income, were as follows (in thousands):

Three Months Ended March 31,

Operating lease income $ 575 $ 575

Total lease income $ 575 $ 575

The remaining maturities of operating lease receivables as of September 30, 2023, are as follows (in thousands):

The remaining maturities of operating lease receivables as of March 31, 2024, are as follows (in thousands):

Operating Leases

Remaining three months ending December 31, 2023 $ 575

Remaining nine months ending December 31, 2024 $ 1,726

Thereafter 2,450

4 unchanged sentences

Certain leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised.

Including renewal options, the terms of the Company’s leases range from less than one year to around thirteen years .

Including renewal options, the terms of the Company’s leases range from less than one year to around fourteen 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.

4 unchanged sentences

Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands):

Balance Sheet Classification September 30, 2023 December 31, 2022

Balance Sheet Classification March 31, 2024 December 31, 2023

Right-of-use assets:

7 unchanged sentences

The components of total lease cost were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Finance lease cost

3 unchanged sentences

Total lease cost $ 733 $ 905

The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of September 30, 2023, are as follows (in thousands):

The Company’s future undiscounted lease payments for finance and operating leases with initial terms of one year or more as of March 31, 2024, are as follows (in thousands):

Operating Leases Finance Leases

Remaining three months ending December 31, 2023 $ 785 $ 81

Remaining nine months ending December 31, 2024 $ 1,774 $ 246

2025 1,404 334

4 unchanged sentences

Note 7— Leased Property (continued)

The following table presents additional information about the Company’s leases as of September 30, 2023, and December 31, 2022.

Supplemental lease information (dollars in thousands) September 30, 2023 December 31, 2022

The following table presents additional information about the Company’s leases as of March 31, 2024, and December 31, 2023.

Supplemental lease information (dollars in thousands) March 31, 2024 December 31, 2023

Finance lease weighted average remaining lease term (years) 12.41 12.66

2 unchanged sentences

Operating lease weighted average discount rate 3.62 % 3.33 %

Nine Months Ended September 30,

Three Months Ended March 31,

Cash paid for amounts included in the measurement of lease liabilities 2024 2023

12 unchanged sentences

The net unrealized gain or loss on AFS securities is not included in computing regulatory capital.

Management believes as of September 30, 2023, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Management believes as of March 31, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject.

“Prompt corrective action” regulations provide five classifications:

2 unchanged sentences

If “undercapitalized”, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

As of September 30, 2023, and December 31, 2022, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for “prompt corrective action”.

The following table presents the actual and required capital amounts and ratios for the Company and the Bank at September 30, 2023, and December 31, 2022 (in thousands except for ratios).

As of March 31, 2024, and December 31, 2023, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for “prompt corrective action”.

The following table presents the actual and required capital amounts and ratios for the Company and the Bank at March 31, 2024, and December 31, 2023 (in thousands except for ratios).

Note 8— Regulatory Capital Matters (continued)

1 unchanged sentence

Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2023

As of March 31, 2024

Total Capital to risk weighted assets

41 unchanged sentences

Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.

As of September 30, 2023, approximately $ 175.0 million of retained earnings was available for dividend declaration without regulatory approval.

As of March 31, 2024, approximately $ 175.8 million of retained earnings was available for dividend declaration without regulatory approval.

Note 9— Derivatives

5 unchanged sentences

To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy.

Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium.

During 2023, such derivatives were used to hedge the variable cash flows associated with variable-rate assets.

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate 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

Note 9— Derivatives (continued)

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate asset.

During the next 12 months, the Company estimates that an additional $ 1.1 million will be reclassified as a reduction to interest income.

over the life of the agreements without exchange of the underlying notional amount.

During 2024, 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 the next twelve months, the Company estimates that an additional $ 0.1 million will be reclassified as a reduction to interest income, and an additional $ 2.8 million will be reclassified as a reduction to interest expense.

Derivatives not designated as hedges

4 unchanged sentences

Changes in the fair value of interest rate swaps are recorded in other non-interest expense and sum to zero because of offsetting terms of swaps with borrowers and swaps with dealer counterparties.

The table below presents the fair value of the Company’s derivative financial instruments, which includes accrued interest, as well as their classification on the Consolidated Balance Sheets as of September 30, 2023, and December 31, 2022 (in thousands):

September 30, 2023

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 March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

Balance Sheet Location Notional Amount Fair Value

Derivatives designated as hedges:

Interest rate swaps related to cash flow hedges Other assets $ 250,000 $ 3,356

Interest rate swaps related to cash flow hedges Other liabilities 50,000 481

5 unchanged sentences

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

2 unchanged sentences

Interest rate swaps related to customer loans Other liabilities 72,572 998

The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended September 30, 2023, and September 30, 2022, as follows (in thousands):

Derivatives in Cash Flow

Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023

Amount of Gain or (Loss) Recognized in OCI on Derivative

Amount of Gain or (Loss) Recognized in OCI Included Component Amount of Gain or (Loss) Recognized in OCI Excluded Component Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component

Interest Rate Products $ ( 48 ) $ ( 48 ) $ — Interest Income $ ( 473 ) $ ( 473 ) $ —

Total $ ( 48 ) $ ( 48 ) $ — $ ( 473 ) $ ( 473 ) $ —

Note 9— Derivatives (continued)

Derivatives in Cash Flow

Hedging Relationships September 30, 2022 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2022

Amount of Gain or (Loss) Recognized in OCI on Derivative

Interest Rate Products $ ( 828 ) $ ( 828 ) $ — Interest Income $ ( 74 ) $ ( 74 ) $ —

Total $ ( 828 ) $ ( 828 ) $ — $ ( 74 ) $ ( 74 ) $ —

The table below presents the effect of cash flow hedge accounting on AOCI for the nine months ended September 30, 2023, and September 30, 2022, as follows (in thousands):

The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended March 31, 2024, and March 31, 2023, as follows (in thousands):

Derivatives in Cash Flow

Hedging Relationships September 30, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2023

Hedging Relationships March 31, 2024 Location of Gain or (Loss) Reclassified from AOCI into Income March 31, 2024

Amount of Gain or (Loss) Recognized in OCI on Derivative

1 unchanged sentence

Interest Rate Products $ ( 17 ) $ ( 17 ) $ — Interest Income $ ( 483 ) $ ( 483 ) $ —

Interest Rate Products 3,385 3,385 — Interest Expense 36 36 —

Total $ 3,368 $ 3,368 $ — $ ( 447 ) $ ( 447 ) $ —

Derivatives in Cash Flow

Hedging Relationships September 30, 2022 Location of Gain or (Loss) Reclassified from AOCI into Income September 30, 2022

Hedging Relationships March 31, 2023 Location of Gain or (Loss) Reclassified from AOCI into Income March 31, 2023

Amount of Gain or (Loss) Recognized in OCI on Derivative

2 unchanged sentences

Total $ 60 $ 60 $ — $ ( 363 ) $ ( 363 ) $ —

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

Note 9— Derivatives (continued)

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the three months ended March 31, 2024, and March 31, 2023.

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Three months ended

September 30, 2023 September 30, 2022

March 31, 2024 March 31, 2023

Interest Income Interest Expense Interest Income Interest Expense

11 unchanged sentences

Amount of gain or (loss) reclassified from AOCI into income - included component

Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — —

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Nine months ended

September 30, 2023 September 30, 2022

Interest Income Interest Expense Interest Income Interest Expense

Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded.

( 483 ) 36 ( 363 ) —

The effects of fair value and cash flow hedging:

Gain or (loss) on fair value hedging relationships in Subtopic 815-20

Interest contracts

Hedged items (1)

( 1,066 ) — — —

Derivatives designated as hedging instruments 776 — — —

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20

Interest contracts

Amount of gain or (loss) reclassified from AOCI into income ( 1,259 ) — 108 —

Amount of gain or (loss) reclassified from AOCI into income as a result that a forecasted transaction is no longer probable of occurring — — — —

Amount of gain or (loss) reclassified from AOCI into income - included component ( 1,259 ) — 108 —

Amount of gain or (loss) reclassified from AOCI into income - excluded component

(1) The Company voluntary discontinued a fair value hedging relationship and these amounts include the gain or (loss) and the hedging adjustment on a voluntary discontinued hedging relationship.

The Company has allocated the basis adjustment to the remaining individual assets in the closed portfolio and will amortize the basis adjustment over a period consistent with amortization of other discounts or premiums on the assets.

Note 9— Derivatives (continued)

(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.

Credit-risk-related Contingent Features

As of September 30, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to these agreements, was $ 1.4 million.

As of September 30, 2023, the Company has posted the full amount of collateral related to these agreements.

As of March 31, 2024, 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 $ 0.5 million.

As of March 31, 2024, the Company has posted the full amount of collateral related to these agreements.

Note 10— Commitments and Contingencies

4 unchanged sentences

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 $ 15.4 thousand and $ 4.2 thousand for the three months ending March 31, 2024, and March 31, 2023, respectively.

The notional amount of the mortgage pipeline that resulted in an interest rate lock commitment was $ 3.0 million and $ 838.0 thousand at March 31, 2024, and March 31, 2023, 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 on the Consolidated Statements of Income.

Credit extension commitments

The Company’s financial statements do not reflect various financial instruments which arise in the normal course of business and which involve elements of credit risk, interest rate risk, and liquidity risk.

These financial instruments include commitments to extend credit, commercial letters of credit, and revolving lines of credit.

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.

2 unchanged sentences

Since many of our commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

A summary of the contractual amounts of the Company’s financial instruments outstanding at September 30, 2023, and December 31, 2022, is as follows (in thousands):

September 30, 2023 December 31, 2022

A summary of the contractual amounts of the Company’s financial instruments outstanding at March 31, 2024, and December 31, 2023, is as follows (in thousands):

March 31, 2024 December 31, 2023

Commitments to extend credit $ 283,042 $ 278,923

Commercial letters of credit 10,904 10,718

Commitments to extend credit and commercial letters of credit all include exposure to some credit loss in the event of nonperformance of the customer.

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.

2 unchanged sentences

Allowance for credit losses - off-balance-sheet credit exposures

The Company recorded a provision for credit losses on unfunded commitments of $ 35.0 thousand for the three months ended September 30, 2023, and a recapture of credit losses on unfunded commitments of $ 69.8 thousand for the nine months ended September 30, 2023.

The ACL on off-balance-sheet credit totaled $ 205.0 thousand at September 30, 2023, and is included in accrued interest and other liabilities on the accompanying Consolidated Balance Sheets.

The Company recorded zero credit losses on unfunded commitments for the three months ended March 31, 2024, and had an ACL on off-balance sheet credit exposures that totaled $ 254.2 thousand at March 31, 2024.

The Company recorded a

Note 10— Commitments and Contingencies (continued)

recapture of $ 7.5 thousand for the three months ended March 31, 2023, and had an ACL on off-balance sheet credit exposures that totaled $ 267.3 thousand at March 31, 2023.

The ACL on off-balance sheet credit exposures is included in accrued interest and other liabilities on the accompanying Consolidated Balance Sheets.

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.

27 unchanged sentences

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

Fair Value Measurements at September 30, 2023 Using:

Fair Value Measurements at March 31, 2024, Using:

Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs

33 unchanged sentences

Derivatives $ — $ 2,045 $ — $ 2,045

Note 11— Fair Value Measurements (continued)

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:

2 unchanged sentences

Individually evaluated loans with an allocation to the ACL are measured at fair value on a non-recurring basis.

Note 11— Fair Value Measurements (continued)

value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income.

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.

13 unchanged sentences

Assets that were measured at fair value on a non-recurring basis during the period are summarized below (in thousands):

Fair Value Measurements at September 30, 2023 Using:

Fair Value Measurements at March 31, 2024, Using:

Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs

20 unchanged sentences

Other real estate owned — — — —

The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at September 30, 2023, and December 31, 2022 (in thousands except for percentages):

The following table presents quantitative information about Level 3 Fair Value Measurements for assets measured at fair value on a non-recurring basis at March 31, 2024, and December 31, 2023 (in thousands except for percentages):

Description Fair Value Valuation Techniques Unobservable Inputs Range Weighted Average

September 30, 2023

Impaired loans $ 3,476 Discounted cash flow analysis Market rate for borrower 3.6 % - 8.5 %

March 31, 2024

Individually evaluated loans $ 3,371 Income, Market, & Discounted cash flow analysis External appraised values;

management assumptions regarding market trends, market rate for borrower, or other relevant factors 3.6 % - 9.0 %

348 Appraisal of collateral Management adjustments (e.g.

liquidity, selling costs, etc.) 5.0 % - 20.0 % for liquidity

6.0 %- 8.0 % for selling costs

December 31, 2023

Impaired loans $ 2,496 Discounted cash flow analysis Market rate for borrower 4.5 % - 6.0 %

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 % - 9.0 %

Note 11— Fair Value Measurements (continued)

Fair value of financial instruments

The carrying amounts and estimated fair values of financial instruments not carried at fair value, at September 30, 2023, and December 31, 2022, were as follows (in thousands):

Fair Value Measurements at September 30, 2023 Using:

The carrying amounts and estimated fair values of financial instruments not carried at fair value, at March 31, 2024, and December 31, 2023, were as follows (in thousands):

Fair Value Measurements at March 31, 2024, Using:

Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs

10 unchanged sentences

Accrued interest 5,268 — 5,268 — 5,268

Note 11— Fair Value Measurements (continued)

Fair Value Measurements at December 31, 2023, Using:

12 unchanged sentences

Note 12— Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2023, and September 30, 2022 (in thousands):

Three months ended September 30, 2023

Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income

Beginning Balance $ ( 1,196 ) $ ( 117,950 ) $ ( 7,031 ) $ ( 126,177 )

Net unrealized gains (losses) ( 38 ) ( 20,285 ) — ( 20,323 )

net realized (gains) losses reclassified to earnings 373 ( 32 ) — 341

Net change in pension plan benefits — — — —

Ending Balance $ ( 861 ) $ ( 138,267 ) $ ( 7,031 ) $ ( 146,159 )

Three months ended September 30, 2022

Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income

Beginning Balance $ ( 1,009 ) $ ( 97,192 ) $ ( 6,020 ) $ ( 104,221 )

Net unrealized gains (losses) ( 654 ) ( 42,793 ) — ( 43,447 )

net realized (gains) losses reclassified to earnings 58 33 — 91

Net change in pension plan benefits — — — —

Ending Balance $ ( 1,605 ) $ ( 139,952 ) $ ( 6,020 ) $ ( 147,577 )

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

Nine months ended September 30, 2023

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2024, and March 31, 2023 (in thousands):

Three months ended March 31, 2024

Gains and Losses on Cash Flow Hedges Unrealized Gains and Losses on Available-for-Sale Securities Defined Benefit Pension Items Accumulated Other Comprehensive Income

4 unchanged sentences

Ending Balance $ 2,523 $ ( 97,732 ) $ ( 5,745 ) $ ( 100,954 )

Nine months ended September 30, 2022

Three months ended March 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

4 unchanged sentences

Ending Balance $ ( 1,255 ) $ ( 115,523 ) $ ( 7,031 ) $ ( 123,809 )

The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023, and September 30, 2022 (in thousands).

The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2024, and March 31, 2023 (in thousands).

Details about Accumulated Other Comprehensive Income Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statements of Income

Three months ended Nine months ended

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Three months ended

March 31, 2024 March 31, 2023

Cash flow hedges:

9 unchanged sentences

Note 13— Other Operating Expense

Other operating expense from the Consolidated Statements of Income for the three and nine months ended September 30, 2023, and September 30, 2022, is as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

FDIC assessment $ 463 $ 294 $ 1,496 $ 974

Other operating expense from the Consolidated Statements of Income for the three months ended March 31, 2024, and March 31, 2023, is as follows (in thousands):

Three Months Ended March 31,

FDIC & other regulatory assessment $ 516 $ 734

Historic tax credit amortization 632 632

IT related 550 491

Consultant fees 1,322 216 2,300 726

Network expense 474 456 1,386 1,268

Consultant and advisory expenses 581 470

ATM & network expense 551 429

Directors' fees 493 410

Audit expense 167 244 687 511

Legal expense 920 ( 3 ) 1,553 584

Accounting and audit expenses 343 307

Legal fees and expenses 345 305

Virginia franchise tax 675 243

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Total $ 6,463 $ 5,607

The Company incurred merger-related expenses of $ 1.7 million for the nine months ended September 30, 2023 including $ 1.6 million which were incurred during the three months ended September 30, 2023.

These expenses are included in the consultant fees and legal expense line items detailed in other operating expenses.

The Company incurred merger-related expenses of $ 633.0 thousand for the three months ended March 31, 2024.

The Company did no t incur any merger-related expenses for the three months ended March 31, 2023.

These expenses are primarily included in the consultant and advisory expenses and legal fees and expenses line items in the table above.

Note 14— Share-Based Compensation

The Company has a share-based incentive plan described below that allows it to offer a variety of equity compensation awards, subject to approval.

Total compensation cost that has been charged against income for the share-based awards granted was $ 610.1 thousand and $ 492.7 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively.

The total income tax benefit was $ 128.1 thousand and $ 103.5 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively.

Total compensation cost that has been charged against income for the share-based awards granted was $ 1.8 million and $ 1.5 million for the nine months ended September 30, 2023, and September 30, 2022, respectively.

The total income tax benefit was $ 377.6 thousand and $ 313.3 thousand for the nine months ended September 30, 2023, and September 30, 2022, respectively.

Total compensation expense that has been charged against income for the share-based awards granted was $ 590.5 thousand and $ 580.6 thousand for the three months ended March 31, 2024, and March 31, 2023, respectively.

The total income tax benefit was $ 124.0 thousand and $ 121.9 thousand for the three months ended March 31, 2024, and March 31, 2023, respectively.

2019 Stock Incentive Plan

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The 2019 SIP provides for the issuance of share-based awards to directors and employees of the Company.

The 2019 SIP authorized 240,000 units to be issued, and the Company has a practice of using shares held as treasury stock to satisfy these share-based awards.

The 2019 SIP authorized 240,000 units to be issued, and the Company’s practice is using authorized unissued shares to satisfy these share-based awards.

Each unit represents a contingent right to receive one common share or an equivalent amount of cash, or a combination of the two, at the discretion of the Company.

Currently, we have a sufficient number of treasury shares to satisfy outstanding equity awards.

Currently, we have a sufficient number of authorized unissued shares to satisfy all outstanding equity awards.

Under the 2019 SIP, the Company has issued restricted stock unit (“RSU”) awards that are both time-based and performance-based.

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Compensation expense is recognized over the vesting period of the awards based on the fair value of the award at grant date.

A total of 24,705 and 13,160 shares were issued during the nine months ended September 30, 2023, and September 30, 2022, respectively.

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.

A total of zero and 24,705 shares were issued during the three months ended March 31, 2024, and March 31, 2023, respectively.

Note 14— Share-Based Compensation (continued)

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 .

Note 14— Share-Based Compensation (continued)

The Board, from time to time, approves performance-based RSU awards that may be earned between a three to five year performance period.

Whether units are earned at the end of the performance period will be determined based on the achievement of a market capitalization target over the performance period.

If the condition is not achieved, the grant recipient will receive 50 % of the units upon fulfilling the required service time.

If the performance condition is achieved, the grant recipient will receive 100 % of the units granted.

The market capitalization target will be determined by the Board.

Whether units are earned at the end of the performance period will be determined based on the achievement of performance and/or market targets (e.g.

market capitalization target) over the performance period.

If the conditions are achieved, the grant recipient will receive 100 % of the units granted as these awards do not provide for a multiplier effect.

The performance / market targets are 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.

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The dividend yield assumption was based on historical and anticipated dividend payouts.

The following is a summary of the Company’s RSU awards:

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 December 31, 2023 143,585 $ 51.21

Granted 24,705 67.81

Vested ( 6,600 ) 45.14

Forfeited ( 200 ) 73.00

Non-vested at September 30, 2023 142,585 $ 51.24

As of September 30, 2023, there was $ 3.5 million of total unrecognized compensation costs related to non-vested shares granted under the 2019 SIP.

Non-vested at March 31, 2024 136,785 $ 51.47

As of March 31, 2024, there was $ 2.3 million of total unrecognized compensation costs related to non-vested shares granted under the 2019 SIP.

The cost is expected to be recognized over a weighted average period of 2.50 years.

2023 Stock Incentive Plan

In 2023, a new stock incentive plan (“2023 SIP”) was approved by the Board of directors and shareholders.

Upon the plan’s shareholder approval date of March 30, 2023, no further share-based awards will be issued under the 2019 SIP.

The plan provides for the issuance of share-based awards to directors and employees of the Company.

The 2023 SIP authorized the issuance of 250,000 shares, subject to an annual increase in available shares.

As of September 30, 2023, no share-based awards have been issued under the 2023 SIP.

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.

At March 31, 2024, 243,620 shares were available to be issued.

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.

The following table presents information for the employee stock purchase plan at the end of March 31, 2024.

March 31, 2024

Shares purchased 6,380

Weighted average price of shares purchased $ 43.11

Compensation expense recognized (in 000’s) 41.3

Note 15— Earnings Per Share

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Diluted earnings per share reflects the potential impact of contingently issuable shares.

The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares dilutive potential Common Stock.

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.

The following shows the weighted average number of shares used in computing earnings per share and the effect of the weighted average number of shares of dilutive potential Common Stock.

Dilutive potential Common Stock has no effect on income available to common shareholders.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Note 15— Earnings Per Share (continued)

Net income (in thousands) $ 5,212 $ 7,524

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Diluted EPS 0.69 1.00

Note 15— Earnings Per Share (continued)

Stock awards equivalent to 1,368 and zero shares of Common Stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2023, and September 30, 2022, respectively, because they were antidilutive.

Stock awards equivalent to zero and zero shares of Common Stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2023, and September 30, 2022, respectively, because they were antidilutive.

Stock awards equivalent to zero and zero shares of Common Stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2024, and March 31, 2023, respectively, because they were antidilutive.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements