Burke & Herbert Financial Services Corp. 10-Q

Item 1. Financial Statements Burke & Herbert Financial Services Corp. Consolidated Financial Statements: Page Consolidated Balance Sheets as of March 31, 2024 (Unaudited), and December 31, 202 3 2 Consolidated Statements of Income for the Three Months Ended March 31, 202 4 , and March 31, 202 3 (Unaudited) 3 Consolidated Statements of Comprehensive Income (Loss) for the Three Ended March 31 , 2024 , and March 31, 2023 (Unaudited) 4 Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 20 2 4 , and March 31, 202 3 (Unaudited) 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 202 4 , and March 31 , 202 3 (Unaudited) 6 Notes to the Consolidated Financial Statements (Unaudited) 8 1 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Balance Sheets (In thousands, except share and per share data) March 31, 2024 (Unaudited) December 31, 2023 (Audited) Assets Cash and due from banks $ 9,152 $ 8,896 Interest-earning deposits with banks 44,925 35,602 Cash and cash equivalents 54,077 44,498 Securities available-for-sale, at fair value 1,275,520 1,248,439 Restricted stock, at cost 16,357 5,964 Loans held-for-sale, at fair value 2,422 1,497 Loans 2,118,155 2,087,756 Allowance for credit losses ( 24,606 ) ( 25,301 ) Net loans 2,093,549 2,062,455 Premises and equipment, net 61,576 61,128 Accrued interest receivable 16,328 15,895 Company-owned life insurance 94,755 94,159 Other assets 81,806 83,544 Total Assets $ 3,696,390 $ 3,617,579 Liabilities and Shareholders’ Equity Liabilities Non-interest-bearing deposits $ 822,767 $ 830,320 Interest-bearing deposits 2,167,346 2,171,561 Total deposits 2,990,113 3,001,881 Borrowed funds 360,000 272,000 Accrued interest and other liabilities 26,969 28,948 Total Liabilities 3,377,082 3,302,829 Commitments and contingent liabilities (see Note 10) Shareholders’ Equity Preferred Stock, $ 1.00 par value per share; 2,000,000 shares authorized; no shares issued or outstanding — — Common Stock 4,006 4,000 $ 0.50 par value; 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 Retained earnings 428,532 427,333 Accumulated other comprehensive income (loss) ( 100,954 ) ( 103,494 ) Treasury stock ( 27,584 ) ( 27,584 ) 571,290 shares, at cost, at March 31, 2024, and 571,290 shares, at cost, at December 31, 2023 Total Shareholders’ Equity 319,308 314,750 Total Liabilities and Shareholders’ Equity $ 3,696,390 $ 3,617,579 See Notes to Consolidated Financial Statements. 2 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Income (In thousands, except share and per share data) (Unaudited) Three Months Ended March 31, 2024 2023 Interest income Loans, including fees $ 28,045 $ 22,760 Taxable securities 8,943 9,802 Tax-exempt securities 1,361 1,458 Other interest income 396 308 Total interest income 38,745 34,328 Interest expense Deposits 12,931 5,401 Borrowed funds 3,655 4,138 Other interest expense 28 15 Total interest expense 16,614 9,554 Net interest income 22,131 24,774 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 Non-interest income Fiduciary and wealth management 1,419 1,337 Service charges and fees 1,606 1,635 Net gains (losses) on securities — — Income from company-owned life insurance 547 560 Other non-interest income 682 682 Total non-interest income 4,254 4,214 Non-interest expense Salaries and wages 9,518 9,494 Pensions and other employee benefits 2,365 2,468 Occupancy 1,538 1,457 Equipment rentals, depreciation and maintenance 1,281 1,339 Other operating 6,463 5,607 Total non-interest expense 21,165 20,365 Income before income taxes 5,890 8,108 Income tax expense 678 584 Net income $ 5,212 $ 7,524 Earnings per common share: Basic $ 0.70 $ 1.01 Diluted 0.69 1.00 See Notes to Consolidated Financial Statements. 3 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Comprehensive Income (Loss) (In thousands, except share and per share data) (Unaudited) Three Months Ended March 31, 2024 2023 Net income $ 5,212 $ 7,524 Other comprehensive income (loss), net of tax: 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 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 ($ 707 ) and ($ 13 ) for the three months ended March 31, 2024, and March 31, 2023, respectively 2,660 47 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 353 287 Total other comprehensive income (loss) 2,540 15,686 Comprehensive income (loss) $ 7,752 $ 23,210 See Notes to Consolidated Financial Statements. 4 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Changes in Shareholders’ Equity For the Three Months Ended March 31, 2024, and March 31, 2023 (In thousands, except share and per share data) (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Comprehensive Income (Loss) Treasury Stock Shareholders’ Equity Shares Outstanding Amount Balance December 31, 2023 7,428,710 $ 4,000 $ 14,495 $ 427,333 $ ( 103,494 ) $ ( 27,584 ) $ 314,750 Net income — — — 5,212 — — 5,212 Other comprehensive income (loss) — — — — 2,540 — 2,540 (Purchase) sale of treasury stock, net — — — — — — — Cash dividends, declared - $ 0.53 per share — — — ( 3,939 ) — — ( 3,939 ) Share-based compensation expense, net 11 6 813 ( 74 ) — — 745 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 Other comprehensive income (loss) — — — — 15,686 15,686 (Purchase) sale of treasury stock, net 2,080 — — — — 99 99 Cash dividends, declared - $ 0.53 per share — — — ( 3,936 ) — — ( 3,936 ) Share-based compensation expense, net — — 404 ( 8 ) — — 396 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. 5 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows (In thousands, except share and per share data) (Unaudited) Three Months Ended March 31, 2024 2023 Cash Flows from Operating Activities Net Income $ 5,212 $ 7,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets 820 684 Amortization of housing tax credits 1,372 1,398 Realized loss (gain) on sales of available-for-sale securities — — Provision for (recapture of) credit losses ( 670 ) 515 Income from company-owned life insurance ( 547 ) ( 560 ) Deferred tax (benefit) 741 ( 1,234 ) Loss on disposal of fixed assets 235 — Accretion of securities ( 442 ) ( 466 ) Amortization of securities 2,228 2,350 Share-based compensation expense 632 581 Repayment of operating lease liabilities ( 598 ) ( 810 ) (Gain) on loans held-for-sale ( 67 ) ( 15 ) Proceeds from sale of loans held-for-sale 5,457 658 Change in fair value of loans held-for-sale 26 7 Originations of loans held-for-sale ( 6,340 ) ( 1,010 ) (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 Cash Flows from Investing Activities Proceeds from maturities, prepayments, and calls of securities available-for-sale, net 35,010 28,883 Proceeds from sale of securities available-for-sale, net 1,281 — Purchases of securities available-for-sale, net ( 65,718 ) — Sales of restricted stock 2,304 22,232 Purchases of restricted stock ( 12,696 ) ( 14,918 ) Purchases of property and equipment, net of disposals ( 1,503 ) ( 2,671 ) Proceeds from (purchase of) company-owned life insurance 1,130 ( 6 ) (Increase) in loans made to customers, net ( 30,425 ) ( 64,517 ) Net cash flows (used in) investing activities $ ( 70,617 ) $ ( 30,997 ) Cash Flows from Financing Activities Net (decrease) in non-interest-bearing accounts ( 7,553 ) ( 53,969 ) Net increase (decrease) in interest-bearing accounts ( 4,215 ) 165,960 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 — 6 Table of Contents Burke & Herbert Financial Services Corp. Consolidated Statements of Cash Flows (In thousands, except share and per share data) (Unaudited) Sale of treasury stock — 99 Net cash flows provided by financing activities $ 73,107 $ 86,715 Increase in cash and cash equivalents 9,579 66,644 Cash and cash equivalents Beginning of period 44,498 50,295 End of period $ 54,077 $ 116,939 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 14,978 $ 4,276 Interest paid on other borrowed funds 785 3,952 Interest paid on finance lease 28 15 Income taxes 625 — Change in unrealized gains on available-for-sale securities ( 559 ) 21,795 Lease liability arising from obtaining right-of-use assets — — Transfers from portfolio loans to loans held-for-sale — — Financing of sale from loan held-for-sale — — See Notes to Consolidated Financial Statements. 7 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies Nature of operations Burke & Herbert Financial Services Corp. (“Burke & Herbert”) was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for Burke & Herbert Bank & Trust Company (“the Bank”), together referred to as the “Company”. The Company commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. In September 2023, the Company elected to be a financial holding company. As a financial holding company, the Company is subject to regulation and supervision by the Federal Reserve. The Company has no material operations and owns 100 % of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Virginia BFI”). The Bank’s primary market area includes northern Virginia, and it has 23 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland. The Company’s branch locations accept business and consumer deposits from a diverse customer base. The Company’s deposit products include checking, savings, and term certificate accounts. The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate. 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 The accompanying consolidated financial statements include Burke & Herbert Financial Services Corp. and its wholly-owned subsidiary Burke & Herbert Bank & Trust Company and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). The accounting and reporting policies of the Company conform to GAAP and reflect practices of the banking industry. They do not include all of the information and notes required by GAAP for complete financial statements. As such, these unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ending December 31, 2023, included in the Company’s Form 10-K filed with the SEC on March 22, 2024. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the 8 Table of Contents Note 1— Nature of Business Activities and Significant Accounting Policies (continued) reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three 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. Certain items in the prior period have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or on shareholders’ equity. 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. 9 Table of Contents Note 2— Securities 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 Securities Available-for-Sale U.S. Treasuries and government agencies $ 196,742 $ — $ 19,211 $ 177,531 Obligations of states and municipalities 533,934 3 75,343 458,594 Residential mortgage backed - agency 47,108 — 4,114 42,994 Residential mortgage backed - non-agency 312,730 28 16,752 296,006 Commercial mortgage backed - agency 35,395 29 1,005 34,419 Commercial mortgage backed - non-agency 176,385 2 5,988 170,399 Asset-backed 83,742 179 1,063 82,858 Other 14,179 — 1,460 12,719 Total $ 1,400,215 $ 241 $ 124,936 $ 1,275,520 December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 197,026 $ — $ 17,955 $ 179,071 Obligations of states and municipalities 535,229 21 72,047 463,203 Residential mortgage backed - agency 47,074 — 4,836 42,238 Residential mortgage backed - non-agency 284,826 17 18,812 266,031 Commercial mortgage backed - agency 36,151 28 1,294 34,885 Commercial mortgage backed - non-agency 183,454 — 6,393 177,061 Asset-backed 79,315 23 1,402 77,936 Other 9,500 — 1,486 8,014 Total $ 1,372,575 $ 89 $ 124,225 $ 1,248,439 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 $ — $ — Gross realized losses — — Proceeds from sales of securities 1,281 — 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). 10 Table of Contents Note 2— Securities (continued) March 31, 2024 Amortized Cost One Year or Less One to Five Years Five to Ten Years After Ten Years Total Securities Available-for-Sale U.S. Treasuries and government agencies $ 29,986 $ 141,415 $ 25,341 $ — $ 196,742 Obligations of states and municipalities — 29,704 342,328 161,902 533,934 Residential mortgage backed - agency 43 19,002 28,063 — 47,108 Residential mortgage backed - non-agency 93,656 120,285 97,243 1,546 312,730 Commercial mortgage backed - agency 25 21,637 13,733 — 35,395 Commercial mortgage backed - non-agency 60,657 110,594 5,134 — 176,385 Asset-backed 8,034 40,745 34,963 — 83,742 Other — — 9,500 4,679 14,179 Total $ 192,401 $ 483,382 $ 556,305 $ 168,127 $ 1,400,215 March 31, 2024 Fair Value One Year or Less One to Five Years Five to Ten Years After Ten Years Total Securities Available-for-Sale U.S. Treasuries and government agencies $ 29,943 $ 125,632 $ 21,956 $ 177,531 Obligations of states and municipalities — 27,643 303,382 127,569 458,594 Residential mortgage backed - agency 42 18,585 24,367 — 42,994 Residential mortgage backed - non-agency 92,335 115,975 86,192 1,504 296,006 Commercial mortgage backed - agency 25 21,168 13,226 — 34,419 Commercial mortgage backed - non-agency 59,551 106,687 4,161 — 170,399 Asset-backed 7,983 40,615 34,260 — 82,858 Other — — 8,041 4,678 12,719 Total $ 189,879 $ 456,305 $ 495,585 $ 133,751 $ 1,275,520 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. 11 Table of Contents Note 2— Securities (continued) 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 March 31, 2024, and December 31, 2023. AFS securities in a continuous unrealized loss position for less than twelve months and more than twelve months are as follows (in thousands): March 31, 2024 Less Than Twelve Months More Than Twelve Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ — $ 177,531 $ 19,211 $ 19,211 Obligations of states and municipalities 210 — 454,027 75,343 75,343 Residential mortgage backed - agency 33 1 42,961 4,113 4,114 Residential mortgage backed - non-agency 46,997 605 236,676 16,147 16,752 Commercial mortgage backed - agency — — 33,645 1,005 1,005 Commercial mortgage backed - non-agency 30,142 210 133,257 5,778 5,988 Asset-backed 8,493 38 53,526 1,025 1,063 Other 4,678 1 8,041 1,459 1,460 Total $ 90,553 $ 855 $ 1,139,664 $ 124,081 $ 124,936 December 31, 2023 Less Than Twelve Months More Than Twelve Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Total Unrealized Losses Securities Available-for-Sale U.S. Treasuries and government agencies $ — $ — $ 179,071 $ 17,955 $ 17,955 Obligations of states and municipalities 501 14 458,113 72,033 72,047 Residential mortgage backed - agency 36 — 42,203 4,836 4,836 Residential mortgage backed - non-agency 632 2 263,184 18,810 18,812 Commercial mortgage backed - agency — — 34,080 1,294 1,294 Commercial mortgage backed - non-agency 23,437 254 153,625 6,139 6,393 Asset-backed 3,721 9 56,106 1,393 1,402 Other — — 8,014 1,486 1,486 Total $ 28,327 $ 279 $ 1,194,396 $ 123,946 $ 124,225 The Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security 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 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 12 Table of Contents 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. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in accumulated other comprehensive income, net of taxes, in the consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach. The Company did not record an ACL on the AFS securities at 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 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 March 31, 2024. Securities of U.S. Treasury and Federal Agencies and Federal Agency Mortgage (Residential and Commercial) Backed Securities 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. government. 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 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. These securities will continue to be monitored as part of our ongoing impairment analysis but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024. Residential & Commercial Mortgage Backed – Non-Agency Securities 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. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024. Asset-Backed Securities 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. The key assumptions for determining expected cash flows include default rates, loss severities, and/or prepayment rates. Based on our assessment of the expected credit losses and the credit enhancement level of the securities, we expect to recover the entire amortized cost of these securities. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at March 31, 2024. 13 Table of Contents Note 2— Securities (continued) Other 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 March 31, 2024. Restricted stock, at cost 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 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 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 among the various loan segments and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. • Commercial real estate loans carry risk associated with either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. Other risk factors include the credit-worthiness of the sponsor and the value of the collateral. • Owner-occupied commercial real estate loans carry risk associated with the operations of the business that occupies the property and the value of the collateral. • Acquisition, construction & development loans carry risk associated with the credit-worthiness of the borrower, project completion within budget, sale after completion, and the value of the collateral. • Commercial & industrial loans carry the risk associated with the operations of the business and the value of the collateral, if any. • Single family residential (1-4 units) loans for consumer purposes carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral. Single family residential (1-4 units) loans for investment purpose carry risk associated with the continued credit-worthiness of the borrower, the value of the collateral, and either the net operating income generated from the lease of the real estate collateral or income generated from the sale of the collateral. • Consumer non-real estate and other loans carry risk associated with the credit-worthiness of the borrower and the value of the collateral, if any. 14 Table of Contents 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 Owner-occupied commercial real estate 131,154 131,381 Acquisition, construction & development 72,022 49,091 Commercial & industrial 82,774 67,847 Single family residential (1-4 units) 524,804 527,980 Consumer non-real estate and other 2,249 2,373 Loans, gross 2,118,155 2,087,756 Allowance for credit losses ( 24,606 ) ( 25,301 ) Loans, net $ 2,093,549 $ 2,062,455 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 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. 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 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. Loans that do not share similar risk characteristics are evaluated on an individual loan basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on non-accrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are collectively evaluated on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price, or the present value of the expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the carrying value of the loan. Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the information that is used to calculate a reasonable and supportable forecast and a reversion period forecast on collectively evaluated loans. Management may consider an additional or reduced reserve as warranted through qualitative risk factors based on the current and expected conditions, as measured in supplemental information relative to the macroeconomic variable loss drivers used to calculate a reasonable and supportable forecast and a reversion period 15 Table of Contents Note 4— Allowance for Credit Losses (continued) forecast. These qualitative risk factors considered by management are largely comparable to legacy factors prior to the adoption of CECL. The following tables present the activity in the ACL, including the impact of the adoption of CECL, for the 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 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 ) Recoveries 3 — — — 1 1 — 5 Balance, end of period $ 18,977 $ 782 $ 674 $ 824 $ 3,272 $ 77 $ — $ 24,606 March 31, 2023 Balance, beginning of period $ 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) loan losses 218 ( 73 ) 410 25 ( 13 ) ( 44 ) — 523 Charge-offs — — — — — ( 17 ) — ( 17 ) Recoveries 28 — — — 3 3 — 34 Balance, end of period $ 18,409 $ 556 $ 1,852 $ 700 $ 4,030 $ 157 $ — $ 25,704 16 Table of Contents 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 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 Commercial real estate $ — $ — $ 22,094 $ 22,094 $ 1,283,058 $ 1,305,152 $ 22,094 $ — Owner-occupied commercial real estate 134 — 635 769 130,385 131,154 — 1,287 Acquisition, construction & development — — — — 72,022 72,022 — — Commercial & industrial 90 — 339 429 82,345 82,774 339 — Single family residential (1-4 units) 3,341 — 27 3,368 521,436 524,804 — 3,028 Consumer non-real estate and other 24 — — 24 2,225 2,249 — — Total $ 3,589 $ — $ 23,095 $ 26,684 $ 2,091,471 $ 2,118,155 $ 22,433 $ 4,315 December 31, 2023 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Loans Total Loans 90 Days Past Due & Still Accruing Non-accrual loans Commercial real estate $ 10,496 $ — $ — $ 10,496 $ 1,298,588 $ 1,309,084 $ — $ — Owner-occupied commercial real estate — — 790 790 130,591 131,381 — 1,000 Acquisition, construction & development — — — — 49,091 49,091 — — Commercial & industrial 195 364 — 559 67,288 67,847 — — Single family residential (1-4 units) 1,657 289 1,532 3,478 524,502 527,980 — 2,744 Consumer non-real estate and other 3 — — 3 2,370 2,373 — — Total $ 12,351 $ 653 $ 2,322 $ 15,326 $ 2,072,430 $ 2,087,756 $ — $ 3,744 The amount of interest income recognized on nonaccrual loans during the periods presented is immaterial. Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic information, and other factors. The Company analyzes loans individually by classifying the loans by credit risk. The Company internally grades all commercial loans at the time of origination. In addition, the Company performs an annual review on the top twenty-five non-homogenous commercial loan relationships as measured by total Company exposure to each borrower. The Company uses the following definitions for credit risk classifications: Pass : These include satisfactory loans that have acceptable levels of risk. Special Mention : Loans classified as special mention have a potential credit weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard : Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of debt. Loans classified as substandard are inadequately protected by sound net worth, payment capacity of the borrower, or of the collateral pledged. If weaknesses go uncorrected, there is potential for partial loss of principal and/or interest. 17 Table of Contents Note 4— Allowance for Credit Losses (continued) Doubtful : Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and unlikely. Loss : Loans classified as a loss are considered to be uncollectible and cannot be justified to continue as viable assets. While there may be the possibility of some recovery in the future, it is not practical or desirable to defer writing off these loans at the present time. The Company has a portfolio of smaller homogenous loans that are not individually risk rated that are included within the single family residential and consumer non-real estate and other loan classes. Generally, these loan classes are rated as “Pass” unless these loans are on non-accrual and are then classified as substandard. The following 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 Term Loans 2024 2023 2022 2021 2020 Prior Revolving Loans Total Commercial real estate Pass $ 39,603 $ 189,776 $ 257,828 $ 149,843 $ 22,496 $ 490,273 $ 37,907 $ 1,187,726 Special Mention — — 12,235 35,586 — — — 47,821 Substandard — — 15,360 2,351 — 51,894 — 69,605 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 39,603 $ 189,776 $ 285,423 $ 187,780 $ 22,496 $ 542,167 $ 37,907 $ 1,305,152 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Owner-occupied commercial real estate Pass $ 1,999 $ 9,260 $ 31,907 $ 11,035 $ 13,551 $ 51,867 $ 8,384 $ 128,003 Special Mention — — — — — — — — Substandard — — 529 — — 2,298 — 2,827 Doubtful — — — — — 324 — 324 Loss — — — — — — — — Total $ 1,999 $ 9,260 $ 32,436 $ 11,035 $ 13,551 $ 54,489 $ 8,384 $ 131,154 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Acquisition, construction & development Pass $ 2,030 $ 20,603 $ 31,779 $ 3,490 $ — $ 929 $ 11,925 $ 70,756 Special Mention — — — — — — — — Substandard — — — — — 1,266 — 1,266 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 2,030 $ 20,603 $ 31,779 $ 3,490 $ — $ 2,195 $ 11,925 $ 72,022 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 2,275 $ 23,424 $ 13,949 $ 2,499 $ 114 $ 1,218 $ 38,792 $ 82,271 Special Mention — — — — — — — — 18 Table of Contents Note 4— Allowance for Credit Losses (continued) Substandard — — — 503 — — — 503 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 2,275 $ 23,424 $ 13,949 $ 3,002 $ 114 $ 1,218 $ 38,792 $ 82,774 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Single family residential (1-4 units) Pass $ 5,561 $ 77,408 $ 120,119 $ 59,440 $ 31,929 $ 172,416 $ 54,903 $ 521,776 Special Mention — — — — — — — — Substandard — — — 289 238 2,501 — 3,028 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 5,561 $ 77,408 $ 120,119 $ 59,729 $ 32,167 $ 174,917 $ 54,903 $ 524,804 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer non-real estate and other Pass $ 137 $ 199 $ 135 $ 34 $ 117 $ 683 $ 944 $ 2,249 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 137 $ 199 $ 135 $ 34 $ 117 $ 683 $ 944 $ 2,249 Year to date gross charge-offs $ 30 $ — $ — $ — $ — $ — $ — $ 30 19 Table of Contents Note 4— Allowance for Credit Losses (continued) December 31, 2023 Term Loans 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial real estate Pass $ 195,857 $ 261,817 $ 166,253 $ 22,791 $ 75,170 $ 416,774 $ 36,761 $ 1,175,423 Special Mention — 12,235 35,449 — 4,876 — — 52,560 Substandard — 15,420 12,847 — 2,209 50,625 — 81,101 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 195,857 $ 289,472 $ 214,549 $ 22,791 $ 82,255 $ 467,399 $ 36,761 $ 1,309,084 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Owner-occupied commercial real estate Pass $ 9,309 $ 31,725 $ 11,229 $ 14,103 $ 10,279 $ 43,616 $ 6,184 $ 126,445 Special Mention — — — — — — — — Substandard — 532 — — — 4,404 — 4,936 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 9,309 $ 32,257 $ 11,229 $ 14,103 $ 10,279 $ 48,020 $ 6,184 $ 131,381 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Acquisition, construction & development Pass $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total $ 8,535 $ 24,286 $ 13,698 $ — $ 728 $ 241 $ 1,603 $ 49,091 Year to date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial & industrial Pass $ 29,111 $ 15,204 $ 4,344 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,025 Special Mention — — — — — — — — Substandard — — 822 — — — — 822 Doubtful — — — — — — — — Loss — — — — — — — — Total $ 29,111 $ 15,204 $ 5,166 $ 162 $ 15 $ 1,335 $ 16,854 $ 67,847 Year to date gross charge-offs $ — $ — $ — $ 29 $ — $ — $ — $ 29 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 — — — — — — — — 20 Table of Contents 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 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 March 31, 2024 Commercial real estate $ — $ — $ — $ — $ — Owner-occupied commercial real estate 324 247 963 1,287 247 Acquisition, construction & development — — — — — Commercial & industrial — — — — — Single family residential (1-4 units) 289 18 2,739 3,028 18 Consumer non-real estate and other — — — — — 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 troubled debt restructuring (“TDR”) accounting model and requires that the Company evaluate, based on the accounting for 21 Table of Contents 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. The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction, or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. For the three 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 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 2025 159,208 2026 84,314 2027 49,583 2028 78,369 2029 173 Total $ 754,869 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 $ 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 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 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 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. 22 Table of Contents 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 Due in 2025 20,000 Total $ 360,000 Note 7— Leased Property Lessor Arrangements The Company enters into operating leases with customers to lease vacant space in certain owned premises that is not being used by the Company. These operating leases are typically payable in monthly installments with terms ranging from around two years to around 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, 2024 2023 Operating lease income $ 575 $ 575 Total lease income $ 575 $ 575 The remaining maturities of operating lease receivables as of March 31, 2024, are as follows (in thousands): Operating Leases Remaining nine months ending December 31, 2024 $ 1,726 2025 2,265 2026 1,657 2027 1,356 2028 1,333 Thereafter 2,450 Total lease receivables $ 10,787 Lessee Arrangements The Company has entered into leases for branches and office space. The leases are evaluated for whether the lease will be classified as either a finance or operating lease. Certain leases offer the option to extend the lease term, and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. Including renewal options, the terms of the Company’s leases range from less than one year to around 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. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. These cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. 23 Table of Contents Note 7— Leased Property (continued) Right-of-use assets and liabilities by lease type, and the associated balance sheet classifications are as follows (in thousands): Balance Sheet Classification March 31, 2024 December 31, 2023 Right-of-use assets: Operating leases Other assets $ 5,283 $ 5,110 Finance leases Other assets 3,518 3,590 Total right-of-use assets $ 8,801 $ 8,700 Lease liabilities: Operating leases Other liabilities $ 5,490 $ 5,327 Finance leases Other liabilities 3,787 3,840 Total lease liabilities $ 9,277 $ 9,167 The components of total lease cost were as follows (in thousands): Three Months Ended March 31, 2024 2023 Finance lease cost Right-of-use asset amortization $ 71 $ 51 Interest expense 28 15 Operating lease cost 634 839 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 March 31, 2024, are as follows (in thousands): Operating Leases Finance Leases Remaining nine months ending December 31, 2024 $ 1,774 $ 246 2025 1,404 334 2026 961 341 2027 747 347 2028 548 354 Thereafter 474 2,993 Total undiscounted lease payments 5,908 4,615 Less: discount ( 418 ) ( 828 ) Net lease liabilities $ 5,490 $ 3,787 24 Table of Contents Note 7— Leased Property (continued) 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 Finance lease weighted average discount rate 2.96 % 2.96 % Operating lease weighted average remaining lease term (years) 3.73 3.71 Operating lease weighted average discount rate 3.62 % 3.33 % Three Months Ended March 31, Cash paid for amounts included in the measurement of lease liabilities 2024 2023 Operating cash flows from operating leases $ 644 $ 868 Operating cash flows from finance leases 28 15 Financing cash flows from finance leases 53 39 Right-of-use assets obtained in exchange for new finance lease liabilities — — Right-of-use assets obtained in exchange for new operating lease liabilities — — Note 8— Regulatory Capital Matters Banks and financial holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, “prompt corrective action” regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (“Basel III rules”), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on AFS securities is not included in computing regulatory capital. Management believes as of 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: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”, although these terms are not used to represent overall financial condition. If “adequately capitalized”, regulatory approval is required to accept brokered deposits. If “undercapitalized”, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of 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). 25 Table of Contents Note 8— Regulatory Capital Matters (continued) Actual Minimum Required for Capital Adequacy Purposes (includes applicable Capital Conservation Buffer) To Be Well Capitalized Under Prompt Corrective Action Regulations Amount Ratio Amount Ratio Amount Ratio As of March 31, 2024 Total Capital to risk weighted assets Consolidated $ 445,121 17.54 % $ 266,504 ≥ 10.5 % $ 253,814 ≥ 10.0 % Burke & Herbert Bank & Trust 442,168 17.43 266,399 ≥ 10.5 253,713 ≥ 10.0 Tier 1 (Core) Capital to risk weighted assets Consolidated 420,261 16.56 215,742 ≥ 8.5 203,051 ≥ 8.0 Burke & Herbert Bank & Trust 417,308 16.45 215,656 ≥ 8.5 202,971 ≥ 8.0 Common Tier 1 (CET 1) to risk-weighted assets Consolidated 420,261 16.56 177,670 ≥ 7.0 164,979 ≥ 6.5 Burke & Herbert Bank & Trust 417,308 16.45 177,599 ≥ 7.0 164,914 ≥ 6.5 Tier 1 (Core) Capital to average assets Consolidated 420,261 11.36 148,038 ≥ 4.0 185,048 ≥ 5.0 Burke & Herbert Bank & Trust 417,308 11.28 148,035 ≥ 4.0 185,044 ≥ 5.0 As of December 31, 2023 Total Capital to risk weighted assets Consolidated $ 443,799 17.88 % $ 260,694 ≥ 10.5 % $ 248,280 ≥ 10.0 % Burke & Herbert Bank & Trust 442,414 17.82 260,626 ≥ 10.5 248,215 ≥ 10.0 Tier 1 (Core) Capital to risk weighted assets Consolidated 418,244 16.85 211,038 ≥ 8.5 198,624 ≥ 8.0 Burke & Herbert Bank & Trust 416,859 16.79 210,983 ≥ 8.5 198,572 ≥ 8.0 Common Tier 1 (CET 1) to risk-weighted assets Consolidated 418,244 16.85 173,796 ≥ 7.0 161,382 ≥ 6.5 Burke & Herbert Bank & Trust 416,859 16.79 173,751 ≥ 7.0 161,340 ≥ 6.5 Tier 1 (Core) Capital to average assets Consolidated 418,244 11.31 147,965 ≥ 4.0 184,957 ≥ 5.0 Burke & Herbert Bank & Trust 416,859 11.27 147,986 ≥ 4.0 184,982 ≥ 5.0 The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of March 31, 2024, approximately $ 175.8 million of retained earnings was available for dividend declaration without regulatory approval. Note 9— Derivatives The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Cash flow hedges of interest rate risk The Company’s objective in using interest rate derivatives is to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of 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 26 Table of Contents Note 9— Derivatives (continued) 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 The Company enters into interest rate swaps with its loan customers to facilitate their financing requests. Upon entering into swaps with our loan customers, the Company will enter into corresponding offsetting derivatives with third parties. These derivatives represent economic hedges and do not qualify as hedges for accounting. These back-to-back interest rate swaps are reported at fair value in “other assets” and “other liabilities” in the Company’s Consolidated Balance Sheets. Changes in the fair value of interest rate swaps are recorded in other non-interest expense and sum to zero because of offsetting terms of swaps with borrowers and swaps with dealer counterparties. The table below presents the fair value of the Company’s derivative financial instruments, which includes accrued interest, as well as their classification on the Consolidated Balance Sheets as of 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 Derivatives not designated as hedges: Interest rate swaps related to customer loans Other assets $ 72,305 $ 1,478 Interest rate swaps related to customer loans Other liabilities 72,305 1,478 December 31, 2023 Balance Sheet Location Notional Amount Fair Value Derivatives designated as hedges: Interest rate swaps related to cash flow hedges Other assets $ 100,000 $ 65 Interest rate swaps related to cash flow hedges Other liabilities 150,000 1,047 Derivatives not designated as hedges: Interest rate swaps related to customer loans Other assets $ 72,572 $ 998 Interest rate swaps related to customer loans Other liabilities 72,572 998 27 Table of Contents Note 9— Derivatives (continued) 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 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 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 $ ( 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 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 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 $ 60 $ 60 $ — Interest Income $ ( 363 ) $ ( 363 ) $ — 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 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 March 31, 2024 March 31, 2023 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. $ ( 443 ) $ 36 $ ( 203 ) $ — The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts Hedged items (1) 40 — 2,362 — Derivatives designated as hedging instruments — — ( 2,202 ) — Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 Interest contracts Amount of gain or (loss) reclassified from AOCI into income ( 483 ) 36 ( 363 ) — 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 ( 483 ) 36 ( 363 ) — Amount of gain or (loss) reclassified from AOCI into income - excluded component — — — — 28 Table of Contents 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. 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 hedged assets. Credit-risk-related Contingent Features 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 Interest rate lock commitments Commitments to fund consumer mortgage loans (interest rate lock commitments) to be sold into the secondary market are defined as derivatives under GAAP. The Company enters into best effort forward commitments for the future delivery of mortgage loans to third-party investors. The Company has elected the fair value option (“FVO”) on both the best-efforts forward commitments and the consumer mortgage loans held-for-sale in order to economically hedge the effect of changes in interest rates resulting from the commitment to fund the loans. Interest Rate lock commitments are not designated as hedging instruments, and therefore, changes in the fair value of these free-standing derivative instruments are reported as non-interest income. The net gains (losses) relating to the free-standing derivative instruments (interest rate lock commitments) were $ 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 (e.g. revolving lines of credit) and commercial letters of credit. Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of our commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. A summary of the contractual amounts of the Company’s financial instruments outstanding at 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 both include exposure to some credit loss in the event of non-performance of the customer. The Company’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the Consolidated Balance Sheets. Many of these instruments have fixed maturity dates, and many of them will expire without being drawn upon; accordingly, they do not generally present any significant liquidity risk to the Company. Allowance for credit losses - off-balance-sheet credit exposures The Company recorded 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 29 Table of Contents 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. Litigation The Company is a party to litigation, claims, and proceedings arising in the normal course of business that are ordinary and routine to the nature of the Company’s business and operations. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from any currently pending or threatened litigation, claims, or proceedings will not be material to the Company’s financial position. Note 11— Fair Value Measurements Determination of Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – Significant unobservable inputs that reflect our own assumptions that market participants would use in pricing an asset or liability. In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company used the following methods and significant assumptions to estimate fair value: Investment securities The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Derivatives The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company has contracted with a third-party vendor to provide valuations for interest rate swaps using standard swap valuation techniques. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities. The Company recognizes interest rate lock commitments at fair value. Fair value of interest rate lock commitments is based on the price of underlying loans obtained from an investor for loans that will be delivered on a best effort basis (Level 2). Loans held-for-sale, at fair value The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. 30 Table of Contents Note 11— Fair Value Measurements (continued) Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurements at March 31, 2024, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial assets Investment Securities U.S. Treasuries and government agencies $ 177,531 $ — $ — $ 177,531 Obligations of states and municipalities — 458,594 — 458,594 Residential mortgage backed - agency — 42,994 — 42,994 Residential mortgage backed - non-agency — 296,006 — 296,006 Commercial mortgage backed - agency — 34,419 — 34,419 Commercial mortgage backed - non-agency — 170,399 — 170,399 Asset-backed — 82,858 — 82,858 Other — 12,719 — 12,719 Total investment securities available-for-sale $ 177,531 $ 1,097,989 $ — $ 1,275,520 Loans held-for-sale, at fair value $ — $ 2,422 $ — $ 2,422 Derivatives $ — $ 4,834 $ — $ 4,834 Financial liabilities Derivatives $ — $ 1,959 $ — $ 1,959 Fair Value Measurements at December 31, 2023, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial assets Investment Securities U.S. Treasuries and government agencies $ 179,071 $ — $ — $ 179,071 Obligations of states and municipalities — 463,203 — 463,203 Residential mortgage backed - agency — 42,238 — 42,238 Residential mortgage backed - non-agency — 266,031 — 266,031 Commercial mortgage backed - agency — 34,885 — 34,885 Commercial mortgage backed - non-agency — 177,061 — 177,061 Asset-backed — 77,936 — 77,936 Other — 8,014 — 8,014 Total investment securities available-for-sale $ 179,071 $ 1,069,368 $ — $ 1,248,439 Loans held-for-sale, at fair value $ — $ 1,497 $ — $ 1,497 Derivatives $ — $ 1,063 $ — $ 1,063 Financial liabilities Derivatives $ — $ 2,045 $ — $ 2,045 31 Table of Contents 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: Individually evaluated loans Upon the adoption of CECL, loans individually evaluated for credit expected losses included non-accrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools and have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income. Prior to adoption of CECL and ASU 2022-02, which eliminated the TDR accounting model, loans were designated as impaired when, in the judgment of management and based on current information and events, it was probable that all amounts due, according to the contractual terms of the loan agreement, would not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan, the present value of the expected future cash flows, or the fair value of the collateral. Generally, the fair value of impaired loans will be determined by the present value of the expected future cash flows or, if collateral-dependent, based on recent real estate appraisals. For collateral-dependent, the fair value is measured based on the value of the collateral securing the loans, less estimated costs of disposal. Collateral may be in the form of real estate or business assets, including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income and will result in a Level 3 fair value classification. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Other real estate owned Assets acquired through foreclosure or other proceedings are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. Assets that were measured at fair value on a non-recurring basis during the period are summarized below (in thousands): Fair Value Measurements at March 31, 2024, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Individually evaluated loans: Commercial real estate $ — $ — $ 277 $ 277 Owner-occupied commercial real estate — — 1,374 1,374 Acquisition, construction & development — — — — Commercial & industrial — — — — Single family residential — — 2,068 2,068 Consumer non-real estate and other — — — — Other real estate owned — — — — 32 Table of Contents Note 11— Fair Value Measurements (continued) Fair Value Measurements at December 31, 2023, Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Individually evaluated loans: Commercial real estate $ — $ — $ 286 $ 286 Owner-occupied commercial real estate — — 1,315 1,315 Acquisition, construction & development — — — — Commercial & industrial — — — — Single family residential — — 1,816 1,816 Consumer non-real estate and other — — — — Other real estate owned — — — — 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 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 % 5.4 % 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 N/A December 31, 2023 Individually evaluated loans $ 3,417 Income, Market, & Discounted cash flow analysis External appraised values; management assumptions regarding market trends, market rate for borrower, or other relevant factors 3.6 % - 9.0 % 5.4 % 33 Table of Contents 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 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 (Level 1) (Level 2) (Level 3) Total Financial Assets Cash and due from banks $ 9,152 $ 9,152 $ — $ — $ 9,152 Interest-earning deposits with banks 44,925 44,925 — — 44,925 Loans, net 2,093,549 — — 1,931,927 1,931,927 Accrued interest 16,328 — 16,328 — 16,328 Financial Liabilities Non-interest-bearing $ 822,767 $ — $ 822,767 $ — $ 822,767 Interest-bearing 2,167,346 — 2,162,288 — 2,162,288 Other borrowed funds 360,000 — 356,679 — 356,679 Accrued interest 5,268 — 5,268 — 5,268 Fair Value Measurements at December 31, 2023, Using: Carrying Amount Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial Assets Cash and due from banks $ 8,896 $ 8,896 $ — $ — $ 8,896 Interest-bearing deposits with banks 35,602 35,602 — — 35,602 Loans, net 2,062,455 — — 1,897,459 1,897,459 Accrued interest 15,895 — 15,895 — 15,895 Financial Liabilities Non-interest-bearing $ 830,320 $ — $ 830,320 $ — $ 830,320 Interest-bearing 2,171,561 — 2,167,218 — 2,167,218 Other borrowed funds 272,000 — 271,716 — 271,716 Accrued interest 8,954 — 8,954 — 8,954 34 Table of Contents 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 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 Beginning Balance $ ( 490 ) $ ( 97,259 ) $ ( 5,745 ) $ ( 103,494 ) Net unrealized gains (losses) 2,660 ( 441 ) — 2,219 Less: net realized (gains) losses reclassified to earnings 353 ( 32 ) — 321 Net change in pension plan benefits — — — — Ending Balance $ 2,523 $ ( 97,732 ) $ ( 5,745 ) $ ( 100,954 ) 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 Beginning Balance $ ( 1,589 ) $ ( 130,875 ) $ ( 7,031 ) $ ( 139,495 ) Net unrealized gains (losses) 47 17,218 — 17,265 Less: net realized (gains) losses reclassified to earnings 287 ( 1,866 ) — ( 1,579 ) Net change in pension plan benefits — — — — 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 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 March 31, 2024 March 31, 2023 Cash flow hedges: Interest rate contracts $ ( 447 ) $ ( 363 ) Interest income Tax effect 94 76 Income tax expense (benefit) Net of tax $ ( 353 ) $ ( 287 ) Available-for-sale securities: Realized gains (losses) on securities $ — $ — Net gains/(losses) on securities Realized gains (losses) on basis adjustment for fair value hedges 40 2,362 Interest income Tax effect ( 8 ) ( 496 ) Income tax expense (benefit) Net of tax $ 32 $ 1,866 Total reclassifications, net of tax $ ( 321 ) $ 1,579 Net income 35 Table of Contents Note 13— Other Operating Expense 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, 2024 2023 FDIC & other regulatory assessment $ 516 $ 734 Historic tax credit amortization 632 632 IT related 550 491 Consultant and advisory expenses 581 470 ATM & network expense 551 429 Directors' fees 493 410 Accounting and audit expenses 343 307 Legal fees and expenses 345 305 Virginia franchise tax 675 243 Marketing expense 329 219 Other 1,448 1,367 Total $ 6,463 $ 5,607 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 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 In 2019, the Company’s Stock Incentive Plan (“2019 SIP”) was approved by the Bank’s Board of Directors. The 2019 SIP provides for the issuance of share-based awards to directors and employees of the Company. The 2019 SIP authorized 240,000 units to be issued, and the Company’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 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. Each RSU award will indicate the number of shares, the conditions (e.g., service, performance, and/or a combination), and the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the award at grant date. 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. 36 Table of Contents 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 . 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 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. The Monte Carlo simulation analysis required the following inputs: (1) expected term, (2) expected volatility, (3) risk-free rate, and (4) dividend yield. The expected term was based on the stated performance period. Management used the expected volatility from a peer group. The risk-free interest rate is based on the U.S. Treasury yield curve over the performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The following is a summary of 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 — — Vested ( 6,600 ) 45.14 Forfeited ( 200 ) 73.00 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 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 Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential impact of contingently issuable shares. The Company uses the treasury stock method as described by ASC 260 - Earnings Per Share for each dilutive instrument when computing diluted earnings per share. 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 March 31, 37 Table of Contents Note 15— Earnings Per Share (continued) 2024 2023 Net income (in thousands) $ 5,212 $ 7,524 Weighted average number of shares 7,433,481 7,426,638 Options effect of dilutive shares 94,008 77,835 Weighted average dilutive shares 7,527,489 7,504,473 Basic EPS $ 0.70 $ 1.01 Diluted EPS 0.69 1.00 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. 38 Table of Contents